Fundamental Review of the Trading Book

Agenda Program
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Prague, NH Hotel Prague
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How you will benefit:

An understanding of the rationale for the regulatory initiatives under FRTB and the implementation challenges
Understand some of the weaknesses in the new proposals and the further regulatory changes proposed
Understand the divergences between BCBS proposals and EU proposed implementation
Understand implications of greater model permission uncertainty and ways to minimise uncertainty
Understand the capital impacts of the new rules prescribed by regulators
Consider ways to optimise allocation of capital across trading desks to mitigate the impact of higher capital requirements
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 Also the standard rules calculations for market risk have been replaced by a new sensitivity based approach (SBA) combined with a standardised default risk charge.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 with MS Excel to maximize the interaction, practical examples and benefit from the seminar.

Program of the seminar: Fundamental Review of the Trading Book

The seminar timetable follows Central European Time (CET).

09.00 - 09.15 Welcome

09.15 - 12.15


  • Regulatory concerns with Basel 2.5
  • BCBS timelines/EU timelines - some of the challenges
  • D424 and D436 proposals

Trading Book/Banking book

  • Definition of the Trading Book
    • Trading Book instruments: standards and presumptive list
  • Risk management Policies, reporting requirements
  • Definition of trading desks
    • Regulatory requirements
    • Model approval will be given at desk level so firms should consider optimal desk structures:
      • Minimise P&L volatility relative to VaR at regulatory desk level
      • Impact of model withdrawal for a regulatory desk
      • Make use of sub-desk structures
      • Optimise allocation of capital across desks
  • Restrictions on moving instruments between banking book and trading book
  • Internal risk transfer
    • Credit risk
    • Equity risk
    • Interest rate risk
  • Comparison between FRTB and current rules

12.15 - 13.15 Lunch

13.15 - 17.00

Introduction to Internal Models Approach

  • Elements of the internal model
  • The Approval Process
  • Identifying eligible desks

Expected Shortfall implementation under FRTB

  • Overview of requirements (D352)
  • A review of 1-day VaR and 1-day Expected Shortfall calculations
  • Some simple examples to work through
  • Introducing liquidity horizons
    • Preliminary discussion on time-scaling
    • The original proposal by regulators - problem with retaining correlation structure
    • The industry responses
    • Final proposals by BCBS (D352)
  • Exercise/Example: Computing Expected shortfall with different liquidity horizons
  • Restriction on diversification benefits
    • Preliminary discussion on correlation and stressed periods
    • The original proposal by regulators
    • The industry response
    • Final proposal by BCBS (D352)
  • Identifying Modellable and Non-Modellable Risk Factors (NMRFs)
    • Industry initiatives: Bloomberg; Markit
    • Additional requirements for data quality set out in D436
  • Computing Stressed Expected Shortfall

09.00 - 12.15

Model Validation Standards

  • Regulatory requirements (D352)

Back testing VaR

  • Actual P+L, Hypothetical P+L and Risk Theoretical P+L
  • Back testing liquidity adjusted ES
  • Back testing VaR
  • Exception counting - traffic lights - binomial tests
  • Problems with back testing ES and VaR

P+L Attribution

  • Discussion of the requirements
  • The D352 Proposals and industry concerns
  • D436 Proposals
  • P-Values
  • Example/Exercises: Computing the regulatory P+L attribution tests and p-values

The Default Risk Charge (DRC)

  • Copula models
  • DRC compared with the Basel 2.5 IRC model
  • A Spreadsheet example/exercise
  • Challenges building with DRC models
    • Equities introduced
    • Computing correlations
    • Sovereign default
    • Concentration risk in periods of stress
    • Validation

12.15 - 13.15 Lunch

13.15 - 17.00

Standard Rules

  • SBA - sensitivity based approach
    • Overview
    • Some practical examples
  • Curvature risk - D436 revisions
  • Aggregation - D436 revisions
  • Standard Rules for default risk
  • Exercise/example calculations
  • Residual Risk
  • Requirements for desks with internal model approval
  • D408 and D436 - proposed simplified alternative to SBA


  • Capitalisation requirements derived from internal models with D436 amendments
  • Adding in unapproved desks
  • Estimates of capital impact of FRTB on banks
  • Capital (output) floor

EU Implementation of FRTB

  • Scope of draft revisions to CRD and CRR - much more than just FRTB
  • Guide to CRR revisions for FRTB
  • Divergence between draft CRR and FRTB
  • EU timetable and phase in

Role Play Exercise - Meet the Regulator

  • Prepare for and play out a review meeting with the regulator

Stress Testing

  • Supervisory scenarios
  • Bank scenarios

Related Topics

  • Illiquid Positions
  • SREP and Pillar 2
  • Counterparty risk
  • D424 - Finalising post - crisis reforms
    • CVA
      • Reduced basic approach
      • Full Basic Approach
      • Standardised Approach
    • Capital (output) floor

Evaluation and Termination of the Seminar

Training catalogue in PDF
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