Quantitative Risk & Capital Modeling

Under MAR33.4, banks compute all Expected Shortfall shocks over a uniform 10-business-day base horizon (ES_10d) and partition risk factors into five nested subsets Q(RF, j) corresponding to supervisory liquidity horizons LH_j in {10, 20, 40, 60, 120} days. For each horizon j >= 2, risk factors with shorter liquidity horizons are held constant while longer-horizon risk factors are shocked over 10 days, scaled by sqrt((LH_j - LH_{j-1}) / 10), and aggregated via root-sum-of-squares.

A risk factor becomes an NMRF if it fails the Risk Factor Eligibility Test (RFET) under MAR31.12—requiring at least 24 committed trades or firm executable two-way quotes per year (with at least 4 per 90-day period) or 100 observations per year—or if it represents uncaptured interpolation basis between observable curve buckets. NMRFs are carved out of the diversifiable ES engine and stressed over a 12-month worst-case window with a 0.60 linear correlation constraint, often accounting for 30% to 55% of exotic desk capital.

Under BCBS-IOSCO Uncleared Margin Rules, ISDA SIMM partitions all trades into four mutually exclusive Product Silos: RatesFX, Credit, Equity, and Commodity. While sensitivities net across risk classes within a single product silo, total SIMM Initial Margin is the strict linear sum of the four product silos. Therefore, interest rate delta inside an Equity silo trade cannot offset interest rate delta inside a RatesFX silo trade unless the exposures are restructured or cleared.

Under SA-CCR (CRE52), EAD equals 1.4 * (RC + PFE). For the party receiving initial margin, segregated collateral reduces the PFE multiplier toward the 5% floor. However, for the posting party, bankruptcy-remote third-party custodial initial margin does not reduce Net Independent Collateral Amount (NICA) against Replacement Cost and simultaneously generates a permanent Margin Valuation Adjustment (MVA) funding drag over the life of the netting set.