On the evening of May 10, 2018, New Horizon Career Club (NHC) held the first session of the 2018 Risk Salon. The first session focused on a hot topic in risk management – fundamental review of the trading book (FRTB). 
The 2-hour session was composed of two parts: a 1-hour presentation by Mr Tim Chen, Senior Business Consultant at RBC Capital Market, and a 1-hour panel discussion in which he was joined by Ms Miao Guo, Senior Manager at TD Enterprise Market Risk Control, and Mr Hong Xu, Manager at BMO Market Risk Models. The panel discussion was moderated by Mr Dmitri Rubisov, Managing Director at BMO Capital Markets.
In his presentation, Tim first reviewed current measures of market risk, focusing on Value-at-Risk (VaR). Tim started his presentation with the basic definition of VaR and then discussed three VaR calculation methods, which are historical simulation, Monte Carlo simulation, and variance-covariance method. Most Canadian banks use historical VaR, except for BMO that uses Monte Carlo simulation method for VaR calculation.Tim also introduced stress tests and backtesting. Tim explained that not all market risks can be captured by VaR, and thus it is equally important for us to understand the notion of Incremental Risk Charge (IRC), Debt Specific Risk (DSR), and Risk Not in VaR (RNIV).After reviewing these current measures of market risk, Tim presented the evolution of risk regulatory requirements from Basel I to FRTB, introduced in Basel IV. The framework of FRTB introduces significant changes in risk measures; one of them is replacement of VaR with Expected Shortfall. Tim discussed in detail the two FRTB framework approaches – Internal Model Approach (IMA) and Standardized Approach (SA). At the end of the presentation, Tim mentioned recent FRTB enhancements and challenges in FRTB implementation.
SA vs IMAIn the panel discussion, Dmitri first asked the panelists to share their views on the two FRTB approaches, IMA and SA. Miao believed that “SA is a good starting point and should be the focus of Canadian banks” . She said that SA does a good job in capturing the risks in trading books while keeping it relatively simple. While IMA usually decreases capital requirements when more sophisticated models are used, IMA comes with a very high infrastructure cost. Its implementation is complicated, and data collection requires significant efforts.The other panelists argued that “regulators favour sophisticated models, and banks have no choice but to implement IMA”. Then Dmitri suggested that FRTB deadline was already pushed several times and meeting the current deadline of 2022 will be very difficult.
The panelists expressed their confidence that while FRTB framework was not yet adopted by the USA, FRTB will not be cancelled, and moreover they believed that 2022 will be the real deadline for FRTB.
Implementation Challenge
After that, Dmitri asked the panelists about the main challenges in their daily work on implementing FRTB framework. They all agreed that data quality is a great challenge due to the massive amount of data. Communication between different groups is another issue.
The implementation of FRTB will involve people from different backgrounds. People with quantitative backgrounds and those from the business can speak different use different terms. To avoid miscommunications, it is important for them to understand each other properly.
The audience was curious about what kind of talents FRTB groups are looking for. Panelists suggested that they are looking for candidates not only with solid quantitative and risk management background, but also with strong desire to discover and learn, as everyone is discovering and learning during the implementation process.
This FRTB session helped the audience to understand the evolution of risk measurements and the key features of FRTB framework. There are many challenges in the FRTB implementation process, but FRTB is a significant step forward in strengthening the risk management framework. NHC Risk Salon also provided the audience with invaluable opportunities to network with industry leaders.
