Standardised Risk under Basel 3. Pardha Viswanadha, Product Management Calypso

Transcription

1 Standardised Risk under Basel 3 Pardha Viswanadha, Product Management Calypso

2 Flow Regulatory risk landscape Trading book risk drivers Overview of SA-MR Issues & Challenges Overview of SA-CCR Issues & Challenges Calypso Confidential

3 Risk: New Landscape IM & OTC Clrg Market Risk Credit Risk xva Regulatory ETD OTC BIM Enterprise Risk Adv. Std. Adv. Cpty Exposure Cpty, Funding Risk FRTB Reg. CCR PRISMA IM VM SIMM VaR ES Stress IMA SA-MR SA-CCR IMM MC PFE etc. CVA FVA MVA etc. H M P Capital: Market Risk CVA CCP Cpty Credit Risk Limits: Head Room Check & IM Limits Market Risk Limits SA- CCR Limits Counterparty Credit Limits - Compliance - Market Conformity Calypso Confidential

4 Regulatory impact on ROE Source: McKinsey Report, 2012 Projected 65% drop in ROE is driven by estimated drop in Profits of 25% and 100% increase in Tier 1 Capital requirements, drop in profits is due to higher liquidity & funding costs driven by regulation About 75% of the projected ROE impact across all capital markets businesses (10 out of 13%) is driven by the new capital requirements for market and counterparty risk Calypso Confidential

5 5 Trading Book Risk Drivers Market Risk SA-MR Expected Shortfall/IMA Default Risk Charge Counterparty Credit SA-CCR Monte Carlo PFE/IMM Risk Factor Back Testing The Standardised approaches provide a level playing field for baseline capital calculations The advanced methodologies imply: Increased operational & computational burden. Hardware and calculation efficiency pressure. Multiple new processes challenging legacy systems. A need for common trade sets, data and performance requirements. Ideally seek a solution that will deliver all the metrics.

6 FRTB SA-MR

7 FRTB Evolution Calypso Confidential

8 8 FRTB (SA-MR) Sensitivity based charges Components Risks Delta Sensitivities-based Method Vega Curvature (=shock) Risk Charges FX IR EQ 3. Aggregate risk position by risk class Default Risk Charge Jump to Default IR USD EUR JPY 2. Aggregate risk position by risk bucket Residual Risk Add-on Exotic Credit Valuation Adjustment Risk Framework CVA USD IR Sensitivity by risk factor, and then weighted

9 9 FRTB SA-MR : Additional Charges Components Risks Delta Risk Charges SBA DRC RRAO 4. Aggregate all risk charges for all components Sensitivities-based Method Vega Curvature (=shock) Risk Charges FX IR EQ 3. Aggregate risk position by risk class Default Risk Charge Jump to Default IR USD EUR JPY 2. Aggregate risk position by risk bucket Residual Risk Add-on Exotic Credit Valuation Adjustment Risk Framework CVA USD IR Sensitivity by risk factor, and then weighted

10 Case Study 100 mio AA Rated 5yr Bond of ANZ Market Risk Charge under old SA-MR Market Risk Charge under FRTB SA-MR Specific Risk Charge 1.6% of 100 mio = $1.6mio General Risk Charge 3.25% of 100 mio = $3.25 mio Total Risk Charge 4.85% of 100 mio = $4.85 mio RAROC Assuming a PnL of 1.0 mio RAROC = 1 / 4.85 = 20.6% Default Risk Charge JTD = LGD * notional + P&L = 75% * $100m + $1mio = $76m DRC = $76m * 2% (for AA bond) = $1.52m Credit Spread Risk Charge Bucket 3, 5% RW CS01 = $46,000 CSR charge = 500X46,000 = $23 mio Interest Rate Risk Charge RW is 1.5% for 5yr tenor PV01 = $45,500 IR Charge = 150X45,500 = $6.825 mio Total Risk Charge % of 100 mio = $ mio RAROC 1 / = 3.19% Ratio of New to Old Capital Charge for Credit Bonds 6.46 times Calypso Confidential

