Preparing for FRTB – what you need to know
By Andre Burrell, Director Industry Solutions for Cloud, Banking and Capital Markets, Microsoft on July 7, 2017
Filed under Financial Services - Banking & Capital Markets
As the deadline to Fundamental Review of the Trading Book (FRTB) approaches, banks must be ready to prove regulatory compliance. Numerix, an industry leader in derivatives technology, has developed an FRTB solution using Microsoft Cloud technology. We sat down with Numerix’s Chief Strategy Officer, Satyam Kancharla, to get a sense of what banks are doing to prepare for the 2020 FRTB deadline, and what still needs to be done.
Q: There are fewer than three years remaining until FRTB goes into effect. Do you see a sense of urgency among banks to get ready?
A: There is a range of readiness states by banks around the globe, but overall most banks are behind. In a way, being behind is understandable because banks must strategically reposition their business models to adjust to FRTB rule changes. Generally, though, there needs to be more urgency in terms of focus and an overall plan because the timeline is very short and the task list is complex. The complexity lies not just in implementation, but also in the second and third order effects of FRTB – which boil down to what it means for all a bank’s different trading desks; how should they operate, what does it mean for the market, and what does it mean for competitors? We feel Numerix FRTB is particularly meaningful, relevant, and timely because it gives banks the ability to answer these questions and understand what the secondary and tertiary effects will be on their business.
Q: What do banks need to do to plan for FRTB?
A: To commit to a plan, banks need to compile all of their data, begin conducting initial assessments and analyses, and get technology up and running. They need analytics and computational tools which can simulate capital and pull together a variety of information from across the organization. The complexity of running the simulations, the technology required to run them, and the understanding of FRTB’s downstream implications are certainly being underestimated. FRTB also requires an unprecedented level of operational integration between different parts of the bank. The most sophisticated banks are those that are rethinking not only their technology landscape and infrastructure, but also their operational processes across the capital markets unit.
Q: Does early FRTB preparation present an opportunity for banks?
A: Absolutely – having the ability to engage with regulators in an informed way will set banks apart, and the only way to have an informed opinion on FRTB’s potential impacts is by running data simulations and conducting analyses now. FRTB is a guideline that every national regulator needs to adapt to their market. To do so, they will need input from banks in their local market, and they’ll have to work with banks to understand what FRTB means for them to get that input.
To participate in this feedback loop, banks must be ready a lot sooner than the actual regulatory timeline. Across the world, we already see regulators asking for quantitative impact studies from their banks. Banks that move faster than others will benefit from better engagement and not face the same rush as those who wait.
For example, some of the FRTB liquidity rules may mean different things for financial markets in different parts of the world. It’s important for banks to look at these rules and determine how well they apply to the local currencies, equities and financial products, and inform the regulator so FRTB can be adapted in the right way for that market.
Q: How are leading banks preparing for FRTB?
A: Leading financial institutions are working with their executive management to understand the organizational impact of FRTB. FRTB applies on a desk-by-desk level, so the number of desks you have and how they are organized will impact how your capital is reported, validated, and approved. This impacts all aspects of a capital market organization, and these impacts need to be understood and communicated at the senior level. The impact may be minimal or it may be large, but either way these are the questions banks need to answer quickly. Often, it’s not a simple answer. The answers will affect what lines of business the bank wants to operate in and how they want to position their business in the coming years.
Q: Why did Numerix choose to work with Microsoft to build their FRTB solution?
A: We adopted Azure very early for our own internal performance testing and quality assurance because we believed it was the optimal testing environment to meet our compute needs We have trusted the platform for several years now, and have a great relationship with Microsoft.
In fact, we use Azure for most of our client proof of concepts (PoCs). In a matter of minutes, when engaging with our clients we can boot up a brand new, powerful server and bring it to life with software and data – without all the pain and complexity of using internal hardware or a client’s hardware.
For these reasons, Microsoft was the natural partner for us to team with on a high-performance, agile, and quickly implementable SaaS solution for FRTB. Numerix and Microsoft’s partnership provides customers with a solution that has the computational power and speed to support the large volume of calculations required for FRTB.
Q: What is the most important thing for banks to keep in mind as they try to tackle FRTB?
A: It is incredibly important for banks to start early and think about FRTB from a larger institutional perspective. As we think about optimizing the next generation of bank enterprise architecture to ensure market risk and data regulations are being met, there’s a long list of tasks to undertake. If banks don’t get started early, hasty decisions will be made and banks will end up with a tactical solution instead of a strategic one. If banks don’t start getting ready now, they’ll end up years behind from a solution standpoint and not be as competitive as they could be. Getting started with the cloud today gives banks the flexibility and time they need to adequately prepare and scale to meet new requirements in the future.
Numerix FRTB, built on Microsoft Cloud technology, is available now on Microsoft AppSource. Learn more about Numerix’s high performance, agile, and quickly implementable SaaS solution by trying the demo today.