Four Key Takeaways from our New York FRTB Summit

03 June 2019 Gil Shefi Paul Jones

Following the publication of the final Basel text on FRTB at the start of the year, we felt the time was right to sit down with regulators and banks to discuss plans for compliance. Hot on the heels of our successful London event which you can read about here, Five Key Takeaways from our London FRTB Summit, we recently hosted a discussion in New York with speakers from the national regulators as well as senior market risk representatives from JP Morgan Chase, Morgan Stanley, RBC and ING. Over 50 banking representatives joined us with many agreeing that the event, which included a regulatory keynote, provided some welcome clarifications on the FRTB text. Here are our four key takeaways:

1. National regulators are targeting the Basel deadline of 2022 as the FRTB go-live date

The final timeline is set for FRTB as far as the U.S. regulators are concerned. The notice of proposed rulemaking (NPR), which should cover any remaining uncertainties that banks have, will be published as soon as possible.

From the banks' perspective, many still have concerns with the complexity of the Basel text in general and more specifically the major changes required in the RFET. Complexity is no excuse for inaction however and banks should urgently move ahead with their compliance plans if they are to meet the 2022 deadline.

2. Non-U.S. G-SIBs will have to follow the U.S. rules for their U.S. operations

Non-U.S. G-SIBs will have to follow the U.S. rules for their U.S. operations under an intermediate holding company (IHC), according to the regulator. This rule will extend to European banks that might be working towards a different timeline and different capital requirements under the EU rules.

As regards the model application process, this will be similar to the Basel 2.5 process from a documentation perspective with the exception of the P&L attribution test which is new.

3. Vendors will also come under the regulatory spotlight

Vendor audit is not yet perfectly prescribed but a U.S. regulator confirmed that vendors are expected to be audited by an acceptable audit firm and should be able to provide public audit attestation.

Vendor solutions should also meet the data governance principles outlined in the so-called, "Annex D", which was first introduced last year and provides guidance for evaluating the sufficiency and accuracy of risk factors for IMA trading desk models.

As regards delta-based buckets, they were created to avoid different moneyness rules for the different asset classes. The strike to delta translation should use each bank's own model and while regulators are aware that this might create a conundrum with vendor solutions, it does not preclude using vendors that have the right architecture in place.

4. The full impact of FRTB is likely underestimated

We closed our event with a panel discussion with senior FRTB representatives from a number of banks. When asked about areas that are still underestimated in terms of complexity and/or impact, the Default Risk Charge (DRC) and the operation post go-live were mentioned as important areas to keep an eye on. Firms also commented that insufficient thought had gone into how they will run the model day-to-day after go-live. Many banks seem to have deferred that discussion. Concern has also been raised as regards Libor replacement from a modellability perspective as well as a lack of historical market data for the incoming SOFR.

Thanks to everyone who participated in and attended our FRTB events this year. With the 2022 deadline now set, we are working with firms globally to help them simplify the challenges presented by FRTB and more quickly calculate and adapt to the changing regulation and related capital impact.

For more information, please visit FRTB Solution Suite page .

Posted 03 June 2019 by Gil Shefi, Managing Director-FRTB, IHS Markit and

Paul Jones, Global Head – FRTB Solutions, IHS Markit

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.