With RBC25 — the trading book and banking book boundary chapter — now fully covered, the standard pauses before getting into rules again. FRTB MAR10 is a chapter of pure vocabulary: 35 terms, defined once, then used constantly and without re-explanation for the rest of the standard. Skipping this chapter would make every later article in this series harder to follow, so we are covering it in full, split into two parts by theme.
This is Part A: the foundational terms, the vocabulary for describing instruments, the terms used specifically in capital requirement calculations, and the risk metric terms — sensitivity, delta, vega, curvature, VaR, expected shortfall, jump-to-default, and liquidity horizon. These last few in particular are worth sitting with, because almost every article from here on in this series builds directly on them.
General Terminology
| Term | Plain-English Meaning |
| Market risk | The risk of losing money on positions — whether on the balance sheet or off it — because market prices move. |
| Notional value | For a derivative, this is simply the number of units of the underlying multiplied by that underlying’s current market value. It is a size measure, not a value of the derivative itself. |
| Trading desk | A group of traders, or trading accounts, within a business line of the bank, following a defined trading strategy — either to generate revenue or to maintain a presence in a market — by taking on and managing risk. |
| Pricing model | A model used to work out what an instrument is worth (mark-to-market or mark-to-model), or how its value changes as risk factors move. A pricing model can be a chain of calculations — for example, a first valuation step, followed by adjustments for risks that step did not capture. |
Sourced from MAR10.1–MAR10.4. https://www.bis.org/basel_framework/chapter/MAR/10.htm
Terminology for Financial Instruments
| Term | Plain-English Meaning |
| Financial instrument | Any contract that creates a financial asset for one party and a financial liability, or an equity instrument, for another. This covers both cash instruments (like bonds and shares) and derivatives. |
| Instrument | The standard’s umbrella word covering financial instruments, foreign exchange positions, and commodities all at once. When the standard says “instrument,” it means any of these three. |
| Embedded derivative | A derivative component hidden inside a larger financial instrument that itself is not a derivative. The classic example: the option to convert a convertible bond into shares is an embedded derivative sitting inside the bond. |
| Look-through approach | Where a position has underlying components — an index, a multi-underlying option, or a stake in a fund — this approach calculates capital as if the bank held each of those underlying positions directly, rather than treating the wrapper (the index or the fund) as a single opaque instrument. |
Sourced from MAR10.5–MAR10.8. https://www.bis.org/basel_framework/chapter/MAR/10.htm
Terminology for Market Risk Capital Requirement Calculations
| Term | Plain-English Meaning |
| Risk factor | The main driver behind a change in an instrument’s value — for example, an exchange rate or an interest rate. |
| Risk position | The slice of an instrument’s current value that could be lost if a particular risk factor moves. A bond issued in a foreign currency, for instance, has risk positions in interest rate risk, credit spread risk, and FX risk simultaneously, because it is exposed to all three underlying risk factors at once. |
| Risk bucket | A group of risk factors that share similar characteristics, bundled together for capital calculation purposes. |
| Risk class | The master list of seven risk types the entire Standardised Approach is built around. |
| The Seven Risk Classes — Worth Memorising MAR10.12 defines risk class as the fixed list every later article in this series will build capital calculations around: 1. General interest rate risk (GIRR) 2. Credit spread risk — non-securitisation 3. Credit spread risk — securitisation (non-correlation trading portfolio) 4. Credit spread risk — securitisation (correlation trading portfolio) 5. Foreign exchange (FX) risk 6. Equity risk 7. Commodity risk Every risk-weight table, every bucket structure, and every correlation parameter later in this series belongs to exactly one of these seven risk classes. When we say “GIRR bucket” or “equity risk class” in future articles, this is the list we are drawing from. |
Sourced from MAR10.9–MAR10.12. https://www.bis.org/basel_framework/chapter/MAR/10.htm
Terminology for Risk Metrics
| Term | Plain-English Meaning |
| Sensitivity | A bank’s estimate of how much an instrument’s value would change if one of its underlying risk factors moved by a small amount. Delta and vega are both types of sensitivity. |
| Delta risk | The straight-line (linear) estimate of how much a financial instrument’s value changes when a risk factor moves — that risk factor could be an equity price, a commodity price, an interest rate, a credit spread, or an FX rate. |
| Vega risk | The potential loss on a derivative caused by a change in the implied volatility of whatever it is written on — its underlying. |
| Curvature risk | The extra potential loss that delta risk alone misses, for instruments with optionality, when a risk factor moves. Under the Standardised Approach, this is captured using two stress scenarios per risk factor — one shock up, one shock down. |
| Value at risk (VaR) | A measure of the worst expected loss on a portfolio, over a chosen time horizon, at a chosen confidence level. |
| Expected shortfall (ES) | A measure of the average of all the potential losses that are worse than the VaR figure, at a given confidence level — in other words, it looks past the VaR cutoff to average the losses in the tail beyond it. |
| Jump-to-default (JTD) | The risk of a sudden, unexpected default. JTD exposure is the loss a bank could suffer if that sudden default happens. |
| Liquidity horizon | The time a bank is assumed to need to exit or hedge a risk position, without moving market prices materially, under stressed market conditions. |
| Delta, Vega and Curvature — Why These Three Specifically These three terms are worth pausing on because the entire Sensitivities-Based Method, which we build starting in Article 7 of this series, is structured around exactly these three risk measures for every one of the seven risk classes above. Delta captures the straight-line move. Vega captures volatility risk for instruments with optionality. Curvature captures what delta misses when the relationship between the instrument’s value and the risk factor is not actually a straight line. Every risk-weight table you will see later in this series is calculating one of these three. |
Sourced from MAR10.13–MAR10.20. https://www.bis.org/basel_framework/chapter/MAR/10.htm
Looking Ahead
Part B of this glossary covers the remaining terminology: how banks describe hedging and diversification, how risk factors are judged modellable or not, the terms used in validating internal models, and the two terms specific to CVA risk. Together, Parts A and B give you the complete vocabulary the rest of this series will assume you already know.
Frequently Asked Questions
What is the difference between delta, vega and curvature risk?
Delta risk is the straight-line estimate of value change from a risk factor movement. Vega risk captures the effect of changing implied volatility on derivatives. Curvature risk captures the extra loss, beyond what delta predicts, for instruments with optionality, using an upward and downward stress scenario.
What are the seven FRTB risk classes?
General interest rate risk, credit spread risk (non-securitisation), credit spread risk (securitisation, non-CTP), credit spread risk (securitisation, CTP), foreign exchange risk, equity risk, and commodity risk.
What is the difference between VaR and Expected Shortfall?
VaR measures the worst expected loss at a given confidence level. Expected Shortfall goes further, averaging all the losses that exceed the VaR threshold — capturing the severity of the tail, not just the cutoff point.
https://decode-finance.com/category/market-risk-credit-risk-and-operational-risks