Answer: FRTB requires that the stressed ES measure be used in determining market risk capital, rather than the VaR and stressed VaR measures that were used in Basel l and Basel ll.5, respectively.

The correct answer regarding the Fundamental Review of the Trading Book (FRTB) is D. The Basel committee has transitioned from the Value at Risk (VaR) and stressed VaR measures used in Basel I and Basel II.5 to the Expected Shortfall (ES) measure in FRTB. This change is part of an effort to improve the risk sensitivity of regulatory capital requirements and to better capture the tail risks associated with market movements. The ES measure is designed to estimate the potential loss that could be exceeded under stressed market conditions, which is considered a more robust measure compared to VaR. Option A is incorrect because FRTB does allow for market risk to be calculated at the trading desk level, contrary to the statement in the option. Option B is also incorrect. FRTB does not encourage banks to develop and rely on an internal models approach. Instead, it places less reliance on internal models and mandates the use of a standardized approach for calculating market risk capital, even for banks that have been approved to use an internal models approach. Option C is incorrect as well. FRTB does not standardize the liquidity horizon to 10 days for all risk factors. Instead, it introduces five different liquidity horizons that are more closely aligned with the liquidity horizons of various risk factors, which is an improvement over the previous 10-day horizons used in Basel I and Basel II.5.

Author: LeetQuiz Editorial Team