SOLVING THE FRTB CHALLENGE

WHY YOU SHOULD CONSIDERAN AGGREGATION SOLUTION

MARKET RISK:LAY OF THE LAND

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THE MARKET RISK INFRASTRUCTURE AT MAJOR BANKS WAS ADAPTED FOR PRE-FRTB REQUIREMENTS, BUT LEGACY SYSTEMS AND PROCESSES WILL NOT COPE WITH THE NEW REGULATIONS

Outdated market risk infrastructure –with some solutions in place for 15-20 years

Fragmented market risk systems leading to siloed calculations and partial coverage

Lightweight, inflexible reporting tools for aggregating multiple VaR calculations

Large investment in vetting and validating pricing models for existing Internal Models Approach (IMA) approval

Front office not actively engaged in understanding market risk capital as market risk calculations often owned by risk and finance

FRTB RAISES THE STAKES

THE FUNDAMENTAL REVIEW OF THE TRADING BOOK IS THE

IN MARKET RISK RULES THAT WE’VE SEEN IN A GENERATION

BIGGEST CHANGE

THERE ISN’T MUCH TIME

FRTB deadline is the end of 2019; EU draft rule suggests up to a one-year delay

IT REQUIRES A GLOBAL VAR/ES CALCULATION –NO MORE ADDING VAR FIGURES TOGETHER

METRICS ARE COMPLEX, NON-INTUITIVE AND HEAVY ON AGGREGATION

TRAPDOOR FORIMA DESKS DOWN TO STANDARDIZED APPROACH WILL REQUIRE FRONT-OFFICE ENGAGEMENT

Additional data collection required to support IMA approval

Solution implementationmust start in 2017

THE ANSWER:A CENTRALIZED AGGREGATION SOLUTION

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WITH AN AGGREGATION SOLUTION, YOU WILL BE ABLE TO:

Source required prices from one or morefront-office and risk engines

Perform bank-wide FRTB calculations both at end of day and intra-day using those inputs

Combine the results with intermediate data and expose inputs via reporting and analysis tools

THE ANSWER:A CENTRALIZEDAGGREGATION SOLUTION

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Is non-intrusive- Leverages the existing front-office and risk infrastructure

- Short implementation timeline and cost control

Allows you to reuse existing pricing- No need to revalidate all models for IMA approval

AN AGGREGATION SOLUTION:

THE ANSWER:A CENTRALIZEDAGGREGATION SOLUTION

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Has in-memory aggregation technology - To handle complex, multi-stage aggregation

methodologies in FRTB SBA, ES calculations

- For optimal performance

Will help you pass P&L attribution tests- If pricing is sourced from engine(s) used to

generate official P&L

- Reduces pricing reconciliation issues across risk, finance and the front office

AN AGGREGATION SOLUTION:

FRTB AGGREGATION: DATA FLOWS

AG

GR

EG

AT

ION

ADVANCED MODEL CHARGE

MARKET RISK CAPITAL CHARGE

ADVANCED MODEL APPROVAL

STANDARDIZED CHARGE

FRONT OFFICE

A

RISK ENGINE

FRONTOFFICE

B

CENTRAL SCENARIO

GENERATION

Back test (bank)

SBA

DRC

Residual Risk

Expected Shortfall

NMRF

DRC

P&L Attribution

Back test (desk)

MULTIPLIER

MARKET DATA

REPOSITORY

Could be more than50 front-office/risk systems. Different

versions with regional instances.

PR

ICE

S

(Se

nsi

tiviti

es,

P&

L v

ect

ors

, Ma

rke

t V

alu

es,

No

tion

als

)

SELECTING THE RIGHT PRICING INPUTS FOR IMA

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TYPE OFPRICING INPUT DESCRIPTION

ACCURACYON EXOTIC PRODUCTS COMMENT

PRICING ENGINE REQUIRES FRTB SCENARIOS?

SensitivitiesDelta, Vega, Gamma price sensitivities

Low

Price determined by extrapolationReuse SBA sensitivities?Intuitive representation that’s useful for what if

×

GridsP&L values for fixed gridof risk factor shocks

MediumGrid typically limited to 2 dimensionsPrice determined by interpolation ×

P&L vectorsP&L values for dynamic set of risk factor scenarios

High Full revaluation approach

BALANCE BETWEEN ACCURACY (TO PASS P&L ATTRIBUTION TEST)AND COMPLEXITY (INTEGRATION AND RISK FACTOR MANAGEMENT)

FRTB AGGREGATION:CHALLENGES AND RISKS

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THE RIGHT SOLUTION WILL HELP MANAGE THE FOLLOWING FRTB AGGREGATION CHALLENGES AND RISKS

REDUCE THE RISK WITH A SINGLE PRICING ENGINE AND A RISK AGGREGATION SOLUTIONUpstream pricing engines need to be FRTB-enabled

Running ad hoc calculations can be operationally demanding

Multiple pricing engines can complicate risk factor management

Integration of multiple pricing engines can pose a challenge

WHAT SHOULD YOU LOOK FOR IN A SOLUTION?

HIGH PERFORMANCE– Reduced data load time to maximize time to analyze and investigate

– Optimized risk data structures to reduce query times

– Concurrency between data load and user query

POWERFUL DRILL DOWN– Detail goes down to scenario/trade level input prices

– Schema design guides user through multi-stage aggregations in FRTB

– Breakdown of bank capital total to additive desk and trade-level capital

FLEXIBILITY– Open technology supports wide variety of reporting tools

– Extensible to keep up with changing needs and regulations

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WHAT-IF ACTIONS WITHOUT RE-PRICING

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RUNNING “WHAT-IF” CALCULATIONS WITH AN AGGREGATION SOLUTION

WHAT-IF ACTIONS REQUIRING RE-PRICING

New trade -Invoke pricing engine(s) to supply price inputs or use proxy pricing in aggregation layer

Move trades from one desk to another for pre-go-live analysis

Scale an existing position

Remove an existing position -if that improves the results then analyse that position further

Risk factor change, for example add risk factors to improve P&L attribution results

Avoid some ad hoc repricing by pre-generating prices for common what if scenarios during end of day

NON-REGULATORY MARKET RISK MANAGEMENT

Typical metrics are VaR and sensitivities

The inputs required are similar to the inputs for FRTB ES and SBA respectively

SIMM AND CVA CAPITAL

Calculations are similar to the FRTB standardized approach

Both require sensitivities inputs

CLEARED INITIAL MARGIN

Various methodologies for different clearing houses but often based on VaR

What-if functionality important

COUNTERPARTY CREDIT RISK AND CVA

Much higher volume of prices and requires performance optimization

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BEYOND FRTBTHE SAME AGGREGATION ARCHITECTURE CAN BE USED TO GENERATE FURTHER METRICS BEYOND FRTB MARKET RISK CAPITAL USING SIMILAR INPUTS

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Contact us today to learn more about FIS’ Risk Aggregation solution and to speak with our experts

SO… ARE YOU READY TO SEE AN FRTB AGGREGATION SOLUTION IN ACTION?