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

A trading desk at a bank using the FRTB internal models approach has had 14 exceptions of its 99% one-day hypothetical P&L VaR over the most recent 250 trading days. What is the consequence for the desk?

The desk must be moved to the standardised approach. FRTB desk-level backtesting disqualifies a desk from internal models if it records more than 12 exceptions at 99% VaR, or more than 30 at 97.5%, over 250 days. With 14 exceptions, the desk fails.

  1. AThe desk must move to the standardised approach because it exceeds 12 exceptions at 99% VaRCorrect
  2. BThe desk stays on IMA but the capital multiplier increases to 1.5
  3. CThe desk is retained with the multiplier unchanged because only the 97.5% exceptions count
  4. DThe desk must be disbanded

Explanation

Desk-level backtesting under FRTB requires that a desk with more than 12 exceptions at 99% VaR (or more than 30 at 97.5%) in the last 250 days be removed from IMA eligibility and capitalised under the standardised approach. 14 exceeds 12, so the desk fails. Multiplier add-ons apply at the bank level, not desk level for this failure.

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