Emma Walden: Stuart, thank you so much for joining us here at Risk Minds. We are another year closer to the adoption of FRTB, what would you say the position we're in at the moment with that and what do you see as the main challenges for banks if you like in adoption?
Stuart Nield: Sure well I think banks are still struggling to understand the impact that FRTB will have on their trading business and this is further complicated by the fact that the regulations are still under some revision with the final version expected at the end of this year so essentially they're trying to answer a few questions about their portfolio, for instance should they contribute to data pools, which can increase the number of real price observations they have on their risk factors. The second is should they even exit certain types of business in a liquid markets because the capital costs are prohibitively high. And also, should they even apply for internal model approval at all, and if they do so what should they consider? So I think it's very difficult for a bank to answer these questions without having an FRTB compliance system in place, so they're caught in a catch-22 situation where in order to justify the investment in an FTRB system they already need to have one in place to calculate the impact.
Emma Walden: So they’ve almost got to have a crystal ball to gaze into to see exactly what the final outcome is going to be?
Stuart Nield: Indeed, yes
Emma Walden: With that all in mind, how could perhaps data tech or machine learning and all the topics that are very hot on the agenda this week help with that implementation and what do they provide?
Stuart Nield: Yeah so I think there's been two technology themes that have emerged in recent years that can help. The first is movement of software to the cloud where it can be provided as a service rather than being installed at the bank's site. And the second is the breaking up of large monolithic systems into smaller modular components with well-defined interfaces called APIs. So we've adopted both of those techniques in our FRTB solution so it means that we can help banks answer those challenging questions in a non-invasive manner. So we've put together three software components; the first is called The Modellabilty Service, so here banks can assess their exposure to normal risk factors and then make a judgment about whether contributing to a data pool can reduce the capital that exposure they have to those risk factors. The second is The Scenario Service, so here they can proxy at nominal risk factors and mitigate the high capital charges associated to them, and we found that a good choice of proxies means that banks can remain profitable in illiquid markets. And then in our third and final component, FRTB studio, we give banks the ability to calculate the total capital under internal model and standardized approach so they can manipulate their debt structure, run the model validation tests and work out what debt they should submit for internal approval
Emma Walden: So you believe it will be hugely beneficial for these banks to go out and seek the expertise that's there from people like you?
Stuart Nield: That's right. In fact we've found that when clients work with us, they can typically reduce their internal model capital charge by, we’ll bring it down to a third of their standardized amount so that means it makes it easy for them to justify the investment cost of building out FRTB infrastructure, integrating with their choice of our software's components.
Emma Walden: Obviously with an eye on the regulators all the time as you do, what do you see is their role going forward because obviously they're the gatekeepers and the protectors but should they also be encouraging innovation - is that their role?
Stuart Nield: Yeah I don't think regulators necessarily are dampening down innovation, I think actually they see it as an advantage to themselves. So there's been talk of using machine learning type methods to actually review people's model approvals so I don't think regulators are against it but of course they're very concerned about the additional risks that it might enter into the market and they're very keen to manage those, as with all the other risks they manage.
Emma Walden: Because with the proliferation of all these new technology and data that also does bring risks let's face it. One of those that's been talked about a lot this week is cyber security as well that's sort of a buzzword at the moment and what would you say about that and how the industry needs to be approaching those sorts of protections too?
Stuart Nield: Well I think I think the industry needs to be aware of what the latest threats are and I think working in finance we're often not at the cutting edge of technology, so I think more partnerships between finance companies and technology companies are the way forward to that front.
Emma Walden: A positive note to end on, Stuart. Thank you so much for your contribution.