Although the Fundamental Review of the Trading Book (FRTB), which is part of the Basel III revisions, has been in the making for several years, banks remain concerned about the demands on the quality and volume of Trade Data needed to determine the revised market risk capital charge. In this paper, we will discuss those market data challenges, along with potential means to address them. The data and computational challenges in implementing the Internal Measurement Approach (IMA) have been well documented, however, banks may find it equally difficult in sourcing and aggregating data for capital computation under the Standardised Approach (SA) as well. The calculation of market risk capital charge as per the Standardised Approach consists of determining a capital charge per risk class using the Sensitivities Based Approach (SBA) and aggregating them to determine the overall capital charge for market risk. To this are added the Default Risk Capital charge (DRC) for the risk of default, as well as the additional charge for the Residual Risk Add-On (RRAO) to arrive at the minimum capital requirement. This blog mainly focuses on the data challenges associated with the Sensitivity Based Approach (SBA) of the FRTB to calculate risk capital charge.
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