Every foundational chapter is now behind us — RBC25 gave us the trading book boundary, MAR10 gave us the vocabulary, MAR11 gave us the scope and the three methods, and MAR12 gave us the trading desk itself. This article is where the Standardised Approach formally begins. MAR20 is short — just five numbered paragraphs — but it is the architectural blueprint for the rest of this series. Every article from here through Article 21 is really just expanding on one piece of what this chapter introduces.
The chapter states its own purpose directly: it sets out the general provisions and the structure of the Standardised Approach for calculating risk-weighted assets for market risk.
From Capital Requirement to Risk-Weighted Assets
The starting mechanic is simple: the risk-weighted assets for market risk under the Standardised Approach are determined by multiplying the capital requirement calculated under MAR20 through MAR23 by 12.5.
| Why 12.5, Specifically This is standard Basel architecture rather than something unique to market risk: 12.5 is simply the reciprocal of the 8% minimum capital ratio used throughout the Basel framework (1 ÷ 0.08 = 12.5). Multiplying a capital requirement by 12.5 converts it into the risk-weighted assets figure that, when 8% is applied back to it, reproduces the original capital requirement. This is general Basel capital mechanics, not a detail specific to this document, included here for context. |
Sourced from MAR20.1.
How Often Must This Be Calculated?
The Standardised Approach must be calculated and reported to the relevant supervisor on a monthly basis. There is one specific exception: subject to supervisory approval, the Standardised Approach for market risks arising from a bank’s non-banking subsidiaries may instead be calculated and reported quarterly.
Separately, a bank must also determine its Standardised Approach regulatory capital requirement for market risk whenever its supervisor demands it — regardless of the standard monthly or quarterly reporting cycle.
| Connecting This to Article 5A’s Continuous Compliance Rule This on-demand requirement sits alongside the continuous compliance principle we covered in Article 5A: MAR11.2 established that banks must manage market risk to meet capital requirements at the close of every business day, not just at formal reporting dates, specifically to prevent window-dressing. MAR20.3’s on-demand rule gives supervisors a direct tool to test that continuous compliance whenever they choose, rather than waiting for the next scheduled report. |
Sourced from MAR20.2–MAR20.3.
https://www.bis.org/basel_framework/chapter/MAR/20.htm
The Three-Component Structure
This is the core of the entire chapter. The Standardised Approach capital requirement is the simple sum of three components: the capital requirement under the Sensitivities-Based Method (SBM), the Default Risk Capital (DRC) requirement, and the Residual Risk Add-On (RRAO).
| Component | What It Captures | Where This Series Covers It |
| Sensitivities-Based Method (SBM) | Delta, vega and curvature risk across all seven risk classes | Articles 8 through 18 |
| Default Risk Capital (DRC) | Jump-to-default risk for instruments subject to credit risk | Articles 19 and 20 |
| Residual Risk Add-On (RRAO) | Risks the sensitivities-based method structurally cannot capture | Article 21 |
Component 1: The Sensitivities-Based Method
The SBM capital requirement is calculated by aggregating three separate risk measures:
- Delta: a risk measure based on an instrument’s sensitivities to regulatory delta risk factors.
- Vega: a risk measure based on sensitivities to regulatory vega risk factors.
- Curvature: a risk measure that captures the incremental risk delta alone misses for price changes in an option, based on two stress scenarios — an upward shock and a downward shock — applied to each regulatory risk factor.
Each of these three risk measures works by specifying risk weights that get applied to the regulatory risk factor sensitivities. To calculate the overall capital requirement, these risk-weighted sensitivities are then aggregated using specified correlation parameters, which recognise diversification benefits between different risk factors.
Here is a detail that becomes central later in this series: because correlations between risk factors can behave very differently in periods of financial stress — sometimes converging sharply, sometimes diverging — a bank must calculate three separate SBM capital requirement values, each based on a different scenario for the correlation parameters. We will only briefly introduce this idea in Article 8A and treat it properly in Article 18, but it is worth flagging now: this three-scenario requirement is not an optional refinement, it is baked into MAR20’s definition of the SBM itself.
