Comparing The Internal Model & The Standardised Approach To FRTBMethodologies, Impacts & Practical Considerations

for Implementation

December 2015

Jonathan Berryman, SVP Risk Strategy, FIS

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and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of

our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130

countries. Headquartered in Jacksonville, Fla., FIS employs more than 55,000 people worldwide and holds leadership

positions in payment processing, financial software and banking solutions. Providing software, services and

outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of

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Agenda

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• Topics covered elsewhere today

• Methodology comparison

• Summary of impacts

• Implementation considerations

• Other FRTB challenges

• What Next for FRTB?

Topics covered elsewhere today

Topics covered elsewhere today

5

The FRTB’s Standardised Approach

Calibrating The Framework & Computing The Sensitivities For The New Standardised Approach

Diana Iercosan, FEDERAL RESERVE BOARD

Backtesting Expected Shortfall (ES)

Assessing Conservativeness Of ES Estimates & Quantifying ES Understatements

Mark Nyfeler, UBS

IDR In The FRTB

Modeling Incremental Default Risk in Fundamental Review of the Trading Book

Rita Gnutti, INTESA SANPAOLO

FRTB QIS

Understanding The Results, The Operational Risk Challenges & How Best To Utilise The QIS Results

Jim Congleton, STANDARD CHARTERED

FRTB and the P&L Attribution requirement

How To Deal With The Infrastructure Challenges Of The Profit Attribution Analysis Requirements Of The FRTB?

Lars Popken, Head of Risk Methodology, DEUTSCHE BANK

Methodology comparison

Methodology comparison

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SA

IRC, CRM

VaR + SVaR RNIV

SA – Standardised Approach

IRC – Incremental Risk Charge

CRM – Comprehensive Risk Measure

VaR – Value at Risk

SvaR – Stressed VaR

RNIV – Risks Not In VaR

SBA

+RRA

DRC +

Securit-

isations

DRC

ES NMRF

SBA – Sensitivity Based Approach

RRA – Residual Risk AddOn

DRC – Default Risk Charge

ES – Expected Shortfall

NMRF – Non-Modellable Risk Factors

Revised approach (FRTB)

Current

• Approval scope is not explicit

• Firms have approval for General Risk, Specific Risk for Credit & Equities. Usually firm-wide but can be by

business line or more granular.

• Back-testing exceptions result in a multiplier

• Approval by desk

• Back-testing exceptions result in a multiplier but can also lead to fall-back to SA

• P&L Attribution test added

• Ongoing test for NMRF

• All firms must calculate SA

Summary of impacts

Summary of impacts

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• ISDA, GFMA and IIF analysed the results of 28 banks’ submissions to the BCBS Quantitative Impact

Study on June 2015 reference data (QIS 4) [published October 22, 2015]

• Analysis shows that the proposed Standardised Approach results in a multiple of the Internal Model

Approach which is of particular concern given the proposal for Capital Floor

SBA to ES *

Interest rate risk x 4.2

Credit spread risk x 2.1

Equity risk x 4.6

Commodity risk x 3.6

Foreign exchange risk x 3.8

* Sensitivity Based Approach (SBA)

excluding Residual Risk AddOn (RRA)

Expected Shortfall (ES)

excluding Non-Modellable Risk Factors (NMRF)

ISDA - International Swaps and Derivatives Association

GFMA - Global Financial Markets Association

IIF - International Institute of Finance

BCBS - Basel Committee on Banking Supervision

• A significant component of the Standardised Approach

charge relates to the Residual Risk AddOn accounting

for 47% of the total

• Non-Modellable Risk Factors (NMRF) account for 29%

of the total proposed market risk charge, 4.3 times the

Risk Not In VaR (RNIV) charge and 1.5 times the

expected shortfall (ES) risk measure

• The results show a 2.2 times increase in capital from

Basel 2.5 for securitisations

Summary of impacts

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• On November 18, 2015 BCBS published its own analysis of the Quantitative Impact Study on

December 2014 reference data (QIS 3)

• BCBS analysis was based on a sample of 44 banks that provided usable data for the study

• Overall the proposed (as at December 2014) changes in the market risk framework would produce a

4.7% increase in total capital requirements

weighted average 74%

simple average 41%

median bank 18%

• BCBS highlighted three statistical measures of the

increase in market risk capital charges:

