Create and backtest market risk models to comply with FRTB using MATLAB

Fundamental Review of the Trading Book (FRTB) is a set of regulations for the calculation of the minimum capital requirements for market risk. Since FRTB was first introduced in May 2012, it has undergone many updates and revisions. FRTB is expected to go live on January 1, 2022. One of the major changes in FRTB is the introduction of expected shortfall (ES), which will replace value-at-risk (VaR) as a market risk measure for capital calculation; market risk capital under FRTB is anticipated to be much higher. FRTB is a part of Basel III reform, commonly referred to as Basel IV.

In addition to the change of risk measure from VaR to ES, changes in relation to FRTB include:

  • Classification of instruments for trading and banking books
  • Revised standardized approach and internal model apparch
  • Non-modelable risk factors (NMRF)
  • P&L attribution tests
  • Credit valuation adjustment (CVA)

Popular tools for creating and backtesting market risk models include MATLAB®, Statistics and Machine Learning Toolbox™Risk Management Toolbox™, MATLAB Report Generator™, and MATLAB Production Server™.

See also: Basel IV, Basel III, Solvency II, IFRS 9, CECL, backtesting, fraud analytics

Effective Model Risk Management with MATLAB