Everything about FRTB ( Fundamental Review of Trading Book) 🤔

PART 1:

The BCBS designed the framework to remove deficiencies in the previous market risk framework which came to light during financial crises.

Objectives of FRTB

1.Boundry Between Trading Book and Banking

During the Financial crisis it came to light that the Majority Banks Converted they Banking book Products to Trading Book products
why?
Because they can save capital ( for Banking books we need to keep 99.99% credit risk var as compared to 99% market risk var,
0.99% save in capital which is huge amount of Capital saving)

Basically they transferring Credit risk Exposure to market risk.
In FRTB we need supervisory approvals

Frtb expands on the "intent to trade" criterion:
lists of instruments that belong in the TB and BB ( supervisory approved exceptions)

2. Risk measures improvements of the trading book
( Modellable and Non Modellable Risk factors, DRC)
3. Standardized Approach
4.Internal Model Approach

standardized approach VS Internal Model Approach

Standardized Approach= sum of (Sensitivity Based Approach+ Default Risk Capital (DRC)+Residual risk add-on (RRAO)

The capital requirement under the sensitivities-based method must be calculated by aggregating three risk measures - delta, vega and curvature

Sensitivity Based Approach = Aggregating ( Delta+Vega+ Curvature)

The DRC requirement captures the jump-to-default risk for instruments subject to credit risk

It is calibrated based on the credit risk treatment in the banking book in order to reduce the potential discrepancy in capital requirements for similar risk exposures across the bank. Some hedging recognition is allowed for similar types of exposures.

,the Committee acknowledges that not all market risks can be captured in the standardised approach, as this might necessitate an unduly complex regime. An RRAO is thus introduced to ensure sufficient coverage of market risks.

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standardized approach VS Internal Model Approach

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