FundamentalReviewofTheTradingBook
(FRTB):TowardsImplementation
July 2016
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Agenda
Ø Walk-through FRTB(Major changes,Components: SAandIMA).
Ø Capitaloptimization usecase
Ø Industrychallenges
Ø Q&A
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FRTBMajorChanges
Ø Boundary betweenTradingBookandBanking Book
Ø RevisedStandardized Approach
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Ø ChangedRiskMeasurement (ESreplacesVaR,StressedCalibration)
Ø MarketLiquidity Risk
Ø RevisedInternalModels-BasedApproach
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Basel2.5comparedwithFRTB
MarketRiskCapitalCharge
StandardApproach
(SA)
Standard
StandardCharge
Charge
Basel2.5
FRTB
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SBA
DRC-SA
VaR + SVaR
Residual
Risk
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InternalModelApproach
(IMA)
ES
IRC+CRM
DRC-IMA
RNIV
NMRF
Terms
Ref
Acronym
Longform
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SBA
Sensitivity BasedApproach
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DRC-SA
DefaultRiskCharge– StandardApproach
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VaR/SVaR
Value atRisk,StressedValueatRisk
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ES
Expected Shortfall
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IRC+CRM
InternalRiskCharge,Comprehensive RiskMeasure
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NMRF
Non-modellable RiskFactors
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DRC-IMA
DefaultRiskCharge– InternalModel Approach
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RNIV
RiskNotInVaR
InternalModelApproach- ApprovalProcessRazorRisk
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Ø Note:Securitizationexposureintrading bookmustusestandardisedapproach.
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StandardApproach:CapitalChargeStructure
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Adirect quotefromBCBS 352Page3
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Sensitivity BasedRazor
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(SBA)
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Risk
SBA:CalculationProcess– Mapping
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1. Identifytheunderlying riskclassforeachinstrument, aswellasthe
associatedriskfactors(grouped bybuckets).
2. Calculatesensitivitiesthennet.
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SBA:CalculationProcess- Aggregation
(GeneralInterestRateRiskexample)
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SBA:CurvatureRiskCalculationandAggregation
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Curvatureriskchargeis
tocatchnon-linearrisk.
Revalue:Shock
reducedsetofrisk
factorsasprescribed
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STEP 1
Aggregate:Intra
bucketsensitivities,
givencorrelations.
STEP 2
Aggregate:Inter
bucketsensitivities,
givencorrelations.
STEP 3
SBA- ScenarioCorrelationMultiplier
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Ø Threecapitalchargecalculationsareperformed, basedonfollowing correlation
scenariosmultiplier (IntraBucketandInterBucketcorrelations):
HIGH
1.25
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MED
1
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LOW
.75
Foreachcorrelationscenario, calculateportfolio levelriskcharge.
Theultimateportfolio levelriskchargeisthelargestofthethreecorrelationbased capitalcharges.
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Internal Model Approach
Risk
(IMA)
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InternalModelApproach
Ø RevisionstoIMAframeworkincludethefollowing:
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• Move from VaR 99%toExpected Shortfall 97.5%tobettercapturetail risk and
reducevariability.
• Calibrationto12month period ofstresstobettercapitalizelossesresulting from
periods ofstress.
• StressedcapitalforNon-Modellable riskfactors.
• Differentliquidity horizon defined atriskfactorcategory
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ExpectedShortfall
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•
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ExpectedShortfallcapturestailrisk
ignoredbyVaR.
ES97.5%isatclosevaluetoVaRat99%
LiquidityHorizons
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Adirect quotefromBSBS352
StressedES
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CapitalizationofRiskFactors
Instrumentsin
ApprovedTrading
Desks
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CapitalCharge(ApprovedandUnapprovedDesks)
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DeskApprovalAssessment
Ø Model approvalwillbeatthedesklevel
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Ø Assessmentofmodel performance willinclude evidencefromBacktesting (1dayrisk
measureattwoconfidencelevels99%and97.5%)andPnL attribution
Ø Standardizedapproachasfallback.
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PnL Attribution
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PnL attributionisdesignedtoidentifywhetherabank’stradingdeskriskmanagementmodelincludesa
sufficientnumberoftheriskfactorsthatdrivethetradingdesk’sdailyPnL.
FrontOffice
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StDev Hypothetical
Mean UnexplainedPnL
VarianceHypothetical
VarianceUnexplainedPnL
Deskcannothavemorethan3breachesoftheseconditionsoverthe
prior12months forIMAimplementation.
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MiddleOffice
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Moving a trade from high charge desk to a low charge desk
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CapitalOptimizationUseCase
Ø Hypotheticalpositions includeEQ,IR,FXexposure
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Ø Riskprofiles using StandardApproachandInternalModel Approach.
