FRTB Compliance and Beyond: A Case Study of Global Bank's Trading Desk Structure Evolution
A global bank needed to comply with the Fundamental Review of the Trading Book (FRTB) regulations, which defined a new set of rules for calculating market risk and regulatory capital associated with specific legal entities. Each trade booked in the front office applications had to be aligned not only with a business hierarchy construct but also with a specific legal entity. The bank required a trading desk structure that would optimize the alignment of eligible lines of business (LOBs) for the FRTB IMA approach, streamline internal risk management, capital calculations, and financial reporting.
Key Business Challenges
The key challenges faced in implementing the FRTB trading desk structure were:
Alignment Complexity: Aligning trades with specific legal entities and optimizing LOBs for the FRTB IMA approach required complex structuring and data management.
Data Pipeline Updates: Updating data pipelines from front office to CFO and risk data warehouse to enable proper financial accounting for legal entities was a critical and intricate task.
Regulatory Compliance: Ensuring compliance with regulatory guidelines for FRTB market risk RWA calculations was essential for avoiding penalties and maintaining regulatory trust.
To address the challenges and implement the FRTB trading desk structure, following solutions were adopted:
Composite ID Linkage: A trading desk structure was introduced to link the Business hierarchy (Global Book Management) used for trade booking with specific legal entities. A new composite ID was created to link Legal Entity ID and Business Entity ID for each trade and position.
Data Pipeline Updates: All data pipelines from front office to CFO and risk data warehouse were updated to flow front-to-back with the composite ID on each trade and position. This ensured proper financial accounting for stand-alone legal entities and allowed for consolidation in case of parent legal entities.
FRTB Market RWAs: Data pipelines from front office to risk data warehouse and various risk engines were updated to enable FRTB market risk-weighted assets (RWAs) calculations in accordance with regulatory guidelines.
The implementation of the FRTB trading desk structure resulted in several positive outcomes for our customer.
Optimal Capital Allocation: The new structure facilitated optimal capital allocation for market risk RWAs associated with specific legal entities, enabling efficient risk management and capital usage.
Inter Affiliate and Intra Entity Trades: The ability to determine inter-affiliate trades versus intra-entity trades allowed for accurate application of financial accounting consolidation rules.
Effective FX Risk Capture: The structure enabled proper and effective capture of foreign exchange (FX) risk on the balance sheet, ensuring accurate financial reporting.
Close-Out Netting: Proper and effective close-out netting set determination was achieved, which was crucial for portfolio risk management, credit exposure calculations, and financial accounting purposes.