Item 31.12 from FRTB's documentation states the following regarding risk factor eligibility for the expected shortfall model:

A bank must determine which risk factors within its trading desks that have received approval to use the internal models approach as set out in [MAR32] are eligible to be included in the bank’s internal expected shortfall (ES) model for regulatory capital requirements as set out in [MAR33].

From this paragraph, I understand that it is only after getting a desk approved for the use of IMA that the risk factors can be deemed eligible for the expected shortfall model.

How is it possible given that the internal model needs to be up and running so to pass the P&L attribution test and backtesting, which are both necessary in order to be approved?

I think I'm a bit confused regarding the steps involved in that process.


1 Answer 1


Desks approved for IMA will always need to run both internal models and SA calculations under Basel III, which is different to B2.5 where they can be on either internal models or SA. For getting IMA accreditation, there will need to be a period when a desk runs internal models in production to establish PLA evidence but would calculate capital under SA. Another example is when a desk is on IMA but its PLA status falls in the red zone, then they will have to calculate capital under SA until their PLA test is back into the green zone.


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