Fundamental Review of the Trading Book

Monday, November 26th

09.00 - 09.15 Welcome

09.15 - 12.15

Overview

  • 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

Tuesday, November 27th

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

  • 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

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