Fundamental Review Of The Trading Book Modelling (FRTB)

Day One

Overview

• Evolution of Basel market risk capital requirements from initial standard (1996) to Basel 2.5 to latest standard (2019)

• Overview of new market risk capital requirements (2019) vs predecessor standard and regulatory thought process behind new standard

Trading Book vs Banking Book Boundary

• Assigning positions to trading vs banking book

Standardised Approach (SA)

• Comparison – new SA vs predecessor Basel 2.5 SA

• Sensitivities-based method – risk factors and sensitivities

• Delta risk buckets, risk weights and correlations

• Vega risk buckets, risk weights and correlations

• Curvature risk buckets, risk weights and correlations

• Default risk capital requirement – non-securitisations and securitisations

• Residual risk add-on

• Case Study 1 – Calculating (FRTB) SA capital requirement for a hypothetical trading book with positions across a wide range of securities and derivatives

• Case Study 2 – Calculating Basel 2.5 SA capital requirement for same hypothetical trading book as in Case Study 1

Day Two

Internal Models Approach (IMA)

• Comparison – new IMA vs predecessor Basel 2.5 IMA

• VAR and sVAR vs stressed expected shortfall (SES)

• Differentiated liquidity horizons

• Capital requirement for modellable risk factors

• Case Study 3 – estimating SES at 97.5% confidence with differentiated liquidity horizons using Monte Carlo simulation vs VAR and sVAR at 99% confidence with a uniform 10 day liquidity horizon. Estimation of capital requirement and comparison of FRTB result vs Basel 2.5

• Case Study 4 – as per Case Study 3 but using historical simulation

• Default risk capital (DRC) requirement (new IMA) vs incremental risk charge (Basel 2.5)

• Case Study 5 – example FRTB-compliant VAR-based internal model for DRC, incorporating default simulation with default correlations between obligors

• Capital requirement for non-modellable risk factors (NMRFs)

• Case Study 6 – example FRTB capital requirement for NMRFs

• Case Study 7 – calculation of total FRTB market risk capital requirement for hypothetical trading book across SES, DRC and NMRFs for hypothetical trading book and comparison to capital requirement for same portfolio under Basel 2.5 IMA

IMA – Model Validation, Approval, Backtesting & P&L Attribution Tests

• Best practice model validation and supervisory approval process including expectations on supervisor

• Case Study 8 – Validating IMA for hypothetical trading book used in Case Studies 3-7

• Backtesting of last 12 months’ actual P&L (APL) vs hypothetical P&L (HPL)

• P&L attribution (PLA) test of daily risk-theoretical P&L (RTPL) vs daily HPL for each trading desk

• Case Study 9 – Illustrative backtesting and PLA test for hypothetical trading book used in Case Studies 3-7

Business Model Adaptation & Capital Efficiency Transactions Under FRTB

• Quantitative impact studies – What was the impact on capital requirements moving from Basel 2.5 to new minimum capital requirements for market risk?

• Case Study 10 – Business adaptation strategies used by major trading banks to manage capital requirements under FRTB

• Strategies moving forward, including capital efficiency transactions, to optimise economic value added from trading business under FRTB