In response to the global financial crisis, the Basel Committee started to reform global regulatory standards. This reform envisages a Fundamental Review of the Trading Book (FRTB). According to the Basel Committee, the rationale for FRTB is to improve the overall design and coherence of the capital standard for market risk. The changes will translate into the credit valuation adjustment (CVA) capital charge. The FRTB-CVA provides the option of applying a sensitivity-based approach (SA) for computing regulatory capital.
In the special report published in partnership with Risk.net, Alexander Sokol, CompatibL’s CEO, shared his thoughts on how to make the most use of algorithmic differentiation (AAD), a technique that gains support from financial institutions and market experts in the light of the FRTB. According to Alexander, although the use of AAD is advantageous for FRTB market risk as well as FRTB-CVA, it is most efficient in the latter: even with the large number of risk sensitivities, calculations can be performed at least 100 times faster.
In addition, Nick Haining underlined that the challenges the market faces as a result of the FRTB and FRTB-CVA rules may require advanced software solutions such as AAD.
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