Many banks face multiple challenges around market risk, with outdated infrastructure, fragmented systems, and inflexible reporting tools. And now FRTB raises the stakes. The Fundamental Review of the Trading Book is the biggest change in market risk rules that we’ve seen in a generation. The answer to the FRTB challenge is a centralized aggregation solution that allows you to source required prices from one or more front-office and risk engines, perform bank-wide FRTB calculations using those inputs, and combine the results with intermediate data and expose inputs via reporting and analysis tools. View our slideshow to learn more about aggregation challenges and why you should consider an external solution.

1. SOLVING THE
FRTB CHALLENGE
WHY YOU SHOULD CONSIDER
AN AGGREGATION SOLUTION

2. MARKET RISK:
LAY OF THE LAND
2
THE MARKET RISK
INFRASTRUCTURE AT
MAJOR BANKS WAS
ADAPTED FOR PRE-FRTB
REQUIREMENTS, BUT
LEGACY SYSTEMS AND
PROCESSES WILL NOT
COPE WITH THE NEW
REGULATIONS
Outdated market risk infrastructure –
with some solutions in place for 15-20 years
Fragmented market risk systems leading
to siloed calculations and partial coverage
Lightweight, inflexible reporting tools for
aggregating multiple VaR calculations
Large investment in vetting and validating pricing models
for existing Internal Models Approach (IMA) approval
Front office not actively engaged in understanding market risk
capital as market risk calculations often owned by risk and finance

3. FRTB RAISES THE STAKES
THE FUNDAMENTAL REVIEW
OF THE TRADING BOOK IS THE
IN MARKET RISK RULES THAT
WE’VE SEEN IN A GENERATION
BIGGEST CHANGE

4. THERE ISN’T
MUCH TIME
FRTB deadline is the
end of 2019; EU draft
rule suggests up to a
one-year delay
IT REQUIRES A
GLOBAL VAR/ES
CALCULATION –
NO MORE ADDING
VAR FIGURES
TOGETHER
METRICS ARE
COMPLEX, NON-
INTUITIVE AND
HEAVY ON
AGGREGATION
TRAPDOOR FOR
IMA DESKS DOWN
TO STANDARDIZED
APPROACH WILL
REQUIRE
FRONT-OFFICE
ENGAGEMENT
Additional data
collection required to
support IMA approval
Solution implementation
must start in 2017

5. THE ANSWER:
A CENTRALIZED
AGGREGATION SOLUTION
5
WITH AN AGGREGATION SOLUTION,
YOU WILL BE ABLE TO:
Source required prices from one or more
front-office and risk engines
Perform bank-wide FRTB calculations both at
end of day and intra-day using those inputs
Combine the results with intermediate data and
expose inputs via reporting and analysis tools

6. THE ANSWER:
A CENTRALIZED
AGGREGATION SOLUTION
6
Is non-intrusive
- Leverages the existing front-office and risk infrastructure
- Short implementation timeline and cost control
Allows you to reuse existing pricing
- No need to revalidate all models for IMA approval
AN AGGREGATION SOLUTION:

7. THE ANSWER:
A CENTRALIZED
AGGREGATION SOLUTION
7
Has in-memory aggregation technology
- To handle complex, multi-stage aggregation
methodologies in FRTB SBA, ES calculations
- For optimal performance
Will help you pass P&L attribution tests
- If pricing is sourced from engine(s) used to
generate official P&L
- Reduces pricing reconciliation issues across risk,
finance and the front office
AN AGGREGATION SOLUTION:

8. FRTB AGGREGATION: DATA FLOWS
AGGREGATION
ADVANCED
MODEL CHARGE
MARKET
RISK
CAPITAL
CHARGE
ADVANCED
MODEL
APPROVAL
STANDARDIZED
CHARGE
FRONT
OFFICE
A
RISK
ENGINE
FRONT
OFFICE
B
CENTRAL
SCENARIO
GENERATION
Back test
(bank)
SBA
DRC
Residual
Risk
Expected
Shortfall
NMRF
DRC
P&L
Attribution
Back test
(desk)
MULTIPLIER
MARKET
DATA
REPOSITORY
Could be more than
50 front-office/risk
systems. Different
versions with regional
instances.
PRICES
(Sensitivities,P&Lvectors,MarketValues,Notionals)

