Market Risk

Deutsche Bank
Risk
The New Market Risk Framework

A
Approaching
hi th
the d
deadline
dli
European Business School

School, Regents
Regent s College Chapter Meeting - GARP
Adolfo Montoro
Head of Traded Market Risk Economic Capital Methodology
October 26th 2011
For internal use only
Agenda
Agenda Item
Topics discussed
Pages
Overview
Historic development of the regulation
M k t developments
Market
d
l
t
The key driver: assessing the performance of the VaR
model and market risk measures during the financial
crisis
- From 4 to 16
Market risk modelling Part a
Overview of significant recent regulatory guidance

Changes to VaR
Specific Risk
Market risk modelling Part b
Introduction of Stressed VaR

Incremental Risk Charge
Comprehensive Risk Model
Calculation of the capital

requirements
Changes to the market risk capital algorithm
Challenges ahead
Interpretative Vs Implementation issues

The relationship between banks and regulators
Approaching the deadline
- From 30 to 32
Feedbacks from QIS
Review of Quantitative Impact Studies
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
Adolfo Montoro The New Market Risk Framework: Approaching the deadline
26th October 2011
Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 32
Feedbacks from QIS
- From 34 to 35
The development of a new market

risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
The development of a new market risk framework

Overview Regulatory
g
yg
groups
Trading Book Group
Task Force on Market Risk
Basel Committee on Banking Supervision
European Banking Authority
Sub-group of the Policy Development Group
Sub-group of the Standing Committee on
Co-chaired
Co chaired by US Board of Governors of the
Regulation and Policy
Federal Reserve System (Mrs Norah Barger) and UK FSA

(Mr Alan Adkins)
Chaired by French ACP (Mr Stphane Boivin)

Work
W k plan,
l
d i d ffrom CRD III iimplementation,
derived
l
t ti
ffocuses
mainly on...
Supports PDG objectives

Identify and review emerging supervisory issues; and,
Where appropriate, propose and develop policies that promote
a sound banking system and high supervisory standards
These developments should be finalized by the end of

2011
Work performed
Guidelines on Stressed VaR

Guidelines on IRC
Revised Market Risk Framework (July 2009), IRC

Guidelines (July 2009) and CRM Stress Test
Requirements (February 2011)
TBG Impact Studies
Dialogue with industry associations and firms
Interpretative issues (July 2011, last version)
Fundamental Review of the Trading Book (ongoing)
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26th October 2011

Overview Evolution of the framework
January 1996 - Amendment to the Capital Accord to incorporate market risks
Introduction of market risks in the 1988 Accord

Revised in September 1997
Removal of the 50 % floor on specific risk
Qualitative and quantitative requirements
Specific risk surcharge aiming at event and default risks
Revised in July 2005

Clarification of the trading book definition
Prudent valuation
Alignment trading book and banking book requirements for standardized specific risk (incl. securitisation
deductions)
Inclusion of event risk
Incremental charge for default risk
Pillar II - stress testing requirements
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Overview Evolution of the framework ((contd))
In September 1997, reiterated and reinforced in July 2005
Weaknesses of VaR methodology

Fat tails
Changes in correlations and volatilities
Intra-day
Intra day risks
Extreme market circumstances (event risk)
Increasing
g number of credit risk-related p
products in the trading
g book ((CDSs,, CDO tranches...))
Default and jump-to-default risks are increasing
Risks proved difficult to apprehend with VaR
Increasing number of structured products

Less liquid positions
Correlation risk
Expected increase in credit and liquidity risk held in the trading book
Initial response = a specific risk floor superseded by a set of multipliers ; then, improvements of the
framework, including IDRC (see July 2005)
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Overview Evolution of the framework ((contd))
October 2007 - consultation document - Guidelines for Computing Capital for Incremental Default Risk in the Trading Book
Default Risk only

Requirement derived from paragraphs 718(xcii) and 718(xciii) of the Basel II Framework (June 2006
comprehensive version)
Implementation by 1 January 2010 (for grandfathered firms)
meanwhile
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Market developments
When extreme situations materialize
Higher delinquency rates have lead to a repricing...
Increased risk aversion and the effects on liquidity
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2010 DB Blue template
26th October 2011

