Teach on Udemy

Turn what you know into an opportunity and reach millions around the world.

Learn More

Your cart is empty.

Keep shopping

Fundamental Review of the Trading Book (FRTB)

Name: Fundamental Review of the Trading Book (FRTB)
Rating: 4.2 (42 reviews)

FRTB, SA vs IMA, Banking vs Trading Book, Expected Shortfall, P&L Attribution Test, NMRFs, Stress Testing, Liquidity

Created byTim Glauner

Last updated 7/2025

English

What you'll learn

Understand the FRTB Framework and Purpose
Calculate in Detail an FRTB SA Charge for a USD/SOFR Interest Rate Swap
Differentiate Between Trading and Banking Books
Explore the Standardized and Internal Models Approaches
Calculate and Manage Risk Sensitivities
Address Implementation Challenges
Evaluate the Impact on Capital Requirements
Perform Model Validation and Stress Testing
Develop Governance and Oversight Strategies

Course content

12 sections • 12 lectures • 2h 54m total length

FRTB Introduction 2.16:25
At the end of this section, students will be able to:

1. Define the Fundamental Review of the Trading Book (FRTB) and its purpose.
2. Explain how FRTB addresses shortcomings in previous market risk frameworks.
3. Describe the current status of FRTB and how the OCC, Fed and FDIC have been involved with FRTB.
4. Have a high level understanding of the two approaches to FRTB, the Standardized Approach and the Internal Models Approach.
5. Understand the categorization of books into Trading books and Banking books.
6. Discuss key implementation challenges for FRTB, such as data management and technology infrastructure needs.
7. Assess the impact of FRTB on financial institutions' capital requirements and business strategies.

FRTB Trading vs Banking Book 2.19:02
At the end of this section, students will be able to:

1. Differentiate between Trading Book and Banking Book.
2. Identify criteria for classifying instruments into Trading or Banking Books.
3. Understand the regulatory requirements for book classifications under FRTB.
4. Recognize the implications of misclassifying financial instruments.
5. Describe desk-level classification and its impact on capital requirements.
6. Explain the restrictions on transferring instruments between books.
7. Discuss additional aspects of both Trading and Banking Books, including risk exposures and capital treatment.
8. Comprehend the reporting requirements for Trading and Banking Desks.

FRTB Standardized Approach (SA) 2.112:57
At the end of this section, students will be able to:

1. Explain the purpose and structure of the Standardized Approach (SA) under FRTB.
2. Identify key components of SA: Sensitivities-based Method (SBM), Default Risk Charge (DRC), and Residual Risk Add-on (RRAO).
3. Calculate delta, vega, and curvature risks using given formulas.
4. Understand how to aggregate these risks across different risk classes using a correlation matrix.
5. Discuss the importance of data management and system capabilities in implementing FRTB-SA.
6. Evaluate challenges in real-time risk calculation and integration with legacy systems.
7. Apply strategies for managing capital efficiency through hedging and portfolio diversification.
8. Recognize differences between global standards and local regulatory requirements in FRTB implementation.

FRTB SA Sample Calculation for USD/SOFR Interest Rate Swap38:28
By the end of this section, students will be able to:
1. Understand and apply the calculation methodologies for risk-weighted assets (RWA) for market risks as per Basel III standards.
2. Perform detailed calculations for a 5-year fixed vs. USD/SOFR interest rate swap using Excel.
3. Construct interest rate curves and calculate zero rates for valuation and risk assessment.
4. Calculate trade-specific risk factor sensitivities by perturbing interest rates at various tenors.
5. Apply appropriate risk weights to sensitivities and compute weighted sensitivities.
6. Aggregate weighted sensitivities within a bucket using correlation matrices to determine delta capital charges.
7. Analyze the impact of different correlation scenarios on capital charges including high, medium, and low adjustments.
8. Determine the final FRTB capital charge based on maximum delta across considered scenarios.

