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

Under FRTB, a bank computes unconstrained ES for the whole portfolio as 80 and ES for each of the risk classes with the constraint of being computed on the stress period as follows: the sum of the standalone class ES figures is 100. Which statement best describes how the aggregate is used in the internal models capital calculation?

FRTB recognises only partial diversification. The aggregate ES blends the full-portfolio ES with the sum of the standalone risk-class ES figures through a regulatory weighting, so the charge lies between the diversified figure of 80 and the undiversified sum of 100, rather than at either extreme.

  1. AThe standalone sums are used in full with no diversification benefit recognised between risk classes
  2. BThe model recognises partial diversification by combining the full-portfolio ES with the sum of the standalone ES figures through a weightingCorrect
  3. CThe full-portfolio ES of 80 alone is the capital charge because diversification is fully allowed
  4. DThe lowest of the class ES figures is selected as the capital charge

Explanation

FRTB's aggregate capital measure is a weighted combination: the unconstrained full-portfolio ES plus a supervisory-weighted add-on from the sum of standalone class ES, with a weight of 50% on the constrained component. This recognises only partial diversification. Using 80 alone ignores the limit; using the full sum ignores any diversification.

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