FRTB: trade bodies reveal threat to risk factor modellability

Swaptions, sovereign CDS and long-dated swaps at risk of being NMRFs

An array of popular derivatives products traded by banks would incur large capital add-ons under the current version of the Basel Committee’s market risk rules because of seasonal lulls in supply and demand.

The framework, known as the Fundamental Review of the Trading Book (FRTB), assigns capital charges to a bank’s trading book based on its sensitivity to certain risk factors. A bank’s sensitivity to a risk factor can be gauged using internal models if it has sufficient trading data to do so

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