A Review of the Fundamentals of the Fundamental Review of the Trading Book II: Asymmetries, Anomalies, and Simple Remedies

27 Pages Posted: 9 Aug 2017 Last revised: 9 Jun 2018

See all articles by Hany Farag

Hany Farag

CIBC World Markets - Risk Quant, Capital Markets, CIBC

Multiple version iconThere are 2 versions of this paper

Date Written: June 3, 2017

Abstract

In this paper we highlight some anomalies in both the standardized approach (SA) and the internal models approach (IMA) of the FRTB that may not be well-known. These anomalies may be unintentional and simply require clarification or rewording of the FRTB text. Alternatively they may be aspects that were not fully considered from certain angles. We here wish to highlight the potential for unintended consequences of ignoring them. They vary in the the degree to which they impact capital, and they can grossly misstate risk in either direction. Indeed, we demonstrate in many cases that the framework can record high risk when there is none, or record zero risk when the risk is high. We offer simple adjustments to eliminate these problems. None of our suggestions require new calibration or a material change to the framework, but merely minor modifications to the wording of the text, that can restore logical consistency. It is our hope that this paper will assist both regulators and practitioners in a productive dialog.

Keywords: FRTB, market risk, Standardized Approach, Fundamental Review, Trading Book, Internal Models Approach

JEL Classification: G28, G01, G21, C00, C02, C54

Suggested Citation

Farag, Hany, A Review of the Fundamentals of the Fundamental Review of the Trading Book II: Asymmetries, Anomalies, and Simple Remedies (June 3, 2017). Available at SSRN: https://ssrn.com/abstract=3014533 or http://dx.doi.org/10.2139/ssrn.3014533

Hany Farag (Contact Author)

CIBC World Markets - Risk Quant, Capital Markets, CIBC ( email )

161 Bay Street
Toronto, Ontario M5J 2S8
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
459
Abstract Views
1,461
rank
77,678
PlumX Metrics