FRTB

The Fundamental Review of the Trading Book (FRTB) revises the risk framework for capital requirements to ensure that the objectives of the Basel Committee are met. While initially introduced in response to the shortcomings of the Basel 2.5 market risk capital framework, FRTB has now become a major challenge for the banking sector, as most financial institutions have to readjust their methods related to risk calculation and measurement.

Starting from as soon as 2019, banks will have to surmount a great number of obstacles indicated by both practitioners and regulators in numerous Quantitive Impact Studies and test cases. Reporting under the Standardized Approach (SA) will not be a matter of choice. The SA calculation will have to be performed with or without internal model (IMA) approval, in the former case as a floor to the IMA capital, and in the latter case as the primary calculation method.

CompatibL’s team of quantitative engineers and software architects has already introduced the necessary FRTB Reporting Framework into the award-winning CompatibL Risk software. Input data and FRTB rule engine are processed with the use of CompatibL FRTB analytics engine to produce capital charges and other elements required by the framework.

FRTB Framework includes guidance for calculating both Market and CVA Capital Charges. We believe that offering FRTB-CVA calculations should come as an extension to our proven XVA solution. Vendors that do not already have a verified enterprise XVA solution will require long project delivery times and increase project risk. CompatibL’s software eliminates these issues by relying on its proven XVA Monte Carlo engine to compute the sensitivities required for FRTB-CVA sensitivity based standardized approach.

Key features of Compatibl Risk FRTB:

  • Full integration of trade, market and reference data from recognized data providers
  • Ability to price most complex portfolios with front office accuracy and exceptional performance
  • Use of CompatibL’s high quality pricing library for compliance with stringent backtest and P&L attribution requirements
  • Availability of Adjoint Algorithmic Differentiation (AAD) for FRTB and FRTB-CVA that makes it possible to compute sensitivities in a fraction of the time required by the traditional bump and reprice methods

For more information on the subject, you can refer to our FRTB Brochure, our latest FRTB report or read Alexander Sokol’s presentation which explains how AAD can be used for FRTB calculations.

 

FRTB Risk framework specifies two methods for calculating CVA Capital charge – Standardized Approach (SA) and Basic CVA method, both of which are presented in the CompatibL Risk platform.

FRTB Report Examples:

sa_cva_report

SA-CVA. Report displays both Delta and Vega, including decomposition by buckets.

 

In adherence to the FRTB regulatory framework, CompatibL Risk offers two methods to calculate the Market Risk Capital Charge – Standardized Approach (SA) and Internal Model Method (IMM).

 

mrcc_report

MRCC SA. Report employs a hierarchical UI, displays Delta Vega Curvature shifts and demonstrates calculation results of DRC and RRAO.

 

For IMA-approved desks, CompatibL Risk offers Market Risk Capital Charge Report and Portfolio-level Attribution Report. Expected shortfall values are provided for all five liquidity horizons.

ima_1_report

MRCC IMA. Market Risk Capital Charge Report.

 

ima_2_pnl_attribution

MRCC IMA. Portfolio Attribution Report.