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While profound changes in business can often present significant challenges, change can also mean new opportunity. No more apparent is the impact of change than in Banking. Drivers of change are numerous where everything from economics, regulation, politics and technology is having an impact. While it’s difficult to pinpoint which is driving the most change, it has never been more important for these institutions to have globally supported operations and a single uniting vision to respond to change wherever it is evolving.
One area that’s been hit especially hard has been trading operations. There’s an incredible onus on banks to comply with evolving regulations and manage increasing costs as a result while working to increase front-office transparency and assess risks more holistically. The relationship between front office, risk management, capital efficiency and liquidity is crystallized by new regulatory requirements, forging a direct link between the quality of risk management and the ability to manage capital and liquidity efficiently.
It’s no secret that financial institutions are often the laggard when it comes to technology adoption – however it seems that banks are now not only catching up but leading the charge when it comes to revolutionizing FinTech. In fact, according to new research1 published by Microsoft 50% of those polls expect their industries to face significant digital disruption within the next two years. As the leading provider of next generation risk solutions for the financial services market Numerix sees cloud as one of the cornerstones transforming the digital future of the banking industry.
For example, under the evolving regulatory environment, the regulatory capital that a bank holds is the primary inhibitor to growth, and therefore efficient capital management can provide a competitive advantage. Industry ROE levels are also being forced lower, and subsequently the cost of the capital a bank requires needs to be reduced in order to maintain profitability. The ability to demonstrate high quality risk management has a significant impact upon the profitability of the bank.
In fact, under Fundamental Review of the Trading Book or FRTB, the latest international banking regulation, is calling for an overhaul of trading book capital rules. Later, we’ll examine challenges banks face, including a close examination of FRTB capital costs and how FRTB will impact the future viability of business lines and trading desk operations. The scale and scope of the regulation is massive, and there are also many issues to consider from a risk data and technology solution perspective. Overall many of these regulations are driving a convergence of front and middle offices with finance. While front offices tend to have larger budgets with easier access to investment and is therefore are first among equals, finance now carries more regulatory fiduciary responsibility and therefore has a stronger influence on risk analytic decisions.
Over the past year, Numerix has continued to innovate and adapt its technology to meet the evolving needs of the market. The net impact of the barrage of incoming regulatory requirements on structured products and risk-management function should not be understated. Overlaid with monetary policy changes, the fallout from Brexit, continued concern over the negative rate environment and negative bond yields, along with new regulations like FRTB – the picture has not been a completely rosy one for some financial institutions.
However, as often seen in times of turmoil, volatility and change – there’s an equal opportunity innovate and recognize opportunity.
Numerix – In a flash
Numerix is a technology company providing next generation trading and risk solutions. Its risk platform helps global financial institutions transform their pricing and risk analytics strategy to achieve their goals – whether it is to increase revenue, acquire new clients, realize cost savings, achieve regulatory compliance or increase operational efficiency. With Numerix financial institutions can attain a holistic view into their risk exposure from a single platform driving risk-informed forecasting and decision making capabilities for optimized profitability.
Risk Data Overload
The Fundamental Review of the Trading Book and the standardized approach for measuring counterparty credit risk exposures (SA-CCR) are game-changers for the risk-management and data-management functions. The increased prescription for FRTB model approvals also means that currently accepted modelling techniques will likely be disallowed and must be replaced; hence, new calculations and new data sources must be found to implement these changes.
Data-aggregation tasks to support the XVA desk (which manages credit, funding, and other valuation adjustments) are also significant, and the quality of this data is of paramount importance in accurately determining the price of OTC derivatives.
“FRTB is a game-changer that demands a fundamental shift in the ways banks function and manage risk. The scale and scope of the regulation is massive, as it requires previously siloed parts of the enterprise to come together and work from a unified set of models and data – not to mention that many of those models must be revised to meet the new guidelines,” says Steve O’Hanlon, CEO of Numerix. “Anyone with experience in banking knows that, desk-by-desk and front office to back office, each part of a bank has its own flavour and approach to these types of calculations, has data on myriad systems and uses a disparate array of spreadsheets and software. Additionally, derivatives valuation adjustments (XVA) calculations under the XVA desk are demanding more complexity, along with significant data aggregation and data quality and accuracy challenges.”
“Risk departments will now have the responsibility for and mandate of bringing together a single view of risk across the enterprise, becoming masters of risk data governance, data infrastructure and the technology to support the demands of rapid and regular reporting,” he adds.
Managing Escalating Costs
Implementing FRTB is proving to be a herculean task for banks. Celent reports1 that FRTB implementation costs are likely to be $60 to $150 million for a Tier 1 bank over the next three years, while Tier 2 and regional banks are still embarking on structuring their FRTB programs and mobilizing the necessary resources to assess what it means for them.
Additionally, according to a recent report3 by Aite “XVA and Risk Transformation,” hardware costs and support will increase to support the higher calculation power required for risk calculations and simulations on a more frequent basis.
These calculations are desk-level, which means a significant increase in volume from the current approach. In fact, according to BCBS’s July 2015 consultation document regarding CVA calculations under FRTB, if CVA is calculated using 100 time steps with 10,000 scenarios per time step, one million simulations are required to compute the value of CVA.
