The FRTB (Fundamental Review of the Trading Book) is the new market risk regulation to be implemented by global banks by 2022. It is likely to also become the standard for the majority of financial institutions (even if non-banks) as they all seek to match to that new standard in the banking system. The rules of the FRTB are not particularly complicated to state, but some have deep and unexpected consequences. We present some such interesting issues underlying the FRTB framework, including backtesting in the internal models method (IMA), and foreign exchange in the standardized approach (SA). We demonstrate the mathematical issues and offer rigorous yet simple solutions.

Hany Farag is Senior Director and Head of Risk Methodology at CIBC. Prior to his current position he was a partner at Eastmoor Capital Partners, LLP; Managing Director and Head of FX Statistical Arbitrage at CIBC; and Head of Quantitative Research at OANDA Corporation. Prior to his industry positions he was a Postdoctoral Fellow at Caltech and at Rice University. He holds a PhD in Mathematical Analysis from Yale, a MS in Theoretical Physics from Yale, and a BSC in Electronics and Communication Engineering from Ain Shams.