More than 10 billion OTC derivative transactions analyzed in DTCC’s ‘‘Real Price Data Study” to form credible observations and recommendations
New York/London/Hong Kong/Singapore/Sydney, September 12, 2017 – A new white paper from The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, suggests ‘real’ price and non-modellable risk factors (‘NMRF’) requirements under the Fundamental Review of the Trading Book (FRTB) will pose significant challenges to market participants, potentially mandating large increases in the capital that banks must maintain for market risk purposes (market risk capital). However, banks have an opportunity to reduce their market risk capital charges by using ‘pooled’ observable transaction data to demonstrate that the associated risk factors meet the ‘real’ price standards under FRTB.
The FRTB, released by the Basel Committee on Banking Supervision on January 14, 2016, overhauls the market risk capital requirements to drive improvements to the Basel III framework. One of the most significant changes is the introduction of a new risk factor modellability assessment framework based on ‘real’ price criteria. The framework requires banks to provide evidence of sufficient liquidity across market risk factors related to the positions in their regulatory trading book, including those that are capitalized using approved internal models. Under FTRB, the demonstration of market liquidity must meet minimum standards with respect to actual transactions and committed quote volume. It is these ‘real’ price requirements to assess risk factor modellability that have raised concern among market participants.
The white paper analyzes the FRTB ‘real’ price criteria to determine risk factor modellability and its impact on banks that are subject to the market risk capital rules. It also provides insights on the key observations from DTCC’s ‘‘Real Price Data Study”, which internally analyzed over 10 billion over-the-counter (OTC) derivative transactions that flow through DTCC’s infrastructure, and examined the potential benefits to banks using DTCC’s pooled ‘real’ price data. This assessment revealed the following observations:
• Large dealers would benefit from using industry-pooled data over and above their own data
• Industry data pools demonstrate significantly higher levels of modellability than individual firm data across credit, rates and FX, and
• Dealers have the potential to see a relative reduction of non-modellability across multiple asset classes using pooled observation data.
“We are hearing a common message across the industry that there is a significant need for a ‘real’ price observation data service that helps firms demonstrate the modellability of risk factors,” said Ron Jordan, Managing Director of Data Services, DTCC. “Our clients have encouraged us to leverage our existing data collection and processing infrastructure because DTCC is a centralized collection point for FRTB-relevant data, most of the industry is already connected to us, and clients recognize the fundamental role we play in reducing risks and costs across global markets. We see a clear opportunity for DTCC to help our clients manage the potential capital impact of FRTB.”
With more than 40 years of experience, DTCC is the premier post-trade market infrastructure for the global financial services industry. From operating facilities, data centers and offices in 16 countries, DTCC, through its subsidiaries, automates, centralizes and standardizes the processing of financial transactions, mitigating risk, increasing transparency and driving efficiency for thousands of broker/dealers, custodian banks and asset managers. Industry owned and governed, the firm simplifies the complexities of clearing, settlement, asset servicing, data management and information services across asset classes, bringing increased security and soundness to the financial markets. In 2016, DTCC’s subsidiaries processed securities transactions valued at more than U.S. $1.5 quadrillion. Its depository provides custody and asset servicing for securities issues from over 130 countries and territories valued at U.S. $49.2 trillion. DTCC’s Global Trade Repository maintains approximately 40 million open OTC positions per week and processes over one billion messages per month. To learn more, visit us at www.dtcc.com or connect with us on LinkedIn, Twitter, YouTube and Facebook.