Treatment of Fixed Income Products with Optionality in Fundamental Review of the Trading Book (FRTB)

The Fundamental Review of the Trading Book (FRTB) is a set of regulations by the Basel committee, which is expected to be implemented by banks by 2022. The regulation targets market risk management in banking industry. According to FRTB, banks need to post extra capital against non-modellable risk factors, which could
account for 30% of total market risk capital requirement. Reducing the weight of non-modellable risk factors can greatly reduce the required capital and thus increase banks’ profitability. In this research, we will first examine three ways for the purpose of reducing non-modellable risk factors: simple rule-based proxies, statistical modelling approach and machine learning. We will also study another machine learning method based on Gaussian process regression. This method requires fewer parameters for calibration and hence less complex. Since the method is based on well-known probability distribution, it can be understood easily.

Faculty Supervisor:

Marcos Escobar Anel;Matthew Davison

Student:

Partner:

CIBC

Discipline:

Business

Sector:

Finance and Insurance

University:

The University of Western Ontario

Program: