FRTB management solution of the year: Bloomberg

Amid the diverging timeframes and complex requirements of the Fundamental Review of the Trading Book (FRTB), Bloomberg offers a consistent, comprehensive and customisable solution for Asia-Pacific (Apac) banks preparing for implementation

A high level of flexibility has been essential to navigate the region’s diverse and often fragmented markets, while the US and other global jurisdictions have pushed back their FRTB plans, says Eugene Stern, head of Multi-Asset Risk System (MARS) Market Risk at Bloomberg.

“Some Apac jurisdictions like Japan and China are live already or about to go live. It’s challenging for the banks in Asia that have operations in Asia, but also in other jurisdictions, because they’re managing very different implementation timelines,” he says.

Stern highlights variations in local regulators’ reporting requirements around FRTB’s standardised approach (SA) as one example where a flexible solution is key. Banks may need to provide a different set of numbers for different jurisdictions, he says, which is why the firm’s customisable reporting templates have proved popular.

“It’s never one size fits all,” adds Thomas Labbe, global regulatory product manager at Bloomberg, who points to the firm’s unique position in the market as a key factor in pre-empting client needs. “We regularly engage in early dialogue with rulemakers and industry bodies as local regulations evolve, sharing information, helping market participants to assess the potential impact and anticipating the changes needed as rules come into play across each jurisdiction.”

FRTB rules bring a greater level of complexity to how banks calculate market risk capital, placing new and strenuous demands on firms’ data and analytics capabilities. But Stern says there is a willingness among Apac clients to embrace the changes and take a proactive stance to get the work done.
 

Data ready

Bloomberg’s FRTB Data Solution enables clients to access and input relevant data into their internal regulatory reporting, market risk and compliance systems, and provides relevant datasets for both the SA and the internal models approach (IMA).

Consistency is key, giving banks confidence that the FRTB data in their front-office trading systems will be the same data used across their valuation and independent price verification, risk, regulatory compliance and other downstream functions.

At the heart of the solution, financial instruments data is classified into appropriate SA buckets, with data points for indexes and funds to assist look-through and non-look-through approaches, and datasets based on all available country-specific FRTB rules.

And, for IMA banks, summary counts of trades and committed quotes, real price observations and pass/fail flags help firms assess risk factor eligibility and avoid the punitive ‘non-modellable’ charge.

Making full use of Bloomberg’s multiple data sources, users can access real-time exchange and over-the-counter pricing data via the Bloomberg Terminal and, via data licence, firms can access full reference data for accurate instrument identification, detailed portfolio constituent fund holdings data and more than a decade of historical data to support robust stress-testing and scenario analysis.

Fund holdings data has been top of the agenda in recent conversations with Apac banks, says Labbe. “Having access to the constituents of the funds is critical for organisations active in that space. The default capital charge carries a 70% risk weight, so there’s a vested interest in looking more closely at the holdings.”

Data is stored such that it can be extracted and presented in a flexible manner. Governance procedures and security protocols ensure the correct level of detail is shared with clients, auditors and regulators.
 

Agile analytics

While data feeds the risk engine, analytics drives the decision-making.

Bloomberg’s MARS Market Risk solution allows banks to integrate its features with their existing systems and processes. Seamless integration with Bloomberg’s Trade Order Management Solutions (TOMS) and other third-party order management solutions tools ensures a smooth workflow and eliminates data discrepancies.

With complete mapping to SA risk factors, including general interest rate risk, credit spread risk, securitisation risk, equities, foreign exchange and commodities, clients can benefit from Bloomberg’s full set of rates, curves, surfaces and cubes, or load their own.

A key feature for FRTB users is the pre-trade analysis functionality, allowing banks to assess potential capital impact and make informed decisions in optimising portfolios. Risk and capital analytics can be quickly and dynamically regenerated intraday to include prospective trades.

The solution also incorporates a robust sensitivity-based method (SBM) for calculating Greek sensitivities consistently across all asset classes, and a jump-to-default analytics approach, leveraging the same settings and data as the SBM calculations.

MARS is highly configurable, allowing banks to tailor the solution to meet the specific requirements of different national regulators, accounting for variations in risk types, risk weights and correlations.

In addition to its analytical capabilities, MARS provides a comprehensive solution for capital reporting, generating regulatory templates for various jurisdictions, including European Union Capital Requirements Regulation 2/3, the US Notice of Proposed Rulemaking, the UK Financial Conduct Authority and the Hong Kong Monetary Authority. As other regions finalise their rules, Bloomberg is adding support for those versions.
 

Looking ahead

Going forward, Bloomberg will focus on adapting to the nuances of FRTB, anticipating and responding to client needs in the region. “We’ve become very good at building scalable frameworks for customising the rules to local specifications,” says Stern.

Labbe describes FRTB as a “nexus of challenges”. “It’s a place where regulation, risk, data, technology and governance intersect. Updating technology stacks, ensuring alignment between different groups within the bank and sourcing high-quality data are all part of the same journey.”

If the past is anything to go by, that FRTB journey is likely to continue for some time.

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