Discussion on Changes under the Fundamental Review of the Trading Book

        According to the Fundamental Review of the trading book, the Basel Committee has made certain changes in the overall standards in2019. It is important to mention here that changes made to different standards have been significantly incremental. Different changes have been made to rules, which can make an effect on various proposals of the industry. More specifically, it is vital to mention here that the committee has made particular changes related to PLA as well as NMRF approaches. The same is the case with an approach related to corresponding capital charges. It was also decided that changes will be made in total market risk capital, and it has been mentioned in the Explanatory Note that the estimated weighted average increase has been reduced. This reduction was around 40% in 2016, which has now been reduced to 22% in 2019. It is up to firms that how they run their quantitative impact assessment per changes in the rules. These changes will revise the overall standardized approach which has been adopted.

2-Liquidity horizons (assets specific risk horizons)

         There are various parts of the overall framework, and one of them is Liquidity horizons. According to Fundamental review of the trading book, it is said about Liquidity horizons that “The greater of 20 days and the corresponding expected shortfall (ES) liquidity horizon” The firms should keep this fact in mind while taking any considerable decisions (EY, 2019)

3-ES model is calibrated on stress period

          It is a fact that FRTB has mentioned an Expected Shortfall (ES) model, which is used as a risk assessment model. The great ability of the Expected Shortfall (ES) model is that tail risk can be captured with its help. That’s why more than 97% expected shortfall related to confidence interval was given as a proposal by FRTB. It is critical to understand that the Expected Shortfall (ES) model is actually measured when there are five successive shocks. The main purpose is to make sure that how stress period and expected shortfall shocks will be altered (Malik, 2019)

4-Desk level approval (Backtesting at desk level)

        FRTB has provided a comprehensive guide that how rules can be used in developing a reporting structure related to market risk, as well as management. All of these things can be checked in detail at a trading desk. So, it is essential for banks to work on a desk level approach so that they can get relevant data as well as calculate risk. It will help them to make adjustments in their data sourcing, and it will also help to make the calculation of the strategy (accenture consulting, 2019)

5-Introduction of P & L attribution tests

       Under the framework, one component is PLA, which talks about the P&L test. It is stated In the FRTB that “Confirmed ability to align risk theoretical P&L and hypothetical P&L data inputs subject to documentation and validation constraints” The good thing about P&L tests is that it helps in evaluating the efficiency related to internal models (EY, 2019)

References of Changes under the Fundamental Review of the Trading Book

accenture consulting. (2019). Fundamental Review of the Trading Book (FRTB. Retrieved December 3, 2019, from https://www.accenture.com/_acnmedia/pdf-56/accenture-fundamental-review-of-the-trading-book-theory-to-action.pdf

EY. (2019). Fundamental review of the trading book: Basel Committee final standard released January 14, 2019. Retrieved December 3, 2019, from https://www.ey.com/Publication/vwLUAssets/EY-fundamental-review-of-the-trading-book-2019/$File/EY-fundamental-review-of-the-trading-book.pdf

Malik, F. (2019). FRTB — Overview Of Fundamental Review Of Trading Book. Retrieved December 3, 2019, from https://medium.com/fintechexplained/frtb-overview-of-fundamental-review-of-trading-book-aa5e92921867