Below are a few key highlights we took away from the conference.
Regulatory Requirements – The central theme
Recently, regulatory requirements have been the major cause for most of the big projects being undertaken by financial institutions and it was no surprise that the theme of the conference was also centered on these regulations. Most sessions, be it the panel discussions, presentations, or the speeches, were either flavored or directly covered regulations such as FRTB (Fundamental Review of the Trading Book), EL provisioning under IFRS9, the collateral and margin requirements for non-centrally cleared derivatives and latest development in the centrally cleared derivatives market.
FRTB – Getting the fundamentals right this time
Certainly FRTB (Fundamental Review of the Trading Book) was a key theme that underpinned the whole conference. The industry verdict was clear, FRTB has far reaching implications and it will redefine the way risk management is currently actioned in the banks.
The presentations by Numerix and Calypso touched on a lot of the core concepts surrounding FRTB including:
- the requirements around segregation between the banking and trading book
- the need around performing cost benefit analysis for deciding standardized approach versus IMA, given that the approvals to be sought would be at desk level
- consideration for NMRF (Non-modelable risk factors)
- PnL attribution
- Expected shortfall instead of VaR
A panel discussion on the same topic was represented by Risk Managers from three of the big Australian banks. They reinforced the same sentiment that FRTB is a game changer and the banks are going beyond the regulatory mandate to also fine tune the way they currently do business, risk management, and use technology in the post-FRTB era.
Given the complexity around the implementation, 2019 doesn’t seem too far away and we should expect the major Australian banks to get the ball rolling on FRTB very soon.
EL Provisioning under IFRS9 - From ‘too little, too late’ to matching the expectations
There was an interesting panel discussion on the new IFRS9 regulation, which becomes mandatory from 1 January 2018. The biggest consequence of this change impacts loan loss recognition, which moves from the current IAS39 prescribed incurred loss model towards the expected loss model. The panellist highlighted that this regulation is a step in the ‘right direction’ post the global financial crisis and also attempts to align the accounting standard with regulatory treatment of credit risk. Not surprisingly, all the panellists agreed that the new mandate will require reviewing and a possible enhancement into the existing IT systems.
More regulations in consideration
The other topic that was covered was around the central clearing of OTC derivatives. As part of a panel discussion, Jenny Hancock from RBA mentioned that “mandating central clearing doesn’t have a case yet” in Australia, even though it is now mandated for certain derivatives elsewhere. She emphasized that even though global harmonization of policies has been a common aim of the G20, harmonization is more complicated than it sounds. It seems that the industry has been adopting clearing gradually where ever possible because of the efficiencies around pricing. Overall, a space to watch for more action in the near future.
The other regulatory change around the margining and risk mitigation for non-centrally cleared derivatives was discussed through a panel discussion and then a presentation by Trioptima. Even though APRA has decided to defer the implementation without a firm date at this stage in Australia, it was interesting to get a perspective on the progress and the challenges that are gripping the industry in the other jurisdictions, where this regulation came into effect from 1 September.
Culture – It matters
One thing that I found quite striking at the conference, other than regulations, was the importance shown to ethics and culture. At the start of the event, an introductory address was given by Cathie Armour (Commissioner, ASIC) where she stressed that even though there is an increasing technology reach, decision making remains “human”, thereby making a case for the constant focus on ethics, culture and behavior.
She also emphasized that culture reflects the underlying mind-set of an organization and its impact can be far reaching. Good culture results in good business and goes onto creating long term value, whereas bad culture can mean increased legal cost and loss of reputation.
She highlighted that ASIC has been working with local regulators globally to align and harmonize the practices and policies in Australia.
A panel discussion at the end of the conference on a similar theme repeated the same sentiment where representatives from banks including Macquarie and BoQ enumerated with example of how their organizations have put many structures in place to guarantee good culture.
It was very heartening to see that in the world of digitalization and rapid technology innovations the human aspect of the business is still a focal point.
Overall, the conference was very informative and covered topics which remain absolutely critical for business success. It was well organized and the agenda was varied both in terms of subject selection and format. The event was followed by evening drinks which gave us the opportunity to socialize with other participants and discuss the topics in more detail.