TMX Technology- Razor Risk: Capital Efficiency Under FRTB
Posted: 23 September 2016
With the forthcoming FRTB standards due to be implemented at the end of 2019, banks have been busy assessing capital impacts. When combined with other regulations such as increased Basel III capital requirements, Dodd Frank Volcker Rule, bilateral margining requirements, IFRS 9, IRRBB, SA-CCR and SA-CVA, capital consumption and performance have become a greater focus more than ever. As each desk needs separate approval for IMA as opposed to SA, the choice of desk structures of banks will have significant influence on the overall market risk capital requirements. The BCBS-352 (FRTB) regulations define trading desks as “a group of traders or trading accounts that implements a well-defined business strategy operating within a clear risk management strategy”2. In order for banks to determine capital impacts before implementation, a series of hypothetical scenarios should be set up relevant to the firm’s portfolios. The baseline test would be the current desk structure post Volcker rule (for the U.S. and Canada) and production portfolios, whereby both the standardized and internal model capital results are calculated and the minimum of the sum of both approaches are calculated to arrive at a probable desk structure.