Glossary of FRTB Accelerator terms

In a Nutshell...

This page provides a definition of the key terms used within the FRTB Accelerator.

Term

Definition

Accelerator

ActiveViam Accelerators are projects that contain business logic, implementation best practices and software code to enable a faster time-to-market and help clients confidently address use cases such as regulations.

They are built on and require:

ActivePivot
ActiveMonitor
ActiveUI

Aggregation Function

An aggregation function is an operation that is used to calculated aggregated values. For example: SUM, COUNT, MIN, AVG, MAX. It is possible to define custom aggregation functions.

Aggregator Location

This is a location within a hypercube, as defined by members on each hierarchy, and the data aggregated at that location. For example, an aggregator for "USA.NY", "2007.May", AllMembers, ... would aggregate Order value for sales in New York state in May 2007.

AllMembers

The single root member in a hierarchy. For example, in a Geographical hierarchy, AllMembers would cover all possible locations. Aggregation of All the Members does not make sense for some properties in some hierarchies, such as value properties classified by Currency.

BCBS

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.

Book

Groups of trades that follow a particular trading or banking strategy. A book will always belong to a desk. Books can be nested into larger books (usually with a parent / child hierarchy). Books can span across legal entities. There can be tens of thousands of books in a large international bank.

Bucket

Buckets provide a means for grouping together risk positions by common characteristics. Buckets are prescribed for each risk class. For example:

Risk Class	Bucketing Method
GIRR	Bucketing is performed using the currency of the instrument.
Equities	Buckets are numbered from 1 to 11) and sensitivities are bucketed based on the type of equity (small cap/ large cap, sector),

Capital Charge

The capital charge is the cost of capital times the amount of invested capital. This capital charge is a dollar amount. By capital charge rate is just the cost of capital. In other words, the capital charge rate is the rate or return required on invested capital.

Capital Requirement

A capital requirement (also known as regulatory capital or capital adequacy) is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets.

Comparator

A comparator is an object that determines the ordering of members within a hierarchy, or of attributes within a data object, for presentation purposes.

Compliance

The ActiveViam FRTB Accelerator is designed and built to support the FRTB Standard Approach and Internal Models Approach as per the BCBS 352 specification.

For the Standardised Approach implementation, see BCBS Compliance - Standardised Approach .

For the Internal Models Approach implementation, see BCBS Compliance - Internal Models Approach .

Correlation

Correlation is a measure of the degree to which two securities move in relation to one another.
Correlations are prescribed for each risk class and applied during intra-bucket aggregation (for example, for Risk Position), defined as Rho (ρ).
Inter-bucket aggregation is used to compute the Risk Charge and applies correlations Gamma ( γ).

CTP

Correlation Trading Portfolio - In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index.

To sell correlation, investors can:

Sell a call option on the index.
Buy a portfolio of call options on the individual constituents of the index.

Cube

OLAP on Big Data is a powerful concept that involves pre-aggregation of massive volumes of data into multidimensional cubes and then querying them to get faster results.

Within FRTB, it is possible to have pre-defined cubes (for each of the FRTB Accelerator Components) with all Measures set in advance or to let users dynamically select Measures and instantiate them on-the-fly in the cubes (ActiveMeasures).

Curvature

Delta risk measures the change in price resulting from a small price or rate shock to the value of each relevant risk factor. Vega risk is the risk due to variations in the volatility for options - computed as the product of the vega of a given option and its implied volatility; and Curvature risk captures the additional risk due to movement in the Delta when the price changes.

Data Model

An FRTB Data Model is provided to support the SA and IMA approaches. This is the default Data Model for all data required, and incorporates the following features:

Trades with economic and organisational attributes
Trades, Positions and Sensitivities per Risk Factor and other granular data for SA
Trade Historical P&Ls, Historical Simulations and other granular data for IMA
Classifications, Books, Desks, Risk Categories, etc.
Correlations and other constants imposed by regulators

Datastore Schema

A Datastore Schema arranges data in stores that can reference each other. The schema contains:

a list of store descriptions (one for each store in the Schema)
a list of reference descriptions that describe how stores reference each other
a list of partitioning directives

Default Risk Charge

This captures the 'jump-to-default' risk for credit instruments (for example Credit Default Swap - CDS).
If the underlying issuer defaults, the buyer of the CDS will receive payment from the seller. The Default Risk Charge is another input into the overall Capital Charge formula.

Delta

Delta is one of four major risk measures used by option traders. Delta measures the degree to which an option is exposed to shifts in the price of the underlying asset (i.e. stock) or commodity (i.e. futures contract). Values range from 1.0 to –1.0 (or 100 to –100, depending on the convention employed).

