FRTB

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

Definition of Trading Desk

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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