Fundamental Review of the Trading Book (FRTB): Impact of Consultative Paper Proposed Revisions (D436)

APRIL 2018
FUNDAMENTAL
REVIEW OF THE
TRADING BOOK (FRTB)
IMPACT OF
CONSULTATIVE
PAPER: PROPOSED
REVISIONS (D436)

AGENDA
Executive Summary • Impact and Objective of the Proposed Revisions
Proposed Revisions to FRTB
• Introduction and FRTB Timeline
• Industry Context and ImpactImpact
Summary1
Areas of FocusKey Sections
Scope of Market Risk Capital
Requirements
Internal Models Approach
Standardized Approach • Impact Heatmap
• Degree of impact to 2016 Standard
• Degree of impact to FRTB Program Workstream
• Proposed Changes
• Summary of change
• Delta from 2016 Standard
• Key Action / Impact
Proposed
Revisions
2
Copyright © 2018 Accenture. All rights reserved. 2
FRTB Framework • Key Elements for FRTB Implementation
FRTB
Execution
3

• In order to address the structural shortcomings in the Basel II market risk framework, in January 2016, the BCBS
published the standard Minimum capital requirements for market risk1
• The BCBS has monitored the pace of the market risk standard implementation as well as its impact on banks’ market
risk capital requirements. Certain issues were identified and the Committee published a consultative document (22nd March
2018) proposing a number of revisions to the Standard. Responses are required by the 20th of June, 2018
PROPOSED BCBS REVISIONS TO FRTB
INTRODUCTION
In March 2018, the Basel Committee on Banking Supervision (BCBS) proposed key changes to the standard
Minimum capital requirements for market risk in order to align FRTB implementation to the intended expectations
2018 2019 2020 2021 2022
BIS1
Consultative
Paper
Mar’18
OSFI2
Update
Application
Open
“Letter of
intent”
Application
Close
Formal
application
Application
Open
Nov (FYE Oct)
Jan (FYE Dec)
May (FYE Oct)
Jul (FYE Dec)
Pre-Application
Close
Feb (FYE Oct)
Apr (FYE Dec)
Full-Application
Close
ECB3
Validation
From Q1
2020
FRTB
Implementation
& First
Reporting
Go Live
Regulatory Compliance
BIS1
OSFI2 ECB3
1. Bank for International Settlements (BIS): Minimum capital requirements for market risk (January 2016), Basel III: Finalizing Post-Crisis
Reforms (December 7th 2017) and Revisions to the minimum capital requirements for market risk (March 22nd 2018)
2. Office of the Superintendent of Financial Institutions (OSFI): OSFI and CBA Correspondence for FRTB Timelines (December 20th 2017)
3. European Central Bank (ECB): ECB Call: FRTB Validation (September 2017)

PROPOSED BCBS REVISIONS TO FRTB
INDUSTRY CONTEXT
• The standard Minimum capital requirements for market risk is in our view a driving force that will be
a global standard for the prudential regulation of banks
• The proposed changes are calibrated to align capital requirements to intended implications, to
allow effective monitoring and controls, and help redefine standards for consistent
interpretation
Establish a
Global Standard
• The Committee is taking into consideration feedback and supporting evidence on all aspects of
the document and proposed standard text
• The revisions demonstrate a pragmatic implementation framework aligned to the original
expectations pertaining to capital implications, while limiting unintended capital volatility
implications
Align Capital
Requirements
• In order to implement a consistent FRTB framework, a bank should consider both the regulatory
timeline (implementation & reporting date 1st January 2022) and the operative workflow, evaluating
possible trade-off in activities plan definition
Drive a Consistent
FRTB Framework
In our opinion, the proposed BCBS revisions to the 2016 Standard, demonstrate the pace and direction banks are
expected to take in implementing a global standard for measuring capital requirements for market risk. What
follows is our perspective on the proposed BCBS changes

