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
US Treasury Repo Clearing Indicators May 2026
The ISDA-Actrix US Treasury Repo Market Clearing Indicators illustrate central clearing adoption in the US Treasury repo market. Sponsored cleared repo volumes are used as a proxy to monitor client participation in central clearing, the key objective of the Securities...
ISDA, FIA, GFMA, CMC, CMCE Respond to IOSCO on Best Practices for OTC Commodity Derivatives
ISDA, FIA, the Global Financial Markets Association (GFMA), the Commodity Markets Council (CMC) and the Commodity Markets Council Europe (CMCE), have responded to the International Organization of Securities Commissions' (IOSCO) consultation report on best practices for over-the-counter (OTC) commodity derivatives...
Joint Response to 2026 US G-SIB Surcharge Proposal
On June 18, ISDA, the Securities Industry and Financial Markets Association and the Institute of International Finance submitted a joint response to US agencies on proposed changes to the surcharge for global systemically important banks (G-SIBs). The associations welcome the...
Eyeing the Basel III Finish Line
An effective regulatory capital framework relies on multiple ingredients, from appropriate drafting to rigorous testing and consultation. Even minor calibration distortions can inflate capital requirements, which could negatively affect the capacity of banks to support deep and liquid markets, with...