The incoming regulation on Market Risk, known as the Fundamental Review of the Trading Book (or FRTB) raise many challenges for Financial Institutions to implement it on time. One of the main changes, and posing particular operational complexity, is the possibility of applying for an internal model at single trading DESK level.
Considering no diversification is allowed between the internal model and the standardized approach, the question on which desks to allocate to which approach is particularly cumbersome.
We propose a five step approach to find an optimal mix:
This approach allows to find general tendencies which are unrelated to the specific composition of the portfolio at the time of the analysis, and it is much quicker than trying different (if not all) the possible combinations.
If you would like to read more in detail about our approach, you can download our paper.