FRTB Solution – Data and Risk Factor Management

Xenomorph’s FRTB Solution provides the ability to map all available price data into respective risk factors / risk factor buckets, and to make that data available for model calibration and back-testing. Risk factors that are in danger of failing the eligibility test can be flagged to allow for remediation by sourcing a committed quote via RFQ. The solution also comes with a full range of data validation workflows to ensure all real price criteria are met (for FRTB risk factor eligibility tests).

The Basel Committee’s Fundamental Review of the Trading Book (FRTB) will cause ‘fundamental’ changes to the industry’s market risk capital framework, and in turn, prompt a broad set of data management challenges. Those challenges relate to every stage of the data management process – from data acquisition and consolidation, data storage, data derivation and analytics, data distribution and visualisation, through to demonstrating data lineage and process auditability, and the identification and management of risk factors.

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. Accurate data will be a crucial factor, not only in helping guide those strategic decisions but also supporting ongoing trading operations.

Some examples of specific data management challenges any FRTB solution will need to address 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); and the identification of modellable risk factors (and potential need for data remediation efforts to meet the criteria for modellability).

The Xenomorph FRTB Solution enables firms to consolidate data from any number of sources – including pricing data and analytics from vendors and internal systems, position data from trading or back-office systems and model outputs from risk engines. All of this data can be aggregated and normalised into a consistent data model. In addition, sources can easily be consolidated for illiquid risk factors to help meet modellability criteria.

Xenomorph is built on a scalable, time-aware architecture that offers a choice of database technologies (SQL and NoSQL) to store validated, cleansed data & analytics. The platform also supports a flexible object-oriented data model to map relationships between key datasets (instrument prices, derived data & analytics, model outputs, liquidity horizons, risk classes, risk buckets etc.).

The Xenomorph FRTB Solution is adept at all forms of analytical data management. It can easily manage time series analysis and compute derived datasets such as correlations (between risk factors and across buckets), standard deviations and other basic risk metrics (based on historical data). In addition, it offers pre-built interfaces to leading financial analytics platforms such as Numerix and Matlab, popular analytical programming languages such as Python, R and F#, and leading risk management applications. The platform helps banks address the data management challenges posed by FRTB (whether running daily validation and cleansing processes on risk factor data, or monthly back-testing and P&L attribution).

FRTB will prompt firms adopting the Internal Models Approach to move from VaR to Expected Shortfall (ES) as a standard measure of risk. Given that ES is more sensitive to data outliers, this means any incorrect data (negative spikes) that creeps into models could result in punitive capital charges. The Xenomorph FRTB Solution enables banks to easily configure data validation rules based on adaptive criteria. Whether you are benchmarking your internal model output to the standardised approach, or validating the output of risk models against theoretical trading results – Xenomorph can quickly flag anomalies for further investigation.

With increases in the amount of data that needs to be analysed on an ongoing basis, data visualisation tools will be crucial to ensure each stakeholder has access to the information they need. The Xenomorph FRTB Solution works with tools like Microsoft PowerBI and Tableau to drive visually intuitive dashboards that help risk personnel and senior managers quickly spot patterns or identify anomalies.

Given the importance of maintaining data quality under the revised market risk capital framework, establishing clear oversight of data management operations will be crucial. The Xenomorph FRTB Solution provides insights into all of the metadata and metrics required for effective data management. It answers questions like “where has a data item come from?”, “which alternative sources were available?”, “which validation checks were run?” and “how long did it take to resolve exceptions?”