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
Pursuing Efficiencies of Tokenization
As we mark the 10-year anniversary of the ISDA Standard Initial Margin Model (ISDA SIMM), which was launched in September 2016 to coincide with the first phase of initial margin (IM) requirements for non-cleared derivatives, we’ve been reflecting on its...
2026 ISDA Canada Conference Opening Remarks
2026 ISDA Canada Conference Toronto, September 24, 2026 Opening Remarks Katherine Tew Darras ISDA General Counsel Good morning and welcome to the 2026 ISDA Canada Conference. Thank you for joining us today and thanks to our sponsor, Osler, Hoskin...
Transition to Mandatory Central Clearing
US Treasury securities sit at the heart of global financial markets and serve as one of the primary forms of high-quality collateral across derivatives and securities financing markets. The transition to mandatory central clearing of US Treasuries therefore has implications...
ISDA Publishes Updated ISDA SIMM Governance
ISDA has published an updated version of the ISDA SIMM® Governance Framework, which sets out the principles under which the ISDA Standard Initial Margin Model® operates and the process through which it will be reviewed and amended on a consistent...