Desk

The concept of desk is a key element of the FRTB regulation. Banks need to identify them and have evidence to support their choice. Constraints on trader alignment with desks and management structures are quite strict. Desks are usually organised as a combination of geographical, business lines and traded instruments criteria. There may be hundreds of desks in a large international bank. FRTB stipulates that desks are classified as either trading or banking desks. A trader can only belong to one desk.

Dimension

A dimension is a named grouping of one or more hierarchies. Its purpose is mainly to provide customers with a means to categorise these separate hierarchies and regard them as a single entity, analogous to storing them together in a directory or folder.

Drill-down

This is the shifting of aggregation level from one member to a set of its child members in a hierarchy. For example, a value aggregated for the "USA" member in a Geographical hierarchy could be drilled-down to show the set of values aggregated at the State level.

Drill-through

A drill-through is a presentation of the set of data objects that underlie a particular aggregator location.

Epoch

An epoch marks the commit of a transaction on a Datastore timeline. Essentially, it is identified by a unique sequence number and a timestamp. An epoch can also receive a label if it needs to be precisely identified (e.g. "Revaluation Run 5 - 11AM").

FRTB

The Fundamental Review of the Trading Book (FRTB) is a Basel Committee on Banking Supervision initiative to overhaul trading book capital rules.

Hidden Measure

A hidden measure is an aggregated measure that is used for calculation purposes, but should not be visible within a presentation

Hierarchy

A hierarchy provides a means for classifying data objects according to some property of these objects. For example, the Customer Location property of an Order entity could be classified on a Geographical hierarchy. A hierarchy allows classification at a number of different levels. (Note: For releases prior to ActivePivot 5, a 'dimension' was equivalent to what has now become a 'hierarchy'. In ActivePivot 5, a dimension is defined as a set of hierarchies that have been grouped together and allotted a (dimension) name - see above).

Hypercube

This is a classification of a set of data objects into a number of different hierarchies (typically more than three).

IMA

The FRTB Internal Models Approach.

Internal Approach

A capital charge calculated for a bank using the output of that bank's internal risk measurement model.

Introspection

This is the process by which an incoming data object is classified according to the hierarchies of a hypercube.

Legal Entity

Banks' activities are conducted through groups of legal entities or branches thereof. A trade will always involve one legal entity (the counterparty from the bank side) and either another internal party (another legal entity of the bank group for an internal trade) or another external counterparty. Desks often span across legal entities (i.e. global desks). There may be tens of legal entities in a large international bank group

Level

A Level in a hierarchy allows classification of a property at a particular level of abstraction. For example, a Geographical hierarchy might have levels for Country, State and City.

Listener

A Listener is an ActivePivot component that receives data objects from a source.

MDX

MultiDimensional Expressions (MDX) is a query language for OLAP databases.

Measure

A measure is property of a data object that can be aggregated within a hypercube.

Member

A member of a level in a hierarchy is a particular attribute value that can be used to classify a property. For example, the Country level within a Geographical hierarchy would have members "UK", "France", "USA", and so on.

Object Key

An attribute of a data object used to identify it within a Base Store.

Parameter Store

The FRTB Parameter Stores page is linked to from the Parameter Sets user guide. Keep in mind these aren't the only parameter stores. For a full list of parameter stores, you must go to each of the Input File Formats pages and look for entries including a field called "Parameter Set".

Parameterisation

Parameterisation is the process of defining or choosing parameters

Plug-in

A plug-in is a set of java classes that each implement an interface. Each implementation is identified by a textual key.

Post-aggregated Measure

This is a measure derived from a location's contents using business logic. Post-aggregated measures are calculated as required by a particular presentation.

Presentation

A presentation is a view of a hypercube in a client application, with two or more visible hierarchies providing row and column headers.

Query

A Datastore query retrieves entities from a Datastore that meets a specified set of conditions. A typical query includes the following: An entity kind to which the query applies. Optional filters based on the entities' property values, keys, and ancestors.

Registry

A registry is a single 'factory' object that creates implementation objects within ActivePivot. Only the interface, not the concrete class, needs to be specified by the client object.

Residual Risk Add-on

The SA rules state that an instrument with an underlying(that is not covered by Delta, Vega or Curvature) must have Residual Risk calculated. An example of an exotic underlying would be a weather derivative. In this case, there are no risk factors that measure/stress weather. the Residual Risk Add-on is the simple sum of gross notional amounts of the instruments bearing residual risks, multiplied by a risk weight of 1.0% for instruments with an exotic underlying and a risk weight of 0.1% for instruments bearing other residual risks.