Ø Positions loadintohypotheticaldeskstructure.
Ø Capitaloptimization bymoving tradefromhigh chargedesktolowchargedesk
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Thousands
Positions
3,000
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2,500
2,000
1,500
1,000
500
(500)
NGD.TO
Equity
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IBMUS
Equity
IBMCall
Option
USD
USD
USD
treasury10y treasury5yr treasury2yr
Swap10Y
Swap5Y
Swap2Y
Swaption5X5 FXBarrier
Option
CapitalOptimizationUseCase
Ø Hypotheticalpositions includeEQ,IR,FXexposure
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Ø RiskprofilesusingStandardApproachandInternalModelApproach.
Ø Positions loadintohypotheticaldeskstructure.
Ø Capitaloptimization bymoving tradefromhigh chargedesktolowchargedesk
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Thousands
ComparingSAversusIMAbyposition
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1,400
1,200
1,000
800
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SACharge
IMACharge
600
400
200
0
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•
•
Generallyspeaking,SAchargeislargerthanIMAchargeforthesameposition
Specialcasemighthappenifpositionistoovolatile.
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RiskProfile(SA)
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1,400
1,200
1,000
800
600
400
200
-
FX-Curvature
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FX-Vega
FX-Delta
EQ-Curvature
EQ-Vega
EQ-Delta
GIRR-Curvature
GIRR-Vega
GIRR-Delta
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SBAtotalcharge=Sumofthecomponentcharges(RiskAssets*D/V/C)
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RiskProfile(IMA)
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500
450
400
350
300
250
200
150
100
50
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ESFX
ESEQ
ESIR
ESALL
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ESCapitalcharge=Multiplier*(0.5*ESALL+0.5*SumofallconstrainedES)
CapitalOptimizationUseCase
Ø Hypotheticalpositions includeEQ,IR,FXexposure
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Ø Riskprofiles using StandardApproachandInternalModel Approach.
Ø Positionsloadintohypotheticaldeskstructure.
Ø Capitaloptimization bymoving tradefromhigh chargedesktolowchargedesk
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DeskStructureandCapitalCharge
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AlldesksneedtocalculateSAcharge
OnlyIMAdeskscalculateIMAcharge
TotalCharge=IMAdeskchargetotal+SAdeskchargetotal.
CapitalOptimizationUseCase
Ø Hypotheticalpositions includeEQ,IR,FXexposure
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Ø Riskprofiles using StandardApproachandInternalModel Approach.
Ø Positions loadintohypotheticaldeskstructure.
Ø Capitaloptimizationbymovingtradefromhighchargedesktolowchargedesk
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Thousands
Step1– TransferSwaption fromSAtoIMA RazorRisk
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CapitalSave
SACapital
IMACapital
3,000
2,500
2,000
1,500
1,000
500
Current Structure
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Swaptiontransferred
fromSAtoIMA
CapitalSave
Capitalchargeisreducedby0.916million,or38%,bytransferringtheswaption
positionfromtradingdeskunderSAtotradingdeskunderIMA.
Drilldown
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Capital Optimisation
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Transfer NGD from IMA to SA
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Risk
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Step2– TransferNGDfromIMAtoSA
2,000
CapitalSave
SACapital
1,500
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IMACapital
1,000
Negativecapitalsave
500
-26.8
(500)
Swaption
transferred from
SAtoIMA
transfer NGDfrom
IMAtoSA
CapitalSave
(1,000)
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Capitalisincreasedby2%bytransferringNGDfromIMAtoSA.
ThoughNGDpositionaloneischargedhighercapitalunderIMA,transferringthe
NGDequitypositionfromIMAtoSAcannotreducecapitalchargeduetoIMA’s
diversificationbenefit.
Drilldown
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Thousands
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CapitalOptimizationhypothetical
– Scaleuptheposition sizeofNGDthenmove
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CapitalSave
SACapital
IMACapital
3,500
3,000
2,500
2,000
Positivecapitalsave
1,500
1,000
832.5
500
Before
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transfer NGDfromIMAto
SA
CapitalSave
OncethesizeofNGDposition isscaledupby10,capitalcanbereducedby25%
bytransferringNGDfromIMAtoSA.
Drilldown
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Next Steps
Challenges
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ChallengesforBanks
Ø Havetobuild FRTBSA(From AlternativetoHave-to)
• Sensitivity computation, RiskAggregation
Ø Deskre-structure
• PnL Attribution (Model, Dataconsistency)
• Desklevelapproval
Ø NonModellable RiskFactor(High quality,timelydata)
Ø Computation power(63ESsimulations forIMA,SAaggregation)
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Questions?
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Contact:
DavidChen
[email protected]
+1-416-947-4342
www.razor-risk.com
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