ISDA FRTB-SA Workflows

Financial institutions must follow the ISDA^® FRTB-SA workflow to ensure they are holding adequate capital, according to FRTB standards, for the market risk inherent in their trading book activities. The FRTB-SA is one of the two approaches that banks can use to calculate market risk capital requirements. The other being the Internal Models Approach (IMA).

The summary of this workflow is:

1. Create and load an ISDA FRTB-SA CRIF file. For more information, see ISDA FRTB-SA CRIF File Specifications.

2. Create a frtbsa object using frtbsa with the ISDA FRTB-SA CRIF file.

3. Calculate the market risk capital charge components.

   1. Calculate the standardized sensitivity-based method (SBM) — Use sbm to calculate the market risk capital requirements for the trading book positions. The SBM captures the risk of losses on financial instruments due to changes in market risk factors such as interest rates, credit spreads, equity prices, commodity prices, and foreign exchange rates.

   2. Calculate the default risk charge (DRC) — Use drc to calculate the capital charge that covers the risk of default of debt instruments in the trading book that are not captured by the credit spread risk charge in the general market risk framework. The DRC addresses the jump-to-default risk, which is the risk that the value of a credit-sensitive instrument, such as a corporate bond or a credit derivative, declines significantly due to the default of the issuer or reference entity, rather than due to incremental changes in credit spreads.

   3. Calculate the residual risk add-on (RRAO) — Use rrao to calculate the RRAO that identifies the instruments that carry residual risks and applies prescribed risk weights to their notional amounts.

4. Calculate the market risk capital charge — Use charge to calculate total capital market risk charge results for each portfolio. The total capital charge for FRTB-SA is the sum of the capital charges from the SBM for each risk class, the DRC, and the RRAO. This total capital charge represents the minimum amount of capital that the bank must hold to be considered adequately capitalized for market risk according to the FRTB regulations.

5. Perform what-if analysis — Define hypothetical scenarios or changes that could influence the trading book, for example, shifts in market risk factors such as interest rates and FX rates, portfolio restructurings such as trading in new instruments and changing positions, and altered risk weights.