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

A bank's trading desk holds a tranche of a securitization that is not part of the correlation trading portfolio. Under the FRTB sensitivities-based method, which feature of the credit spread risk treatment for securitizations (non-CTP) distinguishes it from the treatment of non-securitization credit spread risk?

Non-CTP securitizations have their own credit spread risk factors, buckets, risk weights and correlations, defined by tranche features rather than issuer names. They are not treated like corporate bonds and receive no exemption for investment grade ratings.

  1. AIt uses separate risk factors, buckets and risk weights, and a tranche-specific rather than issuer-name risk factor structureCorrect
  2. BIt uses exactly the same buckets and risk weights as corporate bonds
  3. CIt has no delta charge, only a curvature charge
  4. DIt is exempt from capital if the tranche is rated investment grade

Explanation

FRTB sets distinct credit spread risk (securitization non-CTP) buckets, risk weights and correlations, based on tranche characteristics such as sector, rating and seniority rather than issuer names. It still has delta, vega and curvature charges. There is no exemption for investment grade tranches.

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