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 particular element of complexity is the possibility of applying for an internal model on a single desk basis, without diversification allowed between the 2 approaches.

This paper analyses how the two approaches benefit from the diversification of a portfolio in terms of capital charge reduction.

We set up a very well diversified portfolio of swaps, cross-currency swaps and swaption and analyse how diversification benefits in the different approaches and for the different asset classes (with or without optionality). A quick analysis of diversification behaviour between the approaches is also presented.

Finally, we propose a summary of general guidelines to optimise the capital charge which can be extended to additional products or asset classes.

Read more in detail about our approach in our White Paper.

  • Portfolio diversification in the fundamental review of the trading book 516.87 KB Download

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  • Dr. Robert Bosch
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