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FRTB-compliant market risk capital calculations under both the Standardised Approach and Internal Models Approach, including Expected Shortfall, default risk charges, and P&L attribution tests.
The Fundamental Review of the Trading Book (FRTB), finalised by the Basel Committee in January 2016 and revised in 2019, is the post-crisis replacement for the 2006 market risk framework. FRTB replaces VaR with Expected Shortfall (ES) at the 97.5% confidence level over a one-day period, scaled to a ten-day horizon, and adds a stressed-ES requirement calibrated to a continuous 12-month period of significant financial stress. The shift from VaR to ES addresses the well-documented failure of VaR to capture tail risk concentration.
FRTB operates in two parallel regimes. The Standardised Approach (SA) uses prescribed supervisory risk weights and correlations, applied at the risk factor level. Banks with approved internal models use the Internal Models Approach (IMA), which permits bank-specific risk factor modelling subject to a series of eligibility tests: the P&L Attribution Test (PLAT) and the Backtesting exception threshold. Failure of these tests triggers fallback to SA, creating strong incentives for model discipline.
Beyond ES, FRTB introduces three new capital components. The Default Risk Charge (DRC) replaces incremental default risk with a 99.9% one-year default measure, capturing jump-to-default risk not visible in mark-to-market ES. The Non-Modellable Risk Factors (NMRF) charge is a stress-based capital add-on for risk factors that fail the bank's model eligibility test. The Stress Scenario component applies standardised stress moves to non-modellable factors.
TQH TERMINAL implements both SA and IMA pathways. ES is computed with full Monte Carlo simulation under the prescribed liquidity horizon bucketing (10 days for rates/FX, 20 for equity, 40 for credit, 60 for commodity). The platform tracks the modellable risk factor eligibility test, runs the PLAT in real time, and produces the full capital stack IMA ES, stressed ES, DRC, NMRF, and stress scenario charges at desk, business line, and bank-wide levels. Reporting is available in BCBS-prescribed templates and configurable formats for internal risk committees.
Capital optimisation under FRTB is now a primary lever for return on regulatory capital. The platform's what-if engine lets desks test the marginal capital impact of new trades, identify positions with high ES per unit of P&L, and stress-test the effect of model eligibility failures on capital consumption. This shifts FRTB from a regulatory compliance exercise to a strategic capital allocation tool.