FRTB: P&L Attribution Challenges
A year after Basel’s new Minimum Capital Requirements for Market Risk (commonly referred to as FRTB) were published, its P&L attribution tests remain a major issue for banks needing to implement it – both in the lack of clarity around it and the potential difficulty in passing these tests. The Frequently asked questions document released in January addresses a couple of issues – valuation adjustments and data timing differences – but does not clear up inconsistencies in earlier publications about how risk-theoretical P&L should be calculated.
The current industry consensus on this seems to be that the “harder” approach, using Risk models rather than Front Office models, will be favoured. This is backed up by the draft EU regulation, which differentiates between the institution’s “risk measurement model”, used for risk-theoretical P&L, and “pricing model”, used for hypothetical P&L. It does not reproduce the technical definitions of the attribution tests – these will be included in future “regulatory technical standards” – which may reflect the expectation that these tests will need to change to be practical. There is some optimism amongst banks around this, especially after the appointment of a new chair of the Basel group that drafted the rules, but any significant change at this stage seems unlikely. The danger is that banks that “wait and see” merely delay their implementation without getting a relaxation of the rules.
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