GoldenSource has created a first of its kind market risk factor data standard. This Risk Factor Taxonomy provides sell-side financial market institutions with a standardized risk factor typology to capture and store market rates and volatilities, link these to pre-defined curve and surface structures and allow for standardized dimensions for risk and finance data aggregation and reporting.
The new standard, which GoldenSource calls Curve Master Definitions, seeks to provide investment banks with a single risk factor taxonomy for the market rates required to price over-the-counter (OTC) derivatives, including the storage and aggregation of industry standard conventions required for quantitative processes. This includes yield curve building, volatility surface calculations, and industry standard interpolation methodologies. The taxonomy will allow financial market institutions to take a common approach to reviewing and conforming to the trading book processes that are pre-requisites for the Fundamental Review of the Trading Book (FRTB) framework, due to be implemented on 1 January 2025 in most jurisdictions. These trading book processes include independent price verification, bid-ask reserving, marking to model, adjustments for illiquid positions, stress testing, internal model reviews, and interest rate risk in the banking book, among others.
Curve Master Definitions offers a single taxonomy for derivative pricing market risk factors. Without such a taxonomy, banks are presented with significant challenges in their efforts to comply with market risk regulations and auditability requirements, including ensuring consistency of approaches between trading book processes, difficulties linking risk factors to trades for the assessment of the ‘modellability’ of risk factors, valuation reporting integrity, market risk reporting integrity, and market risk exposure aggregation.
By providing a structured and consistent approach to defining market risk factors, GoldenSource’s Curve Master Definitions will offer users a more holistic view of their risk factors, as well as an accelerated approach for implementing the core GoldenSource Curve Master module, designed to centralize and validate the market rates for curves and surfaces that form the set of a bank’s market risk factors. Beyond helping firms to align their FRTB and core trading book processes, having a standard taxonomy for market risk factors will allow firms to standardize their approaches to regulatory requirements, such as stress testing, internal model reviews and interest risk in the banking book.
The development of GoldenSource’s Curve Master Definitions was led by the company’s head of market data, quant and risk solutions, Charlie Browne, who is completing a PhD on the merits of taking a taxonomic approach to risk factors in derivative pricing.
Commenting on the launch, Browne said: “This innovation has the potential to be impactful for the banking sector, including the regulators and central banks who are responsible for its oversight. In addition to transforming the way market participants approach trading-book process alignment, the taxonomy could act as a useful tool for regulators and auditors for ensuring that there is commonality between the data set that underlies all trading book processes, namely market rates.”