FRTB, Important AND urgent!

Following the www.risk.net news article on 19th October that the ECB is advising banks to apply for IMA approvals before the full FRTB rules are finalised, has left bankers worrying that as the rules are still “up in the air” the timetable seems unreasonable. As the rules are still slated to enter into force in 2019 firms will be expected to submit their internal models (should they be planning to use them) at the same time so that they can go live by the 2021 deadline date for full compliance and reporting. In short, confusion, a little anger, increased costs and frustration whilst firms decide what and when to move from prototype/one-off data submission to a fully operational “production ready” environment.

Despite the rules being “up in the air”, the need to move from thinking to doing is increasingly urgent. Razor Risk Technologies Limited can provide a range of solutions to alleviate the potential issues such delays and confusion is likely to create.
Even though the IMA approval submissions now need to be accompanied by 60 days of data, each desk still has to apply individually, which is where the impact on resources will be felt most keenly.

By providing desk by desk simulations with both “model” and Standard Approaches simultaneously, Razor can speed up the review and validation processes, freeing up resources to undertake more valuable tasks in preparing the firm’s submissions. The software, which can be installed or “rented” as a service, can simulate the overall capital charges and individual desk level contributions. The chosen operating model can also be manipulated to help identify the optimum shape of the trading operations. As models are created and pre-submission, the tests can be run as many times as necessary. The related data is instantly available and time series recording is provided “off the shelf”.

Given that the largest likely “production” cost within an IMA bank for each desk will be P & L attribution testing and model back testing. These difficult and time/resource hungry activities can also be alleviated by Razor. Razor can support the firm by running the desk-by-desk PnL attribution tests and related back-testing automatically. These tests can also be fed by “what-if” scenarios to see where the “breaking point” is likely to occur. This “real-time” data can be vital in informing the decisions as to whether or not to sustain an IMA or revert to the SA. Or indeed inform the rationale to refine the model to delay or even avoid the so “cliff edge” between the IMA and SA capital charges.

The ease of adding or amending models within the Razor framework will also aid the testing of any model before and after changes or recalibrations of the rules required in the finalised Regulatory Technical Standards (RTS).

The tight timeframes between submitting each model for approval and reporting to the regulator will be reduced by the likely 6 month approval process the regulator will need to undertake before issuing the “go live” green light. By delaying activities until everything is perfect will result in the bank missing the deadlines and paying the SA based capital charges from day 1.

FRTB is not the only initiative underway during the scheduled roll-out period (2019/2021) that IT and existing systems have to be available for. The current recognised time line for moving into a “production ready” environment is November 2018. Whilst a year appears to be a long time, moving from prototype modelling and data analysis or producing a one off set of numbers to “production ready”, including daily generation of back testing and PnL attribution results, will in fact be a very tough deadline to meet given the limitations imposed on people and running systems.

That is of course unless you can access and leverage a “ready to use” solution. Razor can work independently of existing systems or as part of the overall ecosystem. To help firms move to a “production ready” environment with 60 days of data for each model submission, Razor Risk Technologies has developed a “streamlined” implementation around our Razor (Baseline) FRTB Configuration.

Where firms are moving to a SA only then Razor can provide all of the pre-live date capabilities and help the firm reach compliance quickly and cost effectively without the need to rip out or redevelop existing systems.

For a demo of our FRTB capability get in touch using the form below, or contact me personally.