solving the frtb challenge: why you should consider an aggregation solution
Post on 12-Apr-2017
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SOLVING THE FRTB CHALLENGE
WHY YOU SHOULD CONSIDERAN AGGREGATION SOLUTION
MARKET RISK:LAY OF THE LAND
2
THE MARKET RISK INFRASTRUCTURE AT MAJOR BANKS WAS ADAPTED FOR PRE-FRTB REQUIREMENTS, BUT LEGACY SYSTEMS AND PROCESSES WILL NOT COPE WITH THE NEW REGULATIONS
Outdated market risk infrastructure –with some solutions in place for 15-20 years
Fragmented market risk systems leading to siloed calculations and partial coverage
Lightweight, inflexible reporting tools for aggregating multiple VaR calculations
Large investment in vetting and validating pricing models for existing Internal Models Approach (IMA) approval
Front office not actively engaged in understanding market risk capital as market risk calculations often owned by risk and finance
FRTB RAISES THE STAKES
THE FUNDAMENTAL REVIEW OF THE TRADING BOOK IS THE
IN MARKET RISK RULES THAT WE’VE SEEN IN A GENERATION
BIGGEST CHANGE
THERE ISN’T MUCH TIME
FRTB deadline is the end of 2019; EU draft rule suggests up to a one-year delay
IT REQUIRES A GLOBAL VAR/ES CALCULATION –NO MORE ADDING VAR FIGURES TOGETHER
METRICS ARE COMPLEX, NON-INTUITIVE AND HEAVY ON AGGREGATION
TRAPDOOR FORIMA DESKS DOWN TO STANDARDIZED APPROACH WILL REQUIRE FRONT-OFFICE ENGAGEMENT
Additional data collection required to support IMA approval
Solution implementationmust start in 2017
THE ANSWER:A CENTRALIZED AGGREGATION SOLUTION
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WITH AN AGGREGATION SOLUTION, YOU WILL BE ABLE TO:
Source required prices from one or morefront-office and risk engines
Perform bank-wide FRTB calculations both at end of day and intra-day using those inputs
Combine the results with intermediate data and expose inputs via reporting and analysis tools
THE ANSWER:A CENTRALIZEDAGGREGATION SOLUTION
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Is non-intrusive- Leverages the existing front-office and risk infrastructure
- Short implementation timeline and cost control
Allows you to reuse existing pricing- No need to revalidate all models for IMA approval
AN AGGREGATION SOLUTION:
THE ANSWER:A CENTRALIZEDAGGREGATION SOLUTION
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Has in-memory aggregation technology - To handle complex, multi-stage aggregation
methodologies in FRTB SBA, ES calculations
- For optimal performance
Will help you pass P&L attribution tests- If pricing is sourced from engine(s) used to
generate official P&L
- Reduces pricing reconciliation issues across risk, finance and the front office
AN AGGREGATION SOLUTION:
FRTB AGGREGATION: DATA FLOWS
AG
GR
EG
AT
ION
ADVANCED MODEL CHARGE
MARKET RISK CAPITAL CHARGE
ADVANCED MODEL APPROVAL
STANDARDIZED CHARGE
FRONT OFFICE
A
RISK ENGINE
FRONTOFFICE
B
CENTRAL SCENARIO
GENERATION
Back test (bank)
SBA
DRC
Residual Risk
Expected Shortfall
NMRF
DRC
P&L Attribution
Back test (desk)
MULTIPLIER
MARKET DATA
REPOSITORY
Could be more than50 front-office/risk systems. Different
versions with regional instances.
PR
ICE
S
(Se
nsi
tiviti
es,
P&
L v
ect
ors
, Ma
rke
t V
alu
es,
No
tion
als
)
SELECTING THE RIGHT PRICING INPUTS FOR IMA
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TYPE OFPRICING INPUT DESCRIPTION
ACCURACYON EXOTIC PRODUCTS COMMENT
PRICING ENGINE REQUIRES FRTB SCENARIOS?
SensitivitiesDelta, Vega, Gamma price sensitivities
Low
Price determined by extrapolationReuse SBA sensitivities?Intuitive representation that’s useful for what if
×
GridsP&L values for fixed gridof risk factor shocks
MediumGrid typically limited to 2 dimensionsPrice determined by interpolation ×
P&L vectorsP&L values for dynamic set of risk factor scenarios
High Full revaluation approach
BALANCE BETWEEN ACCURACY (TO PASS P&L ATTRIBUTION TEST)AND COMPLEXITY (INTEGRATION AND RISK FACTOR MANAGEMENT)
FRTB AGGREGATION:CHALLENGES AND RISKS
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THE RIGHT SOLUTION WILL HELP MANAGE THE FOLLOWING FRTB AGGREGATION CHALLENGES AND RISKS
REDUCE THE RISK WITH A SINGLE PRICING ENGINE AND A RISK AGGREGATION SOLUTIONUpstream pricing engines need to be FRTB-enabled
Running ad hoc calculations can be operationally demanding
Multiple pricing engines can complicate risk factor management
Integration of multiple pricing engines can pose a challenge
WHAT SHOULD YOU LOOK FOR IN A SOLUTION?
HIGH PERFORMANCE– Reduced data load time to maximize time to analyze and investigate
– Optimized risk data structures to reduce query times
– Concurrency between data load and user query
POWERFUL DRILL DOWN– Detail goes down to scenario/trade level input prices
– Schema design guides user through multi-stage aggregations in FRTB
– Breakdown of bank capital total to additive desk and trade-level capital
FLEXIBILITY– Open technology supports wide variety of reporting tools
– Extensible to keep up with changing needs and regulations
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WHAT-IF ACTIONS WITHOUT RE-PRICING
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RUNNING “WHAT-IF” CALCULATIONS WITH AN AGGREGATION SOLUTION
WHAT-IF ACTIONS REQUIRING RE-PRICING
New trade -Invoke pricing engine(s) to supply price inputs or use proxy pricing in aggregation layer
Move trades from one desk to another for pre-go-live analysis
Scale an existing position
Remove an existing position -if that improves the results then analyse that position further
Risk factor change, for example add risk factors to improve P&L attribution results
Avoid some ad hoc repricing by pre-generating prices for common what if scenarios during end of day
NON-REGULATORY MARKET RISK MANAGEMENT
Typical metrics are VaR and sensitivities
The inputs required are similar to the inputs for FRTB ES and SBA respectively
SIMM AND CVA CAPITAL
Calculations are similar to the FRTB standardized approach
Both require sensitivities inputs
CLEARED INITIAL MARGIN
Various methodologies for different clearing houses but often based on VaR
What-if functionality important
COUNTERPARTY CREDIT RISK AND CVA
Much higher volume of prices and requires performance optimization
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BEYOND FRTBTHE SAME AGGREGATION ARCHITECTURE CAN BE USED TO GENERATE FURTHER METRICS BEYOND FRTB MARKET RISK CAPITAL USING SIMILAR INPUTS
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Contact us today to learn more about FIS’ Risk Aggregation solution and to speak with our experts
SO… ARE YOU READY TO SEE AN FRTB AGGREGATION SOLUTION IN ACTION?
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