The five main FRTB implementation challenges

February 13, 2018

Another day another regulation, and this time it’s the Fundamental Review of the Trading Book. FRTB, as it is known, is part of the Basel III rules and is aimed at significantly transforming the way banks manage their capital requirements and how they are structured and managed internally.

Risk models, liquidity horizons and data for risk calculations, back testing and hedging will all have to be changed to meet the new regulatory guidelines when they come into force in January 2019, with a significant component of this change impacting desk structures and their oversight, management and reporting.

What does the introduction of FRTB actually mean?

While banks and other financial firms are no strangers to regulation, ensuring your firm is ready for all the upcoming legislative changes requires significant time and effort. So, what does the introduction of FRTB actually mean for financial institutions and what are the main challenges facing those seeking to implement it? Here, Richard Cryer, an executive director in Brickendon’s Risk & Regulation practice takes a look at the five main challenges facing banks implementing FRTB.


As with most regulations, the quality and supporting infrastructure of an institution’s data is fundamental to achieving FRTB compliance. FRTB necessitates a number of specific data challenges in terms of understanding the data, the volumes of data required and the quality of that data. One example of the challenges in understanding the data is the distinction of the boundary between banking and trading books. Transactional data will need to be strictly classified in one of these two categories, with robust governance to ensure compliance with the rule set making that distinction. Another issue is the real-time reporting requirement for intraday risk and the comparison between risk management and pricing models. In addition, the management of reference data in terms of client, book, instrument and market remains a challenge with respect to maintenance, especially when volumes of data increase. As with BCBS 239 and other banking regulations, reliable golden sources of data that can be independently validated will be crucial to achieving compliance.


One way of dealing with these data challenges is to improve the use of technology. Implementing common data hierarchies on big data infrastructure, such as Hadoop, HDInsight or NoSQL, can significantly help manage your data. Still, there are considerable challenges associated with migrating data, including optimising the distribution infrastructure for more grid-distributed calculations, updating aggregation infrastructure to cope with more dimensions, and transforming larger data sets. All of these need to be addressed in a structured manner that provides a framework for good, compliant data management in the future. It is also worth noting that several aspects of the FRTB guidelines are still under consultation (eg. the impact on the Credit Value Adjustment (CVA)) and local regulators are not due to publish the final rules until next year. As a result, any technology changes need to be flexible enough to adapt to additional needs in the future.

Structure and cost of business

Under the new guidelines, trading activities for products with more non-modellable risk factors will attract higher capital charges and need to have robustly defined business cases in order for them to survive in the post-FRTB world. It is likely that more exotic derivative products will be supported by fewer institutions as it becomes increasingly uneconomical to write this business. The location of certain operations and alignment to the Basel regulatory reporting structures will also have an impact on desk structure going forward as banks struggle to satisfy the need for real-time desk monitoring.

Time and cost

Meeting the regulatory objectives of any new legislation in an efficient and timely manner is a challenge, particularly given the reduction in change budgets and pressure to reduce high-cost headcount. The increasing capital requirements, homogenisation of products and pressure on location strategies required for FRTB compliance, means institutions need to develop a realistic and achievable roadmap, whilst also taking into account other data-centric regulations such as MIFiD II and BCBS 239. In addition, in the UK the Senior Managers Regime (SMR) places greater accountability on material risk-takers responsible for the bank’s activities and as a result, banks are increasingly looking for the validation of compliance through their internal audit and assurance functions.

Model Risk Management

FRTB requires models to be documented with a strong emphasis on model-risk management and the ability to demonstrate ‘real’ price criteria. Models need to determine accurate profit and loss attribution at a desk level, and should also be back-tested. Failure to do this will result in a requirement to switch back to standardised models, implying higher capital charges. One particular challenge is that some risk factors are not easily modelled, and the process by which this is performed needs to be made clearer, possibly by ensuring the availability of good quality stress-test calibration data. The danger here however is that many products would be forced to use the more punitive standard model.

FRTB guidelines

In addition to these challenges, there are also the ‘softer’ HR impacts of the FRTB guidelines. The rearrangement of trading desks and more stringent requirements for staff job descriptions aligned to those desks and their strategies and business cases will have a significant impact on a company’s organisational structure. Anything that fundamentally impacts a person’s role, their responsibilities and authority levels, and directly links them to a reportable, regulator-approved business case and strategy is likely to cause a significant shift in where and how businesses are run in the post-FRTB world.

While the deadline for compliance is still over a year away, there is no time for complacency. Banks need to seize the opportunity and start preparing now to ensure they are ready when yet another regulatory deadline crosses the finish – or is it starting? – line.

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