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

Under the Basel framework as revised by the Fundamental Review of the Trading Book (FRTB), which statement best describes how the credit valuation adjustment (CVA) risk capital charge relates to the market risk capital charge for the trading book?

CVA risk capital is calculated under its own separate framework and is not embedded in the FRTB market risk charge. The two requirements are computed independently and then added together, because CVA captures counterparty credit spread and exposure variability rather than the desk-level market risk factors that FRTB covers.

  1. ACVA risk is capitalised in a separate framework from the FRTB market risk charge, and the two charges are added togetherCorrect
  2. BCVA risk is included within the FRTB expected shortfall measure for the trading desk holding the derivative
  3. CCVA risk is excluded from capital entirely if the derivative is centrally cleared with a qualifying CCP
  4. DCVA risk is capitalised only through the default risk charge for the counterparty

Explanation

The CVA risk capital framework is a separate standalone framework covering the variability of CVA due to counterparty credit spreads and exposure drivers. It is not part of the FRTB internal models or standardised approach charge for the trading desk, so its capital is added on top. Transactions with a qualifying central counterparty are generally exempt from CVA capital, but this does not alter the separation of the two charges.

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