Students will gain hands-on experience in calculating regulatory capital requirements under the FRTB framework, enhancing their skills in financial risk management applicable to banking sectors.

FRTB SA: From Excel Reconciliation to Python Code15:07
At the end of this section, students will be able to:

1. Recap main concept of Basel III FRTB requirements for GIRR delta capital.
2. Understand that Chatpgt 03 is able to convert complex Excel logic into Python code.
3. Review and understand detailed calculations in Python code.
4. Observe validation of Python outputs against spreadsheet results.
5. Apply the exercise to a single swap example from prior lectures.
6. Generate weighted sensitivities using Python functions.
7. Build cross-tenor correlation matrices in Python.
8. Compute GIRR FRTB charge using quadratic-form variance.

In summary, students will gain practical skills understanding the GIRR Delta algorithm in great detail. See the power of LLMs that generated the working Python code. Also, observe and understand that python code is often cleaner and less error prone than Excel spreadsheets for financial risk management tools.

FRTB Internal Models Approach 2.114:40
At the end of this section, students will be able to:

1. Explain the purpose and requirements of the Internal Models Approach (IMA) under FRTB.
2. Describe the process for regulatory approval of IMA models.
3. Identify key components of IMA including VaR, ES, NMRFs, and PLAT.
4. Calculate Value-at-Risk (VaR) and Expected Shortfall (ES) for a portfolio.
5. Discuss the significance of non-modellable risk factors (NMRFs) and their impact on capital requirements.
6. Understand the P&L Attribution Test and its role in maintaining IMA eligibility.
7. Evaluate model performance through backtesting and stress testing methodologies.
8. Recognize the challenges and governance requirements associated with implementing IMA.

FRTB IMA In Depth: Risk Factor Eligibility Test 2.19:04
At the end of this section, students will be able to:

1. Explain the purpose and importance of the Risk Factor Eligibility Test (RFET) in FRTB.
2. Distinguish between modellable and non-modellable risk factors.
3. Identify the minimum data requirements for a risk factor to pass RFET.
4. Describe different types of real price observations used in RFET.
5. Analyze examples of modellable and non-modellable risk factors.
6. Understand the capital implications of non-modellable risk factors (NMRFs).
7. Recognize how risk factors are categorized into different buckets for RFET purposes.
8. Discuss strategies to improve RFET outcomes and manage NMRFs effectively.

Students will gain comprehensive knowledge on managing risk factors under FRTB, focusing on improving RFET results and handling capital requirements efficiently.

FRTB IMA In Depth: Non Modellable Risk Factors 2.17:18
At the end of this section, students will be able to:

1. Define Non-Modellable Risk Factors (NMRFs) and their importance in financial risk management.
2. Identify criteria that qualify a risk factor as non-modellable under FRTB regulations.
3. Explain the process and significance of capital add-ons for NMRFs.
4. Describe various types of risk factors typically considered as NMRFs.
5. Analyze examples of NMRFs and understand the implications for banks' capital requirements.
6. Discuss the role of data systems in managing NMRF compliance.
7. Evaluate the impact of NMRFs on banks' overall risk management strategies.

This section equips students with a comprehensive understanding of NMRFs, enhancing their ability to manage financial risks effectively in a banking environment.

FRTB IMA In Depth: P&L Attribution Test 2.116:38
At the end of this section, students will be able to:

1. Explain the purpose and importance of the P&L Attribution Test in banking.
2. Describe how the P&L Attribution Test assesses a bank's FRTB risk models.
3. Identify the components compared in the P&L Attribution Test: Hypothetical P&L vs. Risk-Theoretical P&L.
4. Understand the metrics used in the test, including Spearman Correlation and Kolmogorov-Smirnov Test.
5. Interpret the results of the test using an FRTB traffic light system (Green, Amber, Red).
6. Recognize consequences for banks if they fail this test.
7. Discuss factors that affect performance on the P&L Attribution Test.
8. Suggest methods to improve test results and ensure compliance with IMA.

