FRTB Demystified

Description

The Fundamental Review of the Trading Book (FRTB) represents a major overhaul to the BIS regulations defining how much capital banks need to cover their market risk exposure.

The changes don’t just affect banks – the impact of FRTB will filter through to all users of financial products offered or traded by banks – in other words, to everyone.

ACF Academy’s intensive two-day FRTB Demystified course provides a unique insight into the detailed workings of the FRTB, and navigates participants through the alphabet-soup of concepts from A-IRB to VaR and VM.

Tracing the evolution of market-risk measurement from the 1996 Market Risk Amendment through to the implementation of the FRTB starting in 2023, the program provides an in-depth examination of the detailed workings of both the Standardized Approach and the Internal Models Approach, and gives participants the opportunity to explore the practical implementation of each method through extensive hands-on workshops and case studies.

Learning Outcomes

By attending this course, you will:

• Investigate the sources of market risk
• Review the history of market risk regulations
• Explore the major changes introduced by the FRTB
• Understand the distinction between the Trading Book and the Banking Book
• Appreciate the importance of the trading desk
• Examine how the Standardized Approach works
• See where the Simplified SA can be used
• Analyze where and how the Internal Models Approach can be used
• Review the Value-at-Risk methodology – its strengths and weaknesses
• Analyze the concept of Expected Shortfall and how it compares to VaR
• Discuss model validation and non-modellable risk
• Calculate how much capital a bank needs under the IMA

Who Should Attend

Anyone who needs to understand the latest techniques in quantifying market risk and determining how much capital is required under the latest Basel rules.

CPD Credits

14 hours

Prerequisites

Participants should be familiar with the principles and pricing of traded securities and standardized derivatives.

Seminar Content

Introduction

• What is market risk?
• Review of statistical principles:
• Probability distributions
• The Normal distribution
• Standard deviation and variance
• Covariance and correlation
• Correlation vs. regression slope
• Historical evolution of market risk regulation
• The 1996 Market Risk Amendment
• Sources of market risk
• The Standardized Approach (SA)
• The Internal Models Approach (IMA)

The Fundamental Review of the Trading Book

• Key features of the FRTB
• Revised definition of trading book vs. banking book
• Revised Standardized Approach
• Revised Internal Models Approach
• Weaknesses of the MRA VaR methodology
• Shift from Value at Risk (VaR) to Expected Shortfall (ES)
• Incorporating liquidity risk

Trading vs. Banking Books

• What is the Trading Book?
• What is the Banking Book?
• The regulatory boundary between trading and banking books
• search Which risks go where?

Trading Desks

• Definition of a Trading Desk
• The trading desk as the unit of regulatory approval

The Standardized Approach

• Key features of the standardized approach
• Sensitivities-based Method (SBM)
• The risk classes
• General Interest Rate Risk (GIRR)
• Credit spread risk: non-securitization
• Credit spread risk: securitizations (CTP and non-CTP)
• Equity risk
• Commodity risk
• FX risk
• Capital charges for delta, vega, and curvature risks
• Correlation scenarios and matrices
• The Default Risk Charge (DRC)
• The Residual Risk Add-On (RRAO)
• computer Calculating the capital charge under the SA

Simplified Standardized Approach

• When can the simplified approach be used?
• Risk-weighted assets (RWA) and capital requirements
• Specific treatment for:
• Interest rate risk
• Equity risk
• FX risk
• Commodities risk
• Options
• computer Calculating the capital charge under the Simplified SA

The Internal Models Approach

• Who is eligible to use the IMA?
• Qualitative and quantitative eligibility standards
• Model validation standards
• External validation
• Stress testing
• Components of risk capital
• Global Expected Shortfall (ES)
• Default Risk Charge (DRC)
• Non-Modellable Risk Factors (NMRFs)

Value at Risk

• Objective of Value at Risk (VaR)
• Establishing confidence intervals
• Establishing the time horizon    Principles of calculating VaR
• Methods of calculating VaR
• The variance / covariance approach
• computer Calculating VaR of single instruments
• Full valuation approaches
• Monte-Carlo simulation
• Historical simulation
• computer Calculating VaR for a portfolio
• Advantages and disadvantages of the different approaches
• Verifying VaR
• VaR and regulatory capital

Evolving from VaR to Expected Shortfall

• Deficiencies of VaR
• Methods of measuring Expected Shortfall
• Specifying market risk factors
• computer Calculating portfolio ES
• How does ES compare with VaR?
• Stressed expected shortfall
• Stress scenarios

Model Validation and Non-Modellable Risk

• PnL attribution
• Hypothetical PnL (HPL)
• Actual PnL (APL)
• Risk-theoretical PnL (RTPL)
• computer PnL Attribution (PLA) for an options portfolio
• Back-testing of internal models
• Non-modellable risk factors (NMRFs)
• Calculating capital for non-modellable risk
• Risk and capital allocation to trading desks
• Fallback to SA

Default Risk Charge

• How the DRC is determined
• Netting and default risk calculations
• computer Calculating the DRC

Putting it all Together

• How much capital does a bank need?
• search Calculating a bank’s total capital requirement under the IMA

When and Where
   19 Feb 2025 - 20 Feb 2025
   09:00-17:00
   London
   Risk Management

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Other Dates and Locations
Search for FRTB Demystified in our course schedule for alternative dates and locations where this course is offered.