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FRTB - Fundamental Review of the Trading Book Sensitivities-based Method of the Standardised Approach: the step-by-step recipe

Authored by: Françoise Caclin, Founder, Fimarkets

Our previous article outlined the reform of market risk monitoring, defined by the Basel Committee and known as FRTB. In this article, we will review the standardised risk calculation method based on risk sensitivities that will come into effect for banks from 2020 onwards. It should be remembered that even banks, which, with the agreement of their supervisory authority, opt for an internal method, will have to be able to calculate their market risk and capital charge using the standardised method. This is one reason why it makes sense to take an interest in it, the other being that this approach in itself is a good basis for a pedagogical view of market risk.

The standard method is presented in considerable detail in the January 2016 Basel Committee document, “Minimum Capital requirements for market risk”, hereinafter referred to as “the document”. The purpose of this presentation is obviously not to reproduce this document, but to propose an approach focused on the major concepts, and hopefully, more educational.

Overall, the calculation of market risk using the standardised method consists in determining a capital charge per risk class and aggregating them to determine the overall capital charge for market risk. To this are added the charge for the risk of default, as well as the additional charge for the residual risk.

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