The Basel Committee on Banking Supervision (BCBS), has placed greater emphasis on improving market risk management since finalising Basel III. In May 2012, the BCBS released the first consultative document on the Fundamental Review of the Trading Book (FRTB). In January 2016, FRTB culminated in the BCBS publishing the finalised standards, titled ‘Minimum Capital Requirements for Market Risk’. The new standards replaced the existing regulatory framework for market risk and go beyond just dealing with quantitative measurement of risk. They also consider internal practices, processes and other qualitative aspects of a bank’s risk management landscape.
Together with other regulatory regimes like Risk Data Aggregation & Risk Reporting (RDARR) and MiFID-ii, FRTB heralds a new era in bank risk management, making it one of the most critical items on a bank’s to-do list for the immediate future and beyond. FRTB is set to revolutionise current market risk practices, placing emphasis on the coordination of operational, risk and data management processes as well as systems and technology. To best respond to these new demands, banks need to make the right strategic and technology decisions and assess the impact on operations and processes across risk, front office, finance and IT.
This paper highlights the enormity of the data and modelling requirements imposed by FRTB as well as its impact on banks’ risk- and systems architecture. We also highlight some key considerations facing banks in achieving compliance and mitigating the impact on capital under the new regulatory regime. Senior management need to look beyond the immediate capital impacts and consider the bigger picture which includes operational and technology costs.
