Senior Market Risk Professionals Set to Discuss FRTB Finalisation Paper


The Basel Committee on Banking Supervision (BCBS) recently released the long awaited revised new market risk framework, the Fundamental Review of the Trading Book ('FRTB'). The final text has prompted much discussion on Basel capital adequacy requirements with fundamental changes to and concerns over the internal models-approach, standardised approach, VaR to ES, trading book and banking book boundaries, and market illiquidity.

The implementation challenges of the FRTB are due to be discussed by senior market risk professionals in London next month, over two days on 19-20 April, at the upcoming Fundamental Review of the Trading Book Summit organised by the Center for Financial Professionals. Heads of Market Risk from global financial institutions including HSBC, Credit Suisse, ING, Nomura, Credit Agricole CIB, ICBC, and Standard Bank are all confirmed to attend the Summit. Attendees will be eagerly anticipating the opening panel discussion with Sylvain Martinez (Head of Market Risk & Analytics at ICBC Standard Bank), Harshit Patwa (Associate Director, Risk Strategic Initiative, Market Risk Change at UBS) and Etienne Varloot (Head of Global Markets Regulatory Strategy & Quant Research at Natixis) who will collectively assess FRTB implementation challenges directly.


Nicola Hortin (Head of the EMEA Regulatory Analysis Team at AxiomSL) has said that banks needs to prepare strategically for the FRTB and other Basel IV calculations; “Banks face a busy few years implementing all of the new Basel capital calculations, including the FRTB. They will need to be able to juggle multiple implementation deadlines and move smoothly from their incumbent calculations to the new versions. By thinking strategically about the entire suite of reforms now and by using a strategic regulatory platform, they can adapt smoothly and efficiently to the new regulatory regime”


Essentially, all firms with a trading book will be impacted by the FRTB, and as such the FRTB 2016 Summit is popular with market risk professionals across a wide range of financial organisations. The Summit’s first session will be of interest to many as Katherine Wolicki (Global Risk Analytics, Wholesale Credit and Market Risk, HSBC) will provide an in depth assessment of the new restrictions and the boundary between the Trading Book and the Banking Book.


The FRTB changes also look to address the revision of the internal models approach, to ensure a better, more comprehensive capture of risks that better account for tail risks and market illiquidity. The enhanced risk capture makes a significant change with the current Value-at-Risk (VaR) being replaced with Expected Shortfall (ES).


Brandon Davies, Former Head of Market Risk, Barclays who will attend the FRTB Summit to assess the move from VaR to ES said ‘ES invariably produces a far higher capital requirement than VaR which suggests the latter provides a gross under estimate of risk and capital. However ES also ignores the probability, that the rare tail risk data observations are far less stable observations. If the tail observations are the result of dynamic and conditional processes projections of risk may prove to be very inaccurate’.


Implementation of the new internal model standards will be challenging, requiring banks to make extensive changes to their existing architectures. Jim Congleton, Market Risk Analytics, Standard Chartered Bank will attend the FRTB 2016 Summit to look at implementing liquidity horizons in the internal models approach and will address modelling for ES. While Dr Sascha Engelbrecht and Michael Kratochwil at Nagler & Company comment “The incorporation of risk-factor specific liquidity horizons will drive a significant increase in valuation efforts.”


Another area of great focus within the revised capital standard for market risk is the revised standardized approach, acting as a fallback for internal models that are not approved, under the standardized approach the method for calculating capital requirements for banks with a level of trading activity is far less complex, requiring no sophisticated measurement of market risk. Gael Robert (Director, Risk Methodologies, Mizuho International) will join the Summit on day two to explain the impact of the standardised approach for market risk and CVA risk.

Seats at the FRTB 2016 Summit are reportedly being reserved fast with the Summit expected to reach full capacity in April. The full agenda for the FRTB Summit is currently available to view at The Center for Financial Professionals have recommended market risk professionals that are unable to attend the FRTB Summit to attend the 5th Annual Risk EMEA 2016, dubbed the premier banking risk and regulation Summit in Europe, taking place 24-25 May. The popularity surrounding the FRTB has resulted in a dedicated FRTB stream at the event.

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