• Internal model approaches (IMA) show an

increase compared to existing IMA

• Standardised approaches (SA) show an increase

compared to existing SA

• QIS 3 did not include the Residual Risk AddOn in the Standardised Approach nor was

Securitization included. Both were added to QIS 4

• Many banks reported zero for NMRF; for banks that did report NMRF this represented 20-30%

capital

simple average 54%

median bank 13%

simple average 128%

median bank 51%

Implementation considerations

Implementation considerations

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• Standardised Approach

• Calculation of sensitivities

• Source of sensitivities

• Full revaluation required for curvature

• Internal Model Approach

• P&L Attribution

• Desk-level backtesting

• Market data management (data problems have more impact, proxies –

identify & track)

• (avoiding) Non-Modellable Risk Factors

• Full revaluation possibly necessary to pass backtesting and P&L attribution

• Operational challenge of desks moving in and out of IMA

Implementation considerations

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• Completeness of market risk system

• FRTB

+ FRTB-CVA

+ ISDA SIMM

+ Market risk limits

+ Counterparty credit risk

• Market data management

• Identifying NMRF

• Proxies

• Pricing model libraries

• Performance considerations

Implementation considerationsPerformance Demands

Consider the data required for trade level drilldown for 100,000 trades – number of PVs.

Consequent cube size.

10 Million

50 Million

500 Million

1 Billion

10 Billion

50 Billion

500 Billion

2500 Billion

FRTB SA-SBA

HSVaR

Monte Carlo VaR

FRTB HS-IMA

FRTB MC-IMA

Potential Future Exposure

PFE Stress Tests

CVA Sensitivities

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Adaptiv Market Risk Solution

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P&L attribution, Back testing, Stress testing

Reporting

Aggregation, Risk and Capital Calculations, Optimisation

Pricing

Trade Data

Static Data

Market Data

Orc

he

str

ation

Control & Limits

Data Staging

Snapshots

T-1

T-2

T-n

Enrichment

Integration (batch, online, ETL)

Audit

Corrections

Re-runs

Other FRTB challenges

Other FRTB challenges

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• Stress testing

• Holistic view including market risk

• Pre-deal measure?

• ES less intuitive, potentially more difficult to hedge

• Risk of becoming Non-modellable

• Multiple approaches

• Standardized, Advanced & Economic models co-exist

• Disclosure

• More granular requirements

• Step change

• VaR was the internal model and then adopted for Capital

• ES and NMRF implemented for the first time

• Need prototype to understand impacts & optimisation

What Next for FRTB?

www.sungard.com 19

Is it time

for an

FRTB

break?

What next for FRTB?

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• Basel Committee

• Publish final framework

• Residual risk add-on

• Securitisation framework

• Non-Modellable Risk Factors identification and capital charge

• Many parameters calibration both in Standardised and Internal Model Approaches

• Confirm implementation date

• Post 2015

• Further calibration, including P&L Attribution thresholds

• Feedback loop from other BCBS streams

• FRTB-CVA

• National Regulators

• Transpose into local laws / rulebooks

What next for FRTB?

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• IMA approved banks

• Need to re-apply

• Implement cost efficient solution

• Optimise capital requirement

• Reduce overall running costs

• SA banks

• Need to assess impact

• Consider IMA

Desk Structure

What next for FRTB?

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Head Office

Consumer Banking

TB / BB Boundary

Global Wealth and Investment Management

TB / BB Boundary

Global Markets

EquitiesFixed Income /

Currencies

Rates Europe

Structured Flow business

GBP

Trader

EUR ...

Rates Asia-Pac ...

Credit Commodities

Global Banking

TB / BB Boundary

What next for FRTB?

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Risk Factor Identification: attempt

to decide which risk factors are

relevant for each desk

Modellability Checks: determine

which of these are in the scope for

ES, and which must go to NMRF,

based on data quality

Is the capital from NMRF excessive?

Backtesting and P&L Attribution:

check if each desk passes the tests

Do we pass the tests?

Add risk factors (or higher order

sensitivities) and re-test

Try to use less granular risk

factors or re-structure the

Trading Desk organisation

Is SA capital tolerable?

Internal Model ApproachStandardised Approach

No

Yes

No

No Yes

Yes

Start

Come and visit us

What next for FRTB?

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