Fundamental Review of the Trading Book

In January 2019, the Basel Committee on Banking Supervision revised their standards document commonly referred to as the Fundamental Review of the Trading Book (FRTB). The changes outlined in this new document will have a significant impact on banks globally - they cover numerous aspects of the trading book, including the definition of the trading book and trading desks, risk measurement and capitalization, and the supervision of internal risk models.

This course explores the new capital calculations, with practical examples of the new standard capital calculations as well as rules and principles behind internal models. The program develops a set of tools which are applied cumulatively in a sequence of workshops to demonstrate various aspects of these new capital calculations.  Concepts are then extended to investigate internal models, expected shortfall, and the treatment of credit risk within the FRTB.

Given the wide scope of the FRTB, the course also explores the impact of the new standards on the banking industry.  This includes the implications of the new capital regime on various business lines and how banks are likely to divide their businesses into trading desks.  Under the FRTB there will be a greater onus on banks to have better risk management and control procedures.  Practical guidelines are given for implementing these new procedures and the impact they will have on business strategy and risk management.

• Traders and Dealing Room Staff
• Risk Managers
• Middle Office and Senior Managers
• Investors
• Quantitative Analysts, Financial Engineers and Systems Developers
• Structured Products Desks, Product Controllers and Researchers
• Loan Portfolio Managers and Fund Managers
• Credit Analysts and Credit Risk Managers

• Understand the new definitions of a trading book and a trading desk. Learn how these new concepts will impact the structure of banks and their capital requirements
• Gain insights into the practical implementation of the new Standard Approach to capital calculation. Understand the impact of the sensitivity based calculations, the default risk charge, and the residual risk add-on across asset classes
• Learn how to use expected shortfall as an Internal Risk Model, and the regulatory concepts of a liquidity horizon, non-modelable risk, backtesting, and P&L attribution testing
• Understand the role of governance, internal policies and procedures as well as external audit in the new capital regime

• Numerate background (intermediate)
• A good grounding in capital markets products and techniques
• Microsoft Excel

Background, Market Risk, Trading Books and the Standardized Approach

Background to Risk Management and Regulation

• History of risk management regulation
• Probability distributions, volatility and correlation
• VaR as a failed risk measure
• Motivation for new regulation

Trading Books and Trading Desks

• Defining a trading book and relationship to IFRS 9
• Separation between banking book and trading book
• Trading desk as a unit of regulatory approval
• Defining trading desks
• Impact division into trading desks on capital

Workshop: Allocating positions to trading book / banking book

The Standardized Approach to Market Risk

• Key features of the standardized approach
• Defining risk factors and sensitivities
• Treatment of linear risk and curvature risk
• Impact of the new standardized approach
• Residual Risk Add-ons

Workshop: Example of the new standardized approach - delta and curvature risk

Simplified Standardized Approach

• Review of the criteria for using a simplified approach
• Specific risk for interest rates
• Calculating general market risk
• Treatment for equity risk
• Measuring fx and commodity risk
• Simplified approach and options

Internal Models, Introduction of the Default Risk Charge, and Capital Impact

Expected Shortfall and the Internal Model Approach

• Changes to the regulations on Internal Models
• Coherent risk measures
• Expected shortfall (ES) as an alternative risk measure
• Comparison of ES and VaR
• Partial ES
• Regulatory stress tests and asset quality reviews

Workshop: Comparing VAR and ES

Model Approval, P&L Attribution and Non-modelable Risk

• Model validation standards
• P&L attribution
• Backtesting of internal models
• FRTB definition of non-modelable risk
• Calculating capital for non-modelable risk
• Identifying trades to reduce ES
• Allocating risk and capital to individual trading desks

Default Risk Charge

• Scope of the default risk charge (DRC)
• Standardized approach to the default risk charge
• Applying the concept of jump to default
• Netting and default risk calculations
• Internal model approaches to default risk charge
• Implementing an internal model

Workshop: Example of calculating the DRC

Changes To Risk Management Frameworks

• Linking capital to risk
• Implementation challenges of the FRTB
• Changes to future risk management practices
• Issues not addressed by FRTB
• Products and businesses impacted by FRTB