The specifications are ambiguous about whether risk weights and netting/offsetting are applied per instrument or per obligor.
Additionally, there is currently no consensus on how to resolve this ambiguity.
The risk weight and netting are stated as being per obligor. The net JTD is calculated per obligor (MAR 22.3 (2)) and the risk weight is determined per net JTD (MAR 22.24).
However, in the formula for $DRC_b$ (MAR 22.25), the risk weights and net JTD are used at the instrument level.
Additionally, in MAR 22.7, some public sector exposures may have either a zero or specific non-zero risk weight.
It is unclear how to calculate $DRC_b$ with this ambiguity.
Implementation
In Atoti FRTB, the exposures (risk-factors) can be flagged as “ZRW” (and this can be set per exposure and per jurisdiction).
The parameter sa.drc.use-zero-risk-weight indicates that
exposures tagged as “ZRW” should be treated according to one of the following interpretations when calculating $DRC_b$.
Additionally, the configuration file SA DRC Public Sector Obligor Risk Weights can be used to specify (by obligor and parameter set)
the risk-weight to apply to exposures with the “ZRW” flag. If this file is not provided or there is no match for an obligor in the file,
the default risk weight of 0% is used.
Scale Zero Risk-Weight exposures
In this interpretation, the “ZRW” exposures are scaled by the ZRW risk-weight divided by the obligor’s (ratings-based) risk-weight for both the HBR ratio and the $DRC_b$ formulas.
Note: when the “ZRW” flag results in a risk-weight of 0%, this effectively means that the exposures are excluded from both the HBR and $DRC_b$ formulas.
This interpretation can be selected by setting the configuration property sa.drc.zero-risk-weight-mode=ignore
Apply the offsetting twice
In this interpretation, when calculating the HBR ratio (MAR 22.23), the “ZRW” flag is ignored and the ZRW and non-ZRW exposures are combined when applying the offsetting.
However, when calculating the $DRC_b$, the risk-weights are applied before performing the offsetting to calculate the net JTD.
Note: when the “ZRW” flag results in a risk-weight of 0%, this effectively means that the exposures are included in the HBR formula, but not the $DRC_b$ formula.
This interpretation can be selected by setting the configuration property sa.drc.zero-risk-weight-mode=hbr (default).
Weighted Average Risk-Weight
In this interpretation, the weighted average of the risk weights for the exposures is determined using the Gross JTD per exposure as the weighting.
This weighted average is then used as the single risk weight for the obligor.
This interpretation can be selected by setting the configuration property sa.drc.zero-risk-weight-mode=weighted