Students will gain comprehensive knowledge how P&L attribution test comes into play in FRTB IMA.

FRTB IMA In Depth: Liquidity Risk and Liquidity Horizons 2.113:33
At the end of this section, students will be able to:

1. Define liquidity risk within the FRTB framework.
2. Explain the concept of liquidity horizons and their importance.
3. Identify different liquidity horizons for various asset classes.
4. Analyze how liquidity horizons affect capital requirements in banks.
5. Discuss the impact of market stresses on liquidity and capital needs.
6. Apply knowledge of liquidity horizons to scenario analysis and stress testing.
7. Evaluate strategies for managing liquidity risk in trading books.
8. Understand regulatory challenges and compliance related to liquidity management under FRTB.

Students will gain a comprehensive understanding of how liquidity risk is taken into account under the FRTB guidelines, preparing them for effective risk management and regulatory compliance in professional banking environments.

Requirements

Basic Understanding of Finance
Very basic Familiarity with Statistical Methods
No programming experience required
Basis understanding of Excel using Formulas

Description

The first five lectures provide you, in just under an hour, a comprehensive and actionable understanding of the FRTB regulation, enabling you to confidently engage with finance professionals on this important and current topic. This course is a high-impact investment of your time, offering immediate and substantial benefits by distilling complex regulatory requirements into clear, expert-level insights.

Following this, the next five lectures will offer deep insights into the specific features of the Internal Models Approach (IMA). These lectures will cover essential tests, modelable and non-modelable risk factors, stress testing of Expected Shortfall analytics, as well as liquidity risk management, and how FRTB addresses liquidity risk using liquidity horizons.

The final lecture dives even deeper, summarizing a study published in June 2024 by ISDA and E&Y. The study analyzes the adoption of IMA at 26 large banks, discussing the most challenging aspects for banks, and offering recommendations to regulators on how adoption could be improved. A 10 minute podcast, AI generated, is also included.

Sign up for this Fundamental Review of the Trading Book (FRTB) masterclass to gain critical expertise in one of the most significant regulatory frameworks reshaping global finance. With regulators worldwide accelerating FRTB’s implementation, this course equips you with the knowledge and skills to navigate its complexities, optimize capital strategies, and ensure and discuss compliance. Whether you're a student, associate, seasoned professional or an aspiring finance leader, this course offers the practical insights and tools needed to stay ahead in today's rapidly evolving financial landscape. Don’t miss this opportunity to understand in detail the aspects surrounding the Fundamental Review of the Trading Book.

The urgency and importace of FRTB stems from the fact that global regulators, including the OCC in the U.S., have set firm deadlines for compliance, with the first phase of implementation slated for July 2025. This leaves financial institutions with little time to overhaul their risk management systems, adjust capital strategies, and ensure compliance with the new, more stringent requirements

Here are the ten most important things students will learn from the course:

