The broad implications of the revised capital framework proposed under the Fundamental Review of the Trading Book (FRTB) have begun to crystalize. These gains are the fruit of significant discussion, analyses and impact studies from industry participants and regulatory bodies. Banks are faced with anticipated increases in overall capital requirements, stricter tests for internal model approvals, needs for enhanced data quality, aggregation challenges, and more computationally-burdensome risk metrics. As we near the finalization of the Basel-level standards, and as implementation dates for the new framework grow nearer, banks are analyzing specific details of the FRTB standards with increased vigor.

This white paper provides an assessment of how the new FRTB framework, including both the new FRTB-Market Risk (FRTB-MR) and FRTB-CVA risk frameworks, deviate from the existing Basel III capital framework, and it seeks to summarize some of the more nuanced issues the industry has raised concerns over throughout the course of 2016. In the context of the FRTB-MR framework, we will dive into some opaque aspects of the P&L attribution test which must be passed to gain internal model approval, and examine the Residual Risk Add-On (RRAO). In the context of the FRTB-CVA framework, we will discuss the calculation of CVA sensitivities and the treatment of initial margin. We will also spend some time on the importance of initial margin and its impact on trading costs at the end of the paper.

Complete the form to the right to download this complimentary white paper.

 

Author Biography

Andrew McClellandAndrew McClelland, PhD, Director of Quantitative Research, Numerix
Andrew McClelland’s quantitative research at Numerix focuses on XVA pricing and hedging, generating counterparty credit risk metrics for structured products, and estimating risk model parameters via time-series estimation. He earned his PhD in finance at the Queensland University of Technology for a thesis on financial econometrics. He considered markets exhibiting crash feedback, option pricing for such markets, and parameter estimation for such markets using particle filtering methods. Dr. McClelland’s work has been published in the Journal of Banking and Finance, the Journal of Econometrics, and the Journal of Business and Economic Statistics.

 

If you experience any difficulties viewing or completing this form, please contact us for help.

newsletter issue - Mar 28, 2024

Thinking Derivatively – March 2024 Newsletter

solution webinar

Solution Webinar | Quants in the Cloud: Timely and Optimized Pricing and Risk Decisioning

newsletter issue - Feb 6, 2024

Thinking Derivatively – January/February 2024 Newsletter

on-demand webinar

On-Demand Solution Webinar | FINCAD Analytics Suite: Real-Time Pricing & Risk of 0DTE Options

journal issue

Numerix Journal Vol. 9, No. 1

analyst report

Coalition Greenwich - Managing Mortgage Market Risk Becomes More Complex

newsletter issue - Dec 13, 2023

Thinking Derivatively – December 2023 Newsletter

on-demand webinar

On-Demand Solution Webinar | FINCAD Analytics Suite: Quantitative Trading Strategies for Corporate...

analyst report

Celent Research: Risk Technology for a Digital World

on-demand webinar

On-Demand Solution Webinar | FINCAD Analytics Suite: Current Rate Dynamics & RFR Curve-Building

newsletter issue - Nov 20, 2023

Thinking Derivatively – November 2023 Newsletter

on-demand webinar

How APAC Banks Can Leverage FRTB-SA for Effective Market Risk Management