Market developments ((contd))
Increased risk aversion and the effects on liquidity...
the shorter, the better
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Increased tensions in the banking system...
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Increased tensions in the banking system...
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The keyy driver: assessing
g the performance of the VaR model and market risk
measures during the financial crisis
The situation confirmed most of the observations made in July 2005 !!
Credit Risk exposure increased relative to other exposure
Credit Risk related risk factors became (more) material (e.g. Bond/CDS Basis, Correlation-Risk)
Underestimation of migration risk
Misapprehension of default and jump-to-default risks
Modelling shortcuts proved incorrect - misuse of proxies in the pricing and risk measurement of securitisation
products... they are not bonds !
Misapprehension of correlations and volatilities
Misapprehension of liquidity
Number of regulatory Backtesting-Outliers increased significantly

120 Outliers for 15 banks with internal model approval in Germany in 20081
In general a significant increased of backtesting outliers has been observed in all BCBS member countries starting
from July 2007
1. Data from BaFin annual report 2009 published April 2010
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The keyy driver: assessing
g the performance of the VaR model and market risk
measures during the financial crisis (contd)
The quality of prediction has to be tested on a daily basis, e.g. checking the forecast accuracy of the model
statistically
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Overview of significant
g
recent regulatory
g
yg
guidance
July 2008 First Consultation
Modification of the qualitative/quantitative criteria for

internal models
January 2009 Second Consultation
Stressed VaR
Standardized specific risk for equity positions
Prudent valuation - illiquid positions

Securitisation treatment
IRC
All price risks

3 different floors for the liquidity horizon
Default and migration by 1 January 2010
All price risks by 1 January 2011
Additional disclosures
IRC
Default and migration risks
1 floor of 3 months for the liquidity
liq idit horizon
hori on
31 December 2010
February 2011 Update
July 2009 Final documents
Exception for correlation trading activities ("Maximum

of..."; Comprehensive Risk Measure)
Initial deadline : 31 December 2010
Announced in a June 2010 BCBS press release

New deadline : 31 December 2011
Two-year transition period for the treatment of
securitisation positions ("Maximum of...")
8 % floor for the CRM
Stress testing guidance for CRM
The path was paved out

July 2011 Interpretative Issues
Provides clarifications
guidelines
id li
Regularly updated
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26th October 2011
to
the
revisions
and
IRC
14

g
recent regulatory
g
yg
guidance ((contd))
Revised Market Risk Framework
Independently of the inclusion of the related positions in the VaR & SVaR
** No adjustment for double counting with other risk measures

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15

g
recent regulatory
g
yg
guidance ((contd))
Regulatory
Changes
All positions
affected
ff t d by
b
Stressed VaR
AND by
Incremental Risk
Charge (IRC)
All Global Markets and Global Banking positions

All trading book positions
All trading book positions sensitive to credit

migration
i
ti
and
d default
d f lt risk
i k
Securitisation
products
OR by
Securitisation
charge
OR by
b
Comprehensive
Risk Model (CRM)
charge (s.t.floor)
Deutsche Bank
Risk
Hedges in
correlation
books
N-th to
ReSecuritisation default
products
products
Correlation Trading
g Portfolio
(CTP)
NTD**
LSS*
CDO^2
* LSS : Leveraged Super senior trades ** NTD : Nth-to-Default credit derivatives
26th October 2011
16
Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 32
Feedbacks from QIS
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
17

Changes
g to VaR
Internal Model Approach - Generalities
Qualitative & quantitative criteria1

Risk factors
Factors deemed relevant in pricing function should be included in VaR model (otherwise justification to Supervisor)
Non-linearities for options and other relevant products (e.g. mortgage-backed securities, tranched exposures or n-th-todefault credit derivatives)
Correlation risk
Basis risk (e.g. between credit default swaps and bonds)
Proxies used should show a good track record for the actual position held (i.e. an equity index for a position in an
individual stock)
Scaling methodology (e.g. square-root of time) for the holding period (1-day to 10-day) is allowed but must
be justified periodically to the supervisors
Use of weighting schemes is more flexible as long as the resulting capital requirements is not reduced
Update of data sets should be made, at least, on a monthly basis (process allows more frequent updates)
Hypothetical (or clean) backtesting is made mandatory for validation
Stress Testing (use of more recent examples for Stress testing scenarios)
1.
CRD III requires in addition reverse stress testing
2
2.
CRD III requires