Calculating CVA risk would require 250 daily market risk scenarios over the 12-month stress period, and CVA has to be calculated for each market risk scenario, resulting in 250 million simulations. These calculations have to be repeated across six risk types and five liquidity horizons, resulting in around 8.75 billion potential simulations, which means calculation efficiency (and the avoidance of data bottlenecks) is of paramount importance.
The solutions market continues to evolve, as vendors enhance and launch new functionalities to help financial firms operate effectively under the FRTB regime. Faced with the challenges of tons of additional calculations—including computing sensitivities under FRTB SBA, IMA, CVA and PnL Attribution calculations—the prevalent trend emerging amongst many financial institutions is to mitigate costs by leveraging cutting edge technologies.
Decision Making: Finalizing Strategy and Blueprint Implementation
While the future state for most financial institutions is still ambiguous and emerging, market participants realize there is no silver bullet answer.
On its path towards developing an FRTB implementation strategy the band-aid approach will not be effective for long-term success. Institutions’ must ensure their transformation strategy is optimal from both an investment and capital perspective. Banks must take ownership of rising costs and understand the business impact of FRTB. Financial institutions must make key decisions to support front office, risk, market data and product control more holistically; and some of these decisions could be painful for management especially in terms of transforming analytics and technology frameworks.
Before strategic decisions are finalized, institutions can take clear first steps to assess the overall business impact of FRTB—including understanding capital charges, how FRTB is impacting each of their desks from a profitability standpoint, and how operational risk and market risk are coming into play. Which business lines will utilize the Standardized Approach versus Internal Model Approach, and what would be the potential business impact of each? By asking the right questions and having the right strategy in place Executives and Heads of Trading and Risk can quickly and efficiently obtain a clear picture of FRTB business impact today, and in to the future.
Firms are focused on getting to a lower cost point, as banks with next-generation technology platforms will be a differentiator and open new market opportunities.
O’Hanlon comments: “We envision a technology platform – such as Numerix Oneview – that can transcend the front office and middle office with a single database, that can handle XVA risk in real time and also be next-generation in terms of what is needed for market risk in the middle office.”
As traders and heads of desk still require a choice of validated models and analytics to cover trader conviction, house exposure standards and legacy corporate profit-and-loss measurement, we view front office first and as a gateway to firm-wide transformational activities. There is also a shift in the front office towards operating from an enterprise exposure perspective versus at the desk or book level.
The first set of changes in this area was XVA, which Numerix pioneered and brought to the market. These XVAs have evolved to capture market risk, as well as capital and margin. Going forward, we see the role of integrated analytics for trading, risk, finance, research and operations providing firms with a steady evolution towards cross-silo and cross-functional risk infrastructures.
Numerix FRTB Cloud Ready Solution for Out-of-the-box Deployment
Numerix FRTB is a fully cloud enabled solution for calculating and reporting actionable impact numbers for FRTB compliance. Modular functionality allows organizations to evolve from a simple initial solution to a more sophisticated solution without the need for costly system upgrades or re-installations.
“Today it’s not enough to be just flexible and scalable but also highly parallel to meet machine requirements demanded by traders for pre-trade and through to EOD and incremental reporting. As we expect larger transformation projects to stem from an FRTB solution, we also realize there’s no silver bullet. Intuitions may need to integrated external libraries, migrate off of legacy products and platforms, remove existing scenario engines – all while bringing enterprise level risk to the front office,” said O’Hanlon. “Numerix Oneview will capture all elements of risk used to underpin architectural foundations for front office, risk management, and finance operations. For the purposes of an impact that a C-level desk is making – Numerix FRTB is an essential first step.”
Meet the Master
Steven O’Hanlon, President & CEO: Steven O’Hanlon is Chief Executive Officer and President of Numerix. O’Hanlon first joined the company in 2002, and as President & COO starting in 2004 he’s driven the evolution of Numerix from a dominate pricing analytics player to a global, enterprise risk technology company providing next generation trading and risk solutions to financial services institutions. It was the financial crisis, specifically Numerix’s experience unwinding Lehman Brother’s derivatives book that propelled the company forward in terms of establishing a future vision for effective risk management solutions. Through his ability to focus, adapt and execute – Mr. O’Hanlon was named CEO in January 2013. Prior to joining Numerix, Mr. O’Hanlon actively negotiated the sale of several companies for nearly $500M. A seasoned veteran, he has more than 25 years of experience building emerging market start–up software companies and has contributed to three successful IPO’s. Mr. O’Hanlon’s personal achievements include being named one of New York SmartCEO’s Future 50 rising stars, FinTech Person of the Year 2015 by FTF News, as well as being ranked annually on Institutional Investor’s “Tech 50” and “Trading Technology 40” Lists.
1 “British businesses fear they will face digital disruption by 2018.” BusinessWire, 31 Oct. 2016,
2 “FRTB and the Upcoming Renaissance in Market Risk Management.” Celent, Nov. 2016,
3 “XVA and Risk Transformation: Establishing the Data Fundamentals.” Aite Sept. 2016,