Sourced from MAR20.4(1), including sub-points (a) through (d).
https://www.bis.org/basel_framework/chapter/MAR/20.htm
Component 2: Default Risk Capital
The DRC requirement captures jump-to-default risk for instruments subject to credit risk. Its calibration is deliberately tied to the credit risk treatment used in the banking book, specifically to reduce the potential discrepancy in capital requirements between similar risk exposures sitting in different parts of the bank. Some hedging recognition is allowed here, but only for similar types of exposures — the standard names corporates, sovereigns, and local governments or municipalities as the categories where this hedging recognition applies.
Sourced from MAR20.4(2).
Component 3: The Residual Risk Add-On
The Committee is explicit about why this third component exists at all: not every market risk can realistically be captured within the Sensitivities-Based Method, because attempting to do so would require an unduly complex regime. The RRAO exists specifically to ensure sufficient coverage of the market risks that fall outside the SBM’s structure, for the instruments specified in MAR23.2 — which we will cover in full in Article 21.
Sourced from MAR20.4(3).
The Correlation Trading Portfolio (CTP) Definition
The final paragraph of this chapter defines a term that will recur throughout the credit spread risk and default risk articles ahead: the correlation trading portfolio, or CTP. For the purpose of calculating both the credit spread risk capital requirement under the SBM and the DRC requirement, the CTP is defined as the set of instruments that meet either of two tests.
Test 1: A Qualifying Securitisation Position
An instrument qualifies as part of the CTP if it is a securitisation position meeting all four of the following requirements:
| # | Requirement |
| a | The instrument is not a re-securitisation position, and not a derivative of securitisation exposures that fails to provide a pro rata share in the proceeds of a securitisation tranche — using the same definition of “securitisation position” as the credit risk framework. |
| b | All reference entities are single-name products, including single-name credit derivatives, for which a liquid two-way market exists, including traded indices on these reference entities. |
| c | The instrument does not reference an underlying that is treated as a retail exposure, a residential mortgage exposure, or a commercial mortgage exposure under the Standardised Approach to credit risk. |
| d | The instrument does not reference a claim on a special purpose entity. |
| What Counts as a “Liquid Two-Way Market” The standard defines this precisely in a footnote: a two-way market is deemed to exist where there are independent, bona fide offers to buy and sell, such that a price reasonably related to the last sales price, or to current bona fide competitive bid-ask quotes, can be determined within one day — and the transaction can be settled at that price within a relatively short time frame, in conformity with trade custom. |
Test 2: A Hedge to a Qualifying Position
The second, simpler route into the CTP: an instrument also qualifies if it is a non-securitisation hedge to a position that meets Test 1 above.
Sourced from MAR20.5, including its footnote.
https://www.bis.org/basel_framework/chapter/MAR/20.htm
| Why This Definition Matters Going Forward This is the exact test that separates “credit spread risk — securitisations (CTP)”, which we will cover in Article 11, from “credit spread risk — securitisations (non-CTP)”, covered across Articles 12A and 12B. The same distinction resurfaces in default risk capital, where Articles 20A and 20B split securitisation DRC treatment along this identical CTP/non-CTP line. Getting this four-part test right at the outset is what determines which bucket structure, which risk weights, and ultimately which capital treatment an instrument receives several articles from now. |
The Roadmap From Here
With the three-component structure and the CTP definition now in place, the rest of this series follows the path MAR20 lays out: Articles 8 through 18 build the Sensitivities-Based Method risk class by risk class, Articles 19 and 20 build Default Risk Capital, Article 21 covers the Residual Risk Add-On, and Article 22 brings everything together into one worked, end-to-end capital calculation.
Frequently Asked Questions
What are the three components of the FRTB Standardised Approach?
The Sensitivities-Based Method (delta, vega and curvature risk), the Default Risk Capital requirement (jump-to-default risk), and the Residual Risk Add-On (risks the sensitivities-based method cannot structurally capture). The total capital requirement is simply their sum.
How often must the Standardised Approach be calculated?
Monthly, as a general rule. Market risk from non-banking subsidiaries may be reported quarterly with supervisory approval, and supervisors can additionally demand a calculation at any time, independent of the regular reporting cycle.
What is the correlation trading portfolio (CTP)?
A defined set of instruments — largely non-re-securitisation positions referencing single-name products with a liquid two-way market, plus their non-securitisation hedges — that receive distinct treatment under both the credit spread risk and default risk capital requirements.