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XENOMORPHSOFTWARELTD.
18/10/2016|Pressrelease|DistriutedPulicon18/10/201619:44

TheDataManagementChallengesofFRTB
Octoer18,2016
ThisarticleentitledDataManagementChallengesofFRTwasoriginallpulishedintheOctoer2016issueofPRMIA'sIntelligentRisk
magazine.

TheaselCommittee'sFundamentalReviewoftheTradingook(FRT)initiallplacedthespotlightonrisingmarketriskcapitalchargesandtheir
impactonanktradingoperations.Giventhatthemostrecentquantitativeimpactstudpredictsmarketriskcapitalchargeswillriseetween1.5x
and2.4x[1]-somemarketparticipantsquestionedthestructure(andinsomecasesviailit)ofanktradingoperations.

However,industrattentionhasnowturnedtopracticalimplementationchallenges,andinparticular,theissueofdatamanagement.Thedata
managementchallengesposedFRTarenotonlroad,thearealsoofpressingimportance.Thesoonerthatdatamanagementchallengescan
eaddressed,themoretimeankswillhavetotakestrategicusinessdecisionsaouttheirtradingoperations,andtheetterinformedthose
decisionswille.
Itisdiculttodojusticetothecomplexitofthechallengesinvolvedinanarticleofthislength.However,someofthekeissueshaveeenrie
outlinedintothefollowinghigh-levelcategories:
DataAcquisitionandConsolidation

FRTwillrequirermstoconsolidatedatafromanumerofsources,othinternalandexternal.TofullP&Lattriutionandack-testing
requirements,ankswillneedtointegrateandanalseawiderangeofdata,includingpricingandanalticsfromvendorsandinternalsstems,
positionandtransactionaldatafromtradingorack-ocesstems,alongsidemodeloutputsfromriskengines.nsuringallofthisdatacane
normalizedintoaconsistentdatamodelandanalsedoverlongtimeperiodsisnomeansatrivialchallenge.
Inaddition,theissueofriskfactor'modellailit'hasalsoeenaggedasakechallenge.ThelatestIDAQIsuggeststhatnon-modellalerisk
factors(NMRFs)couldaccountforapproximatel30%oftotalmarketriskcapitalchargesundertheinternalmodelsapproach(IMA).Thishas
promptedmuchdeateaouthowtominimizetheurdenandensureenough'real'dataisavailaletomodelriskfactors.Therearealreada
varietofparticipantspreparingtooersolutionstothatchallenge,includingindustrconsortia,datavendors,interdealerrokers,andpotentiall
evenIndicationofInterest(IOI)networks(providedtheprovideactionaleIOIsthatrepresentcommittedquotes).Whileitmaetooearltogauge
whichsuchsolution/swillprevail,animportantprerequisitewillethatthehavestrongdatagovernanceandvalidationprocessesinplacetoensure
thecriteriafor'real'pricesaredemonstrale.
Datatorage

Withsomanriskfactorsandderiveddatasetstoeanalsedoversignicanttimehorizons,thereadthanddepthofdatarequiredformodelling
rm-wideandindividualdesk-levelriskisvast.anksnotonlneedtoensurethehaveasucientlscalalearchitectureinplacetostorevalidated
andcleanseddata.Thealsoneedaexiledatamodeltoadequatelmaprelationshipsetweendierentdatasets,suchaspricing,deriveddata/
analtics,liquidithorizons,riskclasses,uckets,etc.
DataDerivation/Calculation

Managingmarketriskalwasrequiresawidevarietofanaltics-fromcomputingasiccorrelations(etweenriskfactorsandacrossuckets)and
standarddeviationstomuchmorecomplexmetrics.Inaddition,therequirementforack-testingandP&Lattriutionwillrequirermsthatoptforthe
IMAtocontinuedemonstratingtheaccurac(andeligiilit)oftheirinternalmodels.Havingtherightdataarchitectureinplacemeansnotonleing
aletocomputetestresultsandproducerelevantreports,utalsohavingtherightalertingmechanismsinplace.Forexample,itwilleimportantto
agwhetherariskfactorisapproachingnon-modellalestatus,orwhenadeskmaeskirtingwiththeeligiilitcriteriaforusingtheInternal
ModelsApproach.
DataValidationandCleansing

xpectedhortfall()isinherentlmoresensitivetooutliersthanVaRgiventhatitfocusessquarelontailrisk.Thatmeansanincorrectdatathat
creepsintomodelscouldresultinpunitivecapitalcharges,thereforeplacingamorepressingoligationonrmstoensuremodelsarefedwith
accurate,highqualitdata.Inaddition,independentpricevericationprocesseswillerequiredtoensurethatilliquidassetsareeingvalued
accuratel.
DataVisualisation

Withtheamountofdatathatneedstoeanalsedonanongoingasis,datavisualisationtoolswillecrucialtoensureeachstakeholderhasaccess
totheinformationtheneed,displaedviavisuallintuitivedashoardstohelpspotpatternsandanomalies.InterfacingwithtoolslikeMicrosoft
PowerIandTaleaucanensuresuchdashoardsmeetusers'requirements,areeasilcongurale,andcosteective.
DataLineageandProcessAuditailit

Therevisedmarketriskcapitalframeworkwillplacemuchgreaterimportanceonensuringdataqualit,whichinturn,willprompttheneedforrmsto
estalishclearoversightofdatamanagementoperations.Knowingwheredatahascomefrom,whichvalidationcheckswererun,whetheralternative
sourcesareavailale,andhowlongittooktoresolveexceptionswillallecomecriticaltousinessasusualoperations.
Conclusions

Datamanagementhasalwasplaedakesupportingroletothefunctionofriskmanagement.Yetrecentregulatorinitiativestheasel
Committeehavereinforcedtheimportanceofthatrole.WhileC239succeededinemphasizingestpracticesfordataaggregationand
reporting,FRTthreatenstohavesignicantlmorecloutasachangedriveracrosstheindustr.
FRThasadirectimpactontheusiness.Assuch,therewillemoretangileenetsfromgettingdatamanagementright.Andwhilethedeadline
forcompliancemaseemalongwaintothefuture,theissueofdatamanagementshouldeseenasapressingpriorit.Giventhekestrategic
decisionsfacingmananks,itisvitalthatthosedecisionsareasedonaccuratedata.
[1]mostrecentFRTquantitativeimpactstud(QI)

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