The countdown for implementing FRTB has now begun in earnest. The revised market risk capital framework was agreed in January of 2016 and is due to be implemented by the end of 2019, but the lengthy back-testing required for model approval means banks will need to have systems and processes in place as soon as possible.
Although the Basel Committee will continue to monitor the impact of the new capital requirements and may fine-tune their calibration should they prove too onerous – the fundamentals of the framework has now been agreed. That means there is little point in delaying implementation plans.
Given that the new market risk framework will have a direct impact on capital requirements, and associated trading costs, banks will need to make key strategic decisions regarding the viability of their trading operations. The sooner that internal models can be calibrated and back-tested, the more time banks will have to take those decisions. Data management will not only help support those initial strategic decisions, but will also be of paramount importance for BAU operations as the new market risk capital framework is implemented.
Some examples of specific data management challenges include:
- The need to carry out back-testing and p&l attribution (for risk models at an individual desk level)
- The move from VaR to Expected Shortfall (which is inherently more sensitive to data outliers)
- The identification of non-modellable risk factors (and potential need for data remediation efforts to meet the criteria for modellability)