Problem and opportunity
The Fundamental Review of the Trading Book (FRTB) introduces a liquidity test that requires banks using their own market risk models to assess trading activity associated with inputs to the models.
To pass the Risk Factor Eligibility Test (RFET), banks must source executed trade and committed quote data for the previous year, attribute the trades to individual risk factors, and check whether there is sufficient activity to pass predefined liquidity thresholds.
With opaque markets and large volumes of data to manage – passing the RFET is going to be a significant challenge for banks.
Sourcing data for RFET
Refinitiv Labs addresses these challenges with Trade Discovery, a tool that provides banks with the data required to comply with RFET, and accelerates the process of conducting the test from months to seconds.
The web application allows banks to source ‘real’ price observation data, refine risk factor to instrument mapping rules, and calculate the pass rate for customers via a UI that allows them to fully understand and analyze the data. This new app is built on top of the Refinitiv Data Platform.
Trade Discovery provides around 40 million processed observations across 3 million instruments covering rates, credit, FX and equities in multiple jurisdictions. A consistent data model captures the instrument terms and conditions across 60 attributes, allowing easy mapping of instruments to risk factors.
Refinitiv stores more than one year’s worth of historical time-series data and provides updated data at the end of each day, enabling banks to monitor existing risk factors and introduce new ones.
The prototype includes:
- Access to ‘real’ price observation data
- Observation data in a consistent data model
- One observation per day for any given instrument
- Ability for banks to define custom risk factor to instrument mappings
- Visualization of RFET pass and fail rates
- A bulk API to download data from the Refinitiv Data Platform
Refinitiv Labs has whittled down more than a year of observation data, so what would typically take risk analysts a month to do in Excel can now be done in seconds by selecting a few options in the Trade Discovery user interface.
A collaborative approach
Refinitiv Labs takes a collaborative, customer-focused approach to building solutions to real problems by combining customer feedback, extensive data capability and third-party technologies.
Collaborating with our customers:
- Trade Discovery has been designed in consultation with banks from the US, Europe and Asia
- Customer meetings were held with 10 banks subjected to FRTB rules
- Many of the banks took part in an early access program
- 'Real' price observation data sourced from the Refinitiv Data Platform using a bulk API
Working with open source technologies:
- PostgresSQL relational database
- Python programming language
What Refinitiv Labs is thinking next...
Refinitiv Labs is planning to move Trade Discovery into production:
- An early access program will guide the solution into production
- Insights gained from customer engagement will be incorporated
- Additional customer meetings and feedback will inform ongoing development