comparing the internal model & the standardised approach to...
TRANSCRIPT
Comparing The Internal Model & The Standardised Approach To FRTBMethodologies, Impacts & Practical Considerations
for Implementation
December 2015
Jonathan Berryman, SVP Risk Strategy, FIS
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About FIS
FIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset
and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of
our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130
countries. Headquartered in Jacksonville, Fla., FIS employs more than 55,000 people worldwide and holds leadership
positions in payment processing, financial software and banking solutions. Providing software, services and
outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of
Standard & Poor’s 500® Index. For more information about FIS, visit www.fisglobal.com
SunGard is now FIS
Agenda
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• Topics covered elsewhere today
• Methodology comparison
• Summary of impacts
• Implementation considerations
• Other FRTB challenges
• What Next for FRTB?
Topics covered elsewhere today
Topics covered elsewhere today
5
The FRTB’s Standardised Approach
Calibrating The Framework & Computing The Sensitivities For The New Standardised Approach
Diana Iercosan, FEDERAL RESERVE BOARD
Backtesting Expected Shortfall (ES)
Assessing Conservativeness Of ES Estimates & Quantifying ES Understatements
Mark Nyfeler, UBS
IDR In The FRTB
Modeling Incremental Default Risk in Fundamental Review of the Trading Book
Rita Gnutti, INTESA SANPAOLO
FRTB QIS
Understanding The Results, The Operational Risk Challenges & How Best To Utilise The QIS Results
Jim Congleton, STANDARD CHARTERED
FRTB and the P&L Attribution requirement
How To Deal With The Infrastructure Challenges Of The Profit Attribution Analysis Requirements Of The FRTB?
Lars Popken, Head of Risk Methodology, DEUTSCHE BANK
Methodology comparison
Methodology comparison
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SA
IRC, CRM
VaR + SVaR RNIV
SA – Standardised Approach
IRC – Incremental Risk Charge
CRM – Comprehensive Risk Measure
VaR – Value at Risk
SvaR – Stressed VaR
RNIV – Risks Not In VaR
SBA
+RRA
DRC +
Securit-
isations
DRC
ES NMRF
SBA – Sensitivity Based Approach
RRA – Residual Risk AddOn
DRC – Default Risk Charge
ES – Expected Shortfall
NMRF – Non-Modellable Risk Factors
Revised approach (FRTB)
Current
• Approval scope is not explicit
• Firms have approval for General Risk, Specific Risk for Credit & Equities. Usually firm-wide but can be by
business line or more granular.
• Back-testing exceptions result in a multiplier
• Approval by desk
• Back-testing exceptions result in a multiplier but can also lead to fall-back to SA
• P&L Attribution test added
• Ongoing test for NMRF
• All firms must calculate SA
Summary of impacts
Summary of impacts
9
• ISDA, GFMA and IIF analysed the results of 28 banks’ submissions to the BCBS Quantitative Impact
Study on June 2015 reference data (QIS 4) [published October 22, 2015]
• Analysis shows that the proposed Standardised Approach results in a multiple of the Internal Model
Approach which is of particular concern given the proposal for Capital Floor
SBA to ES *
Interest rate risk x 4.2
Credit spread risk x 2.1
Equity risk x 4.6
Commodity risk x 3.6
Foreign exchange risk x 3.8
* Sensitivity Based Approach (SBA)
excluding Residual Risk AddOn (RRA)
Expected Shortfall (ES)
excluding Non-Modellable Risk Factors (NMRF)
ISDA - International Swaps and Derivatives Association
GFMA - Global Financial Markets Association
IIF - International Institute of Finance
BCBS - Basel Committee on Banking Supervision
• A significant component of the Standardised Approach
charge relates to the Residual Risk AddOn accounting
for 47% of the total
• Non-Modellable Risk Factors (NMRF) account for 29%
of the total proposed market risk charge, 4.3 times the
Risk Not In VaR (RNIV) charge and 1.5 times the
expected shortfall (ES) risk measure
• The results show a 2.2 times increase in capital from
Basel 2.5 for securitisations
Summary of impacts
10
• On November 18, 2015 BCBS published its own analysis of the Quantitative Impact Study on
December 2014 reference data (QIS 3)
• BCBS analysis was based on a sample of 44 banks that provided usable data for the study
• Overall the proposed (as at December 2014) changes in the market risk framework would produce a
4.7% increase in total capital requirements
weighted average 74%
simple average 41%
median bank 18%
• BCBS highlighted three statistical measures of the
