The Fundamental Review of the Trading Book offers banks the opportunity to finally look closely at their legacy infrastructure, as it portends more and more regulatory and operational changes, Emilia says.
Before I go any further, I’d like to formally introduce myself. Hi, my name is Emilia. You may have read some of the things I’ve written for the magazine and for some reason the powers that be deemed me important enough to start writing columns. I’m going to talk a lot about fintech, particularly about stories I write and my impressions on them. I generally have a lot of opinions on most things, so be warned ...
This month, I looked into the Fundamental Review of the Trading Book, or FRTB, a framework proposed by the Basel Committee on Banking Supervision that focuses on new regulatory capital rules and calculation methodologies for large, international banks, and the technology challenges facing such institutions. The regulation is coming soon—2020 is not that far off—and has the potential to upend the way banks go about their business. While our sibling publication Risk regularly does deep dives into FRTB and what it might mean for the sell side, the technology side of the framework has yet to be properly explored.
Flurry of Activity
Since the FRTB was first announced back in 2011, there has been a flurry of activity, both on the vendor and user sides. Solutions were crafted to integrate front and middle offices so that both constituents have the same risk calculations available to them.
What has become apparent is that banks have to start dealing with FRTB now if they haven’t started already. Sure, there are still rules pertaining to the framework being finalized, particularly regarding the scope of the Internal Model Approach, but overall, it remains largely unchanged since the draft proposal was produced.
FRTB offers banks an opportunity to evaluate their technology stacks and possibly redefine them.
Preparing for FRTB doesn’t just mean changing how risk is calculated and reminding front-office personnel that they need to cooperate with the risk management folks in the middle office; it also entails preparing software to ensure that it is ready for 2020, too. That entails determining whether banks’ current infrastructure will be able to handle the amount of data, communication and calculations flowing through their various systems. It also means familiarizing themselves with the different offerings on the market.
FRTB offers banks an opportunity to evaluate their technology stacks and possibly redefine them. This is not just another add-on to meet some regulatory requirement—FRTB changes so much of banks’ workflows that simply patching on a band-aid will not work in the long run. The solution has to be something that focuses specifically on FRTB and works with their current infrastructure.
The FRTB regulation plays into the hands of the buy-versus-build debate, a dispute that’s been going for years. There are not many rules being produced by regulators that genuinely force institutions to take a hard look at their existing technologies, despite the entreaties of their technologists. And we know there will be more regulation to come—that much is inevitable.
Marcus Cree, a risk specialist at Misys, says now is the time for financial institutions to look closely at the regulations and figure out ways to optimize it and use the current business environment to their advantage. “We want to optimize the impact on capital and work with banks to see which desks they have to invest in more,” he says.
Cree adds that banks need to “future proof” their spending by figuring out how to maximize the potential of their spending now. He advocates componentizing, where systems target a specific service. For him, a lot of banks’ infrastructures are too central to their entire operation, which makes it almost impossible to replace.
That is understandable, but it also doesn’t hurt if banks take a much closer look at their inner workings, study their current infrastructure, and investigate ways to get it up to speed with the current regulatory environment. Completely overhauling systems will take years, but FRTB and the other coming regulations might well be the wake-up call banks need to see just how much strain their aging, legacy infrastructure has been under for all these years.
Jesse Lund talks about real uses for DLT in the capital markets, lessons learned while rolling out IBM's blockchain platform, and what’s ahead for 2018, and into 2019.Subscribe to Weekly Wrap emails