大浩浩的笔记课堂——FRM考试学习笔记129

Topic 58 

Basel Ⅱ.5 and Fundamental Review of the Trading Book(FRTB)

1.The Basel Ⅱ.5(2011.12.31 implemented):

⑴introduction to changes:

There are 3 changes:

①the calculation of a stressed VaR(SVaR)

②a new incremental risk charge(IRC)

③a comprehensive risk measure(CRM) for instruments dependent on credit correlation

⑵stressed VaR(SVaR):

①definition:

It is calculated by combining current portfolio performance data with the firm´s historical data from a significant financial stressed period in the same portfolio.

②calculation:

A.calculation of SVaR is defined as follows:

max(SVaR_t-1,multiplicative factor×SVaR_avg)

B.total capital charge:

total capital charge=max(VaR_t-1,m_c×VaR_avg)+max(SVaR_t-1,m_s×SVaR_avg)

a/ VaR_t-1,SVaR_t-1:10-day,99%,calculated on the previous day

b/ VaR_avg,SVaR_avg:10-day,99%,calculated on the previous 60 days

c/ m_c,m_s:≥3,in addition to a plus factor that depends on the results of backtesting the regular VaR,and not SVaR

C.It requires that banks to calculate two VaRs:

a/ usual VaR:

△It is based on the previous 1-4 years of market movements.

△It is calculated by using historical simulation method.

b/ stressed VaR(SVaR):

△It is the loss on the current portfolio that corresponds to a 99% confidence over a 10-day period.

△It is using a 250-dayperiod of stressed market conditions.

△It is calculated by banks that must identify a 1-year period when their portfolios performed poorly.

③comparison:

The stressed VaR≥VaR,so the new rule is to at least double the capital requirement.

⑶incremental risk charge(IRC):

①The IRC covers the default risk(jump-to-default risk) and credit migration risk(credit spread risk) for debt instruments:

An incremental default risk charge(IDRC) to correct for the fact that the banking book was attracting more capital than the trading book.

②The IRC requires banks to calculate a 1-year 99.9% VaR for losses from defaults and credit rating changesinto account,on at least a weekly basis.

③Banks are therefore required to estimate a liquidity horizon for each instrument subject to the IRCand rebalance the portfolio if credit quality declines.

④The minimum liquidity horizon for IRC is specified by the Basel committees as 3 months.

⑷comprehensive risk measure(CRM):

①It is designed to take account of risks in what is known as the correlation book.

②The CRM is a single capital charge replacing the incremental risk charge and the specific risk charge for instruments dependent on credit correlation.

③Asset-backed securities(ABSs) and collateralized debt obligations(CDOs) are sensitive to the default risk of other assets.

④The committee has specified a standardized approach to assign capital charges for rated instruments.

⑤For unrated instruments or instruments rated below BB-,the bank must deduct the principal amount of the exposure from capital which is equivalent to a 100% capital charge.

2.fundamental review of the trading book(FRTB)(2012.5 implemented):

⑴New market risk measures:

The FRTB has proposed an alternative measure using expected shortfall(ES):

①formula:

ES with a 97.5% confidence level is proposed:

μ+2.338σ

②advantage:

A.It satisfies the subadditivity property and takes better account of tail risk.

B.It will better capture the value of capital at risk below a certain confidence interval.

③characteristic:

Capital is based solely on the calculation of the expected shortfall using a 10-day VaR with a 99% confidence interval with a 250-day stressed VaR.

④liquidity horizon:

A.definition:

It is the time required to execute transactions that extinguish an exposure to a risk factor,without moving the price of the hedging instruments,in stressed market conditions.

B.usage:

The ES will then be calculated by structuring risk assets into categories and solving for an overall value of ES of a bank´s risk assets,the liquidity horizon used should be changed to reflect the fact that the market variables underlying transactions vary according to their liquidity:

⑤calculation:

The ES is based on a waterfall of the liquidity horizon categories and is then scaled to the square root of the difference in horizon lengths of the nested risk factors:

A.changes to all variables over 10 days

B.changes to variables in categories 2 to 5 over an additional 10 days

C.changes to variables in categories 3 to 5 over an additional 40 days

D.changes to variables in categories 4 to 5 over an additional 60 days

E.changes to variables in categories 5 over an additional 130 days

⑥approach:

internal models-based approach:

The expected shortfall is based on a waterfall of the liquidity.Horizon categories and is then scaled to the square root of the the difference in the horizon lengths of the nested risk factor.

3.Proposed modifications to Basel regulations:

⑴comparison:

The FRTB makes a specific distinction between assets held in the trading book and those held in the banking book:

⑵criteria:

①To be allocated to the trading book,the bank must prove more than an intent to trade.

②criteria for trading book assets:

A.The bank must be able to physically trade the asset.

B.The bank must manage the associated risks on the trading desk.

⑶characteristic:

①The FRTB provides more objective rules for determining whether the trading book or the banking book should be used.

②Any capital benefit as a result of moving items between the books will be disclosed.

⑷arbitrage:

①Some banks have engaged in regulatory arbitrage by actively assets between the trading book and the banking book depending on which category would show their capital requirements in a more favourable light.

②The FRTB is mitigating this arbitrage opportunity by developing a rules-based standard for classification into these categories and a roadblock for easily switching between them.

3.Credit trades:

The FRTB provides a modification of the incremental risk charge(IRC,1-year time horizon with 99.9% confidence level).It recognizes that for instruments dependent on the credit risk of a particular company:

⑴jump-to-default risk:

①a default by the company

②measured by 99% VaR

⑵credit special risk:

Company´s credit spread will change.

·特别注意！

大浩浩的笔记课堂之FRM考试学习笔记合集