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

Under FRTB, a trading desk's eligibility for the internal models approach depends on passing which pair of tests?

Desks must pass both backtesting and the profit-and-loss attribution test to use the internal models approach. Backtesting checks VaR exceptions, while P&L attribution checks that the risk model captures the drivers of actual desk P&L.

  1. ABacktesting and profit-and-loss attributionCorrect
  2. BStress-scenario test and incremental risk test
  3. CLiquidity coverage test and leverage test
  4. DStandardised-approach floor test and credit rating test

Explanation

Desk-level eligibility requires satisfactory backtesting of 99% and 97.5% VaR exceptions, and a P&L attribution test comparing hypothetical and risk-theoretical P&L. Other items are unrelated to desk eligibility.

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