Numerix FRTB supports both the Internal Model Approach and the Standardized Approach, so banks can use whichever model is most appropriate for each trading desk.

Calculations are run daily for all business units from desk level to enterprise level, and all calculations and reports can be generated in minutes rather than hours due to the high performance risk engine within Numerix FRTB.

Internal Models Approach

  • Calculates Expected Shortfall (ES) at the 97.5% confidence interval on a daily basis for each trading desk seeking IMA approval
    • Runs 3 ES calculations to scale the current ES to the stress period
    • Automatically identifies the bank’s 1-year historic stress window out of 10+ years of historical data
    • Uses single market simulations to limit diversification
    • Runs the ES calculations across 5 liquidity bands which are then combined back into the Internal Model Capital Charge (IMCC) result
  • Provides “battle-tested” pricing models for the P&L attribution and back-testing frameworks, which can match any in-house or vendor models to ensure P&L alignment between FO and MO
  • Runs Standardized Approach calculations on a monthly basis as the fallback capital charge if IMA eligibility is lost

 

Standardized Approach

  • Sensitivity-based risk charge:
    • Provides fully transparent and accessible definitions for risk factors, sensitivities, buckets, risk weights and correlations
    • Generates all delta/vega/curvature sensitivities, and then applies them to the appropriate SA vertices for the capital calculation
    • Aggregates the sensitivities using the SA-prescribed correlation scenarios and aggregation formulas
  • Adds Default Risk Charge (DRC) and Residual Risk Add-On (RRAO) to the Sensitivity-based risk charge to arrive at a Total SA charge
  • Uses a “risk factor driven” model to defining sensitivities, where sensitivity definitions contain wild cards to ensure all risk factors are automatically captured, generating sensitivities, and assigned to FRTB buckets
    • Even new risk factors (e.g. from a new trade) with an unassigned FRTB mapping will be captured, and the sensitivity will be calculated and stored in the FRTB “other” bucket to attract the highest capital charges