FRTB Overview and Objectives: FRTB introduces a new market risk capital framework aiming to enhance the robustness of capital requirements, improve risk sensitivity, and reduce variability in market risk-weighted assets (RWA) across jurisdictions.
Trading Book vs. Banking Book: FRTB enforces a stricter boundary between the trading and banking books, requiring correct classification of instruments, which impacts capital requirements. Instruments in the trading book are exposed to market risk, while banking book instruments are typically held to maturity.
Standardized Approach (SA) and Internal Models Approach (IMA): FRTB provides two options for calculating capital requirements - SA, which uses predefined risk weights, and IMA, which allows banks to use their internal models but requires rigorous regulatory validation. Students will understand the operational trade-offs between these two approaches.
Calculation Walkthrough for FRTB SA on USD/SOFR vs. Fixed Interest Rate Swap: This lecture provides a comprehensive descriptions and the steps to calculating FRTB SA capital requirements for a USD/SOFR vs. Fixed Interest Rate swap. It includes detailed steps for risk factor identification, sensitivity generation, and aggregation into risk charge components. Supporting materials include an Excel file with detailed calculations and a presentation that explains each step in the process, ensuring practical understanding and application.
Python Implementation of FRTB SA Capital Charges: To bridge theory and practice, this lecture includes a complete Python program that replicates the SA calculation for GIRR (General Interest Rate Risk) for the previous Excel example. We step thorugh the source code which facilitates the complete understanding of the SA algorithm.
Non-Modellable Risk Factors (NMRFs): NMRFs are risk factors that fail the Risk Factor Eligibility Test (RFET) due to insufficient real price data. These risk factors require additional capital through stress testing, increasing a bank's capital requirements.
Risk Factor Eligibility Test (RFET): RFET is essential for determining whether a risk factor is modellable. If a risk factor fails RFET (e.g., lacks sufficient price observations), it is classified as an NMRF, leading to higher capital charges.
Profit and Loss Attribution Test (PLAT): PLAT ensures that a bank's internal risk models accurately reflect the daily P&L movements. Passing PLAT is critical for continued eligibility to use the IMA. This test compares hypothetical P&L from the model with actual market P&L, using Spearman Correlation and the Kolmogorov-Smirnov tests.
Liquidity Risk and Liquidity Horizons: FRTB incorporates liquidity horizons to measure the time needed to hedge or exit a position under stressed conditions. Different asset classes have varying liquidity horizons, which directly impact capital requirements.
Challenges of IMA Adoption: According to the ISDA and E&Y paper, many banks face challenges in adopting IMA, including regulatory uncertainty, high operational complexity, and capital volatility, particularly from NMRFs and the PLAT. This has led several banks to favor the Standardized Approach despite the theoretical capital benefits of IMA.
Computational and Data Demands: FRTB’s implementation introduces significant computational demands, especially for banks using IMA, due to the need for high-quality data, daily backtesting, and stress testing. Managing these requirements efficiently is a key implementation challenge.
Capital Impact of FRTB: FRTB’s rules are expected to increase capital requirements, particularly for illiquid assets and non-modellable risk factors. The ISDA and E&Y paper highlights the mitigation strategies banks can adopt to manage capital charges, including reforms to the PLAT and adjustments to NMRF capital add-ons.

The course agenda provides a comprehensive understanding of FRTB, equipping participants with practical tools and strategies to enhance their expertise, optimize regulatory compliance, and drive impactful contributions within their organizations' risk management and capital efficiency practices.

Reconciled SA examples in Excel and Python brings the theory close to the practical applications and deepens the understanding of the material.

Who this course is for:

Undergraduate Finance Students
MBA Students
Finance Professionals
Risk Analysts
Quantitative Analysts
Consultants
Regulatory Compliance Officers
Actuaries interested in Capital Markets risk management
Continuing Education for Finance Professionals

Fundamental Review of the Trading Book (FRTB)

What you'll learn

Explore related topics

Course content

FRTB Introduction 2.11 lecture • 6min

FRTB Trading vs Banking Book 2.11 lecture • 9min

FRTB Standardized Approach (SA) 2.11 lecture • 13min

Calculation Walkthrough for FRTB SA on USD/SOFR vs. Fixed Interest Rate Swap1 lecture • 38min

FRTB SA: From Excel Reconciliation to Python Code1 lecture • 15min

FRTB Internal Models Approach 2.11 lecture • 15min

FRTB IMA In Depth: Risk Factor Eligibility Test 2.11 lecture • 9min

FRTB IMA In Depth: Non Modellable Risk Factors 2.11 lecture • 7min

FRTB IMA In Depth: P&L Attribution Test 2.11 lecture • 17min

FRTB IMA In Depth: Liquidity Risk and Liquidity Horizons 2.11 lecture • 14min

Requirements

Description

Who this course is for: