FRTB: proxy risk factors may trigger model failures

Swapping non-modellable risk factors for proxies may make it harder to pass P&L attribution test

Using proxies for illiquid risk factors in regulatory capital models might prove to be a double-edged sword – potentially shrinking capital charges for market risk while increasing the possibility of model failures, market participants say.

Non-modellable risk factors (NMRFs), which are those not based on a required number and frequency of past price points, will attract whopping capital add-ons under the Basel Committee’s incoming market risk capital framework – the Fundamental Review of the