Fundamental Review of the Trading Book (FRTB)

Fundamental Review of the Trading Book (FRTB) free download

FRTB, SA vs IMA, Banking vs Trading Book, Expected Shortfall, P&L Attribution Test, NMRFs, Stress Testing, Liquidity

The first five lectures provide you, in just under an hour, a comprehensive and actionable understanding of the FRTB regulation, enabling you to confidently engage with finance professionals on this important and current topic. This course is a high-impact investment of your time, offering immediate and substantial benefits by distilling complex regulatory requirements into clear, expert-level insights.

Following this, the next five lectures will offer deep insights into the specific features of the Internal Models Approach (IMA). These lectures will cover essential tests, modelable and non-modelable risk factors, stress testing of Expected Shortfall analytics, as well as liquidity risk management, and how FRTB addresses liquidity risk using liquidity horizons.

The final lecture dives even deeper, summarizing a study published in June 2024 by ISDA and E&Y. The study analyzes the adoption of IMA at 26 large banks, discussing the most challenging aspects for banks, and offering recommendations to regulators on how adoption could be improved. A 10 minute podcast, AI generated, is also included.

Sign up for this Fundamental Review of the Trading Book (FRTB) masterclass to gain critical expertise in one of the most significant regulatory frameworks reshaping global finance. With regulators worldwide accelerating FRTB’s implementation, this course equips you with the knowledge and skills to navigate its complexities, optimize capital strategies, and ensure and discuss compliance. Whether you're a student, associate, seasoned professional or an aspiring finance leader, this course offers the practical insights and tools needed to stay ahead in today's rapidly evolving financial landscape. Don’t miss this opportunity to understand in detail the aspects surrounding the Fundamental Review of the Trading Book.

The urgency and importace of FRTB stems from the fact that global regulators, including the OCC in the U.S., have set firm deadlines for compliance, with the first phase of implementation slated for July 2025. This leaves financial institutions with little time to overhaul their risk management systems, adjust capital strategies, and ensure compliance with the new, more stringent requirements

Here are the ten most important things students will learn from the course:

1. FRTB Overview and Objectives: FRTB introduces a new market risk capital framework aiming to enhance the robustness of capital requirements, improve risk sensitivity, and reduce variability in market risk-weighted assets (RWA) across jurisdictions.

   
   

2. Trading Book vs. Banking Book: FRTB enforces a stricter boundary between the trading and banking books, requiring correct classification of instruments, which impacts capital requirements. Instruments in the trading book are exposed to market risk, while banking book instruments are typically held to maturity.

   
   

3. Standardized Approach (SA) and Internal Models Approach (IMA): FRTB provides two options for calculating capital requirements - SA, which uses predefined risk weights, and IMA, which allows banks to use their internal models but requires rigorous regulatory validation. Students will understand the operational trade-offs between these two approaches.

   
   

4. Calculation Walkthrough for FRTB SA on USD/SOFR vs. Fixed Interest Rate Swap: This lecture provides a comprehensive descriptions and the steps to calculating FRTB SA capital requirements for a USD/SOFR vs. Fixed Interest Rate swap. It includes detailed steps for risk factor identification, sensitivity generation, and aggregation into risk charge components. Supporting materials include an Excel file with detailed calculations and a presentation that explains each step in the process, ensuring practical understanding and application.

   
   

5. Non-Modellable Risk Factors (NMRFs): NMRFs are risk factors that fail the Risk Factor Eligibility Test (RFET) due to insufficient real price data. These risk factors require additional capital through stress testing, increasing a bank's capital requirements.

   
   

6. Risk Factor Eligibility Test (RFET): RFET is essential for determining whether a risk factor is modellable. If a risk factor fails RFET (e.g., lacks sufficient price observations), it is classified as an NMRF, leading to higher capital charges.

   
   

7. Profit and Loss Attribution Test (PLAT): PLAT ensures that a bank's internal risk models accurately reflect the daily P&L movements. Passing PLAT is critical for continued eligibility to use the IMA. This test compares hypothetical P&L from the model with actual market P&L, using Spearman Correlation and the Kolmogorov-Smirnov tests.

   
   

8. Liquidity Risk and Liquidity Horizons: FRTB incorporates liquidity horizons to measure the time needed to hedge or exit a position under stressed conditions. Different asset classes have varying liquidity horizons, which directly impact capital requirements.

   
   

9. Challenges of IMA Adoption: According to the ISDA and E&Y paper, many banks face challenges in adopting IMA, including regulatory uncertainty, high operational complexity, and capital volatility, particularly from NMRFs and the PLAT. This has led several banks to favor the Standardized Approach despite the theoretical capital benefits of IMA.

   
   

10. Computational and Data Demands: FRTB’s implementation introduces significant computational demands, especially for banks using IMA, due to the need for high-quality data, daily backtesting, and stress testing. Managing these requirements efficiently is a key implementation challenge.

    
    

11. Capital Impact of FRTB: FRTB’s rules are expected to increase capital requirements, particularly for illiquid assets and non-modellable risk factors. The ISDA and E&Y paper highlights the mitigation strategies banks can adopt to manage capital charges, including reforms to the PLAT and adjustments to NMRF capital add-ons.

    
    

The course agenda provides a comprehensive understanding of FRTB, equipping participants with practical tools and strategies to enhance their expertise, optimize regulatory compliance, and drive impactful contributions within their organizations' risk management and capital efficiency practices.