GoldenSource Launches OTC Derivative Taxonomy Solution

Data management solution provider GoldenSource says it has created a first of its kind market risk factor data standard, the Risk Factor Taxonomy, a solution that provides sell-side financial market institutions with a standardised risk factor typology.

This allows them to capture and store market rates and volatilities, link these to pre-defined curve and surface structures, as well as allow for standardised dimensions for risk and finance data aggregation and reporting.

The new standard, Curve Master Definitions, seeks to provide banks with a single risk factor taxonomy for the market rates required to price 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.

GoldenSource says 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.

The new service seeks to alleviate the “significant challenges” banks face 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 ‘modelability’ 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 says the new solution 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 centralise and validate the market rates for curves and surfaces that form the set of a bank’s market risk factors.

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 firm adds.

“This innovation has the potential to be impactful for the banking sector, including the regulators and central banks who are responsible for its oversight,” says Charlie Browne, head of market data, quant and risk solutions at GoldenSource. “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.”