Fundamental Review of the Trading Book

Prague, NH Hotel Prague
Gary Dunn

A comprehensive overview of the proposed new minimum capital requirements for market risk, the changes required for internal models and the new standard rules approach.

The Fundamental Review of the Trading Book (FRTB), which began following the 2008 financial crisis, was finalised by BCBS with the publication of paper D352 in January 2016. The EU commission published a first revised draft of CRD and CRR in November 2016.

The revised framework does indeed fundamentally overhaul the way banks are required to capitalise market risk on the Trading Book and has implications for the management of risk on the banking book as well. Some of the more significant revisions to the internal model approach (IMA) include a move from VaR + stressed VaR to a single stressed expected shortfall measure (ES), with restrictions on diversification benefits and a capital penalty for less liquid risks; the incremental risk charge (IRC) replaced by a version of its simpler predecessor the default risk charge (DRC) but with equity exposures now included; and the abolition of the comprehensive risk measure (CRM). Also the standard rules calculations for market risk have been replaced by a new sensitivity based approach (SBA) combined with a standardised default risk charge. Banks using internal models will also be required to compute the standardised charges, as a benchmark, and the standard rules charge may be used to create a floor to the capital requirements based on internal models. New rules are also proposed to restrict movement of positions and the transfer of risk between the banking book and the trading book.

Many issues remained outstanding however with the proposed framework and further work has been undertaken by the BCBS resulting in the publication of two further papers at the end of 2017 (d424) and in March 2018 (d436). A consultation paper was also issued by the EBA at the end of 2017.

Implementation of the new rules is due by end 2022 according to the revised BCBS timetable although regulatory jurisdictions may not keep to this timeframe and the revised CRR proposes a phased introduction.

This course will provide a comprehensive overview of the proposed new market risk regulations, with practical examples and exercises, and will discuss in detail technical issues that have been debated between regulators and the industry, outstanding issues and challenges banks face. It will also take a look at the draft revised CRD and CRR and the revisions proposed recently proposed in the latest BCBS and EBA publications.

Participants are encouraged to bring their own notebook to maximize the interaction, practical examples and benefit from this workshop.

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