i
i tit ti
institutions
t calculate
to
l l t overshootings
h ti
consistently
i t tl on the
th basis
b i off hypothetical
h
th ti l (clean)
( l
) and
d actual
t l (dirty)
(di t ) back-testing.
b k t ti
Th plus-factor
The
l f t is
i determined
d t
i d by
b the
th higher
hi h off the
th
number of overshootings under hypothetical and actual changes in the value of the portfolio.]
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Specific Risk
Internal Model Approach Specific Risk
All material components of price risk must be captured

Surcharge models are no longer allowed
Specific risk of equity risk positions
Model event risk (e.g.
(e g merger break-ups/takeovers)
break ups/takeovers) at 99%,
99% 10 day horizon
For securitisation positions and n-th-to-default credit derivatives

Specific risk capital charge is based on the standardised method
Positions may be included in VaR but a standardised charge is required anyway
Limited exception for correlation trading portfolio
Comprehensive Risk Measure
Floor equivalent
q
to 8 % of the standardised method
For traded debt instruments (interest rate risk positions)

Must be completed
p
by
y an incremental capital
p
charge
g for default and migration
g
risk
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19
Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 26
Feedbacks from QIS
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
20

Stressed VaR
Internal Model Approach New charges
Intended to replicate a value-at-risk calculation that would be generated on the banks current portfolio if the
relevant market factors were experiencing a period of stress
Applied to all positions covered under VaR - Consistent with the VaR (99%, 10 days) for the current portfolio
Model inputs calibrated to historical data
Continuous 12-month p
period of significant
g
financial stress
Relevant to the banks portfolio
Approved by the supervisor
Regularly reviewed
No particular technique is prescribed for VaR (i.e. parametric, historical or Monte Carlo); hence, different techniques might be
used to deliver a SVaR
For example, banks should consider applying anti-thetic data, or applying absolute rather than relative volatilities to deliver an
appropriate stressed value-at-risk1
At least, a weekly calculation

Capital requirement
Expressed as :
"sVaRavg"= average SVaR number over the last 60 business days (i.e. 12 results)
Multipliers (mc and ms ) are set by supervisors, minimum 3 plus [0 - 1] depending on the backtesting results based on the VaR (not
the SVaR)2
1.
This is not specified in the CRD III
2.
CRD III requires the plus-factor being based on both hypothetical and actual backtesting
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g
Who?
Banks that model specific risk for traded debt instruments (interest rate risk positions)
If not met,
met standardised method
If met, default and migration risks could be excluded from VaR/SVaR to avoid double counting
What?
Default and migration risks
All positions subject to a capital charge for specific interest rate risk, BUT
Not securitisation positions nor n-th-to-default credit derivatives (even if hedges)
Subject to supervisory approval, all listed equity positions and derivatives positions based on listed equities, consistently
with internal risk management framework
Not CRM hedges, if applicable
How?
No prescribed methodology
Soundness standards comparable to IRB (99,9 % ; 1 year)
Constant
C
t t level
l
l off risk
i k assumption
ti
Rebalancing positions thereby maintaining initial risk level (i.e. equivalent risk characteristics than original position)
Rebalancing frequency is driven by the liquidity horizon of a given position
Banks may assume a 1-year constant position, if applied consistently
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Incremental Risk Charge.Detailed
g
g
guidelines
Soundness of standard
Comparable to that of the internal-ratings based approach for credit risk as set forth in this Framework (99,9%, 1 Year),
under the assumption of a constant level of risk,
risk
and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging, and optionality
Constant level of risk