11 Case Study Portfolio of Swaps Market Risk Charge under old SA-MR General Interest Risk Charges Portfolio Notional Risk Weights Risk Charge 3M Leg 1,000, % 2,000 1Yr Swap 1,000, % 7,000 2Yr Swap 1,000, % 17,500 3yr Swap 1,000, % 22,500 4Yr Swap 1,000, % 27,500 5Yr Swap 1,000, % 32,500 Market Risk Charge under FRTB SA-MR IR Sensitivities and Risk Weights Swap\Tenor 3M 6M 1Y 2Y 3Y 5Y 1yr Swap yr Swap yr Swap yr Swap yr Swap Portfolio (Sum) Risk Weights 3M 6M 1Y 2Y 3Y 5Y Bps Interest Rate Risk Charges for Swaps Portfolio Risk Charge 5Yr Swap 30,500 Swap Portfolio 97,000 Interest Rate Risk Charges for Swaps Portfolio Risk Charge 5Yr Swap 68,101 Swap Portfolio 218,590 Ratio of New to Old Capital Charge for IR Swaps 2.23 times Calypso Confidential

12 SA-MR solution flow Trade level Greeks Delta Vega Risk weights by risk class DRC by Rating Exotic Add-on by type Trade Supplementary info Trade Id Product CCY Tenor Attributes: Desk, Trader. FRTB Engine Shock PL for Curvature DRC Issuer Position Market Value Ratings Exotic Trade Notionals BASIC CVA Exposure at Default at CP / Netting Set Effective Maturity at CP / Netting Set CP ratings CVA Hedges Notional- CDS hedges CVA Hedge Effective Maturity Market Data FX spot 1. Sensitivity by risk factor, and then weighted 2. Aggregate risk position by risk bucket 3. Aggregate risk position by risk class 4. Aggregate all risk charges for all components FTRB Risk Metrics Capital Charge Reports 5.Scheduled tasks run Calypso Confidential

13 Standardized Approach: SA -CCR

14 SA-CCR Introduction SA-CCR replaces both CEM and SM. SA-CCR takes effect 1 st January 2017 (being revised). SA-CCR Highlights: Differentiates between margined and un-margined trades. More meaningful recognition of netting benefits. Captures the level of volatilities observed over recent stressed periods. Minimizes the discretion used by national authorities and banks. 14 Calypso Confidential

15 Current Standard Vs New Approach Current Standard Current Exposure Method (CEM) EAD = RC+ PFE RC (replacement cost) is the current market value with offsetting of collaterals Calculate PFE(Potential Future Exposure) at trade level Addon = Notional x Supervisory Factor Recognise hedging at netting set level by net gross ratio: PFE = AddOn Trade ( NGR) Drawbacks: No differentiation between margin/unmargined trades Supervisory Factor not suited for stress period NGR too simplistic for hedging/netting Standardised Method (SM) Has not become popular. No differentiation between margined/unmargined trades Too complex, with limited upside. Uses IMM concepts to an extent New Approach Standardised Approach EAD = (RC+ PFE) Factor =1.4 as in IMM RC considers collaterals and margining EAD for margined netting sets is capped at the EAD on an unmargined basis Within each of five asset classes, calculate PFE as Notional x Delta x Maturity Factor x Supervisory Factor on trade level and aggregate across hedging sets PFE is further reduced in case of over collateralisation Key objectives: Addresses deficiencies of CEM and SM Simple and easy to implement Aims to be more risk sensitive than CEM/SM Minimises discretion of national authorities Internal Model Method (IMM) Remains valid (However, the IMM shortcut method will be eliminated from the framework once SA-CCR takes effect from 1 Jan Source: PPT by Nagler & Company 2013 Calypso Confidential

16 16 Calypso Confidential SA-CCR Overview Counterparty: Cpty 1 C1 C2 C3 = Cpty Exposure Netting Set: NSet 1 NSet 2 N1 N2 N3 + Collateral +Margining Asset Class: FX IR FX IR EQ + Primary Risk Hedging Set: HSet 1 HSet 2 1yr 5yr + Diversification Trade Level: Trade 1 Trade 2 Trade 3 1yr 5yr Full Netting

