The Fundamental Review of the Trading Book (FRTB) brings the most comprehensive regulatory changes to the financial industry in the past years.
FRTB represents the backbone of Basel III regulatory framework and addresses the most critical aspects of financial regulation – i.e. the market risk and capital. It replaces the entire capital calculations methodology defined in previous Basel frameworks, improves accuracy, introduces methodological clarity and redefines core functions around risk data, models and operational boundaries. Centricity of capital measure dictates the scope – proper capturing of the tail and liquidity risks, compatibility of capital regime across jurisdictions and modelling consistency between the so-called ‘internal model approach’ and standardised measure – are the key targets to achieve.
The comprehensive nature of FRTB introduces material changes across the entire industry with trading presence. Banking business models, risk methodologies, workflow processes, data and IT infrastructure are all to be affected and modified to meet the compliance.
A common denominator of FRTB implementation is technology. FRTB is more than speed or performance - FRTB’s technology means a new design and architectural composition that is capable to support demanding FRTB calculations. System compliance requires integrated data model, re-designed workflow process and full consolidation of quantitative models used for FO pricing and risk calculations. Requirements to include liquidity horizons into internal models and risk factor level computation with stress period addition on a reduced set of factors are just a few examples why FRTB is ‘special’ and why general-purpose technology will not be able to cope with these tasks. The increased volume of computational requirements also calls for new design of optimisation and scalability layers specification that support intelligent risk engine flows on GPU grids with in-memory aggregation.
The complexity of FRTB's scope and technology requirements have encouraged risk vendors to start offering FRTB packages. Murex was one the first to offer comprehensive FRTB solution that meets most critical regulatory requirements. The product incorporates both – Internal Model Method and Revised Standardised Approach, covers major tradable asset classes across full calculation chain and provides a flexibility that adapts the system to existing end-user infrastructure. Having designed the package with adaptable and scalable architecture that can sit on top of the integrated platform, Murex has been able to deliver an end-to-end solution that meets the most stringent requirements and addresses compliance calls on anticipated business impacts.
The integrated nature of the platform helped Murex introduce intelligent data model with efficient store capabilities that support the most demanding tasks associated with FRTB processes such as liquidity horizon determination or stress period selection over an extended time frame. This architectural feature also supports financial models’ compliance – specifically the requirements to apply the same models for pricing and risk (including the advanced ones under MACS framework). Since this and other similar features are natively supported by Murex architecture, the FRTB package simply extends the platform’s capabilities in directions where FRTB requirements stand unique.
Built as an extension of a powerful ERM engine, Murex's FRTB package benefits from many advanced features embedded in the Market Risk suit. This includes extensive scenario generation, MRB platform for calculation runs and powerful MRA for results normalisation, aggregation, visualisation, and presentation.
What makes Murex FRTB package special? A combination of features, design, performance and, capabilities that altogether make the solution a compelling option for financial institutions aiming to meet their regulatory obligations in a timely manner.
In practical terms, the solution offers:
- Full capital charge calculation coverage for both IMA and RSA. This is particularly attractive to institutions that ultimately consider IMA route
- Expected Shortfall (ES) calculation with liquidity horizon scaling. Risk factors filtering is supported for instruments and types with detailed granularity on objects’ components. Liquidity adjustment multipliers for scaled ES are available on-the-fly
- ES is fully calibrated to reduced factors set that is being determined through sophisticated algorithmic selection that guarantee compliance with explanatory power test. Sensitivities are being used to expedite the search
- Non-modelable risk factors are being determined through extensive data quality / availability control tests that include risk factor analysis, tagging, stress scenario definitions and aggregation. Granularity of calculation ensures that the factors are valid and reflective of live positions to which they are linked
- P&L attribution test - a key component of IMA - seamlessly calculates hypothetical and risk-theoretical P&L on FO models with risk-compliant factors. Full backtesting capabilities with P&L Explain functions are natively available to the FRTB tasks to validate the attribution test passing. Consequently, P&L Attribution Monitor provides effective visual control of P&L convergence
- Risk engine application for sensitivities-based approach in RSA guarantees full compliance with risk groups and dependent sub-categories, Natural support for multi-curve environment with full sensitivities mapping and risk re-projection to regulatory buckets facilitates fast results generation and easy greeks aggregation for both linear and higher-order risks
- Default risk charge calculation, classification, and aggregation resides on standard suite of credit functionalities that support easy netting and aggregation per issuer, buckets and DRC categories
- MRA-based control dashboard and reporting monitor with dynamic aggregation and drill-down capabilities provide an elegant mechanism for capital calculation and transparent facility for active risk management. Full audit trail and direct link to regulatory templates facilitates productivity and operational integrity
The attractiveness of Murex's FRTB package lies undoubtedly in its comprehensiveness and product design that ensures quick compliance and leads to an easier programme implementation. This is particularly the case when FRTB package is implemented on top of existing Murex platform. Although the FRTB solution is a game changer in the regulatory reporting space, the system preparation, configuration, validation, and integration still require specialist skills and know-how to guarantee timely project completion.
MThree Consulting brings this required expertise to the market and provides a level of sophistication that organically links individual project phases to an overall implementation scheme. Through our Alumni Pro for Murex (APMx) service, we're ready to guide and support your FRTB initiatives in an agile way to address programme challenges and meet project deadlines.