fundamental review of the trading book (frtb)...dec 31, 2019 · for entire trading book fail step...
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London, November 23rd, 2016
Fundamental Review of the Trading Book
(FRTB)
http://www.bis.org/bcbs/publ/d352.pdf
Arnaud Sandrin Symposium
London, November 23rd, 2016
Arnaud Sandrin
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Any views expressed in this presentation are those of
the author only, and not those of Autorité de Contrôle
Prudentiel et de Résolution nor Banque de France.
Arnaud Sandrin
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Contents
1. Brief introduction to FRTB
The new Trading Book / Banking Book boundary
Internal Models Approach
Standardised Approach
2. Focus on P&L Attribution
3. Focus on SbM, interactions with SIMM
3 Arnaud Sandrin
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Milestones
Beginning of the FRTB: 2009
Three consultative documents: 2012, 2013, 2014
Publication of the final standards: 14 January 2016
Transposition in the national rules: 1 January 2019
First reporting date: 31 December 2019
FAQs are being developed
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Boundary trading book / banking book
Definition of the boundary on an instrument basis
Trading-intent
Presumptive lists
Accounting trading asset or liability → trading book
Market-making → trading book
Real estate holdings → banking book (eg)
Switching limits
Capital arbitrage mitigation
Supervisory re-designation
Daily fair-valuation required for trading book
Better reporting
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Internal Models Approach
97.5% Expected Shortfall (ES) – tail risk
Single, stressed measure – procyclicality
Varying liquidity horizons
Constrained diversification effects
Validation at desk level
Backtesting
P&L Attribution
Risk factor modellability
Default risk charge
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Standardised Approach
Sensitivities-based Method
Delta, vega, curvature (≈ stress test on non-linear risks)
Prescribed risk weights and correlations
Residual Risks Add-on
1,0% exotic
0.1% other residual risks
Default Risk Charge
Securitisation
Correlation Trading Portfolio (CTP)
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Contents
1. Brief introduction to FRTB
The new Trading Book / Banking Book boundary
Internal Models Approach
Standardised Approach
2. Focus on P&L Attribution
3. Focus on SbM, interactions with SIMM
8 Arnaud Sandrin
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P&L Attribution: requirements
Comparison between two P&Ls
𝑅𝑇: risk-theoretical P&L
𝐻: hypothetical P&L
First ratio
−10% <𝜇 𝑅𝑇−𝐻
𝜎𝐻< 10%
Second ratio
𝜎2 𝑅𝑇−𝐻
𝜎2𝐻< 20%
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P&L Attribution and model validation (1/2)
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Standardised approach
for entire trading book
Fail
Step 2(i)
Banks nominate which trading desks
are in-scope for model approval and
which are out-of-scope
Step 2(ii)
Assessment of trading desk-level
model performance against
quantitative criteria (P&L attribution,
backtesting)
Standardised approach
for specific trading
desks
Pass
Pass
Fail
Out of
scope
Step 3
Individual risk factor analysis
Frequency of update
Available historical data
Other factors
Global ES with
diversification
constraints
Capital add-on based on
stress scenario per risk
factor
Capital charge for
default risk
Modellable
Non-modellable
Step 1
Overall assessment the banks’
firm-wide internal risk capital
model
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P&L Attribution and model validation (1/2)
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Standardised approach
for entire trading book
Fail
Step 2(i)
Banks nominate which trading desks
are in-scope for model approval and
which are out-of-scope
Step 2(ii)
Assessment of trading desk-level
model performance against
quantitative criteria (P&L attribution,
backtesting)
Standardised approach
for specific trading
desks
Pass
Pass
Fail
Out of
scope
Step 3
Individual risk factor analysis
Frequency of update
Available historical data
Other factors
Global ES with
diversification
constraints
Capital add-on based on
stress scenario per risk
factor
Capital charge for
default risk
Modellable
Non-modellable
Step 1
Overall assessment the banks’
firm-wide internal risk capital
model
“For a risk factor to be classified as modellable by a
bank, there must be continuously available “real”
prices for a sufficient set of representative
transactions. A price will be considered “real” if:
• It is a price at which the institution has conducted a
transaction;
• It is a verifiable price for an actual transaction
between other arms-length parties; or
• The price is obtained from a committed quote.
• If the price is obtained from a third-party vendor,
where: (i) the transaction has been processed
through the vendor; (ii) the vendor agrees to
provide evidence of the transaction to supervisors
upon request; and (iii) the price meets the three
criteria immediately listed above, then it is
considered to be real for the purposes of the
modellable classification.” Source: Extract from FRTB, §183(c)
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Contents
1. Brief introduction to FRTB
The new Trading Book / Banking Book boundary
Internal Models Approach
Standardised Approach
2. Focus on P&L Attribution
3. Focus on SbM, interactions with SIMM
12 Arnaud Sandrin
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SIMM and SbM
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Source: Extract from FRTB, §51 Source: Extract from SIMM, §9
Link:
http://www2.isda.org/attachment/ODY2OA==/ISDA_SI
MM_vR1.0_(PUBLIC).pdf
Two similar approaches
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Opportunities and challenges
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Opportunities
A unique global market risk measure
Standardisation of sensitivities
Standardisation of model inputs (common definitions)
Challenges
Model risk
Global supervision / governance of SIMM and SbM
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Many thanks for your attention
Arnaud Sandrin