Risk

Risks can come from various sources including uncertainty in financial markets, threats from project failures, legal liabilities, credit risk, accidents, natural causes and disasters, or deliberate attack from an adversary

Risk Charge

This is the amount of capital that a bank must hold as a consequence of the risks it takes.
It is computed as an aggregation of risk positions (as defined below) across buckets within a risk class.
This aggregation includes the application of the prescribed correlations.
Final risk charge (Delta separated from Vega) is the aggregate across all buckets and risk classes. E.g. Delta GIRR (all vertices) plus Delta (Equity) plus etc.

Risk Classes

The seven Risk Classes used for FRTB calculations are as follows:

Risk Class	Description
GIRR	General interest rate risk
CSR non-Sec	CSR non-Securitisation - credit spread risk for a portfolio that does not include securitisation of underlying assets .
CSR Sec CTP	CSR Securitisation (Correlation trading portfolio). Includes securitisation of underlying asset. A correlation trading portfolio consists of securitisation positions and nth-to-default credit derivatives.
CSR Sec non-CTP	CSR Securitisation (non-Correlation trading portfolio). Includes securitisation of underlying assets.
Equity	Equity risk
Commodity	Commodity risk
FX	Foreign exchange risk

Risk Factor

A risk factor is any measurable characteristic or element, a change in which can affect the value of an asset, such as exchange rate, interest rate, or market price.

Each instrument or trade may be "sensitive" to multiple risk factors. For FRTB, each risk factor is mapped to one of the prescribed risk classes defined above.

For the ActivePivot FRTB (SA) Accelerator, we expect clients to send the sensitivities to underlying risk factors at the most granular level possible, i.e. at Trade level for OTCs and Position level for fungible instruments.

The native ActivePivot capabilities provides the required aggregation, netting and multi-dimension analysis.

The specification calls for specific risk factors based on risk class. Risk factor and sensitivity definitions are found in BCBS 352 - Section 3 (pages 20-28).

Risk Management

Risk management is the identification, evaluation, and prioritization of risks, followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events^[or to maximize the realisation of opportunities.

Risk Measure

For the purposes of the ActivePivot FRTB (SA) Accelerator, a risk measure is one of the following:

Delta: Based on the sensitivities of a bank's trading book to regulatory Delta risk factors
Vega: Based on the sensitivities of a bank's trading book to regulatory Vega risk factors
Curvature: This captures any incremental risk not captured by the Delta risk of an instrument with optionality. Curvature risk is based on two stress scenarios, involving an upward shock and a downward shock to a given risk factor. The worst loss of the two scenarios is the risk position to be used as an input into the aggregation formula which delivers the capital charge.

Risk Position

The formal definition of Risk Position is "the main input that enters the risk charge computation".
For Delta and Vega risks, it is a sensitivity to a risk factor. For Curvature risk, it is the worst loss of two stress scenarios.
Informally, and within the existing accelerator, the definition is as follows:

A risk position is computed for Delta and Vega (within each risk class) by first netting sensitivities within risk class and buckets as prescribed (BCBS 352 - 51.a).
Net sensitivities are then multiplied by a prescribed risk weight (BCBS 352 - 51.b).
Finally, the weighted sensitivities are aggregated between sensitivities within the same bucket, using a prescribed formula and correlations.
For Curvature, risk positions are calculated by first computing a curvature risk charge based on the worst loss, after deducting delta risk position, from upward and downward shocks of each risk factor and applying prescribed risk weights.
Curvature risk exposures are then aggregated within the same bucket, using prescribed formulae and correlations (BCBS 352 - 53.b).

Schema

A formal description of the structure of a database: the names of the tables, the names of the columns of each table, and the data type and other attributes of each column.

Securitised

Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

Servlet

A Servlet is an object resident within a web server that handles requests of a particular type. For example, the Sandbox has an XMLA servlet and a Web Services servlet.

Slicer

Where a hierarchy is not visible in a presentation, a slicer member must be used to define the visible locations. If a slicer member is not chosen explicitly, the default member is used, if enabled. If the default member is not enabled, AllMembers is used. If AllMembers is not enabled, the first member of the top level is used instead.

Source

This is a source of incoming data objects for a hypercube.

Type

This is single Java class that implements a Java interface.

Vega

Vega is the measurement of an option's price sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the implied volatility of the underlying asset.

Vertices

The term vertex is used throughout BCBS 352. It refers to a tenor or expiry/maturity point along which a risk factor sensitivity is mapped or projected.
For example, for GIRR Delta, the vertices represent points along a risk free yield curve.
For CSR Delta, the vertices represent points along a credit spread curve.
For Commodity Delta, the vertices represent time to maturity a traded commodity. It is worth noting there are NO vertices for FX or Equity Delta risk classes.
For Vega, vertices represent option expiry dates. In all cases, the vertices are prescribed. For sensitivities that are not exactly mapped, linear interpolation to prescribed points has been implemented.
Other interpolation methods may be implemented as needed.

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