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

Under the Fundamental Review of the Trading Book (FRTB) framework as reflected in Basel's revised market risk standard, a bank holds a securitization position in its trading book that is not a correlation trading portfolio position. Which approach is used to compute the capital charge for the default risk of this position?

Non-CTP securitization positions are capitalised under the standardised approach default risk charge for securitizations, with prescribed risk weights and restricted offsetting. FRTB excludes securitizations from internal-model default risk capital, and the old Basel 2.5 incremental risk charge no longer applies.

  1. AThe internal models approach using an expected shortfall model for default risk
  2. BThe standardised approach default risk charge for securitizations (non-CTP), with its own risk weights and offsetting rulesCorrect
  3. CThe IRC model from Basel 2.5 without modification
  4. DThe standardised approach for equity default risk with a flat 8% charge

Explanation

Under FRTB, securitizations are excluded from the internal models default risk charge (IMA DRC). They must be capitalised under the standardised approach, using the securitization non-CTP default risk charge with prescribed risk weights and limited offsetting. The IRC was replaced by the DRC and does not cover securitizations.

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