Skip to content

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

A regulator reviewing the trading book framework observed that during the crisis, banks with large securitisation positions held in the trading book suffered losses far exceeding their VaR-based capital. Which design feature of the pre-FRTB VaR approach best explains this shortfall for such positions?

The uniform 10-day, 99% VaR assumed positions could be liquidated or hedged quickly. For illiquid securitisations this horizon was far too short, so losses during the crisis greatly exceeded capital. FRTB responded with liquidity horizons that vary by risk factor.

  1. AA 10-day holding period at 99% confidence assumed positions could be liquidated quickly, which understated risk for illiquid securitisationsCorrect
  2. BVaR was calculated using expected shortfall at 97.5%, which ignored tail losses
  3. CVaR was calibrated only to stress periods, which overstated risk
  4. DSecuritisations were excluded from the trading book entirely

Explanation

A uniform 10-day horizon assumed ready liquidation, but illiquid securitisations could not be sold within that time, so losses were far larger. Expected shortfall at 97.5% is the FRTB metric, not the old one. Pre-FRTB VaR was not calibrated only to stress, and securitisations were held in the trading book.

Did you get it right without looking?

One question tells you little. A timed set on Fundamental Review of the Trading Book shows your real accuracy, how long you take and where you lose marks.

Practise Fundamental Review of the Trading BookFree diagnostic mock

More Fundamental Review of the Trading Book questions