ISDA has announced that eight technology vendors have licensed the ISDA Standardized Approach, or SA, Benchmarking unit tests to promote consistent implementation of the standardized approach for calculating capital requirements. The eight vendors are ActiveViam, Avera AI (Area 120 at Google), AxiomSL, Calypso, Finastra, FIS, MSCI, and Murex. In 2018, ISDA had launched the Standardized Approach Benchmarking to help firms and regulators achieve consistent and accurate implementation of the standardized approaches for regulatory capital for market risk, known as the Fundamental Review of the Trading Book (FRTB). The exercise is also used to benchmark the use of standardized approaches for counterparty credit risk (SA-CCR) and credit valuation adjustment (CVA) risk and leverages the Common Risk Interchange Format (CRIF) data standards.
So far, 52 banks, including 23 global systemically important banks, and 16 regulators have participated in the benchmarking exercise. The vendor licensing program allows the benefits of Standardized Approach benchmarking to reach smaller entities that use third-party systems for their capital calculations. The ISDA Standardized Approach Benchmarking exercise comprises a unit test to ensure the fitness of implementation of the standardized approach across firms and a hypothetical portfolio exercise to identify, assess, and explain any observed variances and coordinate remediation where necessary. In the same way as vendors have licensed the ISDA Standard Initial Margin Model (ISDA SIMM), they can license the unit test by confirming to ISDA that they have reconciled their technology to the industry standard. The unit test and hypothetical portfolio exercise together form part of an assurance framework for both banks and regulators.
ISDA was selected in the UK to help coordinate the first FRTB-SA benchmarking exercise and run an industry working group, leveraging the capabilities and experience gained in performing similar exercises for the ISDA Standard Initial Margin Model. Participating institutions benefit from a peer-to-peer review of their standardized approach model implementation, enabling them to address possible interpretation issues in the regulatory text. Following interest from other institutions and regulators, ISDA has expanded the scope of this initiative to cover other participating institutions and other capital models, including SA-CCR and SA-CVA.
AxiomSL claims to be one of the first vendors to deliver these complex calculations that are attested to ISDA’s unit test benchmark. The golden source calculations are designed to ensure the credibility of firms’ standardized calculations for FRTB, SA-CCR and CVA, and this initiative will help promote transparency and alignment between regulators and market participants, according to Edward Royan, Head of Global Products at AxiomSL. Additionally, Irina Reitgruber, Product Management, Market Risk at FIS said that "this will provide our customers with additional value and allow our solution to communicate with surrounding IT systems using standard international formats.” FIS had previously licensed the ISDA SIMM unit test and is now participating in the ISDA FRTB-SA unit test.
Keywords: International, Banking, Basel, Regulatory Capital, Standardized Approach, SA-CCR, SA-CVA, FRTB, Market Risk, ISDA Benchmarking Tool, Hypothetical Portfolio Exercise, Regtech Vendors, ISDA
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