Standardised Risk under Basel 3events.risk.net/digital_assets/21249/Risk_Indonesia_PPT.pdf ·...

Standardised Risk under Basel 3

Pardha Viswanadha, Product Management Calypso

Flow

Regulatory risk landscape

– Trading book risk drivers

Overview of SA-MR

– Issues & Challenges

Overview of SA-CCR

– Issues & Challenges

© 2015 Calypso Confidential 2

Risk: New Landscape


ETD OTC BIM Enterprise Risk Adv. Adv. Std. Cpty Exposure Cpty, Funding Risk

Market Risk Credit Risk xVA IM & OTC Clrg

Regulatory

PRISMA IM

VM SIMM ES VaR Stress IMA SA-MR SA-CCR IMM MC PFE etc. CVA FVA MVA etc.

FRTB Reg. CCR

H M P

Market Risk CVA

CCP Cpty Credit Risk

Capital:

Limits:

- Compliance

- Market Conformity

Head Room

Check & IM

Limits

Market Risk

Limits

Counterparty

Credit Limits SA- CCR

Limits

Regulatory impact on ROE


– 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

Source: McKinsey Report, 2012

Trading Book Risk Drivers

5

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.

FRTB SA-MR

FRTB Evolution


8

Components Risks

Sensitivities-based

Method

Delta

Default Risk

Charge

Vega

Curvature

(=shock)

Residual Risk

Add-on

Jump to

Default

Exotic

Credit Valuation

Adjustment Risk

Framework

CVA

1. Sensitivity by

risk factor, and

then weighted

IR FX EQ

. . . . . .

EUR USD JPY

. . . . . .

IR 2. Aggregate

risk position by

risk bucket

3. Aggregate

risk position by

risk class

.25

.50 1.0

2.0

3.0

4.0 5.0

. . .

USD IR

Risk

Charges

FRTB (SA-MR) – Sensitivity based charges

9

Sensitivities-based

Method

Delta

Default Risk

Charge

Vega

Curvature

(=shock)

Residual Risk

Add-on

Jump to

Default

Exotic

Components Risks

Credit Valuation

Adjustment Risk

Framework

CVA

IR FX EQ

. . . . . .

EUR USD JPY

. . . . . .

IR 2. Aggregate

risk position by

risk bucket

3. Aggregate

risk position by

risk class

.25

.50 1.0

2.0

3.0

4.0 5.0

. . .

USD IR

Risk

Charges

4. Aggregate all

risk charges for

all components

Risk

Charges

DRC SBA RRAO

. . .

1. Sensitivity by

risk factor, and

then weighted

FRTB SA-MR : Additional Charges

Case Study – 100 mio AA Rated 5yr Bond of ANZ

Market Risk Charge under old 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%

Market Risk Charge under FRTB SA-MR

– 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

• 31.353% of 100 mio = $31.345 mio

– RAROC

• 1 / 31.345= 3.19%

10 © 2015 Calypso Confidential

Ratio of New to Old Capital Charge for Credit Bonds

6.46 times

Case Study – Portfolio of Swaps

Market Risk Charge under old SA-MR

General Interest Risk Charges

Interest Rate Risk Charges for Swaps

Market Risk Charge under FRTB SA-MR

IR Sensitivities and Risk Weights

Interest Rate Risk Charges for Swaps


Portfolio Notional Risk Weights Risk Charge

3M Leg 1,000,000 0.20% 2,000

1Yr Swap 1,000,000 0.70% 7,000

2Yr Swap 1,000,000 1.75% 17,500

3yr Swap 1,000,000 2.25% 22,500

4Yr Swap 1,000,000 2.75% 27,500

5Yr Swap 1,000,000 3.25% 32,500

Portfolio Risk Charge

5Yr Swap 30,500

Swap Portfolio 97,000

Swap\Tenor 3M 6M 1Y 2Y 3Y 5Y

1yr Swap -25.068 1.522 90.61 -0.116 0.047 0.006

2yr Swap -25.018 0.874 3.431 194.495 -0.424 -0.051

3yr Swap -25.018 0.99 3.544 0.851 287.933 0.182

4yr Swap -25.018 1.087 4.12 1.629 -0.857 0.205

5yr Swap -25.018 1.157 4.652 2.04 0.676 466.908

Portfolio (Sum) -125.14 5.63 106.357 198.899 287.375 467.25

Risk Weights 3M 6M 1Y 2Y 3Y 5Y

Bps 240 240 225 188 173 150

Portfolio Risk Charge

5Yr Swap 68,101

Swap Portfolio 218,590

Ratio of New to Old Capital Charge for IR Swaps

2.23 times

SA-MR solution flow


Trade level Greeks

• Delta

• Vega

Trade Supplementary info

• Trade Id

• Product

• CCY

• Tenor

• Attributes: Desk, Trader.

