FRTB IMA DRC and the 3 Basis Point Floor

As part of the default risk charge (DRC) in the internal models approach (IMA) within the Fundamental Review of the Trading Book (FRTB), the Basel Committee on Banking Supervision (BCBS) has set a floor of 3 basis points (bp) for the probability of default (PD) of any entity. This input floor applies to all entities and primarily impacts the highest rated AAA sovereigns.

There has been no evidence published to date to support the calibration of the 3 bps floor and as local jurisdictions implement FRTB, some jurisdictions have already published their intentions to adjust this floor.

This paper provides quantitative and qualitative analysis in support of the removal of the PD floor. The paper uses the Bayesian inference model to estimate the probability distribution of rare events (eg, defaults of highly-rated entities) and sensitivity analysis is performed to demonstrate its robustness.

Documents (1) for FRTB IMA DRC and the 3 Basis Point Floor

FRTB Impact on Correlation Trading

The capitalization of the correlation trading portfolio (CTP) under the Fundamental Review of the Trading Book will have an adverse economic impact for users of these instruments. In particular, there is a lack of clarity and consistency in the application...

A Path to Greater CFTC-SEC Alignment

Earlier this week, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) held a roundtable on regulatory harmonization – an initiative we wholeheartedly support. The US regulatory framework has evolved over time to facilitate financial markets...