1
Standardized
Approach
2
Internal Models
Approach
3
Scope of Market
Risk Capital
Requirements
We believe the proposed
revisions help align the overall
level of capital requirements
resulting from the
Standardized Approach to the
Committee’s initial
expectation.
IMPACT OF BCBS REVISIONS TO FRTB
EXECUTIVE SUMMARY
The BCBS proposed changes in our view help to align the impact of capital requirements, support ongoing
monitoring and controls and permit a consistent and standard interpretation of the 2016 Standard
Proposed revisions in our
view help redefine standards
for consistent interpretation,
and treatment of scope as to
the original intent of the 2016
Standard.
1. Liquid FX (foreign exchange) Pairs
2. Correlation Scenario
3. Curvature Requirements
4. Risk Weights
5. Treatment of multi-underlying Options
and Index Instruments
Reduction of Capital Requirements
1. Structural FX Positions
2. Trading Book and Banking Book
Boundary
3. Trading Desk Requirements
Note: The Committee proposed a simplified alternative to the standardized approach to market risk capital requirements.
This should facilitate the adoption of the market risk standard for banks other than those that are internationally active and
which have been excluded from this analysis.
Consistent & Standard Interpretation
We feel the proposed revisions
can allow for the ongoing
monitoring and effective
implementation of Internal
Models Approach.
1. P&L Attribution Test (Input Data,
Metric Design & Test Failure
Consequences)
2. Non-Modelable Risk Factors (Risk
Factor Modelability, Seasonal Markets
& Idiosyncratic Equity Risk)
Ongoing Monitoring & Controls

STANDARDIZED APPROACH
IMPACT HEATMAP
Standardized Approach: Potential Impact to the 2016 Standard
Risk Factor and
Sensitivity
Delta Risk Weights
and Correlation
Vega Risk Weights
and Correlation
Curvature Risk Weights
and Correlations
General
Provisions
Structure of
Standardized Approach
Residual
Add-On
Default
Risk Charge
Potential Impact to Key Workstreams
Governance
& Controls
Models &
Methodology
Data
Desk Analysis
& Optimization
Technology
Regulatory
N/A
Medium
Medium
N/A
Medium
N/A
No material impact
Methodology to be enhanced in order
to align with computation
requirements
Additional / revised data elements to
be identified and sourced
No material impact
Solution should be flexible to
integrate proposed revisions upon
finalization
No material impact
The BCBS has monitored the impact on banks’ market risk capital requirements and has proposed a few changes
in order to align the overall level of capital requirements resulting from the Standardized Approach
The general impact of the proposed revisions is to align overall level of capital requirements resulting
from the Standardized Approach and provide clarification to methodology
N/A M L N/A
L M L L
High
Impact
H
Legend
Medium
Impact
MLow
Impact
LNot
Applicable
N/A
• Multi-underlying Options
• Correlation Scenario• General Interest Rate,
Equity & FX
• Correlation Scenario
• Liquid FX Pairs
• Curvature Risk
• FX Risk Factor
• Multi-underlying Options
Sources: Bank for International Settlements (BIS): Minimum capital requirements for market risk (January 2016)
and Press release (March 2018)

PROPOSED CHANGES
The following proposed revisions to key components focus on aligning the overall level of capital requirements
resulting from the Standardized Approach (SA)
Component
Treatment of
Liquid FX Pairs
Impact
• Treatment of Liquid FX pairs –
calibrating the risk engine using the
pairs list
• Positive impact (i.e. reduction) on
capital charge
Proposed Revision
Allows for a combination of two liquid currency pairs to create a
triangulated pair that would also be liquid and subject to lower associated
capital requirements.
2016 Standard
FX Delta and Curvature risk weight is 30%
and applies to all currencies except for Basel-
defined liquid currency pairs.
Correlation
Scenarios
calibrating the risk engine using the
pairs list
capital charge for portfolios
Correlations would be scaled downward by less than 25% (the “low
correlation” scenario) for base correlations above 80%. This would reduce
the overly conservative impact.
For “low correlation” scenarios, all required
correlations to be scaled downward by 25%.
Capital
Requirements
(Non-linear
Instruments)
Shock Scenarios: Apply consistent scenarios within same SA “bucket” or
“sector” for a similar capital treatment of closely related instruments.
Cliff Effect: Apply a zero-floor when aggregate curvature charge is
negative to limit abrupt increases in capital requirements due to
aggregation.
FX Curvature: Proposes that where none of the underlying currencies of
a particular FX instrument is the bank’s reporting currency, any resulting
FX curvature sensitivities may be scaled down.
Upward and downward shocks are applied
separately.
Must use alternative specification when the
aggregate curvature sum is negative.
FX Risk factors are the exchange rate
between reporting currency and currency of
denomination.
• Risk engine configuration
capital charge due to consistency of
shock scenarios
• Risk engine configuration
capital charge due to the zero floor
(portfolios with negative curvature)
• Capital requirements - risk engine
calibrated using the new scalar
• Theoretical positive impact (i.e.
reduction) on capital charge
Proposed
Revision
Feedback /
Evidence
Requested

