FRTB

Overview

Fundamental Review of Trading Book Approach

Basel Committee on Banking Supervision (BCBS) has proposed the new market risk framework as "The Fundamental Review of the Trading Book" (FRTB) with the intent to address the shortcomings of the existing framework and bring consistency in market risk assessment standards across jurisdictions. The new framework will come into effect globally starting in January 2022.

  • Introduction of a more objective boundary to reduce arbitrage between regulatory books
  • Internal Models Approach with more rigorous model approval process at individual desk level. Stringent and consistent identification of market risk factors across banks as well as constraints on hedging and diversification
  • Shift from Value-at-Risk (VaR) to an Expected Shortfall (ES) measure of risk under stress to ensure a more prudent capture of “tail risk”, and capital adequacy during periods of significant financial market stress
  • BCBS estimates that FRTB will result in 40% increase in total market risk capital requirements. The changes proposed not only to have an impact on the capital requirements, but it will also pose challenges for a bank's technology infrastructure
  • Risk sensitive Standardized Approach and incorporation of market illiquidity to mitigate the risk of sudden and severe impairment
  • Internal Models Approach with more rigorous model approval process at individual desk level. Stringent and consistent identification of market risk factors across banks as well as constraints on hedging and diversification
  • Shift from Value-at-Risk (VaR) to an Expected Shortfall (ES) measure of risk under stress to ensure a more prudent capture of “tail risk”, and capital adequacy during periods of significant financial market stress
  • BCBS estimates that FRTB will result in 40% increase in total market risk capital requirements. The changes proposed not only to have an impact on the capital requirements, but it will also pose challenges for a bank's technology infrastructure
  • Risk sensitive Standardized Approach and incorporation of market illiquidity to mitigate the risk of sudden and severe impairment
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