Response to consultation Paper on draft RTS on criteria for assessing risk factors modellability under the IMA
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Under the current market structure, exchange traded markets are subject to high levels of pre- and post-trade trade transparency meaning that executed trades and committed quotes are widely available where activity is taking place. However, in OTC markets there is very limited availability of verifiable prices that can be used for the risk factor eligibility test. The opaque and fragmented nature of these markets means that without efficient consolidation and distribution of trade and committed quote data, institutions will inaccurately classify modellable risk factor as NMRFs which could result in excessive NMRFs. Smaller banks and new entrants are disadvantaged vs. larger banks and incumbents as in opaque markets they have fewer observations based on internal data. This could reduce their likelihood of passing RFET and hence require them to hold more capital, which could act as an unfair barrier to entry.
Refinitiv note that the requirements for an annual independent audit and provision of evidence of the transaction or committed quote to competent authorities upon request already place a significantly higher burden on vendors than those requirements associated with traditional delivery of market and reference data, which can be used in other elements of FRTB. We are concerned that these requirements in conjunction with the already narrow scope of data that’s eligible for inclusion in the risk factor eligibility test risk significantly increasing the cost of third-party vendor “real” price observation data and hindering its availability. As mentioned in our response to Q5 this could lead to excess NMRFs and act as an unfair barrier to entry.
Refinitiv propose that these risks could be mitigated through a pragmatic implementation approach to the requirements for third-party vendors as well as alignment between the definition of committed quotes and market convention. Limiting the scope and granularity of the annual independent audit, as well as ensuring there isn’t excessive adoption of the requirement to provide evidence of trades and quotes to competent authorities would ensure sufficient data quality without unduly increasing cost. Mandating committed quotes to be a legal obligation to buy and sell the corresponding financial instrument at that price if requested is not fully consistent with convention in many OTC markets. Revising this requirement to include those quotes where there is an obligation under market convention to buy or sell the corresponding financial instrument at that price if requested would more closely align the definition with market convention and avoid unduly restricting the availability of data.
Q5. Do you see any problems with requiring that institutions are allowed to use data from external data providers as input to the modellability assessment only where the external data providers are regularly subject to an independent audit (independent of whether the price is shared with the institution or not)? If so, please describe them thoroughly (i.e. for which data providers and the reasons for it).
It is essential for institutions to be allowed to use data from external data providers as an input to their modellability assessment for there to be an efficient market where smaller institutions or new entrants do not face undue barriers to entry.Under the current market structure, exchange traded markets are subject to high levels of pre- and post-trade trade transparency meaning that executed trades and committed quotes are widely available where activity is taking place. However, in OTC markets there is very limited availability of verifiable prices that can be used for the risk factor eligibility test. The opaque and fragmented nature of these markets means that without efficient consolidation and distribution of trade and committed quote data, institutions will inaccurately classify modellable risk factor as NMRFs which could result in excessive NMRFs. Smaller banks and new entrants are disadvantaged vs. larger banks and incumbents as in opaque markets they have fewer observations based on internal data. This could reduce their likelihood of passing RFET and hence require them to hold more capital, which could act as an unfair barrier to entry.
Q6. Do you have any proposals on additional specifications that could be included in the legal text in order to ensure that verifiable prices provided by third-party vendors meet the requirements of this Regulation?
No. Refinitiv do not propose any additional specifications to ensure verifiable prices provided by third party vendors meet the requirements of this regulation.Refinitiv note that the requirements for an annual independent audit and provision of evidence of the transaction or committed quote to competent authorities upon request already place a significantly higher burden on vendors than those requirements associated with traditional delivery of market and reference data, which can be used in other elements of FRTB. We are concerned that these requirements in conjunction with the already narrow scope of data that’s eligible for inclusion in the risk factor eligibility test risk significantly increasing the cost of third-party vendor “real” price observation data and hindering its availability. As mentioned in our response to Q5 this could lead to excess NMRFs and act as an unfair barrier to entry.
Refinitiv propose that these risks could be mitigated through a pragmatic implementation approach to the requirements for third-party vendors as well as alignment between the definition of committed quotes and market convention. Limiting the scope and granularity of the annual independent audit, as well as ensuring there isn’t excessive adoption of the requirement to provide evidence of trades and quotes to competent authorities would ensure sufficient data quality without unduly increasing cost. Mandating committed quotes to be a legal obligation to buy and sell the corresponding financial instrument at that price if requested is not fully consistent with convention in many OTC markets. Revising this requirement to include those quotes where there is an obligation under market convention to buy or sell the corresponding financial instrument at that price if requested would more closely align the definition with market convention and avoid unduly restricting the availability of data.