PROPOSED CHANGES
The following proposed revisions to key components focus on aligning the overall level of capital requirements
resulting from the Standardized Approach (SA)
Component
Risk
Weights
Impact
calibrating risk engine using pairs
list
• SA capital charge computation
capital charge
Proposed Revision
Risk weights to be aligned with the indented level of capital impact.
Reduction of risk weights for general interest rate, equity and FX risk
classes. Additional recalibration will be determined based on further
analysis of impacted data provided and feedback.
2016 Standard
FX Delta and Curvature risk weight is 30%
and applies to all currencies except for Basel-
defined liquid currency pairs.
Multi-underlying
Options &
Index
Instruments
• Risk engine configuration with look-
through approach
• High requirement of data (index
components)
capital charge
• Better results by applying look-
through both in the Delta and in the
Curvature context
To the treatment of multi-underlying options and index instruments with
the option to not use a look-through approach for computing Delta and
Curvature.
European or American plain vanilla multi-underlying options, and any
options that can be written as a linear combination of such options, are
exempt from residual add-on regardless of the directions of the underlying
Delta sensitivities.
Look through approach where all index
constituents / underlying options have delta
risk sensitivities of the same sign.
Options with multiple underlying or index
options, where all the underlying risk factors
have Delta sensitivities of the same sign are
exempt from residual add-on.
Proposed
Revision
Feedback /
Evidence
Requested

INTERNAL MODEL APPROACH
IMPACT HEATMAP
Internal Model Approach (IMA): Potential Impact to the 2016 Standard
The BCBS has monitored the impact on banks’ market risk capital requirements and has proposed a few changes
to allow for the ongoing monitoring and effective implementation of the Internal Model Approach
Interaction with
Standard Approach
Methodology
General
Criteria
N/A
N/A
Specification of
Market Risk
Factors
Qualitative
Standards
N/A
N/A
Default
Risk
Quantitative
Standards
N/A
N/A
Capitalization of
Risk Factors
Model Validation
Standards
N/A
H
Stress
Testing
Eligibility of
Trading
Activities
H
N/A
External
Validation
H
The general impact of the proposed revisions is to provide clarification pertaining to monitoring
controls, and the eligibility of trading activities and capitalization of risk factors
• Risk Factor Modelability
• Profit Loss Attribution
(PLA) Metric Design
• IMA Capital
Requirement and
PLA Test failure
Appendix B:
Backtesting
and PLA
H
• PLA Test Metric,
Framework and
Attribution
Governance
& Controls
Models &
Methodology
Data
Desk Analysis
& Optimization
Technology
Regulatory
High
High
High
N/A
High
N/A
Enhanced controls, rules and
procedures required to monitor for
eligibility of trading activities
Methodology to be enhanced to align
proposed changes regarding Risk
Factor Modelability and PLA metrics
High dependency on data for inputs
to Risk Factor Modelability and data
sources for PLA Metric
No material impact
Technology architecture
enhancements to enable ongoing
monitoring and implementation
No material impact
High
Impact
H
Legend
Medium
Impact
MLow
Impact
LNot
Applicable
N/A