9. SELECTING THE RIGHT PRICING INPUTS FOR IMA
9
TYPE OF
PRICING INPUT DESCRIPTION
ACCURACY
ON EXOTIC
PRODUCTS COMMENT
PRICING
ENGINE
REQUIRES
FRTB
SCENARIOS?
Sensitivities
Delta, Vega, Gamma
price sensitivities
Low
Price determined by extrapolation
Reuse SBA sensitivities?
Intuitive representation that’s
useful for what if
×
Grids
P&L values for fixed grid
of risk factor shocks
Medium
Grid typically limited to 2
dimensions
Price determined by interpolation ×
P&L vectors
P&L values for dynamic
set of risk factor scenarios
High Full revaluation approach

BALANCE BETWEEN ACCURACY (TO PASS P&L ATTRIBUTION TEST)
AND COMPLEXITY (INTEGRATION AND RISK FACTOR MANAGEMENT)

10. FRTB AGGREGATION:
CHALLENGES AND RISKS
10
THE RIGHT SOLUTION WILL HELP MANAGE
THE FOLLOWING FRTB AGGREGATION
CHALLENGES AND RISKS
REDUCE THE RISK WITH A
SINGLE PRICING ENGINE
AND A RISK AGGREGATION
SOLUTIONUpstream pricing engines need to be FRTB-enabled
Running ad hoc calculations can be operationally demanding
Multiple pricing engines can complicate risk factor management
Integration of multiple pricing engines can pose a challenge

11. WHAT SHOULD YOU LOOK
FOR IN A SOLUTION?
HIGH PERFORMANCE
– Reduced data load time to maximize time to analyze and investigate
– Optimized risk data structures to reduce query times
– Concurrency between data load and user query
POWERFUL DRILL DOWN
– Detail goes down to scenario/trade level input prices
– Schema design guides user through multi-stage aggregations in FRTB
– Breakdown of bank capital total to additive desk and trade-level capital
FLEXIBILITY
– Open technology supports wide variety of reporting tools
– Extensible to keep up with changing needs and regulations
11

12. WHAT-IF ACTIONS WITHOUT RE-PRICING
12
RUNNING
“WHAT-IF”
CALCULATIONS
WITH AN
AGGREGATION
SOLUTION
WHAT-IF ACTIONS REQUIRING RE-PRICING
New trade -
Invoke pricing
engine(s) to supply
price inputs or use
proxy pricing in
aggregation layer
Move trades
from one desk
to another for
pre-go-live
analysis
Scale an
existing
position
Remove an
existing position -
if that improves
the results then
analyse that
position further
Risk factor change,
for example add risk
factors to improve
P&L attribution
results
Avoid some ad
hoc repricing by
pre-generating
prices for common
what if scenarios
during end of day

13. NON-REGULATORY MARKET
RISK MANAGEMENT
Typical metrics are
VaR and sensitivities
The inputs required are
similar to the inputs for FRTB
ES and SBA respectively
SIMM AND CVA CAPITAL
Calculations are similar
to the FRTB standardized
approach
Both require
sensitivities inputs
CLEARED INITIAL MARGIN
Various methodologies for
different clearing houses but
often based on VaR
What-if functionality important
COUNTERPARTY
CREDIT RISK AND CVA
Much higher volume
of prices and requires
performance optimization
13
BEYOND FRTB
THE SAME AGGREGATION ARCHITECTURE CAN BE USED TO GENERATE FURTHER
METRICS BEYOND FRTB MARKET RISK CAPITAL USING SIMILAR INPUTS

14. getinfo@fisglobal.com
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linkedin.com/company/fisglobal
Contact us today to learn more about
FIS’ Risk Aggregation solution and to
speak with our experts
SO… ARE YOU READY TO
SEE AN FRTB AGGREGATION
SOLUTION IN ACTION?