Bloomberg and KPMG China Publish Whitepaper on Data Challenges of FRTB Implementation in China

FRTB will impact Chinese banks’ operations, risk management and data governance

Beijing — Bloomberg and KPMG China today released a whitepaper titled The FRTB’s Data Challenges for Financial Institutions in China. The whitepaper focuses on the major data challenges that Chinese financial institutions face in the implementation of Basel III Minimum Capital Requirements for Market Risk, also known as “Fundamental Review of the Trading Book” or “FRTB”. The white paper illustrates the key points and challenges of FRTB implementation in China and proposes various implementation solutions.

FRTB revises the overall regulatory framework for market risk capital standards and adjusts the boundary definition and workflow requirement of banks and their trading books. By changing the calculation of market risk capital, this new regulation will affect banks’ business operations, risk management, as well as data model governance.

“The breadth, depth and type of data required under FRTB poses many challenges for banks in terms of data management. ” said Brad Foster, Global Head of Enterprise Data Content at Bloomberg LP. “Banks need to review, and in many instances, upgrade their data management strategy, systems and infrastructure to meet the significant demands that come with these new requirements. It is critical for banks to take a strategic and integrated approach to FRTB implementation that addresses consistency and alignment across their full workflow. It not only helps them effectively address the challenges posed by the FRTB implementation, but also creates workflow efficiencies across trading, risk management and back-office operations.”

KPMG China has been assisting quite a number of banks in FRTB implementation and the Quantitative Impact Study (QIS) since 2016. “Most of the large and medium-sized domestic banks have attached great importance to this new regulation. It is not only about meeting regulatory requirements, but more importantly an opportunity for banks to review and rebuild their market risk framework including the governance, policy and procedure, models, data and IT infrastructure, etc. Definitely FRTB implementation will elevate the overall market risk management standards of China’s banking industry.” said Tony Cheung, Head of Financial Services, KPMG China.

The deadline proposed by BCBS for FRTB implementation is January 2023. Although China has not officially announced the rules and timetable for the implementation of FRTB, Chinese banks are actively moving forward in accordance with international standards, but they face implementation challenges in data, assessment, technology and operations with the data challenge being the most important.

Higher requirement on data acquisition, management and risk measurement
Banks must overhaul and strengthen their market risk structure and governance workflow, as well as rethink how they access, adjust and use reference and market data to meet regulatory requirements, according to the white paper. Both the Standardized Approach (SA) and Internal Modelling Approach (IMA) under FRTB require banks to acquire, consume and manage a larger amount of data than before and to ensure consistency in data consumption from front, middle and back offices.

The whitepaper elaborated on the data challenges that banks may face, including bucketing classification, bond rating, risk factors across asset classes, and the higher requirements if the banks adopt FRTB SA, and the quality and breath of market observation data and the application of Risk Factor Eligibility Test (RFET) at critical time points under FRTB IMA, among others.

“According to a survey conducted by KPMG, it is expected that China will follow the international timetable and require banks to report based on FRTB SA, starting in January 2023. Chinese banks should evaluate the impact of the implementation of FRTB on the capital, management, calculation, systems and other aspects at least a year in advance, and prepare for adjustment on business and management while ensuring compliance on schedule,” said David Yang, Head of Market Risk, KPMG China. “The implementation of FRTB IMA is a more challenging task. It requires a qualitative and quantitative evaluation across the whole institution and trading desks. The banks will decide the extent to which desks are allowed to implement the FRTB IMA based on the results of RFET and the measurement capacity of the internal model. A qualified trading desk design and capital calculation for modelable and un-modelable risk factors at trading desks, back testing, profit and loss attribution and default risk capital measurement are core elements of FRTB IMA. We also suggest that banks with FRTB IMA implementation plans should start the preliminary assessment as soon as possible.”

The treatment of fund exposures and other challenges
The treatment of fund exposures under FRTB is also a concern expressed by commercial banks around the world, according to the whitepaper. Banks can choose Look-through Approach or Non-look-through Approach, which includes Index Benchmark Approach and Mandate Approach. According to a Bloomberg survey, banks generally regard using the Look-through approach to decompose the funds as a preferred solution. It requires the integrity and accuracy of the fund holdings data first of all, followed by the updating frequency of data, the adequacy and timeliness of the data, as well as the number of layers to look through, among others.

“Funds, including ETFs and mutual funds, with multiple holdings can only be prudently and consistently risk managed by having fully transparency in the underlying portfolio holdings. The Look-through Approach is a core component of the Basel requirements for capital the treatment of funds. To ensure proper and complete implementation of FRTB, this will be key for banks with fund exposure,” said Brad Foster.

The whitepaper said that Chinese banks should also take into consideration the differences between the local implementation rules to be issued by the China Banking and Insurance Regulatory Commission (CBIRC) and the BCBS requirements. As Chinese banks increasingly invest in foreign currency assets, the risks extend beyond RMB assets. Banks should make sure the data they acquire covers global assets and complies with China’s local FRTB regulations.

Modelling and risk sensitivity calculation also pose challenges for many banks. The whitepaper noted that commercial banks need to coordinate all departments to comprehensively upgrade technical standards and adopt optimized management practices to improve capability in market risk management. Therefore, it is critical to choose an appropriate and efficient risk management system.

Since 2016, Bloomberg has hosted regular roundtables with banks and regulators to discuss the key points and challenges in the implementation of FRTB. As a leading financial data provider, Bloomberg has helped banks develop their data structure and management strategies with solutions of data access, integration, calculation, and management. KPMG China also has been assisting large and medium-sized commercial banks in China to prepare for FRTB implementation and the Quantitative Impact Study (QIS) since 2016.

For more information, click here to download the full report.

About Bloomberg
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About KPMG China
KPMG member firms and its affiliates operating in Mainland China, Hong Kong and Macau are collectively referred to as “KPMG China”.
KPMG China is based in 29 offices across 26 cities with around 14,000 partners and staff in Beijing, Changsha, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Hefei, Jinan, Nanjing, Ningbo, Qingdao, Shanghai, Shenyang, Shenzhen, Suzhou, Taiyuan, Tianjin, Wuhan, Xiamen, Xi’an, Zhengzhou, Hong Kong SAR and Macau SAR. Working collaboratively across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.
KPMG is a global organisation of independent professional services firms providing Audit, Tax and Advisory services. We operate in 146 countries and territories and in FY20 had close to 227,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.
In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong firm can trace its origins to 1945. This early commitment to this market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in KPMG’s appointment for multi-disciplinary services (including audit, tax and advisory) by some of China’s most prestigious companies.

Media Contacts
Irene Gu, igu3@bloomberg.net, +86-10-6649-7535
Wei Sun, kw.sun@kpmg.com, +86-10-85085119