The rules that govern financial organizations and transactions undergo complex and wide-scale changes from time to time. One such undertaking is the Fundamental Review of the Trading Book (FRTB). Created in response to the 2007-2008 global financial crisis, the FRTB aims to prevent the systemic losses on trading books that were observed at the start of the said crisis. As a result, this overhaul fundamentally changes how financial organizations calculate and manage risk in the trading book.
A Look at the History of the Fundamental Review of the Trading Book
This rule change was initiated by the Basel Committee on Banking Supervision (BCBS) in July 2009 to address the recent global financial crisis and prevent it from taking place again. This set of revisions later earned the moniker Basel 2.5. However, it only served as a temporary fix for the issues that it aimed to address.
The FRTB is a result of a thorough examination of existing rules and guidelines on trading and resolves the challenges that have been made apparent by Basel 2.5. The first proposals for the FRTB were published in 2012, and the final rules were published in 2016 with the aim of implementing them by January 2019. Though the COVID-19 pandemic has led to the rollout’s repeated postponement, the new set of rules is now slated to be implemented by January 2023.
Ensuring That an Organization Is Capable of Adapting to Changes in Financial Standards
With the compliance deadline drawing near, financial organizations must start preparing for the potential impacts on financial services risk management presented by FRTB implementation. Fortunately, banks and other financial organizations still have time to prepare for this impending upheaval and the technical complexity that it brings. Here’s how they can do that:
Determine the Limit of the Organization’s Core Calculating Capabilities
The implementation of the FRTB introduces more resource-intensive computational processes. Once this happens, banks will need to revise the boundary between the trading book and the banking book and utilize a more rigid model approval process. They will also have to increase the sensitivity of the standardized approach (SA) for market risk and calibrate for stress conditions. All these will enable the bank to retain sufficient capital even during periods of extreme market stress.
In short, financial organizations must increase their computational capacity in order to fulfill the requirements presented by the new rules. At the very least, the system used by a bank should be able to support the extensive calculation of expected shortfall. It should also be capable of considering various factors like intraday monitoring data and a range of liquidity scenarios.
Review Data Architecture and Ensure Accessibility of Information
Data architecture plays a central role in enabling a financial organization to keep up with the changes that will accompany FRTB implementation. To develop a risk methodology and strategy that adheres to the new guidelines, a bank must have easy access to standardized data from a single source of information. This will ensure that the organization can swiftly respond to the additional operational and procedural complexities that will result from the rollout of the new rules.
Anytime that the bank needs to develop and manage models that adhere to the FRTB guidelines, it can simply fetch the information it needs from its data lake. With this information readily available, the bank can produce results that will enable it to meet compliance requirements and achieve its business goals.
Use an Integrated Platform for Completing Reporting Requirements
Of course, the upcoming implementation of the FRTB will also change the requirements that regulatory bodies have for financial organizations. Different jurisdictions are looking into adopting the new guidelines in the near future. Hong Kong is expected to implement the FRTB’s rules by 2023, Canada and Japan by 2024, and Australia and the UK by 2025. However, the United States’ exact target implementation date has yet to be finalized.
A change in the guidelines will undoubtedly make the reporting process more complicated and resource-intensive for the compliance team. That said, it’ll be much easier if the team has access to a consolidated platform where they can fetch all the information needed for building the report. With such a platform, they can easily refine the parameters of their search and double-check that every detail of the report meets the FRTB guidelines.
Instead of spending an inordinate amount of time sourcing information and putting pieces together, the compliance team can focus on the quality of the report. Additionally, they can concentrate the bulk of their efforts on making the reporting process more efficient moving forward.
The face of an impending upheaval presents banks with an opportune moment to analyze their organizational IT structures and address their points for improvement. Taking time to carry out these preparations today will help banks of all sizes go through a smooth transition once the FRTB has been fully enforced.
