Fundamental Review of Trading Book (FRTB)
The financial crisis exposed material weaknesses in the overall design of framework for capitalising trading activities and level of capital requirements for trading activities proved insufficient to absorb losses.
The fundamental review seeks to address shortcomings in the overall design of the regime as well as weaknesses in risk measurement under both the internal model based and standardised approaches.
The fundamental review seeks to address shortcomings in the overall design of the regime as well as weaknesses in risk measurement under both the internal model based and standardised approaches.
Key changes in Market Risk Capital Assement Framework after FRTB
Allocation of Instruments to Regulatory Books
Current Market Risk Framework
New Market Risk Framework
Definition of Trading Desk
Current Market Risk Framework
New Market Risk Framework
Standardized Approach
Current Market Risk Framework
C4 risk classes - interest rate, equity, FX & commodity
General & specific risk charge for interest rate & equity
Charges on options include delta, vega & curvature risks
New Market Risk Framework
Additional default risk charges & residual risk add on
Sensitivity based risk charges for all risk factors in all risk classes
Correlations to aggregate risk charges on portfolio level
3 additional risk classes - non-securitisations, securitisation (non-CTP & CTP)
Simplified standardised approach for banks with small and simple portfolio
Internal Model Approach
Current Market Risk Framework
Implementation subjected to supervisory approval
Independent review by internal audit team
Guidelines for selection of market risk factors
99th percentile, one tailed VaR & stressed VaR
Comprehensive stress testing program
New Market Risk Framework
Approvals required at individual desk level
Unapproved desk falls back to standardized approach
Back testing and P&L attribution test at individual desl level
Monthly rigorous stress testing program
97.5th percentile, one tailed Expected Shortfall
Separate internal model to measure default risk
Defined model validation standards
Different treatment for modellable and non modellable risk factors
Quarterly risk factor eligibility test
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