In practice, banks sometimes find it difficult to search for past stressed periods using all market variables because of a shortage of historical data for some of the variables. The FRTB, therefore, allows the stressed period calculations to be based on a subset of market variables and the results scaled up by the ratio of the expected shortfall for the most recent 12 months using all market variables to the expected shortfall for the most recent 12 months using the subset of market variables. (The subset of market variables must account for 75% of the expected shortfall.)

Things to Remember

• The Fundamental Review of Trading Book (FRTB) is a set of global regulations developed by the Basel Committee on Banking Supervision to address the shortcomings of the current market risk framework.
• Expected Shortfall (ES) is a risk measure that quantifies the average loss that could be expected in the worst case scenario, beyond a certain confidence level.
• Stressed periods are periods of market stress or turmoil where market variables experience significant fluctuations or extreme movements.
• FRTB allows banks to use a subset of market variables for stressed period calculations when historical data for all variables is not available.
• The ratio of the expected shortfall for the most recent 12 months using all market variables to the expected shortfall for the most recent 12 months using the subset of market variables must be calculated and used to scale up the results.