FRTB Ongoing Compliance

Ongoing FRTB compliance under CRR III involves daily backtesting of expected shortfall models per Art. 325bf, regular P&L attribution tests (PLAT) to validate internal models, NMRF monitoring for non-modellable risk factors, and ongoing desk-level approval processes. Additionally, it includes regulatory change management for new EBA guidelines, national supervisory circulars and BCBS papers. IMA institutions must have these processes fully established by 1 January 2027.

Daily FRTB backtesting compares predicted risk values (VaR and expected shortfall) with actual trading results. Results are classified using the Basel traffic light system: green zone (0‑4 exceptions), yellow zone (5‑9 exceptions) and red zone (10 or more exceptions over 250 trading days). Exceeding thresholds may result in capital add-ons or loss of IMA approval for the affected trading desk.

Failure to meet ongoing FRTB requirements can lead to several consequences: the affected trading desk may lose IMA approval and must fall back to the less capital-efficient standardised approach (SA). Supervisory authorities can impose capital add-ons, initiate supervisory measures, or increase examination intensity. Additionally, deficiencies in the P&L attribution test or backtesting can trigger a reassessment of the entire model approval by the ECB.

The P&L attribution test (PLAT) examines whether the internal risk model sufficiently accurately explains the actual profit and loss of the trading desk. It compares the hypothetical P&L (based on the risk model) with the actual P&L. The PLAT uses two metrics: the Spearman correlation coefficient and the Kolmogorov-Smirnov test statistic. Trading desks that fail the PLAT must switch to the standardised approach.

Non-modellable risk factors (NMRF) are risk factors for which insufficient real market data exists to reliably model them internally. CRR III requires NMRFs to be separately identified, assessed and capitalised using stress scenarios. Ongoing monitoring includes regular review of data quality and availability, reclassification of risk factors when data conditions change, and calculation of separate capital requirements for NMRFs.

IMA institutions (Internal Model Approach) have significantly more extensive ongoing obligations: daily backtesting, quarterly PLAT execution, NMRF monitoring and desk-level approval procedures. SA institutions (Standardised Approach) primarily need to ensure correct application of prescribed risk weights, implement regulatory changes and keep their sensitivity calculations current. Both approaches require regulatory change management when new EBA or supervisory directives are issued.

For ongoing FRTB compliance, the following sources must be systematically monitored: CRR III (particularly Part 3 Title IV Chapters 1a-1b), EBA Regulatory Technical Standards and Guidelines on market risk calculation, the EBA Q&A database for interpretation questions, national supervisory circulars and guidance notes, BCBS papers (particularly d457 and subsequent revisions), and ECB publications on TRIM and Targeted Reviews of Internal Models.