The constant level of risk assumption implies that a bank rebalances its trading positions over the one
one-year
year capital horizon in a
manner that maintains the initial risk level
This means incorporating the effect of replacing positions whose credit characteristics have improved or deteriorated over the
liquidity horizon with original positions
Soundness
S
d
off standard/Constant
d d/C
l
level
l off risk
i k
The frequency of the assumed rebalancing must be governed by the liquidity horizon
The liquidity horizon represents the time required to sell the position or to hedge all material risks covered by the IRC model in a
stressed market
A bank can assess liquidity by position or on an aggregated basis ((buckets)
buckets )
The liquidity horizon for a position or set of positions has a floor of three months
The liquidity horizon is expected to be greater for positions that are concentrated
A non-investment-grade position is expected to have a longer assumed liquidity horizon than an investment-grade position.
A bank may elect to use a one
one-year
year constant position assumption
Correlation/Diversification/Concentration
A banks IRC model must include the impact of clustering of default and migration events (-> correlation/dependence within IRC)
Diversification between default or migration
g
events and other market variables is not reflected
Issuer and market concentrations must be reflected. issuer and market concentrations
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Incremental Risk Charge.Detailed
g
g
guidelines ((contd))
Modelling
Netting only allowed if long and short refer to the same financial instrument
Significant basis risks has to be captured
Risk because of a maturity of the instrument shorter maturity than the liquidity horizon has to be captured
Residual risks resulting from dynamic hedging strategies must be reflected
Optionality must be captured
Validation
Model assumptions and inputs must be regularly validated (LH, CH, correlation, )
Back testing will not be possible. Accordingly, validation of an IRC model necessarily must rely more heavily on indirect methods
including but not limited to stress tests, sensitivity analyses and scenario analyses
Banks should develop relevant internal modelling benchmarks
Use test
Model assumptions and inputs must be regularly validated (LH, CH, correlation, )
Back testing will not be possible. Accordingly, validation of an IRC model necessarily must rely more heavily on indirect methods
i l di but
including
b t nott limited
li it d to
t stress
t
t t sensitivity
tests,
iti it analyses
l
and
d scenario
i analyses
l
Banks should develop relevant internal modelling benchmarks
Diverging internal approaches

Demonstrate that the approach does not results in a lowered capital charge
CRD III foresees an annual review by competent authorities
Weekly Calculation
Capital requirement = Max.
Max [IRCt-1 ; IRCAVG],
] where IRCAVG equals the institution
institutions
s 12 weeks average measure of IRC
(or 12 observations)
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Who?
Banks that model specific risk for interest rate risk positions
Banks active in buying and selling correlation trading products
If not met, standardised method for correlation trading portfolio
What?
All price risks
All positions subject to the correlation trading portfolio definition
CDR III : including any positions that are jointly managed ( = hedges) with positions of the correlation trading portfolio those positions are then excluded from IRC
How?
No prescribed methodology
Same principles as for IRC (99,9 % ; 1-year ; constant level of risk assumption ; adjusted for liquidity, concentrations, etc.)
Minimum risk coverage
Cumulative risk arising from multiple defaults, including the ordering of defaults, in tranched products.
Credit spread risk, including the gamma and cross-gamma effects
Volatility of implied correlations, including the cross effect between spreads and correlations.
Basis risk, including both the basis between:
the
th spread
d off an index
i d and
d those
th
off its
it constituent
tit
t single
i l names
the implied correlation of an index and that of bespoke portfolios
Recovery rate volatility
To the extent the comprehensive risk measure incorporates benefits from dynamic hedging, the risk of hedge slippage
and the potential costs of rebalancing such hedges
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Comprehensive Risk Model How? ((contd))
Additional conditions
Sufficient market data (fully captures the salient risks of exposures)

Demonstrate (e.g.
(e g backtesting) appropriate explanation of the historical price
variation of these products
Ensure positions separation between those positions subject to CRM approval
and other positions
Stress scenarios ((cf. additional g
guidance introduced in February
y 2011 version))
Predefined scenarios
Scope : default rates, recovery rates, credit spreads, and correlations
At least, weekly run
At least, quarterly reporting to supervisors (possible capital add-ons)
Weekly calculation
Capital requirement
Max. [CRMt-1 ; CRMAVG], where CRMAVG equals the institutions 12 weeks
average measure of CRM (or 12 observations).
Floor = 8 % of standardised method for correlation trading portfolio
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Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 32
Feedbacks from QIS
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
27
Calculation of the capital requirements

Changes
g to the market risk capital algorithm
g
Current Framework
The Market Risk capital charge is defined as the highest of

