SIMM and FRTB.

SIMM and FRTB.

Hi all,

FRTB (Fundamental Review of the Trading Book) and SIMM (Standard Initial Margin Model) regulatory requirements have been rolling for a while now. Yet computing and reporting related risk metrics remain a challenge for OTC derivatives market participants.

High stakes and regulatory aches

Making the right choices when implementing FRTB and SIMM workflows is key to optimizing the cost of capital and improving liquidity management.

These regulations involve significant technological and operational changes necessary to perform requested calculations. Such calculations require the expertise of specialists in risk analytics and quantitative finance. Financial institutions must also consider the auditability of results and their ease of integration within their systems.

Our clients leverage off LexiFi’s Apropos tools and services to compute SIMM and FRTB reports. LexiFi helps control market data input, pricing parameters as well as generated results.
Examples of clients using LexiFi Apropos to produce these regulatory reports include:

  • Quintet Private Bank: LexiFi Apropos experts helped with the identification of risk factors and the computation of required sensitivities by asset class for the FRTB report metrics
  • Banque et Caisse d’Épargne de l’État (BCEE): the bank uses LexiFi Apropos’ Grid Reporting views containing Greeks calculations for SIMM
  • Arkea Crédit Mutuel: LexiFi helped with SIMM computations. We asked for feedback regarding SIMM reporting in LexiFi Apropos over a short phone interview reported below!

Interview with: Sebastien Treguer, Head of Valuation Services of Market Operations at Arkea Crédit Mutuel

Sebastien Treguer, Head of Valuation Services of Market Operations at Arkea Crédit Mutuel provided some feedback on SIMM computations with LexiFi Apropos:

LexiFi: “Before we dive into SIMM, how is the reporting activity going with LexiFi Apropos?”

Sebastien Treguer: “LexiFi Apropos allows us to generate and automate tailored reports on complex products in a record time. LexiFi’s experts provide a high-quality service to support reporting routines.”

LexiFi: “Is LexiFi Apropos helpful in answering SIMM requirements?”

Sebastien Treguer: “Regarding SIMM reporting, LexiFi’s pricing engine and quantitative tools allow us to match counterparties’ prices and sensitivities and provide us with so many user-friendly tools to inspect and investigate computed results.”

LexiFi: “How did our Product Specialists and Quantitative Engineers help out?”

Sebastien Treguer: “LexiFi’s experts quickly adapt to regulators' requests on tight deadlines, any time of the year even during holiday seasons. They are always willing and able to work out every minute detail to help us adjust to regulatory requirements and produce reports such as the SIMM.”

LexiFi: “What is the advantage of using LexiFi Apropos pricing framework compared to other systems that you have at Arkea?”

Sebastien Treguer: “LexiFi Apropos’ pricing framework is a lot more information-rich compared to other software solutions. We easily test pricing models, play around with complex parameters, drill down into pricing results, and have user-friendly access to calibration and investigative tools such as the Curve Inspector and the Monte Carlo Inspector.”

LexiFi: “Can you give us an example?”

Sebastien Treguer: “An example of LexiFi’s ingenious pricing investigation framework is the case of the Monte Carlo Heston Local Volatility models where both the stochastic and the historical volatilities are estimated: LexiFi Apropos easily allows for testing different volatilities to find the right dosage in the context of an independent valuation.”

Our solution: powerful engine, experienced specialists, and seamless integration

SIMM

Regarding the SIMM report, a typical implementation for LexiFi is to compute the sensitivities serving as product and/or position referential. Such referential could be a report that includes computed sensitivities by asset class. Some clients also run backtesting and validation reports to support their risk management teams. These could be a daily PNL report that computes their operations over a given period to control for daily price differences and detached cash flows.

Reports can be exported as Excel files with the “CRIF-like” format: Common Risk Interchange Format, defined by ISDA. This simple file format allows post-computing software to apply correlation matrices and post-computing operations for final Initial margin amounts by counterpart.

FRTB

“The FRTB implementation project at Quintet went well thanks to LexiFi’s Product Specialists who have provided us with strong support in the background.”
Head of Group Risk Modelling & Quantitative Analysis at Quintet Private Bank

“The FRTB implementation project at Quintet went well thanks to LexiFi’s Product Specialists who have provided us with strong support in the background.” Guillaume Ledure, Head of Group Risk Modelling & Quantitative Analysis at Quintet Private Bank LexiFi supports its clients through two main steps to compute capital charges for FRTB:

  1. the identification of the risk factors for each indicator by asset class (spot price & repo rates for Equity delta, interest rate curves by a set of tenors for IRR delta, etc.)
  2. the computation of the weighted sensitivities/indicators (Delta, Vega, Curvature) of each position for the different risk classes (Equity, IRR, FX, Credit)

Once both steps are done, LexiFi ensures the generation of results in the right format for clients to complete necessary aggregations and correlation scenarios to obtain results.


What we're reading Bloomberg: Why FRTB matters and why it’s hard
BNP Paribas: Initial margin for non-cleared derivatives: getting ready for the next phase:
What we're watching Mayor Brown series: Initial Margin for Uncleared Derivatives: The law firm Mayer Brown posted a series presented by Edmund Parker, Mayer Brown’s Global Head of Derivatives & Structured Products; and guests, on the latest thinking and best practices regarding the Uncleared Margin Regulations!
Related client stories  NATIXIS INVESTMENT MANAGERS: AMONG THE FIRST ASSET MANAGERS TO COMPLY WITH THE QUANTITATIVE REQUIREMENTS OF EMIR
FEDERAL FINANCE: COMPLYING WITH REGULATORY REQUIREMENTS
Features in focus Grid Reporting

Compliance and regulatory requirements for structured investments and OTC derivatives

Backtesting of structured investment products

Structured Investments risk and what-if scenarios

Sensitivity Analysis (Greeks)

Pricing models

Monte Carlo Simulation Inspector


Client stories

Features

Thanks!

LexiFi team