Risk weights by

risk class DRC by Rating Exotic Add-on

by type

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

FRTB Engine

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

5.Scheduled

tasks run

• FTRB Risk Metrics

• Capital Charge Reports

Market Data • FX spot

Standardized Approach: SA -CCR

SA-CCR Introduction

SA-CCR replaces both CEM and SM.

SA-CCR takes effect 1st 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.

Calypso Confidential 14


Current Exposure Method (CEM)

• 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 = AddOnTrade (0.4+0.6 . NGR)

• Drawbacks:

• No differentiation between margin/unmargined

trades

• Supervisory Factor not suited for stress period

• NGR too simplistic for hedging/netting

Current Standard

EAD = RC+ PFE

Standardised Method (SM) • Has not become popular.

• No differentiation between margined/unmargined trades

• Too complex, with limited upside. Uses IMM concepts to

an extent

Standardised Approach

• 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

New Approach

EAD = (RC+ PFE)

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 2017

Source: PPT by Nagler & Company

Current Standard Vs New Approach

16

SA-CCR Overview

Trade 1 Trade 2 Trade 3 Trade Level: . . .

Hedging Set: HSet 1 HSet 2 . . .

IR FX Asset Class: . . .

NSet 1 NSet 2 Netting Set:

Counterparty: Cpty 1 . . .

+ Diversification

+ Primary Risk

Full Netting

+ Collateral

+Margining

= Cpty Exposure

IR

FX EQ

1yr 5yr

1yr 5yr

N1 N2 N3

C3 C2 C1

. . . . . .

. . . . . .

. . . . . .

Calypso Confidential

Case Study – Portfolio of Interest Rate Swaps

EAD under CEM

• Portfolio 1 = Swap1Yr+Swap3Yr+Swap5Yr

• Portfolio 2 = Swap5Yr – Swap3Yr – Swap1Yr

• No difference between Margined and

UnMargined Trades

EAD under SA-CCR

• Two Portfolios – Portfolio1 and Portfolio 2

• Two Cases – Margined and UnMargined

• 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

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

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

Case Study – Portfolio of Equity Derivative Swaps

EAD under CEM

• Portfolio 1 = Swap1Yr+Swap3Yr+Swap6Yr +

Swap 10Yr

• Portfolio 2 = Swap10Yr+Swap 6Yr –

Swap3Yr – Swap1Yr

• No difference between Margined and

UnMargined Trades

EAD under SA-CCR

• Two Portfolios – Portfolio1 and Portfolio 2

• Two Cases – Margined and UnMargined

• 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

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

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 846,640 253,992

Portfolio2 554,256 166,277

SA-CCR solution flow


Trade level Basic Data

• Notional, Buy/Sell, S,E,M Etc. • NPV

Clearing Information

• OTC Trade

• Bilateral Cleared Trade

• Exchange Traded

Regulatory

Supervisory

Parameters Mapping Tables Exotic Add-on

Margin Agreement Details

• Threshold

• MTA

• NICA

Collateral Information

• Collateral Type

• MTM, Rating, Category

Supplementary Data

• Trade level

• Counterparty level

Market Data • Spot FX, Equity, Commodity

• Swap rates, Credit Spreads

SA CCR Engine

1. Trade level

AddOns

2. Aggregate

at Hedging Set

Level

3. Aggregate

at Asset Class

Level

4. Aggregate at

Netting set level

for each Cpty

5.Scheduled

task run at

Processing

Org Level

• Exposure at Default (EAD)

by Counterparty

• Capital Charge Reports by

Counterparty

Conclusion

Basel I, II, III….

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.

BCBS 239

BCBS d325

BCBS d352

BCBS 279

BCBS 171

BCBS 189

New Architecture

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.

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

What should Banks do?

23

• Understand Risk across all Trading

• Maintain the pace with Regulatory Requirements

• Optimize Balance Sheet

• Reduce Cost

• Meet the required ROI

• Understand Cost of Trading

Thank You!

Additional Slides

Risk factor: Market variables within each

risk class:

equity spot price, vertex on an interest rate

curve, FX spot rate, implied volatility, etc.

26

Definitions

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 bucket: Subsets within each risk class

that share common

characteristics

currency (rates), sector / credit quality (credit),

sector / economy / market cap (equity), etc.

Definition

Risk class: Asset class risk groupings interest rates, FX, credit spread (3 types),

equity, and commodity

Examples

Risk charge: The amount of capital that a bank should hold as a

consequence of the risks it takes

Standardised Risk under Basel 3events.risk.net/digital_assets/21249/Risk_Indonesia_PPT.pdf ·...

Documents

Transcript of Standardised Risk under Basel 3events.risk.net/digital_assets/21249/Risk_Indonesia_PPT.pdf ·...