Correlation Scenarios

Q1. Please confirm that for the purposes of paragraphs 54 and 55, the “ultimate portfolio” is the group level aggregated portfolio when calculating the standardised approach capital charge for paragraphs 45 and 193 and the individual desk portfolio when calculating the standardised approach capital charge per paragraph 184?

Relevant provisions: Paragraphs 45, 54, 55, 184 and 193 of the January 2016 market risk framework.

BCBS response: Yes, at the level of either the aggregated portfolio or the trading desk, the standardised approach capital charge is themaximum of the standardised approach capital charges across the three correlation scenarios at the concerned level.

Referenced FRTB text:
45. The standardised approach must be calculated by all banks and reported to their supervisor on a monthly basis.

54. In order to address the risk that correlations increase or decrease in periods of financial stress, three risk charge figures are to be calculated for each risk class, corresponding to three different scenarios on the specified values for the correlation parameter ρkl (correlation between risk factors within a bucket) and γbc (correlation across buckets within a risk class).

(a) Under the first scenario, “high correlations”, the correlation parameters ρkl and γbc that are specified in sections 4, 5 and 6 are
uniformly multiplied by 1.25, with ρkl and γbc subject to a cap at 100%.

(b) Under the second scenario, “medium correlations”, the correlation parameters pkl and γbc remain unchanged from those specified in sections 4, 5 and 6.

(c) Under the third scenario, “low correlations”, the corresponding prescribed correlations are the correlations given in section 4, 5 and 6 uniformly multiplied by 0.75.

55. For each scenario, the bank must determine a scenario-related risk charge at the portfolio level as the simple sum of the risk charges
at risk class level for that scenario. The ultimate portfolio level risk capital charge is the largest of the three scenario-related portfolio-level risk capital charges.

184. Banks must calculate the standardised capital charge for each trading desk as if it were a stand-alone regulatory portfolio. This
calculation must be performed at least monthly and will:

(a) Serve as an indication of the fallback capital charge for those desks that fail the eligibility criteria for inclusion in the bank’s
internal model as outlined in paragraphs 180 and 181.

(b) Generate information on the capital outcomes of the internal models relative to a consistent benchmark and facilitate comparison
in implementation between banks and/or across jurisdictions.

(c) Monitor over time the relative calibration of standardised and modelled approaches, facilitating adjustments as needed.

(d) Provide macroprudential insight in an ex ante consistent format.193. The regulatory capital charge associated with risks from model-ineligible (ie, unapproved) desks (Cu) is to be calculated by aggregating all such risks and applying the standardised charge.

Authors’ comment: This Q&A resolves the question about what level to roll-up SA proscribed correlations (0.75x, 1.0x or 1.25x).BCBS’s clarifies that SA correlations should be made at the relevant reporting level. If that reporting level is the portfolio, then correlations should be calculated in the aggregate.