Over the last 20 years, there have been significant technology advancements in the financial markets. Most recently, the interest in blockchain has been huge.
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FRTB impacts financial institutions across all functions as it poses operational, methodology and technology challenges. To meet the requirements financial institutions will need to rethink their business and technology strategies with a view to streamlining their processes and architecture.
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).
New challenges in the financial markets are being driven by changes in market structure, regulations and accounting rules like Basel III, EMIR, Dodd Frank, MiFID II, Solvency II, IFRS 13, IRFS 9, and FRTB. There is a rise in demand for vendors to deliver high performance solutions in order to satisfy the computational requirements of problems like XVA. This demand has pushed software providers to put technology at the forefront of the strategic roadmap and make significant optimisations.
One of the largest overhauls by the Basel Committee on market risk regulatory capital in recent times is close to completion. FRTB is intended to address the undercapitalisation of trading book exposures witnessed during the financial crisis.
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.
The derivatives landscape has evolved greatly over the past few years, driven by the scale and pace of regulatory change, economic unease and competitive pressures. These drivers have heightened the attention on risk technology and operations, forcing firms to re-think their business operating models. The rapid pace of innovation in technology presents a whole new range of possibilities for how technology can be leveraged.
Over-the-counter (OTC) derivatives markets continue to be impacted by regulatory changes. These interrelated changes are affecting financial institutions and their business operations. For example, rising capital requirements are impacting profitability and return on equity market participants are now being forced to clear standard OTC derivatives trades through Central Counterparties (CCPs). Soon, there will even be margin requirements for the remaining nonstandard, uncleared derivatives (MRUDs). This is prompting firms to better assess and manage costs (funding, collateral, capital) in a consistent manner at a trade, desk and business unit level. The question is, how much of these costs can be passed on to clients?
In July 2015, the Basel Committee of Banking Supervision (BCBS) published a consultative paper on credit valuation adjustment (CVA) risk to improve the current regulatory framework. In February 2016, first improvements of this framework have been introduced within the QIS instructions for the QIS based on December 2015 results.
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