PLA Test
Input Data
• Assessment of HPL and RTPL to
evaluate the need for alignment
intervention and the respect of
conditions proposed by the regulator
• Evaluate the stability of the PLA test
performed on the new structure
• Assessment of the alternative
measures proposed by the regulator
• High impact on data management
framework
• Reduce the capital impact of PLA
test failure at the desk level
• Point of attention: This continues a
‘’broken diversification’’ effect
between eligible and non-eligible
desks. The “Zones” calibration will
be crucial to avoiding a Cliff Effect
The proposed revisions to the Hypothetical P&L (HPL) and Risk
Theoretical P&L (RTPL) and clarifications for banks’ input data can help
avoid differences that may arise as a result of market data timing and
data providers
Description of P&L attribution & backtesting
framework at trading desk level provided, but
without guidance on time / data consistency.
PLA Test
Metric Design
To frequency of metrics calculation: quarterly basis using a time series of
daily P&Ls over the preceding 12 months
Two new PLA metrics to replace the previous metrics.
• Measure 1: Assessing the correlation between the HPL and the
RTPL using Spearman’s rank correlation coefficient
• Measure 2: Assessing the “similarity” of the HPL and RTPL
distributions over time (Alternative 1: “Kolmogorov-Smirnov” test;
Alternative 2: “Chi-squared” test)
Metrics to be calculated on a monthly basis
using daily P&Ls over the previous one-month
period.
Measure 1: Mean of unexplained daily
P&L over the standard deviation of HPL
Measure 2: Variance of unexplained P&L
over the variance of HPL
PLA
Test Failure
Consequences
Introduces a “traffic light” approach that includes 3 zones to address
concerns over volatility in capital requirement from failing the PLA test
and switching from IMA to SA:
• Green zone: Passed the PLA test
• Red zone: Failed the PLA test and must fall back to the use of SA
• Amber zone: Have not met the full requirements of the PLA test
and would be subject to a simple formula-based capital requirement
to be added to the trading desk’s IMA-based capital requirements
Trading desks that fail the PLA test would
become ineligible to use IMA and thereby
subject to capital requirements based on SA –
with only two zones: Green zone and Red
zone.
PROPOSED CHANGES
The following proposed revisions allow for the ongoing monitoring and effective implementation resulting from
the use of the Internal Model Approach (1/2)
Proposed
Revision
Feedback /
Evidence
Requested
Component ImpactProposed Revision 2016 Standard

Modelability
Requirements
and Calibration
• High impact on data management
framework
• Potential benefit to modelability
framework
• Assessment of third-party vendor
solutions and bucketing proposals
• Trade-off in risk-factor structure
definition: Higher granularity level
benefits PLA but has negative
impact on modelability results
To clarify the meaning of “representative” real price observations.
To processes, policies and procedures and that clearly set out the
approach to follow in order to map real price observations pertaining to
relevant risk factors.
Two potential alternatives proposed to determine how a risk factor for a
financial instrument is to be classified as an observation for the risk factor
eligibility test (i.e., bank established criteria and Standard prescribed
criteria).
To clarify conditions whereby committed quotes may be used as a real
price observation and data pooling schemes can be used to satisfy risk
factor eligibility tests.
The rule required that real price observations
be “representative” of the risk factors which
are subject to the risk factor eligibility test
without a clear definition of what is
“representative.”
• Assessment of bank portfolio to
evaluate the materiality of the
described issue
Impact of
Seasonal
Markets on
Non-Modelable
Risk Factor (NMRF)
Framework
No proposed revisions, however the Committee welcomes data evidence
and comments to confirm the validity and materiality of concerns related
to risk factors that are sufficiently liquid in seasonal periods, but are
deemed non-modelable based on the current requirements.
The Committee also welcomes alternative proposals for the Risk Factor
Eligibility Tests (RFETs).
No consideration for seasonality effect in the
RFET framework.
• Assessment of bank portfolio to
evaluate the materiality of the
described issue
Impact of
Idiosyncratic
Equity Risk on
NMRF Framework
No proposed revisions, however the Committee welcomes feedback and
evidence proving the materiality of the impact of a lack of an exceptional
treatment for idiosyncratic equity risk on NMRF capital add-on.
The Committee also welcomes feedback on whether an exceptional
treatment of idiosyncratic equity risk would address the issue of
exceedingly high capital requirements for equity risk NMRFs.
Capital requirements for NMRFs are
calculated using a stress scenario for each
type of NMRF and aggregated without
recognition of diversification benefits with the
exception of idiosyncratic credit spread risk
NMRFs.
PROPOSED CHANGES
The following proposed revisions allow for the ongoing monitoring and effective implementation resulting from
the use of the Internal Model Approach (2/2)
Proposed
Revision
Feedback /
Evidence
Requested

