FRTB: The Canadian Perspective – Part 2 | KPMG | CA

FRTB: The Canadian Perspective – Part 2

FRTB: The Canadian Perspective – Part 2

The new capital requirements under FTRB are a marked change from those in the Basel 2.5 and CAR guidelines

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FRTB, Capital Adequacy Requirements, banks

In part 2 of our series on FRTB: The Canadian Perspective, we highlight key differences and similarities between FRTB and the Capital Adequacy Requirements (CAR) guidelines that have been adopted by Canadian banks. The new capital requirements under FTRB are a marked change from those in the Basel 2.5 and CAR guidelines; however, both regulatory documents offer banks a choice between a standardized approach (SA) and an internal models approach (IMA). The FRTB standardized approach is generally more sophisticated than its predecessor, and is based on three components: risk charges under the sensitivities-based method, default risk charge, and residual risk add-on.

Capital Adequacy Requirements

The standardized approach capital requirement under CAR considers five risk categories:

  1. Interest rate position risk
  2. Equities risk
  3. Foreign exchange position risk
  4. Commodities risk 
  5. Options risk.

The capital charges for market risk are predefined by OSFI based on historical losses for each product type, and typically based on a weighted sum, where the weights are prescribed for each risk category and instrument type in Chapter 9 of the CAR guidelines.

KPMG sees FRTB implementation as an opportunity to improve organizations’ internal models and risk measures.

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FRTB: The Canadian perspective – Part 1

FRTB: The new market risk paradigm

Fundamental Review of the Trading Book

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