Elderlake Partners

04 · Market risk (FRTB)

Pt 3 Tit IV · Art 94, 104–106, 325 ff CRR

Purpose & history

Why expected shortfall

2008 falsified 10-day 99% VaR comprehensively: trading losses exceeded years of accumulated market-risk capital, driven by what VaR ignores — the tail's depth beyond the quantile, evaporating liquidity, and credit warehoused at trading-book charges. Basel 2.5 (2009) patched with stressed VaR and the IRC; the FRTB rebuilt.

VaR: where the tail starts ES 97.5%: how deep it goes, on average loss →

VaR reports the location of the tail; ES prices its average depth. Same book, very different incentives at the extremes.

The other four design corrections

  • Liquidity horizons 10–120d — you cannot exit HY spread risk at index-future speed; capital now knows that.
  • A policed boundary — Basel 2.5's arbitrage was moving assets to whichever book charged less.
  • Desk-level approval — bank-wide permission let one good desk carry many bad ones; PLAT and backtesting now test each desk quarterly.
  • A credible fallback — every bank runs the A-SA, so revoking a model is survivable, and the threat believable.

Thirty years, one timeline

1996
Market Risk Amendment: VaR becomes regulatory technology.
2008
Trading losses exceed a decade of trading capital. VaR's tail-blindness, illiquidity, boundary arbitrage — all at once.
2009
Basel 2.5: stressed VaR + IRC. Triples charges, fixes nothing structural.
2012–14
FRTB consultations: ES, liquidity horizons, boundary, desks.
2016 / 2019
FRTB standard, then the January 2019 recalibration (PLAT redesign, NMRF softening).
2021 / 2024
EU: reporting-only first — A-SA from 2021, IMA-scope from 2024.
2024 / 2025
Own funds deferred by delegated act: to 2026, then 2027. Competitiveness, not prudence.
Jun 2026
Third DA: no further delay possible → Art 495v multiplier + relief, 2027–29. In EP/Council scrutiny.
1 Jan 2027
FRTB own funds finally apply in the EU. UK IMA follows 2028.
end-2029
Multiplier expires — the second step-up.

Requirements

Everyone (from 2027)

Boundary policy & inventoryPresumptive-list mapping per instrument, deviation approvals on file, reclassification governance, IRT desk framework.
Reporting continuityFRTB figures reportable since 2021/2024; the own-funds switch must reconcile to that history.

A-SA banks

Sensitivity productionFront-office-to-risk pipeline at prescribed granularity, validated pricing models, curvature scenario capability.
DRC & RRAO dataIssuer hierarchies and seniorities mapped; exotic/residual instrument tagging owned and audited.

A-IMA banks — per desk, continuously

Desk architectureDefinitions with strategy, mandate, limits, independent P&L.
RFET evidenceReal-price sourcing (own trades, committed quotes, vendor pools): ≥ 24 obs/12m per factor with gap rules — a data-procurement function in itself.
PLAT & backtesting opsDaily HPL/RTPL, quarterly tests, amber-surcharge computation, fallback-to-A-SA procedures rehearsed.
NMRF frameworkIdentification, stress-scenario calibration, sign-off per non-modellable factor.
Model risk managementChange policy, annual validation, documentation to inspection standard.
Fallback economicsBoard-level view of the capital consequence of losing desks to A-SA — the number that disciplines everything above.

Calculations

SSA — scalars on CRR2 charges CRR2 SA: IR €4.0m, FX €1.0m → 4.0×1.3 + 1.0×1.2 = €6.4m → RWA-equivalent €80m
SbM delta — single equity position €10m large-cap equity, illustrative bucket RW 30% · s = €10m → WS = €3.0m → Kb = €3.0m → SbM delta = €3.0m; DRC on the name and RRAO (nil here) add. Diversification appears only with more names.
Art 495v multiplier — stylised FRTB OF €120m vs CRR2-IMA €80m → adversely affected bank scales toward the CRR2 level for 2027–29, running both stacks. Expiry end-2029: plan the step-up.

IMA aggregation — composition

IMCC avg €40m (last day €38m) · SES €15m · DRC €25m · mc = 1.7

mc×IMCC = €68m
SES €15m
DRC €25m

OF = max(38+15, 1.7×40+15) + 25 = €108m. The multiplied average binds, as it usually does; SES and DRC sit outside the multiplier — hedging IMCC does not shrink them.

Changes & sources

CRR2 → FRTB, the essentials

BeforeNow
VaR 99%, 10-day + stressed VaR + IRCES 97.5% stressed, liquidity horizons 10–120d, IMA-DRC
Bank-wide model approvalDesk-level approval, earned quarterly (PLAT, backtesting)
Intent-based boundaryPresumptive lists, reclassification lock, IRT desks
Old SA (building-block)Sensitivities-based A-SA + DRC + RRAO; SSA for small books
All risk factors modellableRFET; NMRFs charged via stress scenarios

Where the law lives

Art 325–325bp CRR; the three FRTB delegated acts (2024/2795, 2025/1496, June 2026 in scrutiny); RTS on PLAT, RFET/NMRF, backtesting; the EBA's August 2026 opinion on boundary/IRT and the 2027 start. UK: PS1/26 (IMA 2028). US: market risk confined to significant trading firms in the 2026 re-proposal.

Open items

  • Scrutiny outcome on the third DA (objection risk low, not zero).
  • A-SA benchmarking from 2027; AIMA benchmarking suspended.
  • End-2029 multiplier expiry — the second step-up behind the first.

Independent analysis by Elderlake Partners, as at August 2026. Not legal, accounting or supervisory advice.