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Celent evaluates impact FRTB and future of risk management

The recent report by Celent, a member of Oliver Wyman, profiles risk management systems for firms in compliance with the new FRTB regime. The March 2017 report, composed by Cubillas Ding, evaluates the effect of the FRTB on existing ecosystem solutions. This is done within the market risk landscape of changing industry pressures on capital.

Celent explores the effects of the upcoming regime, the Fundamental Review of the Trading Book (FRTB), on developments in risk management landscape. The report is titled FRTB and the Upcoming Renaissance in Risk Management, Part 3. The FRTB is expected to revise minimum capital requirements. It will also require firms to reassess operational and capital efficiency capacities. This implies that firms will have to look beyond operational and capital efficiency and towards the capacities of Front Office and Risk Functions in adopting emerging innovations. In particular, it is expected that emerging innovations and technology solutions will be adopted by firms to implement FRTB initiatives.

The solution market includes building capabilities in areas such Ecosystem Component Specialists (e.g. data value chain), Risk System Providers (e.g aggregation and reporting) and Front-to-Risk Platforms (e.g. multi asset class trading). Amongst vendors discussed in this report are Asset Control, Calypso, IBM, Moody’s Analytics and TIX. 

1. The first part of this report asks the following research question: ‘What technology solutions are available for firms implanting and executing their FRTB initiatives?’

Specifically, the report categorises the impact of the FRTB on solutions in three areas within an overall ecosystem that affect financial firms and vendors.

• Risk System ProvidersThe second category mentions vendors that market risk, measurement and reporting across enterprises. Their applications include aggregations, stimulations, capital ratios and stress testing within the entire FRTB ecosystems. Amongst the firms are IBM, Markit, SAS, and FIS and may overlap with the previous category as vendors diversify their solution capabilities.

• Ecosystem Component SpecialistsThis first category refers to firms that are positioned within the FRTB’s data value chain or as part of a set of broader applications. These include Asset Control, SAD, Moody’s Analytics and Quantify.

• Front-to-Risk PlatformsThe third category relates to those vendors that are able to perform risk monitoring, asset class trading, deal capturing and position-keeping at front office level, and across markets. Vendors belonging to this class include Calypso, FIS and Murex.

2. The second part of the report asks, ‘What differentiates before solutions and where are their strengths and weaknesses?’

The analysis focuses on evaluating firms according to a framework for Xcelent awards called “ABCD”, namely “advanced technology and features”, “breadth of coverage and functionality”, “client base and presence” and “depth of client services”. The top performers are ranked according to ecosystem component specialists, risk system providers and front-to-risk platforms. They are also differentiated by their observed value-added capabilities.

3. The third part of this report focused on: ‘Which systems win Celent’s 2017 Market Risk and FRTB ABCD awards?’

Within this framework, the top performers for each of the ABCD dimensions for Market Risk and FRTB Solutions are:

• XCelent Advanced Technology , Numerix, FIS, IHS Markit, Misys, and Murex

• XCelent Functionality , IBM, Misys, and Quantifi

• XCelent Customer Base , IHS Markit and Murex

• XCelent Service , FIS, IBM, Misys, and Numerix

The report concludes that FRTB will catalyse change in market risk management and practices, affecting multiple parties, including banks, capital market institutions, software vendors and solutions providers. It outlines expectations for collaboration, diversification and partnerships amongst these players by referring to examples such as capital efficiency options, stringent transparency requirements and a demand for new operating models that pass FTRB’s “eligibility tests”. Beyond short term objectives, technology and emerging innovations are expected to redesign risk management approaches in a profitable manner.

To read the complete report: FRTB and the Upcoming Renaissance in Risk Management, Part 3, by Celent, click here.

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