Its previous days value-at-risk number (VaRt-1 ) and
The average of the daily value-at-risk
value at risk measures on each of the preceding sixty business days (VaRavg) multiplied
by a multiplication factor (m)
plus
The previous days Specific VaR component (VaRSpec,t-1)
c MR ,Old maxVaRt 1 ;VaRavg * m VaRSpec ,t 1 c MR ,Tot c MR , Spec

Upcoming Framework
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Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 32
Feedbacks from QIS
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
29
Challenges ahead
Interpretative Vs Implementation Issues
Interpretative
Implementation
Stressed VaR
Stressed VaR
Anti-thetic and applying absolute rather than relative

volatilities?
Stress-period market data availability for new products /

risk factors
Varying stress periods due to changes in the portfolio
IRC&CRM
Sovereign bonds to be included in the IRC? -> YES

Extend IRC to CRM for one single
g calculation?
One single integrated CRM model?
Assuming multivariate normal distributions or normal
copula?
VaR specific risk necessary for CRM covered positions?
Standardised Measurement Method

Netting, basis of assessment and Max-Loss principle
Other issues
Updates if and when additional interpretive issues
arise
IRC & CRM

Definition of regions
g
and sectors
Relevance for bank portfolio vs. availability of
data
Calculation of short term migration matrices
Continuous (generator matrix) vs. discrete (cohort
method) time methods
Instrument Valuation
Modelling positions maturing before the end of
the liquidity horizon
IRC
C is
s a hypothetical
ypot et ca risk
s measure,
easu e, ta
takes
es into
to
account only a limited number of RF and
therefore explains only parts of the price variation
CRM
No industry standard
Model complexity
Identification of positions / treatment of hedges (->IRC)
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Challenges ahead
g
Have we enjoyed it so far?
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Challenges ahead
Approaching
g the deadline
A we ready?
Are
d ?
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Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 32
Feedbacks from QIS
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
33
Feedbacks from QIS

TBG-QIS 2009:
Excluding the so-called correlation trading portfolio, the study concludes that the changes to the market
risk framework will increase average trading book capital requirements by two to three times their current
levels, although the Committee noted significant dispersion around this average
TBG-QIS 2009/2010: Adjustments to the Basel II market risk framework announced by the Basel Committee (18
June 2010):
As a result of these revisions, market risk capital requirements will increase by an estimated average of
three to four times for large internationally active banks
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Feedbacks from QIS

Changes in risk-weighted assets
- Table below presents the change in risk-weighted
assets attributable to the introduction of Basel III and
separated into the following items:
Changes in risk-weighted assets in the trading book

- Table below shows the impact of the revised trading
book capital charges on overall RWAs
- SVaR results in an average increase in overall capital
requirements of 2.6%. However, there is significant
dispersion of the increases across Group 1 banks with
a maximum of 51.8% for one bank in the sample
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Changes in trading book-related capital charges

relative to current market risk requirements
- Across the sample of 61 Group 1 banks providing data,
the SvaR was on average 248.7% of the VaR provided
by firms for a non-stressed period, typically the period
ending 31 December 2006.
- This ratio ranged from as low as 86.7% to a high of
814.9%, with a median of 207.2% and a standard
deviation of 141.7%.
- Some additional summary statistics regarding the new
trading book capital requirements compared to current
market risk capital requirements are included in the
table below
9. Source BCBS (2010)
26th October 2011
35
Feedbacks from QIS

Changes in risk-weighted assets
- Table below presents the change in risk-weighted
assets attributable to the introduction of Basel III and
separated into the following items:
Changes in risk-weighted assets in the trading book

- Table below shows the impact of the revised trading
book capital charges on overall RWAs
- SVaR results in an average increase in overall capital
requirements of 2.6%. However, there is significant
dispersion of the increases across Group 1 banks with
a maximum of 51.8% for one bank in the sample
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Changes in trading book-related capital charges

relative to current market risk requirements
- Across the sample of 61 Group 1 banks providing data,
the SvaR was on average 248.7% of the VaR provided
by firms for a non-stressed period, typically the period
ending 31 December 2006.
- This ratio ranged from as low as 86.7% to a high of
814.9%, with a median of 207.2% and a standard
deviation of 141.7%.
- Some additional summary statistics regarding the new
trading book capital requirements compared to current
market risk capital requirements are included in the
table below
9. Source BCBS (2010)
26th October 2011
36
Agenda
Agenda Item
Topics discussed
Pages
Overview
M k t developments
Market
d
l
t
crisis
- From 4 to 16

