Solving the FRTB P&L Attribution Test Puzzle
This paper explains the FRTB IMA P&L attribution test, highlights the practical challenges involved, and gives recommendations on how to overcome these.
When the Fundamental Review of the Trading Book (FRTB) regulation comes into effect in December 2019, market risk capital will increase significantly. Compared to the standard sensitivity-based approach (SBA), the industry expects the internal models approach (IMA) to save an average of 40% in market risk capital. However, desks have to consistently pass two tests in order to get approval for FRTB IMA: back-testing and the P&L attribution test. Especially the P&L attribution test poses a huge challenge.
This white paper explains the P&L attribution test and highlights the practical challenges involved. It gives recommendations on how to overcome these challenges in order to ensure this test is passed consistently.
- FRTB IMA approval process
- P&L attribution test
- Review of latest regulations
- Inconsistency in BCBS D352
- Data alignment challenges
- Valuation adjustment challenges
- Performance vs accuracy
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