Dan Magarino, DTCC Data Services.
The Fundamental Review of the Trading Book (“FRTB”) released by the Basel Committee on Banking Supervision overhauls the minimum capital requirements for market risk to address shortcomings of the current Basel III market risk capital framework. FRTB requires banks to provide evidence of sufficient market liquidity related to the positions in their trading book that are capitalized using approved internal models. Evidence of liquidity must be based on “real” price observations which include actual trades or committed quotes.
DTCC is in a unique position to help. By leveraging its existing data collection and processing infrastructure, and working hand-in-hand with industry participants, DTCC plans to deliver an FRTB Real-Price Observations Data Service to the industry which will assist affected banks in maximizing risk capital charge efficiencies related to FRTB.
DTCC Connection sat down with Dan Magarino, Executive Director, DTCC Data Services to learn more about DTCC’s Real Price Observations Data Service and why banks can’t delay their planning despite the FRTB compliance date being postponed until 2022.
DC: If FRTB doesn’t go into effect until 2022, why should banks begin preparing now?
DM: DTCC is encouraging banks not to wait to begin preparing for regulatory compliance. While the regulation is not expected to go into effect until 2022, banks, particularly those applying the internal models approach, will need to define technology strategies, design and develop operational models, and source, analyze and manage existing and new data sources. Data sourcing, analysis and management are critical to FRTB compliance, particularly to ensure high-quality results and optimal capital calibrations.
We’ve outlined a timeline for banks as they work towards compliance:
2018: FRTB Rule Finalization, Identify Trading Data Gaps, Sourcing Options and Technology Approaches
2019: Integrate Data Sources and Test Technology Approaches
2020: Technology Deployments and Model Approval
2021: Live Parallel Testing to the BCBS FRTB Framework and Continued Model Approval
2022: FRTB Go-Live!
Framed this way, it becomes clear that banks cannot delay in preparing for the 2022 deadline.
DC: What is the source and scope of DTCC’s “real” price observations?
DM: As the premier post-trade market infrastructure for the global financial services industry, DTCC has unsurpassed data collection capabilities across multiple asset classes, including the more illiquid securities in the opaque OTC derivatives market.
In 2017, DTCC’s subsidiaries processed securities transactions valued at more than U.S. $1.61 quadrillion. DTCC’s Global Trade Repository (GTR) processes 14 billion messages annually across 5 asset classes and 100,000 entities with an estimated global market share of 80%. DTCC’s Trade Information Warehouse (TIW) automates 98% of all cleared and bilateral credit derivatives with U.S. $10 trillion in global worth.
DTCC’s post-trade infrastructures also support processing for cash products composed of corporate bonds, equities and asset-backed securities in DTCC’s clearing agency affiliates, National Securities Clearing Corporation (NSCC) and The Depository Trust Company (DTC). DTC and NSCC combined cover an estimated 98% of U.S. domestic cash products.
Our FRTB Real Price Observations Data Service will leverage DTCC’s global data collection infrastructures to pool observable transaction data, helping banks meet requirements for internal model approval and thereby maximizing risk capital charge efficiencies.
DC: How can DTCC’s FRTB Real Price Observations Data Service help banks to maximize risk capital charge efficiencies?
DM: DTCC’s internal “real” price data study, which 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. Observations from this study showed that industry pooled data may result in 66% modellability by notional for credit, 97.8% for Rates and 99.7% for FX. The study further showed large dealers could see a 23% reduction of non-modellability for basic swaps.
DC: How does DTCC’s FRTB Real Price Observations Data Service work?
DM: DTCC’s FRTB Real Price Observations Data Service leverages DTCC’s existing data collection and processing infrastructures to pool observable transaction data to help banks manage risk capital charges related to FRTB more efficiently.
In order for a risk factor to be classified as modellable under FRTB, it must meet two requirements. First, there must be at least 24 price observations, trades or committed quotes, for the risk factor, in the last year and second, that there must be no more than one month between two observations. Using DTCC’s FRTB Real Price Observations Data Service, banks may be able to materially increase the number of risk factors that meet “real” price criteria by providing access to industry pooled data.
DTCC’s FRTB Real Price Observation Data Service will provide banks with three main components. The first includes a web-based application where banks will configure each instrument query based on their own unique risk factor and bucketing mapping requirements. Once banks have configured their instruments, the service will immediately determine if the instrument passes or fails the NMRF assessment In addition, the service will provide analytics including graphical charts, interactive displays and alerts to monitor instrument modellability. The second and third components will include a Web Service API and SFTP for systematic delivery and integration of daily output results into banks’ FRTB applications.
DC: Where can we learn more?
DM: To learn more about DTCC’s FRTB Real Price Observations Data Service and to read our white paper, “Real” Price Data and Risk Factor Modellability Challenges and Opportunities, visit: www.dtccdata.com/products/frtb-data
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