Changes to VaR
Specific Risk


requirements
Challenges ahead

- From 30 to 32
Feedbacks from QIS
- From 34 to 35
Th d
The
development
l
t off a new market
k t
risk framework
Conclusions & Q&A
Deutsche Bank
Risk
- From 18 to 19
- From 21 to 26
- 28
- 39
26th October 2011
37
Conclusion - Q&A
Wrapping
g Up
New market risk framework as imperfect solution with a noble scope

Lacking intellectual consistency
Citiboys would have preferred a simpler solution
Potential damages for some trading activities
Weakening the importance of VaR for capital management purposes
Changing shape for risk management profession
Swelling costs for financial institutions
Any questions?
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38
Appendix 1
Metrics for calculating
g regulatory
g
y capital for market risk
The regulatory framework distinguishes between general and specific market risk:
Specific market risk relates to the idiosyncratic risk affecting exposures to individual issuers
General market risk relates to the systematic risk affecting the overall market
The total market risk of a (portfolio of) position(s) is the sum of its idiosyncratic and systematic components
General Market Risk
Specific Market Risk
Ordinary Trading Book

Positions
VaRG + S-VaRG
VaRS + S-VaRS (equity
Linear Traded Credit

Products (CDS, Indices)
VaRG + S-VaRG
VaRS + S-VaRS+ IRC
Securitisation Positions and

Nth-to-default Credit
Derivatives
VaRG + S-VaRG
Market Risk Standard

Approach
Correlation Trading Portfolio
VaRG + S-VaRG
CRM
Deutsche Bank
Risk
issuer and prepay risk)
26th October 2011
39
Appendix 2
Specific risk: EQUITY
Preferential treatment for liquid equity positions removed
8% specific risk capital charge for all equity positions
Specific risk: (RE-) SECURITISATIONS

Standard risk weights according to banking book regulation
SFA, concentration measure or deduction for unrated positions
Supervisory Formula Approach based on PDs and LGDs for all underlying exposures derived from IRBA or from IRC
Capital requirements for long and short positions

Max (long, short) for a two year transition period
Specific risk: CORRELATION TRADING PORTFOLIO

Definition correlation trading portfolio
Max (long, short) on a permanent basis
Deutsche Bank
Risk
26th October 2011
40
Appendix 2 - Securitisations
Standardised approach
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Risk
26th October 2011
41
Appendix 2 The correlation trading portfolio

