As part of the default risk charge (DRC) in the internal models approach (IMA) within the Fundamental Review of the Trading Book (FRTB), the Basel Committee on Banking Supervision (BCBS) has set a floor of 3 basis points (bp) for the probability of default (PD) of any entity. This input floor applies to all entities and primarily impacts the highest rated AAA sovereigns.
There has been no evidence published to date to support the calibration of the 3 bps floor and as local jurisdictions implement FRTB, some jurisdictions have already published their intentions to adjust this floor.
This paper provides quantitative and qualitative analysis in support of the removal of the PD floor. The paper uses the Bayesian inference model to estimate the probability distribution of rare events (eg, defaults of highly-rated entities) and sensitivity analysis is performed to demonstrate its robustness.
Documents (1) for FRTB IMA DRC and the 3 Basis Point Floor
Latest
ISDA & EMTA Market Practice 45
ISDA & EMTA jointly published the attached updated market practice regarding the determination of barrier events for Brazilian Real non-deliverable continuously monitored barrier option transactions.
Episode 54: A Modernization Agenda
ISDA’s chair Amy Hong sets out priorities for the association in 2026 and the important role that technologies like tokenization and artificial intelligence will play in modernizing derivatives markets. Please view this page via Chrome to access the recording.
Developing OTC Commodity Derivatives in India
The development of a robust and liquid over-the-counter (OTC) commodity derivatives market in India could support the continued growth of India’s economy given its significant reliance on commodities. A well-functioning OTC market in India would offer several advantages. First, it...
A Critical Step to Efficient Treasury Clearing
By the end of this year, the first prong of the Securities and Exchange Commission’s (SEC) Treasury clearing mandate will come into force. This is part of a regulatory effort to make the financial system more robust, but it will...