Sensitivity-Based Approach (SbA) – Delta, Vega, Curvature
Design and implementation of the complete SbA calculation chain: Derivation of sensitivities, assignment to risk factors and buckets, aggregation under three correlation scenarios.
Precise market risk modeling for regulatory excellence under FRTB
FRTB Market Risk Modeling: Sensitivity-Based Approach, Risk Classes and Risk Factor Modeling
The Fundamental Review of the Trading Book requires fundamentally new market risk modeling: The sensitivity-based approach (SbA) calculates delta, vega and curvature risks across seven risk classes – GIRR, CSR (non-sec, sec CTP, sec non-CTP), equity, FX and commodity.
- 01Sensitivity-based approach: Delta, vega and curvature calculation per FRTB standards
- 02Full coverage of all risk classes – GIRR, CSR, equity, FX, commodity
- 03Risk factor modeling with regulatory-compliant simulation methods
- 04Expected Shortfall calculation and stress testing per Basel III requirements
11+Years of experience
120+Employees
540+Projects
ISO 27001certified
Market Risk Modeling Under FRTB – From Sensitivity Calculation to Capital Charges
The FRTB framework replaces the previous Value-at-Risk with Expected Shortfall and introduces the sensitivity-based approach (SbA) as the new standardized approach. Each trading position is evaluated based on its sensitivities to defined risk factors – delta for linear, vega for volatility, and curvature for non-linear risks.
We guide institutions from gap analysis of existing market risk models through methodological redesign to productive implementation of FRTB requirements.
6 service modules
What we take on for you
Bookable individually or as an end-to-end programme.
Risk Class Modeling – GIRR, CSR, Equity, FX, Commodity
For each of the seven FRTB risk classes, we define the risk factor structure, calibrate risk weights and implement regulatory correlation matrices.
Risk Factor Modeling and Simulation Methods
Modeling of modellable and non-modellable risk factors (NMRF), selection of suitable simulation methods and calibration to regulatory stress periods.
Expected Shortfall and Capital Charges
Calculation of Expected Shortfall across various liquidity horizons, integration into capital planning and ensuring SA-IMA consistency.
Residual Risk Add-On and Default Risk Charge
Implementation of RRAO for exotic underlyings and DRC for jump-to-default risks as supplementary capital components.
Model Validation, Backtesting and Re-Calibration
Ongoing validation processes with profit-and-loss attribution, desk-level backtesting and regular re-calibration of model parameters.
5 phases
Our Approach to FRTB Market Risk Modeling
We develop a methodologically sound and regulatory-compliant market risk modeling strategy that systematically meets all FRTB requirements for sensitivity calculation, risk factor modeling and capital charges.
Analysis of your current market risk architecture and FRTB readiness assessment across all risk classes
Definition of risk factor taxonomy for GIRR, CSR, equity, FX and commodity
Setup of SbA calculation methodology
Delta, vega, curvature per risk factor and bucket
Integration of residual risk add-on, default risk charge and correlation scenarios
Validation, backtesting and continuous calibration of model parameters
Your contact
Melanie Düring
Head of Risk Management
Our FRTB Market Risk Modeling Expertise
- 01Deep expertise in FRTB market risk modeling and regulatory-compliant capital calculation
- 02Proven methodology for Expected Shortfall calculation, risk factor calibration and model validation
- 03End-to-end approach from gap analysis through SbA implementation to ongoing model monitoring
- 04Hands-on experience with desk-level approval, PnL attribution and backtesting processes
Market Risk Modeling Excellence in Focus
Effective FRTB market risk modeling requires more than meeting minimum regulatory standards. A well-defined risk factor taxonomy, accurate sensitivity calculation and consistent aggregation create lasting capital advantages and audit resilience.
9 QUESTIONS, BRIEFLY ANSWERED
Frequently asked questions about FRTB Market Risk Modeling – Sensitivity-Based Approach, Risk Classes & Risk Factor Modeling
What is the sensitivity-based approach (SbA) under FRTB?
The SbA is the new standardized approach under FRTB for calculating market risk capital requirements. Trading positions are assessed using delta (linear), vega (volatility) and curvature (non-linear) sensitivities, risk-weighted and aggregated across correlation matrices in three scenarios.
What risk classes does the FRTB define?
Seven risk classes: GIRR (interest rate risk), CSR non-sec, CSR sec CTP, CSR sec non-CTP (credit spread risk), equity, FX (foreign exchange) and commodity. Each has its own buckets, risk weights and correlation parameters.
How does delta-vega-curvature calculation work?
Delta measures linear price sensitivity to risk factors. Vega measures volatility sensitivity. Curvature captures non-linear risks by comparing valuation changes under upward and downward shocks. All three are calculated separately per risk class and aggregated to the SbA result.
What distinguishes the standardized approach (SA) from the internal models approach (IMA)?
The SA uses regulatory risk weights and correlations. The IMA allows proprietary Expected Shortfall models but requires desk-level approval, risk factor eligibility test and PnL attribution testing. The SA always serves as a floor.
What are non-modellable risk factors (NMRF)?
NMRFs are risk factors without sufficient real market price observations. They are subject to a separate stress-scenario-based capital add-on and are critical for the total capital requirement under the IMA.
How are the three correlation scenarios applied?
Capital requirements are calculated under high, medium and low correlations. The scenario with the highest requirement is binding – ensuring both diversification and concentration risks are adequately captured.
What role does risk factor modeling play?
It determines how market prices, interest rates, spreads, volatilities and commodity prices are represented. Under the SbA, risk factors are prescribed by regulators; under the IMA, banks must demonstrate modellability.
What does the residual risk add-on (RRAO) cover?
The RRAO supplements the SbA capital requirement for instruments with exotic underlyings (1% add-on) or special payout profiles (0.1% add-on) on the gross notional value.
How does ADVISORI support FRTB market risk modeling?
From gap analysis through SbA calculation chain design and risk factor taxonomy to productive implementation. We calibrate risk weights, implement delta-vega-curvature calculations and establish validation processes.
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