Securitisations and n-th-to-defaults that meet the following criteria:
All reference entities are single-name products, including single-name credit derivatives, for which a liquid two-way
market exists. This will include commonly traded indices based on these reference entities
A two
two-way
way market is deemed to exist where there are independent bona fide offers to buy and sell so that a price
reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined
within one day and settled at such price within a relatively short time conforming to trade custom
No resecuritisations and no derivatives of securitisation exposures that do not provide a pro-rata share in the
proceeds
d off a securitisation
i i i tranche
h ((e.g. options
i
and
d LSS)
Positions which reference an underlying that would be treated as a retail exposure, a residential mortgage
exposure or a commercial mortgage exposure under the stan-dardisedapproach to credit risk are not included in
the correlation trading portfolio
portfolio. Positions which reference a claim on a special purpose entity are not included
either
Hedges which are neither securitisation exposures nor n-th-to-default credit derivatives and where a liquid two-way
market as described above exists for the instrument or its underlyings may be included
Deutsche Bank
Risk
26th October 2011
42
References
The Turner Review: A regulatory response to the global banking crisis (2009)
Results of the comprehensive quantitative impact study. BCBS (2010)
Revisions to the Basel II market risk framework. BCBS (2010)
Fear drives rethink of value-at-risk models. (Dominic Elliott). Efinancial News (2010)
An empirical approach for determining the stressed time window. (Adolfo Montoro) Internal document. Deutsche Bank (2010)
Stress Value-at-Risk. (Adolfo Montoro) Internal document. Deutsche Bank (2010)
Stressed Value-at-Risk (SVaR) Overview. (Adolfo Montoro). Internal Document. Deutsche Bank (2010)
Stressed VAR questioned by risk managers..Mark Pengelly. Risk.net (2010)
Message from the academic literature on risk measurement for the trading book. BCBS (2011)
Comments to Consultative Document Revisions to the Basel II market risk framework. BCBS (2009)
Note on Stressed VaR. (Axel Kunde). Internal Document. Deutsche Bank
Regulatory developments and timeline for implementation Mark Peters. Banque Nationale de Belgique
Regulatory developments and timeline for implementation Karsten Stickelmann . Deutsche Bundesbank
Deutsche Bank
Risk
For 24/10/2011
internal use only
26th October 2011
43
Bio
Adolfo Montoro FRM, is a Vice President within Deutsche Bank's Market Risk Management department in London
He currently heads up the Traded Market Risk Economic Capital Methodology team located in London as well as the
Risk Research & Development team in New York.
York He has previously been part of the Value-at-Risk Methodology team.
team
The teams insure the adequacy of quantitative methodologies used for market risk management and regulatory purposes
Prior to joining Deutsche Bank, he was a member of the Market Risk Control Department at UBS OConnor in London.
O'Connor is a keyy strategic
g alternative investment p
provider within the A&Q p
platform of UBS Global Asset Management
g
Before transferring to the UK Adolfo worked as Market Risk Manager for the Front Office Market Risk team at Banca Del
Gottardo (now Banca della Svizzera Italiana BSI) in Lugano, Switzerland. He started his career in the Risk Management
Department at FinecoGroup in Milan, Italy
He has earned an MSc in Risk Management from Bocconi University, Italy, and graduated with a degree in economics
(with honors) from Universita' della Calabria, Italy. He has earned his Financial Risk Manager (FRM) certification in 2005
Adolfo is currently affiliated with the Global Association of Risk Professionals where he serves as Regional Director for
the UK Chapter
Adolfo can be contacted at adolfo.montoro@db.com
Deutsche Bank
Risk
For 24/10/2011
internal use only
26th October 2011
44
Disclaimer
The views expressed in this presentation are the views of the speaker and do not necessarily
reflect the views of Deutsche Bank AG
Deutsche Bank
Risk
26th October 2011
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Deutsche Bank

The New Market Risk Framework

European Business School

For internal use only

Market risk modelling Part a

Overview of significant recent regulatory guidance

Market risk modelling Part b

Introduction of Stressed VaR

Calculation of the capital

Changes to the market risk capital algorithm

Interpretative Vs Implementation issues

Feedbacks from QIS

Review of Quantitative Impact Studies

Conclusions & Q&A

For internal use only

Market risk modelling Part a

Overview of significant recent regulatory guidance

Market risk modelling Part b

Introduction of Stressed VaR

Calculation of the capital

Changes to the market risk capital algorithm

Interpretative Vs Implementation issues

Feedbacks from QIS

Review of Quantitative Impact Studies

The development of a new market

Conclusions & Q&A

For internal use only

The development of a new market risk framework

Task Force on Market Risk

Basel Committee on Banking Supervision

European Banking Authority

Sub-group of the Policy Development Group

Sub-group of the Standing Committee on

Regulation and Policy

Federal Reserve System (Mrs Norah Barger) and UK FSA

Chaired by French ACP (Mr Stphane Boivin)

Supports PDG objectives

These developments should be finalized by the end of

Guidelines on Stressed VaR

Revised Market Risk Framework (July 2009), IRC

The development of a new market risk framework

Introduction of market risks in the 1988 Accord

Revised in July 2005

The development of a new market risk framework

Weaknesses of VaR methodology

Increasing number of structured products

The development of a new market risk framework

Default Risk only

The development of a new market risk framework

Higher delinquency rates have lead to a repricing...

Increased risk aversion and the effects on liquidity

The development of a new market risk framework

Increased risk aversion and the effects on liquidity...

the shorter, the better

The development of a new market risk framework

Increased tensions in the banking system...

The development of a new market risk framework

Increased tensions in the banking system...

The development of a new market risk framework

Number of regulatory Backtesting-Outliers increased significantly

The development of a new market risk framework

Market risk modelling Part a

Modification of the qualitative/quantitative criteria for

January 2009 Second Consultation