Fundamental Review of the Trading Book

Day One

09.00 - 09.15 Welcome

09.15 - 12.00

Overview

  • Regulatory concerns with Basel 2.5
  • Group discussion - want went wrong in 2008 - did VaR fail?
  • Solutions provided by the FRTB
  • BCBS timelines/EU timelines - some of the challenges

Trading Book/Banking book

  • Definition of the Trading Book
    • Trading Book instruments: standards and presumptive list
  • Risk management Policies, reporting requirements
  • Definition of trading desks
    • Regulatory requirements
    • Model approval will be given at desk level so firms should consider optimal desk structures:
      • Minimise P&L volatility relative to VaR at regulatory desk level
      • Impact of model withdrawal for a regulatory desk
      • Make use of sub-desk structures
      • Optimise allocation of capital across desks
  • Restrictions on moving instruments between banking book and trading book
  • Internal risk transfer
    • Credit risk
    • Equity risk
    • Interest rate risk
  • Comparison between FRTB and current rules

12.15 - 13.15 Lunch

13.15 - 17.00

Introduction to Internal Models Approach

  • Elements of the internal model
  • The Approval Process
  • Identifying eligible desks

Expected Shortfall implementation under FRTB

  • Overview of requirements (D352)
  • A review of 1-day VaR and 1-day Expected Shortfall calculations
  • Some simple examples to work through
  • Introducing liquidity horizons
    • Preliminary discussion on time-scaling
    • The original proposal by regulators - problem with retaining correlation structure
    • The industry responses
    • Final proposals by BCBS (D352)
  • Exercise/Example: Computing Expected shortfall with different liquidity horizons
  • Restriction on diversification benefits
    • Preliminary discussion on correlation and stressed periods
    • The original proposal by regulators
    • The industry response
    • Final proposal by BCBS (D352)
  • Identifying Modellable and Non-Modellable Risk Factors (NMRFs)
    • Industry initiatives: Bloomberg; Markit
  • Computing Stressed Expected Shortfall

Day Two

09.00 - 12.15

Model Validation Standards

  • Regulatory requirements (D352)

Back testing VaR

  • Actual P+L, Hypothetical P+L and Risk Theoretical P+L
  • Exception counting - traffic lights - binomial tests
  • What does it tell us?

Problems with back testing ES

  • Non - elicitable functions, so what?
  • What is the right question?
  • P-values, the right answer?
  • The regulatory answer - back test VaR at 97.5th and 99th percentiles
  • What does that tell us?

P+L Attribution

  • Discussion of the requirements
  • Issues and ambiguities
    • Basis risk between Theoretical P+L and Hypothetical P+L
    • The regulatory tests - likelihood of failure?
    • P-Values again!
  • Example/Exercises: Computing the regulatory P+L attribution tests and p-values

12.15 - 13.15 Lunch

13.15 - 17.00

IRC/IDRC/CRM

  • Copula models
  • Migration risk dropped
    • Is migration risk adequately captured in VaR and ES?
    • If so, is default risk adequately captured?
  • Equities introduced
    • Why? Why not before?
  • Computing correlations
    • Equity correlations or CDS?
  • Sovereign default
    • What do you do about sovereign correlations?
    • PD floors - how material are they?
  • Example/Exercise - exploring a spread sheet implementation of a DRC model

Standard Rules

  • SBA - sensitivity based approach
    • Overview
    • Some practical examples
  • Standard Rules for default risk
  • Residual Risk
  • Do the proposed new standard rules meet the regulatory objectives and are they practical for small firms?
  • Requirements for desks with internal model approval
  • Exercise/example calculations

Day Three

09.00 - 12.15

Capitalisation

  • Capitalisation requirements derived from internal models
  • Adding in unapproved desks
  • Estimates of capital impact of FRTB on banks

EU Implementation of FRTB

  • Scope of draft revisions to CRD and CRR - much more than just FRTB
  • Guide to CRR revisions for FRTB
  • Divergence between draft CRR and FRTB
  • EU timetable and phase in

Role Play Exercise - Meet the Regulator

  • Prepare for and play out a review meeting with the regulator

12.15 - 13.15 Lunch

13.15 - 17.00

Stress Testing

  • Supervisory scenarios
  • Bank scenarios

Related Topics

  • Counterparty risk
  • CVA
  • Illiquid Positions
  • SREP and Pillar 2

Evaluation and Termination of the Seminar

  Site Map    Policy Statements    Mobile Version
COPYRIGHT © 2017 MONECO