SCOPE OF
MARKET RISK
CAPITAL
REQUIREMENTS

SCOPE OF MARKET RISK CAPITAL REQUIREMENTS
IMPACT HEATMAP
Standardized Approach
The BCBS has monitored the impact on banks’ market risk capital requirements and has proposed revisions to
help redefine standards for consistent treatment of scope as to the original intent of the 2016 Standard
Restrictions on Moving
Instruments Between the
Regulatory Books
Scope of Application
and Methods
L
N/A
Treatment of Internal
Risk Transfers
Definition of
Trading Book
L
N/A
Treatment of
Counterparty Credit Risk
in the Trading Book
Risk Management
Policies for Trading
Book Instruments
N/A
N/A
Transitional
Arrangements
Definition of the
Trading Desks
L
N/A
The general impact of the proposed revisions is to provide clarity to processes, standards and policies
regarding FX positions, book designation and trading desks
Governance
& Controls
Models &
Methodology
Data
Desk Analysis
& Optimization
Technology
Regulatory
Low
Low
N/A
N/A
N/A
N/A
Align processes, standards and
policies with proposed revisions
Align processes, standards and
policies with proposed revisions
No material impact
No material impact
No material impact
No material impact
High
Impact
H
Legend
Medium
Impact
MLow
Impact
LNot
Applicable
N/A
• Trading Book vs
Banking Book
• Structural FX
Positions
• Trading Desk
Definition
and Press release (March 2018) Copyright © 2018 Accenture. All rights reserved. 16

SCOPE OF MARKET RISK CAPITAL REQUIREMENTS
PROPOSED CHANGES
The following proposed revisions to key components help redefine standard for consistent interpretation, and
treatment of scope as to the original intent of the 2016 Standard
Structural FX
Positions
• More clarity to structural FX
position(s) exempt from capital
requirements
• Impact on policies and procedures
definition
To the amount of structural FX positions that may be exempted from
market risk capital requirements based on FX risk and stemming from an
investment, rather than the amount of investment.
To clarify that structural FX positions in foreign branches of a bank can be
included in the scope of structural FX exemption.
Exclusion is limited to the maximum of the
amount of investments in affiliated but not
consolidated entities denominated in foreign
currencies; and / or the amount of investments
in consolidated subsidiaries denominated in
foreign currencies.
Trading Book and
Banking Book
Boundary
• More clarity to Trading Book /
Banking Book definition
definition
To provide amendments to clarify the treatment of financial instruments
that must be in the banking book or trading book:
• Providing conditions and controls for Equity Investment in Funds for
Trading Book
Defined financial trading book and banking
book instruments.
Trading Desk
Requirements
• More flexibility in trading desks
definition
definition
Proposed detail requirements for trading desk attributes:
• One head trader per desk unless the roles, responsibilities and
authorities are clearly separated, or one has ultimately oversight
over the other, then the two head traders are permitted
• One trader per trading deck unless supervisory approval is given to
assign individual traders and with a maximum of two trading desks
Trading desk is a group of traders or trading
accounts that implements a well-defined
business strategy operating within a clear risk
management structure.

