/basel-rwa-market

name: basel-rwa-market
description: >
  Activate for: FRTB, Fundamental Review of the Trading Book, market risk RWA,
  trading book capital, SA-TB, standardised approach trading book, sensitivities-
  based method, SBM, delta, vega, curvature, default risk charge, DRC, residual
  risk add-on, RRAO, internal models approach, IMA, expected shortfall, ES,
  P&L attribution, PLA, backtesting, GIRR, CSR, equity risk, commodity risk,
  FX risk, market risk capital, trading desk.
  NOT for: credit risk RWA under standardised or IRB approach (use basel-rwa-credit),
  capital adequacy ratios and buffer calculations (use basel-capital), IFRS 9 ECL
  provisioning (use ifrs9-ecl).
metadata:
  version: "1.0"
  author: "Panaversity — The AI Agent Factory"
  standard: "Basel III FRTB (BCBS d352/d457) — jurisdiction implementations vary (load overlay)"

CORE PRINCIPLE

Market risk capital under FRTB replaces the pre-2016 VaR-based framework with a risk-sensitive approach that distinguishes between the Standardised Approach (SA) and the Internal Models Approach (IMA). The SA is the default and fallback; IMA requires desk-level regulatory approval including P&L attribution and backtesting.

FRTB applies to all instruments in the regulatory trading book. The trading book boundary is defined by strict criteria (intent to trade, ability to hedge, daily fair-value accounting) -- not by the bank's internal designation alone.

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STANDARDISED APPROACH (SA-TB) -- THREE COMPONENTS

Market Risk Capital (SA) = SBM + DRC + RRAO

Component 1: Sensitivities-Based Method (SBM)

The SBM captures delta, vega, and curvature risks across seven risk classes.

Seven Risk Classes

| # | Risk Class | Key Risk Factors | | --- | --------------------------------- | ------------------------------------------------------------------------------------------- | | 1 | GIRR (General Interest Rate Risk) | Risk-free rates by tenor (3M, 6M, 1Y, 2Y, 3Y, 5Y, 10Y, 15Y, 20Y, 30Y), cross-currency basis | | 2 | CSR non-securitisation | Credit spreads by issuer, sector, tenor | | 3 | CSR securitisation (CTP) | Correlation trading portfolio credit spreads | | 4 | CSR securitisation (non-CTP) | Non-correlation trading securitisation spreads | | 5 | Equity | Equity spot prices, repo rates | | 6 | Commodity | Commodity prices by type (energy, metals, agricultural, other) and tenor | | 7 | FX | Exchange rates against reporting currency |

SBM Calculation Steps

Step 1 -- Net Sensitivities: Calculate net delta, vega, and curvature sensitivities per risk factor within each risk class.

Step 2 -- Weighted Sensitivities: Multiply each net sensitivity by the prescribed risk weight for that risk factor. Delta risk weights vary by risk class and tenor (e.g., GIRR: 1.5%-2.4% by tenor; Equity: 15%-70% by market cap and economy; FX: 15%). Vega risk weights: uniform within risk class, calibrated to stressed implied volatility.

Step 3 -- Aggregation Within Bucket: Aggregate weighted sensitivities within each bucket using prescribed intra-bucket correlations (rho). K*b = sqrt( sum_i sum_j rho_ij * WS*i * WS_j ) where WS = weighted sensitivity, rho = intra-bucket correlation

Step 4 -- Aggregation Across Buckets: Aggregate across buckets using prescribed inter-bucket correlations (gamma). Capital = sqrt( sum*b sum_c gamma_bc * S*b * S_c ) where S_b = net bucket-level capital, gamma = inter-bucket correlation

Step 5 -- Three Correlation Scenarios: Calculate SBM under three correlation scenarios: (a) Medium correlations (prescribed rho and gamma) (b) High correlations (rho _ 1.25, gamma _ 1.25, capped at 1) (c) Low correlations (rho _ 0.75, gamma _ 0.75) SBM = MAX(SBM_medium, SBM_high, SBM_low)

Curvature Risk

Curvature risk captures the non-linear risk that delta sensitivities miss. Calculate by shocking each risk factor up and down by a prescribed amount, revaluing the portfolio, and computing the curvature charge: CVR*k = -min( V(x_k^up) - V(x_k) - s_k * delta*k, V(x_k^down) - V(x_k) + s_k * delta_k, 0 ) where s_k = prescribed shock size for risk factor k.

Component 2: Default Risk Charge (DRC)

DRC captures jump-to-default risk for credit and equity instruments in the trading book -- the risk of an issuer defaulting between now and the next rebalancing period.

DRC Calculation: DRC = sum*i ( LGD_i * Notional*i * RW_i ) after hedging benefit Risk weights by credit quality: AAA 0.5%, AA 2%, A 3%, BBB 6%, BB 15%, B 30%, CCC 50%, Default 100% Hedging benefit: long-short offset within same issuer and seniority; partial offset across issuers in the same sector using prescribed hedge benefit ratios.

DRC is additive to SBM -- no diversification benefit between DRC and SBM.

Component 3: Residual Risk Add-On (RRAO)

RRAO is a simple gross notional charge for instruments with exotic risks not captured by SBM or DRC:

• Instruments bearing exotic underlying risks (e.g., longevity, weather, natural disaster): 1.0% of gross notional
• Other instruments with residual risks (e.g., gap risk, correlation risk, behavioural risk): 0.1% of gross notional

Instruments subject to RRAO include: barrier options, digital options, Asian options, basket options with non-standard payoffs, variance/volatility swaps, correlation products, weather derivatives.

RRAO is additive -- no diversification with SBM or DRC.

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INTERNAL MODELS APPROACH (IMA)

IMA is approved on a desk-by-desk basis by the regulator. Any desk failing IMA eligibility reverts to SA