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FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book

A bank's trading desk has had 14 backtesting exceptions against 99% VaR over the latest 250 trading days and is therefore failing desk-level backtesting thresholds. Which consequence applies under the FRTB internal models approach?

The desk must revert to the standardised approach. FRTB grants model approval desk by desk, and a desk with more than 12 exceptions at 99% VaR over 250 days fails backtesting, so it loses internal model treatment until it satisfies the requirements again.

  1. AThe desk must be moved to the standardised approach until it again satisfies the requirementsCorrect
  2. BThe desk keeps its internal model approval but must use a 10-day ES
  3. CThe desk's capital is reduced because VaR was overly conservative
  4. DThe desk is only required to report the exceptions to the supervisor with no capital effect

Explanation

FRTB approves internal models at desk level. A desk with more than 12 exceptions at 99% VaR, or more than 30 at 97.5% VaR, over 250 days, breaches the limits, and it must use the standardised approach until it qualifies again. 14 exceeds 12. A capital reduction is the opposite of what happens.

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