Major Challenges
Major Challenges
Basel III Market Risk, aka FRTB, is a game changing regulation for capital markets trading businesses
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- Significantly more granular and prescriptive standards
- Limit jurisdictional and institutional interpretations
- Consistency across regulatory and geographic jurisdictions
- Revised trading/banking book boundary with explicit requirements and limitations
- Flexibility to select model approach for calculating capital charge at the regulatory trading desk (RTD) level
- Use of Expected Shortfall (ES) as the principal risk parameter
- Revised Standardized Approach (SA) – more risk-sensitive with Default Risk Charge (DRC) and Residual Risk Add On (RRAO)
- Redefined Internal Models Approach (IMA)
- Focuses on tail risk with varying liquidity horizons, risk factor based, with constrained diversification
- Stringent model approval process – desk-level P&L attribution tests
- New tests for data observed liquidity incorporated into new concepts such as Liquidity Horizons (LHs), Non-Modellable Risk Factors (NMRFs), and “dark matter” data
- Significantly more granular and prescriptive standards