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Fundamental Review of the Trading Book

Day One

Background, Market Risk, Trading Books and the Standardized Approach

Background to Risk Management and Regulation

  • History of risk management regulation
  • Probability distributions, volatility and correlation
  • VaR as a failed risk measure
  • Motivation for new regulation

Trading Books and Trading Desks

  • Defining a trading book and relationship to IFRS 9
  • Separation between banking book and trading book
  • Trading desk as a unit of regulatory approval
  • Defining trading desks
  • Impact division into trading desks on capital

Workshop: Allocating positions to trading book / banking book

The Standardized Approach to Market Risk

  • Key features of the standardized approach
  • Defining risk factors and sensitivities
  • Treatment of linear risk and curvature risk
  • Impact of the new standardized approach
  • Residual Risk Add-ons

Workshop: Example of the new standardized approach - delta and curvature risk

Simplified Standardized Approach

  • Review of the criteria for using a simplified approach
  • Specific risk for interest rates
  • Calculating general market risk
  • Treatment for equity risk
  • Measuring fx and commodity risk
  • Simplified approach and options

Day Two

Internal Models, Introduction of the Default Risk Charge and Capital Impact

Expected Shortfall and the Internal Model Approach

  • Changes to the regulations on Internal Models
  • Coherent risk measures
  • Expected shortfall (ES) as an alternative risk measure
  • Comparison of ES and VaR
  • Partial ES
  • Regulatory stress tests and asset quality reviews

Workshop: Comparing VAR and ES

Model Approval, P&L Attribution and Non-modellable Risk

  • Model validation standards
  • P&L attribution
  • Backtesting of internal models
  • FRTB definition of non-modellable risk
  • Calculating capital for non-modellable risk
  • Identifying trades to reduce ES
  • Allocating risk and capital to individual trading desks

Default Risk Charge

  • Scope of the default risk charge (DRC)
  • Standardized approach to the default risk charge
  • Applying the concept of jump to default
  • Netting and default risk calculations
  • Internal model approaches to default risk charge
  • Implementing an internal model

Workshop: Example of calculating the DRC

Changes To Risk Management Frameworks

  • Linking capital to risk
  • Implementation challenges of the FRTB
  • Changes to future risk management practices
  • Issues not addressed by FRTB
  • Products and businesses impacted by FRTB



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