Banks Facing Data and Modeling Difficulties in Implementing FRTB

Data was the number one challenge identified for FRTB implementation, with 59% of 131 respondents to a Bloomberg poll citing it as their main challenge.

Preparation for FRTB (Fundamental Review of the Trading Book) is uneven across the banking industry, with data and risk modeling decisions cited as some of the most difficult challenges, according to a recent poll conducted by Bloomberg.

FRTB will revamp how banks approach market risk on their trading desks, and is considered one of the most significant regulatory changes to come from the wave of post-financial crisis reforms known as Basel III.

In March, the FRTB implementation deadline was delayed one year to January 2023 by the BCBS (Basel Committee on Banking Supervision) due to the Covid-19 pandemic. However, the first reporting deadlines are approaching in Q3 2021, making FRTB a top item on the banking regulatory agenda.

At a recent online event, Bloomberg asked senior trading, compliance and regulatory professionals from across the sell-side how their institutions are preparing for FRTB.

As a result of the BCBS’ delay, over half (57%) of 188 respondents said they have slowed their implementation program, with 47% saying implementation has “slowed somewhat” and 10% saying implementation has “slowed significantly.”

Only 2% of respondents said they accelerated implementation, and 41% reported no change of pace.

About half of 111 respondents (50%) felt they were on target—barring minor challenges—to begin reporting later this year, with just 3% saying they had finalised their solution and had no open issues.

The remaining 47% saw challenges ahead, with 25% of respondents anticipating challenges implementing analytical system and risk sensitivity calculations, and the other 22% anticipating challenges in data bucketing and the treatment of funds.

“FRTB presents all of the major data challenges banks face in a nutshell, from cleaning the data to categorising it and ultimately making it applicable for risk management and regulatory compliance,” said Brad Foster, head of enterprise content at Bloomberg.

“The upcoming implementation of this major new rule should be a reminder for banks to evaluate their overall data strategy and make sure their data aligns across the front, middle, and back office, from the trading desk to the compliance department.”

Data was by far the number one challenge identified to FRTB implementation, with 59% of 131 respondents saying the data aspect of FRTB was their main challenge.

The challenge includes cleaning data, obtaining historical data such as volatility and curves, data bucketing, and capturing real price observations for the Internal Models Approach (IMA).

Other challenges identified including deciding on the Standard Approach (SA) versus IMA, and aligning market risk and front-office pricing models across the institution.

“Despite the delay, banks should continue to keep FRTB implementation high on their radar,” said Eugene Stern, head of market risk product at Bloomberg.

“FRTB is about more than just checking the boxes: it requires banks to make some major decisions about their risk management processes and data practices which go far beyond market risk. Combined with the ongoing LIBOR transition, the next two years promise to be full of change for the global sell-side.”