In June 2018, the Basel Committee on Banking Supervision published an updated consultation paper (CP) related to the Fundamental Review of the Trading Book (FRTB). By January 2022, certain global banks are expected to report FRTB numbers and calculate regulatory capital charges resulting from these market risk numbers.
The new standards are focused on creating a more resilient banking sector as well as strengthening capital standards for market risk. This will include a more prescriptive boundary between trading book and banking book to reduce the scope of arbitrage, the introduction of highly prescriptive and standardized risk metrics (“Standardized Approach”), and trading desk-level model approval process for internal model approaches (“IMA”).
Entities will need at least 10 years of historical prices and associated metadata to comply with the back-testing requirements as well as for populating historical Expected Shortfall (ES) models. Results will be disclosed to national supervisors using a three-zone approach for the classification of their back-testing results (i.e. green, yellow or red). ICE Data Services is a leading providers of OTC Derivatives valuations, Fixed Income evaluated pricing, pricing for Equity markets and transparency data. For example, data sets such as granular implied volatility surfaces, forward curves, dividends, correlations, etc. are available both ongoing and up to 10 years of history across all major asset classes.
Our data is collected from a multitude of sources such as exchanges, interdealer brokers, market-making dealers, data aggregators, and trading venues to name a few. Our processes include quality assurance measures prior to the delivery of the data to customers.
The process for determining the eligibility of a trading desk for the internal models-based approach is based on, among other things, a risk factor analysis. For a bank to classify a risk factor as modellable, there must be continuously available “real prices” for a sufficient set of representative transactions. This is currently defined as having at least 24 observable real prices over a rolling 12-month period with a maximum period of one month between any two consecutive observations. Real prices are further defined as a price at which the institution has conducted a transaction, a verifiable price of an arms-length trade at other institutions, or prices obtained from committed quotes.
ICE Data Services has created a flag that will identify which instruments have market data that would meet the criteria for a “real price”. Supporting information to this flag is also available, including the count of eligible observations in the last 12-months, the longest gap between two consecutive eligible observations, and the time period necessary to get the most recent 24 eligible observations into scope, among other fields. In addition, we created the aforementioned statistics both on the target instrument in isolation, as well as for a cohort group or cluster (i.e. bucket). We are currently working with industry participants and experts to see what additional evidentiary support we can generate to help entities support this classification.
For each of the bank’s trading desks, the bank must prepare, evaluate and have available for supervisors certain reports including reports on the assessment of market liquidity. ICE Liquidity Indicators service calculates instrument-level liquidity indicators that can be a useful input in the bank’s assessment of market liquidity. For certain asset classes, our Liquidity Indicators service includes metrics such as sector-level scores, portfolio-level scores, projected volumes and volatilities, as well as liquidity stress-testing capabilities.
FRTB reiterates the necessity for banks to perform independent verification of its daily mark-to-market activities, and suggests that verification of market prices is performed at least monthly, from a unit independent of the trading/dealing room. ICE Data Services offers various transparency tools and portals that can serve as inputs into the verification workflow.