Whitepapers

This whitepaper focuses on the applications of blockchain technology on various aspects of the capital markets. The blockchain technology platform is a distributed ledger technology (DLT) system, which has triggered a fundamental challenge to the nature of money, transforming current business processes. It is one of the most disruptive technologies available at present, designed to simplify the value chains around trading, payment and market infrastructure. If fully adopted, blockchain will create a more efficient, more transparent and more secure marketplace whilst reducing transaction processing costs.

Over the last 20 years, there have been significant technology advancements in the financial markets. Most recently, the interest in blockchain has been huge. This new technology has the potential to redefine operations and improve the efficiency, security and economics of the financial industry. It is time for financial institutions to change and benefit from the possibilities of distributed technologies. Firms are investing millions in developing blockchain applications. Few now doubt that blockchain could soon revolutionise the global financial services industry.

The global financial crisis exposed the shortcomings of market risk management practices of the trading book. In January 2016, the Basel Committee for Banking Supervision (BCBS) overhauled the approach to assess capital requirements with the Fundamental Review of the Trading Book (FRTB). With a 2019 deadline, FRTB is expected to have significant impact on financial institutions and financial markets in terms of infrastructure, capital requirements and operational controls. Banks must adhere to the rules of the fundamental review of the trading book to avoid higher capital requirements.

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 main changes being introduced by the new market risk standards and the related challenges in terms of data management, modelling and technology.

New challenges in the financial markets driven by changes in market structure and regulations and accounting rules like Basel III, EMIR, Dodd Frank, MiFID II, Solvency II, IFRS 13, IRFS 9, and FRTB have increased demand for higher performance risk and analytics. Problems like XVA require orders of magnitude more calculations for accurate results. This demand for higher performance has put a focus on how to get the most out of the latest generation of hardware. Vectorisation is a key tool for dramatically improving the performance of code running on modern CPUs. Vectorisation is the process of converting an algorithm from operating on a single value at a time to operating on a set of values at one time. Modern CPUs provide direct support for vector operations where a single instruction is applied to multiple data (SIMD).

The Basel Committee’s overhaul of the market risk capital framework marks a major change to previous versions. FRTB is likely to have a substantial influence in the way firms are organised, and their approach to measuring and reporting risk. For example, at desk level there will be a requirement to monitor SA capital in addition to IMA. Banks need to decide whether the costs associated with operational and IT change is justified. Are more complex products likely to pay for themselves given the majority of the life of a trade will need to be calculated with SA as opposed to IMA? What is the impact of CVA charges?

The global financial crisis highlighted the importance of liquidity in functioning financial markets. Pre-2008, market participants received easy access to readily available funding and were ill-prepared for events that transpired during the credit crisis. Failure to adequately assess and manage liquidity underpinned major market turmoil, triggering unprecedented liquidity events and the ultimate demise of Bear Stearns, Lehman Brothers and other financial institutions previously thought too big to fail.