INPUTS TO
FRTB
CAPITAL MODEL BUILD
& CONFIGURATION
BUSINESS
INTEGRATION
TARGET OPERATING
MODEL DEFINITION
Trades & Positions
Sensitivities (SA)
P&L Strips (IMA)
Market Data
Reference Data
Hierarchies – Product,
desk, book, legal entity
Issuer & party data
Consistency & alignment
Risk factors mapping
Proxy for missing time series
Risk / Front office
alignment
Data consistency
NMRF framework
Calculation as per SA
Calculation as per IMA
Data Management
& Load
Model Testing,
Approval & Validation
Geographic & Entity
Configurations
Model Build
Clear policies and procedures
Reg. computation logic
Reg. aggregation logic
Flexibility of design
Business rules for each entity
according to jurisdiction
regulator
Parallel Run
Control Framework
Enhance Capital
Reports
Desk Optimization
Governance
Data ownership
Data & process controls
Governance
Data ownership
Data & process controls
New risk measures
New reporting
Clear policies & procedures
Model Compliance
& Regulatory Changes
IMA Application
Infrastructure,
Performance &
Capacity
Results Interpretation
Clear policies and procedures What-if analysis
IMA / SA comparison
Clear policies and procedures
End 2019: ECB formal
application
ELEMENTS OF AN FRTB FRAMEWORK
KEY STEPS

THANK YOU
To find out more:
Accenture Finance & Risk:
https://www.accenture.com/us-en/financial-services-finance-risk
Accenture Finance & Risk Blogs:
http://financeandriskblog.accenture.com/homepage/
https://www.linkedin.com/showcase/16183502
https://twitter.com/AccentureFSRisk
Contact us:
Canada:
Avinash P. Pimento: Managing Director, Accenture Finance & Risk
avinash.p.pimento@accenture.com
Usman Raj: Senior Manager, Accenture Finance & Risk
usman.raj@accenture.com
United States:
Ashley Davies: Managing Director, Accenture Finance & Risk
ashley.davies@accenture.com
Rahim Inoussa: Senior Principal, Accenture Finance & Risk
rahim.inoussa@accenture.com
Gaurav Kapoor: Manager, Accenture Finance & Risk
gaurav.a.kapoor@accenture.com
Europe:
Paolo Brognara: Managing Director, Accenture Finance & Risk
paolo.brognara@accenture.com
Abulenta Librazhdi: Senior Manager, Accenture Finance & Risk
abulenta.librazhdi@accenture.com
Gianluca Marcuzzo: Consultant, Accenture Finance & Risk
gianluca.marcuzzo@accenture.com

FUNDAMENTAL REVIEW OF THE TRADING BOOK
(FRTB)
IMPACT OF CONSULTATIVE PAPER PROPOSED
REVISIONS (D436)
About Accenture
Accenture is a leading global professional services
company, providing a broad range of services and
solutions in strategy, consulting, digital, technology
and operations. Combining unmatched experience
and specialized skills across more than 40
industries and all business functions—underpinned
by the world’s largest delivery network—Accenture
works at the intersection of business and
technology to help clients improve their
performance and create sustainable value for their
stakeholders. With more than 442,000 people
serving clients in more than 120 countries,
Accenture drives innovation to improve the way the
world works and lives. Visit us at
www.accenture.com
Accenture, its logo, and High Performance
Delivered are trademarks of Accenture.
Disclaimer
This presentation is intended for general
informational purposes only and does not
take into account the reader’s specific
circumstances, and may not reflect the
most current developments. Accenture
disclaims, to the fullest extent permitted
by applicable law, any and all liability for
the accuracy and completeness of the
information in this presentation and for
any acts or omissions made based on
such information. Accenture does not
provide legal, regulatory, audit, or tax
advice. Readers are responsible for
obtaining such advice from their own legal
counsel or other licensed professionals.

Fundamental Review of the Trading Book (FRTB): Impact of Consultative Paper Proposed Revisions (D436)

Recommended

Recommended

More Related Content

More from accenture

More from accenture (20)

Recently uploaded

Recently uploaded (20)

Fundamental Review of the Trading Book (FRTB): Impact of Consultative Paper Proposed Revisions (D436)