FRTB and the Upcoming Renaissance in Market Risk Management, Part 2: Transformation Opportunities and Smarter IT Implementations

by Cubillas Ding, November 16, 2016
Product Trends/ Reviews
Global

Abstract

Celent has released a new report titled FRTB and the Upcoming Renaissance in Market Risk Management, Part 2: Transformation Opportunities and Smarter IT Implementations. The report was written by Cubillas Ding, a Research Director with Celent’s Securities & Investments practice.

With Fundamental Review of the Trading Book (FRTB) projects moving from initial quantitative exercises into actual design and implementation phases, having a cohesive approach to plan both strategic and tactical elements upfront when connecting the various stakeholders in front office, risk, IT, and market data operations is critical.

During implementation stages and for “build vs buy” decisions, firms must formulate implementation plans cohesively across various stages, considering: FRTB ambitions and future vision; solution build-buy options against strategic gaps; and ease of implementation, time-to-benefit, and total cost of ownership tradeoffs; as well as operational and change management implications.

Even though FRTB represents mandatory regulatory spending, forward-looking institutions see it as a one-off opportunity for front office, risk, finance, and market data operations stakeholders to collaborate to deliver something that is meaningful to the business. Firms with FRTB programmes that are targeting ambitions beyond standard compliance must adopt a disciplined approach to business case development for various parts of their investment, based on estimated effort, cost, and timelines provided in RFP responses, and proactively monitor progress against the business case targets, constraints, and assumptions.

Looking forward, FRTB is setting in motion a trajectory that incentivizes firms to move towards stronger business and functional risk management capabilities built on sound data and analytical supply chains and “front-to-back-aligned” information delivery, with shareable service and process components enabling optimal trading, risk-aligned pricing, and governance. At the same time, through the clever exploitation of next-generation technologies, firms can achieve better performance, cost-efficiency, and “future-proofing” of risk IT investments.

“Celent believes that we are standing at the dawn of a new renaissance in market risk management, and the banking industry is certainly ripe for an overhaul,” says Ding.

“Critical FRTB implementation activities executed in the coming years will determine a firm’s prospects as we head towards 2020 and beyond. However, the right design and smart execution of programme management activities, guided by sound implementation and build-buy decisions, are paramount in order to achieve success on this complex journey,” he adds.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

Introduction

3

 

Key Research Questions

3

Impact of the New Market Risk Imperative

4

 

Overhaul of Trading Book Capital

4

Impact on Trading Processes and Operating Models

6

 

Implications for Existing Functions and IT Ecosystems

6

Implementing a Fit-for-Purpose FRTB-Enabled Architectural Vision

8

 

Capability Development and Technology Approaches

8

Implementing Solutions: Strategic Considerations and Build Vs. Buy Decisions

11

 

FRTB Ambition, Vision, and Scope

12

 

Business Requirements and Gaps

13

 

Solution and Fit Assessment

18

 

Ease of Implementation, Time to Benefit, and Total Cost of Ownership

19

 

Operational Implication Assessment

21

 

Business, Risk, and Change Management

22

Toward a Renaissance: Real Opportunities for Transformational Change

24

Closing Thoughts

26

Appendices

27

 

Appendix A — FRTB Ecosystem

27

 

Appendix B — Implications for Future State IT/Operations

28

Leveraging Celent’s Expertise

31

 

Support for Financial Institutions

31

 

Support for Vendors

31

Related Celent Research

32

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