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Fundamental Review of the Trading Book

Gain a deep understanding of the key elements of the FRTB and the differences between the Standard Approach and the Internal Model Approach

Fundamental Review of the Trading Book Training Course

A one-day course

The aim of this course is to review the main changes associated with the introduction of the Fundamental Review of the Trading Book. We look at the Banking and Trading Books and analyse the differences and the changes that will be caused by the new rules. We will look at the impact that FRTB will have on Trading Desks.

  • Gain a deep understanding of the key elements of the Fundamental Review of the Trading Book
  • Appreciate the boundaries between the Trading and the Banking Book
  • Understand the differences between the Standard Approach and the Internal Model Approach
  • Have a good understanding of the impact of Market Risk Management on the Trading Book
  • Appreciate how the FRTB will impact trading desks and how trading desks will look in the future

An Introduction to the FRTB

  • What is FRTB and what are the aims?
  • What are the key changes recommended by the Basel Committee?
  • What will be the consequences for banks?

FRTB Implementation

  • EBA requires Capital Requirements Regulation (CRR II) by 3Q 2021
  • January 2023 Deadline for FRTB Implementation
  • FRTB Implementation Timeline

The Key Elements

  • What will be the impact of the move from Value at Risk (VaR) to expected shortfall (ES)?
  • The new boundary between the trading and banking books
  • The new standard approach (SA)
  • Risk sensitivity and the SA
  • Internal model-based approach (IMA) and liquidity horizons
  • Non-modelable risk factors
  • The default risk charge (DRC)
  • Correlation trading positions (CTP)
  • Running both SA and IMA in parallel
  • Quiz: Recap and understanding of the “ Key Elements”.

The Books

To understand the new rules, we compare the “before” and “after” situations in both the Trading Book and the Banking Book, clarifying the differences.

  • The trading book (TB) and banking book (BB) boundary
  • The classical TB and BB
  • The boundary before the FRTB
  • TB and BB internal risk transfers and regulatory arbitrage
  • Trading intent and ‘presumptive list’ of eligible assets
  • Intraday monitoring and measurement of market risk
  • Enhanced public disclosures
  • Case Study: we look at how TB and Bb looked before and after FRTB

The Approaches

In this session we learn about the tools required to understand the specific changes in the standardized approach (SA) and the internal model approach (IMA).

The standardized approach (SA)

  • The SA before the FRTB
  • Capital calculation using ES (Expected Shortfall)
  • Correlation trading positions under SA
  • New risk factors definitions
  • Correlation or disallowance factors for basis risk
  • Diversification application
  • Treatment of optionality
  • Case Study: Example of Capital Calculations using Expected Shortfall

The internal model approach (IMA)

  • The IMA before the FRTB
  • ES to replace VaR and SVaR for tail risk
  • Asset-specific liquidity horizons
  • Non-modelable risk factors
  • DRC replacement of IRC

Market Risk Management in the Trading Room

  • Market Risk Calculation
  • New Regulations
    • Delta, Vega and Curvature Risk
    • Case Study: A look at Delta and Vega Risk and its impact on
    • Correlation analysis
    • Risk factor and Sensitivity
    • Interest Rate Risk (IRS) and FX Risk (Forward and Options)
  • The Internal Model Approach
    • Basel 2 and Value at Risk Analysis
    • Basel 2.5 and Stressed VaR
    • Basel 3 and Expected Shortfall
      • New ES Model
      • Stress Testing and Validation
      • Eligibility for Internal Model Approach
    • Exercise: Participants are asked to calculate examples of Market Risk Calculations
    • Case study: We look at Stress Testing and Validation of a test

FRTB Desk Impact

  • FRTB Pillar 1 Capital Charge Components
  • Stringent requirements on risk transfers between the trading book (TB) and banking book (BB) to limit regulatory arbitrage
  • ‘Presumptive list’ of TB-eligible assets with focus on trading intent
  • Pass-through approach for risk transfer pertaining to equity/credit risk trades
  • Hedging recognition based on stress period hedge effectiveness
  • Case Study: looking at examples of Hedging recognition

Scope

  • Desk-level model review and approval requirements
  • Desk-level P&L attribution and backtesting to be performed daily
  • Intra-day monitoring and measurement of market risk

Restructuring of Trading Desks

  • Viable Trading Desks under FRTB
  • Case Study: What does a post-FRTB Trading Deal look like?

The trainer worked in Investment Banks including HSBC and Bank of Montreal for nearly 20 years. During this time, he worked in Operations and then as a trader, running books in FX, bonds and derivatives.

He has run courses all over the world including Amsterdam, Dublin, London, New York, Hong Kong, Singapore, Jakarta, Johannesburg, Delhi, Accra, Johannesburg etc.

He delivers courses that focus on providing a practical and in-depth understanding of the markets from a Trading, Operations and Risk viewpoint. His courses are interactive and stimulating, offering delegates the opportunity to participate in an environment that encourages free discussion of the real issues faced in the workplace.

In addition to his training activities, he has undertaken various consultancy projects, such as an in-depth collateral risk assessment at a major European Investment bank.

The trainer held the position of Non-Executive Director of Cazenove’s Derivative Oversight Committee for many years. Acting as a member of the committee in a general consultative capacity to assess the firm’s derivative capabilities and risks.

He has also presented at JPMorgan Forums in London, speaking on topics such as the Benefits and Risks of Derivatives. He along with representatives from the FSA, law firms, hedge funds, etc. were asked to give their views on the risks of derivatives to 150 / 200 Directors and senior managers from the top investment firms in the UK.

  • Learn what the impact of the move from Value at Risk (VaR) to expected shortfall (ES) will be
  • Understand the new rules Trading and Banking Books and the risk transfer and regulatory arbitrage caused.
  • Appreciate the various types of Market Risk Management, including Delat<var Expected Shortfall(ES) etc
  • Learn about the impact on the Trading Desk that FRTB will have, from Capital charge components to Hedging Recognition
  • Understand Desk-level model review and approval requirements
  • Learn about Desk-level P&L attribution and back testing and monitoring and measurement of market risk
  • What will Trading Desks look like in the new environment

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