Pro-rata capital allocation

Naming pattern: Measures with “Pro-rata” behavior follow the name pattern:Main Measure Name Pro-Rata.

Pro-Rata is one of the approaches implemented in the FRTB Accelerator to decompose a non-linear measure down to additive components.

Depending on the specified context values, a Pro-Rata measure behaves as:

• bottom-up calculation: charges computed at leaf level (usually, trades) are scaled proportionally so that they sum to a charge computed at ReferenceLevel. Scaled leaf-level charges are additive and can be rolled up to any level;

  Pro-Rata Capital Allocation := Leaf * Scale

• “Russian Doll” calculation: charges are computed recursively along the levels in a specified hierarchy (for instance, organizational hierarchy), so that the sum at each level is equal to the pro-rata charge for a parent.

  Scale := Parent / {sum of Siblings}

Both methods ensure that the charge computed at ReferenceLevel is decomposed into additive components.

The main difference between the approaches is that the capital allocation per “Russian Doll” method will take into account the netting within aggregation nodes, wheres in bottom-up approach only the leaf-level netting matters.

Follow this link to see the measures with the described behavior: Pro-Rata Measures.