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As part of developing the Basel III framework, the Basel Committee on Banking Supervision initiated the Fundamental Review of the Trading Book (FRTB). Several years later, the outcome is a new set of global standards for calculating minimum capital requirements for market risk in the trading book. The EU plans to implement the standards for European credit institutions in the Capital Requirements Regulation/Directive (CRR/CRD) in the coming years.…

In this blog series, we investigate the impact of FRTB on the Danish bond market. In Scanrate (2020), we gave an overview of the standardised approach in FRTB (SA-FRTB) for bonds and analyzed the effects on capital requirements for non-callable fixed rate bonds (RTLs). In this blog, we move on to Danish floating rate mortgage bonds with and without a cap/floor. The value of floating rate notes depends on the fixing curve which is a separate risk factor in SA-FRTB.…

The EU's new CRD/CRR reporting requirements based on Basel's Fundamental Review of the Trading Book (FRTB) are approaching fast. This blog provides a high-level introduction to FRTB as well as the impact on capital requirements for Danish bonds. Callable fixed-rate mortgage bonds are affected the most by FRTB due to the recognition and capitalization of curvature and vega risk. The impact for non-callable bonds and floating rate notes is less significant which is probably good news for the banks.…

The new minimum capital requirements for market risk in the trading book set out by Basel’s Fundamental Review of the Trading Book (FRTB) are approaching fast. In this blog, we discuss FRTB’s impact for positions in non-callable mortgage-backed bullet bonds (so-called RTL bonds ) of which Danish banks hold about 400bn DKK in notional. We estimate capital requirements to increase somewhat less than the 30-40% target increase set by the Basel committee.…

During the summer of 2018, the Danish government has refinanced approximately DKK 8bn of callable loans by taking new loans funded in bonds from the recently established government guaranteed capital centers according to the Danish Transport, Construction and Housing Authorithy. How will these new bonds affect the Danish bond market, and how should they be priced compared to regular adjustable-rate mortgage bonds (RTL)?…

Key rate duration and convexity measure your portfolio’s risk towards changes in specific key interest rates. But when do the individual measures add up to your overall measures based on parallel shifts? And how well do the delta and gamma vectors represent the nature of the underlying bonds? We have done the maths and provide you with some (surprising?) answers…