The Fundamental Review of the Trading Book (FRTB) has been a long time coming. However, it is thought that the European Commission will introduce legislation to trigger a three-year implementation period starting in 2021. With the FRTB finally approaching, now is a good time to review attitudes towards FRTB, and how organisations are preparing.

What is FRTB?

After the 2008 credit crisis, the Basel Committee on Banking Supervision (BCBS) extended and refined banking standards by creating the Basel III regulation, which includes the FRTB. The FRTB’s primary purpose is to better prepare financial institutions for periods of uncertainty by improving the calculations used to estimate the capital required to cope with losses from market risk.

One of the key changes is to create a more objective boundary between the banking book and trading book — intending to reduce the incentive to arbitrage between them. Other changes include a revised standardised approach that encourages greater reliance on risk sensitivities as inputs into capital charge calculations, and a revised internal model approach that replaces value-at-risk with expected shortfall.

Challenges and opportunities?

The number one complaint about FRTB is the cost. Banks have expressed concern about the amount of capital they will be required to hold, the complexity of the regulations, and the additional staff needed to ensure compliance. The Basel Committee has made several amendments to FRTB since its initial proposal in order to reduce the financial pressure on organisations. However, the financial and logistical challenges of implementing FRTB should not be understated.

Despite this, it is also important to recognise the opportunities FRTB offers. Banks that fully embrace FRTB have the chance to rebuild modelling approaches using tools such as big data, analytics, cloud technology and data science. This could provide a competitive edge and offset increased costs of compliance. For example, the FRTB requires enormous amounts of data, which could also be used to improve fraud detection and trend spotting.

How are banks preparing?

While there are a few banks whose existing infrastructure (i.e. those with bespoke and integrated trading and risk platforms built with advanced technology) facilitates the move to FRTB, for most organisations preparations are extensive. However, despite the pandemic, preparations for FRTB are still going strong. According to Risk.net’s conversation with Bloomberg’s Essan Soobratty, ‘banks have mostly continued along their established pre-Covid trajectories.’ And while there have been some inevitable delays, some banks are even viewing the current situation as an ‘opportunity to continue at a pace that allows for a more strategic implementation.’

These more strategic banks are viewing FRTB as an opportunity to improve their entire risk platform. For example, a key priority includes assessing and upgrading computing and operational systems to support the tasks that will be necessary to comply with FRTB (e.g. P&L testing, expected shortfall and sensitivity analysis). In addition, FRTB requires an unprecedented level of integration across departments. This means that banks are having to re-align roles and responsibilities across Risk, Finance and Trading, and co-ordinate FRTB implementation with other programs (such as BCBS 239) to achieve holistic transformation. This approach is likely to provide long term-gains and avoid the situation of the new system, which has been built on different data and models, conflicting with the existing one.

Alternatively, many banks are considering third party platform and data vendors. With the number of infrastructure solutions on offer and the FRTB move towards increased standardisation, McKinsey & Co have suggested that it makes sense for banks to buy in certain solutions while building only the aspects of their infrastructure that provides a competitive advantage. 

Clearly, a bank’s approach to FRTB preparations will depend on existing infrastructure, size and culture. However, more and more banks are using the delay caused by Covid-19 to implement deeper structural change. While it may make sense to outsource certain processes, investing in new technology and committing to the integrated culture required by FRTB establishes an organisation as a bank of the future.

Several major employers, such as Twitter and Facebook, have announced that remote work will continue indefinitely. For those who enjoy the flexibility and lack of commute that working from home offers, this will be welcome news. For others who thrive in an office environment or who lack a suitable home-working space, a remote future could be a nightmare. There are also growing concerns about what remote work will mean for training, teamwork and sustaining company culture.

The hybrid office is being touted as a solution, where employees split their week between their home and the physical office space. However, this comes with its own set of problems. For example, there is concern over a two-tier system arising between office and home workers, and a possible breakdown in communication as a result. Luckily, there are a number of innovative new technologies being designed — could they help build a hybrid office that people want to be part of?

Creating togetherness

One of these new technologies is Yonderdesk, a custom digital workspace. One of the main issues with a hybrid office is that it lacks the ‘sense of togetherness’ created by physically being in the same space. This means employees miss out on socialising and are less likely to ask their colleagues quick queries. Yonderdesk is a digital floor plan that can mimic the organisation’s actual office space. Employees are given an avatar and a desk, so that it’s easy to see where your colleagues are at (e.g., in meetings, available or working on a task). Digital floor plans have been a key element of online games, such as Habbo, for years because they are fun, engaging and make people feel like they are having a shared experience, so it will be fascinating to see whether ideas like Yonderdesk prove popular.

Virtual co-workers

On a more tech-heavy futuristic note, there is plenty of development in virtual and augmented reality technology. Digital start-up, Spatial, are working on augmented reality filters that create the illusion that your co-worker is right in front of you (similar to Pokemon Go). The avatar has facial expressions and can even sit down on a chair. It also works on existing virtual reality headsets, but Spatial are particularly excited by the idea of lightweight glasses, which are likely to be far more practical for everyday use. In addition, Spatial allows your avatar to interact with virtual tools. In their words, ‘Your room is your monitor, your hands are the mouse.’ There are plenty of other virtual reality meeting applications, such as the ones on this list, but Spatial is one of the most immersive.

Productivity software

A more controversial development is the increase of monitoring software, sometimes known as ‘Tattleware’. Some of these products can be used without employee knowledge to spy on emails, software use and more, which can have serious data privacy implications and undermine trust. Given that, on average, people have been working longer hours during the pandemic, it seems unwise to use monitoring software in this way. However, when used ethically and transparently, such tools can provide a rich understanding of employee behaviour that can improve productivity, engagement and prevent fatigue and/or burnout. For example, software like Time Doctor has time-tracking features that can help employees and managers gain a better understanding of how long tasks actually take, which can be fed into future estimates and used to reshuffle schedules.

Collaboration tools

Last but not least, collaboration tools. If you haven’t done this already, finding and implementing effective collaboration tools is vital to successful remote and hybrid working. You are probably most familiar with services like Slack — instant messaging chat rooms are a great way for employees to show their availability and engage in more casual conversations. Take this further with tools like Donut, a slack channel that makes introductions with a random employee every couple of weeks and encourages virtual or in-person meet-ups. This helps build a cohesive company culture by structuring those random encounters from the pre-pandemic days.

Clearly, it will take time to build a hybrid office that suits your organisation. Exploring new tools is a great way to avoid complacency and ensure the hybrid office experience is something your employees want to be part of.