17 Case Study Portfolio of Interest Rate Swaps EAD under CEM EAD under SA-CCR Portfolio 1 = Swap1Yr+Swap3Yr+Swap5Yr Portfolio 2 = Swap5Yr Swap3Yr Swap1Yr Portfolio AddOn % AddOn $ 1Yr Swap 0% - 3Yr Swap 0.50% 5,000 5Yr Swap 1.50% 15,000 Portfolio 1 20,000 Portfolio 2 8,000 Two Portfolios Portfolio1 and Portfolio 2 Two Cases Margined and UnMargined Portfolio AddOn % AddOn $ UnMargined AddOn $ Margined 1Yr Swap 0.49% 4,877 1,463 3Yr Swap 1.39% 13,929 4,179 5Yr Swap 2.21% 22,120 6,636 Portfolio 1 36,032 10,810 Portfolio 2 31,559 9,468 No difference between Margined and UnMargined Trades UnMargined EAD higher than CEM Margined EAD lower than CEM for Portfolio1 but not Portfolio 2 SA-CCR compares better with CEM for Margined cases because of the impact of MPOR Calypso Confidential

18 Case Study Portfolio of Equity Derivative Swaps EAD under CEM EAD under SA-CCR Portfolio 1 = Swap1Yr+Swap3Yr+Swap6Yr + Swap 10Yr Portfolio 2 = Swap10Yr+Swap 6Yr Swap3Yr Swap1Yr Portfolio AddOn % AddOn $ EDS 1Yr 6% 60,000 EDS 3Yr 8.00% 80,000 EDS 6Yr 10.00% 100,000 EDS 10Yr 10.00% 100,000 Portfolio1 340,000 Portfolio2 136,000 No difference between Margined and UnMargined Trades Two Portfolios Portfolio1 and Portfolio 2 Two Cases Margined and UnMargined Portfolio AddOn % AddOn $ UnMargined AddOn $ Margined EDS 1Yr 32% 320,000 96,000 EDS 3Yr 32% 320,000 96,000 EDS 6Yr 32% 320,000 96,000 EDS 10Yr 32% 320,000 96,000 Portfolio1 846, ,992 Portfolio2 554, ,277 UnMargined EAD higher than CEM Margined EAD lower than CEM for Portfolio1 but not Portfolio 2 SA-CCR compares better with CEM for Margined cases because of the impact of MPOR Calypso Confidential

19 SA-CCR solution flow Trade level Basic Data Notional, Buy/Sell, S,E,M Etc. NPV Regulatory Supervisory Parameters Mapping Tables Exotic Add-on Clearing Information OTC Trade Bilateral Cleared Trade Exchange Traded Margin Agreement Details Threshold MTA NICA Collateral Information Collateral Type MTM, Rating, Category Supplementary Data Trade level Counterparty level 1. Trade level AddOns 2. Aggregate at Hedging Set Level SA CCR Engine 3. Aggregate at Asset Class Level 4. Aggregate at Netting set level for each Cpty 5.Scheduled task run at Processing Org Level Market Data Spot FX, Equity, Commodity Swap rates, Credit Spreads Exposure at Default (EAD) by Counterparty Capital Charge Reports by Counterparty Calypso Confidential

20 Conclusion

21 Basel I, II, III. BCBS d325 BCBS 189 BCBS d352 BCBS 239 BCBS 171 BCBS 279 There is more than one directive. No regulation acts in isolation. The initiatives represent a wave of risk transformation. There will be an explosion in data volumes. Aligning the regulatory initiatives will provide economies of scale. An enterprise solution will reduce the overall footprint and decrease costs through system consolidation.

22 New Architecture Data Improve Data Quality Harmonise Data Architecture Harmonise Data governance Share data management and reporting Risk Commoditise reporting Automate report generation Embed risk control standards Reduce cost and develop risk utilities Finance Improve Reporting Improve Governance Improve Accountability Build a reference data dictionary Core data aggregation and automation is required. Need to reduce complexity and resolve performance issues. A front-to-back enterprise platform will naturally embed these practices.

23 23 What should Banks do? Understand Cost of Trading Understand Risk across all Trading Maintain the pace with Regulatory Requirements Reduce Cost Optimize Balance Sheet Meet the required ROI

24 Thank You!

25 Additional Slides

26 26 Definitions Definition Examples Risk factor: Market variables within each risk class: equity spot price, vertex on an interest rate curve, FX spot rate, implied volatility, etc. Risk bucket: Subsets within each risk class that share common characteristics currency (rates), sector / credit quality (credit), sector / economy / market cap (equity), etc. Risk class: Asset class risk groupings interest rates, FX, credit spread (3 types), equity, and commodity Risk position: The main input to the risk charge calculation: aggregate sensitivity (delta and vega) or aggregate loss amount (due to stress scenarios), converted to positive numbers Risk charge: The amount of capital that a bank should hold as a consequence of the risks it takes