Feb 23, 2017

FRTB: The Picture Is Now Recognizable—And Clearly, It’s Time to Consult with FinTech

James Jockle, Chief Marketing Officer of Numerix

I wouldn’t be surprised if some banks see FRTB as a jigsaw puzzle. It may seem like there are a lot of pieces in isolation, with no cohesive, recognizable view of the big picture. But thanks to Celent, the research and consulting firm focused on application of information technology, all the pieces have been slotted into place and a full picture is starting to take shape.

Celent recently completed its third and final report, “Evaluating Ecosystem Solutions,” as part of its Renaissance in Market Risk Management series. Taken together, the three reports provide a comprehensive discussion and vast insight into all the ways FRTB will impact the capital markets. Key issues addressed include how banks should approach FRTB from an architectural and capability standpoint, the possibilities for innovation and solution implementation, the vendor landscape, the benefits of cloud adoption, and what are the real opportunities for transformational change.

Besides making very clear that FRTB represents the beginning of a genuinely new era for market risk management—more than we all probably initially conceived—the report also uncovers the challenges of data and computing power, as well as the need for a joined-up approach for the front, middle and back offices. What does this mean? Old technology needs to be moved to the current realities.

At this juncture is when I like to talk about infrastructure in the modern world. It’s built on structures such as roads, bridges and tunnels, or technical facilities such as water supplies and electrical grids. You don’t need to know a thing or two about infrastructure to understand that any infrastructure improvements will be costly to develop or install but will, however, return an important value over time.

And so for banks, the biggest obstacle to IT improvement is the “legacy” issue. Once an older system has been in place for a while, having been built at significant cost and effort, transitioning to new, improved technology can be challenging. Nonetheless, old systems were developed for old needs.

FRTB’s requirements are so explicit there is little question they will influence technology strategy for most institutions—and in term of cost, meeting up to new standards could run up to tens of millions of dollars for Tier 1 banks. This presents a unique opportunity for the fintech industry. Most banks will likely actively look to third-party technology providers rather than building a new architecture in-house for reasons related to cutting costs and complexity and to enable customization.

The third Celent report I mentioned above, “Evaluating Ecosystem Solutions,” profiles and evaluates the vendors that have the competencies to help capital market firms operate effectively under the new, upcoming regulatory regime. Essentially, the report provides a thorough “under the hood” look at all the vendor solutions that are available and their key strengths.

So what better way for a bank executive to spend time than by analyzing IT ecosystem solutions? OK, that might not sound like anyone’s idea of a good time, but there are a few items worth considering. Of particular note is that a bank’s IT platform will need to be highly scalable, flexible and extremely fast. As part of this, the costs and benefits of building internally or buying from a third party must be weighed up—i.e., what part of the platform should be built in-house and what elements can be better met by best-of-breed technology vendors, such as Numerix. To this point, regulatory climates have been moving banks away from building technology in-house and relying more on third-party providers. Vendors like us specialize in developing very customizable technology, which can serve as a competitive advantage for you. After all, hiring the experts means banks can spend more of their time being banks.

Fittingly, Numerix was honored to have won two XCelent 2017 awards as part of Celent’s recent vendor research. Within the framework of the XCelent awards, Numerix was the top performer for Market Risk and FRTB in two categories: XCelent Advanced Technology and XCelent Service.

We are very pleased to have received this affirmation of our dedication to establishing the best approach to FRTB. Our high performance solution for FRTB compliance, Numerix FRTB, is designed to be a flexible component of an institution’s FRTB strategy, for business impact assessment or as a core component of a broader enterprise-wide transformation. Numerix FRTB has put Numerix in the unique positon of spanning the Celent categories of Ecosystem Specialist and Risk System Provider.

Moving on to another key point, when discussing the topic of FRTB we can’t ignore the current focus in the U.S. on the potential loosening of banking regulations. This regulatory uncertainty has caused a “pause” in the American banking system in the sense of wanting to wait and see what all this may mean before adopting new risk management practices. Globally, even though several countries are being more aggressive in pursuing the principals of FRTB in their regulatory regimes, others are adopting the same wait and see approach.

However, despite this regulatory ambiguity, any bold attempts to amend or repeal existing or pending rules in the U.S. will probably have to go through a full legislative process. So at this time, banks should still consider planning for ways to address FRTB. It is a very powerful regulation that will have a significant impact for banks. If it hits the capital markets as expected in 2019, banks will want to be in the best shape for it. Fintech can get them there.

To read more about Numerix and its inclusion in Celent’s FRTB vendor report, read more here:

Celent Names Numerix Advanced FRTB Technology and Service Awards Winner

A copy of the report can be requested here:

FRTB and the Upcoming Renaissance in Market Risk Management, Part 3: Evaluating Ecosystem Solutions 

Part 1 and 2 of Celent’s FRTB research can be requested here:

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

FRTB and the Upcoming Renaissance in Market Risk Management, Part 1: How to Execute Sound Go-to-Market IT Strategies

 

 

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