increase in market risk capital charges:
• Internal model approaches (IMA) show an
increase compared to existing IMA
• Standardised approaches (SA) show an increase
compared to existing SA
• QIS 3 did not include the Residual Risk AddOn in the Standardised Approach nor was
Securitization included. Both were added to QIS 4
• Many banks reported zero for NMRF; for banks that did report NMRF this represented 20-30%
capital
simple average 54%
median bank 13%
simple average 128%
median bank 51%
Implementation considerations
Implementation considerations
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• Standardised Approach
• Calculation of sensitivities
• Source of sensitivities
• Full revaluation required for curvature
• Internal Model Approach
• P&L Attribution
• Desk-level backtesting
• Market data management (data problems have more impact, proxies –
identify & track)
• (avoiding) Non-Modellable Risk Factors
• Full revaluation possibly necessary to pass backtesting and P&L attribution
• Operational challenge of desks moving in and out of IMA
Implementation considerations
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• Completeness of market risk system
• FRTB
+ FRTB-CVA
+ ISDA SIMM
+ Market risk limits
+ Counterparty credit risk
• Market data management
• Identifying NMRF
• Proxies
• Pricing model libraries
• Performance considerations
Implementation considerationsPerformance Demands
Consider the data required for trade level drilldown for 100,000 trades – number of PVs.
Consequent cube size.
10 Million
50 Million
500 Million
1 Billion
10 Billion
50 Billion
500 Billion
2500 Billion
FRTB SA-SBA
HSVaR
Monte Carlo VaR
FRTB HS-IMA
FRTB MC-IMA
Potential Future Exposure
PFE Stress Tests
CVA Sensitivities
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Adaptiv Market Risk Solution
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P&L attribution, Back testing, Stress testing
Reporting
Aggregation, Risk and Capital Calculations, Optimisation
Pricing
Trade Data
Static Data
Market Data
Orc
he
str
ation
Control & Limits
Data Staging
Snapshots
T-1
T-2
T-n
Enrichment
Integration (batch, online, ETL)
Audit
Corrections
Re-runs
Other FRTB challenges
Other FRTB challenges
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• Stress testing
• Holistic view including market risk
• Pre-deal measure?
• ES less intuitive, potentially more difficult to hedge
• Risk of becoming Non-modellable
• Multiple approaches
• Standardized, Advanced & Economic models co-exist
• Disclosure
• More granular requirements
• Step change
• VaR was the internal model and then adopted for Capital
• ES and NMRF implemented for the first time
• Need prototype to understand impacts & optimisation
What Next for FRTB?
www.sungard.com 19
Is it time
for an
FRTB
break?
What next for FRTB?
20
• Basel Committee
• Publish final framework
• Residual risk add-on
• Securitisation framework
• Non-Modellable Risk Factors identification and capital charge
• Many parameters calibration both in Standardised and Internal Model Approaches
• Confirm implementation date
• Post 2015
• Further calibration, including P&L Attribution thresholds
• Feedback loop from other BCBS streams
• FRTB-CVA
• National Regulators
• Transpose into local laws / rulebooks
What next for FRTB?
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• IMA approved banks
• Need to re-apply
• Implement cost efficient solution
• Optimise capital requirement
• Reduce overall running costs
• SA banks
• Need to assess impact
• Consider IMA
Desk Structure
What next for FRTB?
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Head Office
Consumer Banking
TB / BB Boundary
Global Wealth and Investment Management
TB / BB Boundary
Global Markets
EquitiesFixed Income /
Currencies
Rates Europe
Structured Flow business
GBP
Trader
EUR ...
Rates Asia-Pac ...
Credit Commodities
Global Banking
TB / BB Boundary
What next for FRTB?
23
Risk Factor Identification: attempt
to decide which risk factors are
relevant for each desk
Modellability Checks: determine
which of these are in the scope for
ES, and which must go to NMRF,
based on data quality
Is the capital from NMRF excessive?
Backtesting and P&L Attribution:
check if each desk passes the tests
Do we pass the tests?
Add risk factors (or higher order
sensitivities) and re-test
Try to use less granular risk
factors or re-structure the
Trading Desk organisation
Is SA capital tolerable?
Internal Model ApproachStandardised Approach
No
Yes
No
No Yes
Yes
Start
Come and visit us
What next for FRTB?
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