# Can the Standardised Approach Ever Be More Capital Efficient than the IMA for Certain Illiquid Portfolios? ▴ Question

**Published:** 2025-08-05
**Categories:** Question

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## Concept

The inquiry into whether the [Standardised Approach](https://prime.greeks.live/area/standardised-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (SA) can surpass the capital efficiency of the [Internal Models Approach](https://prime.greeks.live/area/internal-models-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (IMA) for illiquid portfolios strikes at the core of a fundamental tension in risk management. The very architecture of the IMA is built on the premise of superior risk sensitivity. It is designed to reward institutions that invest in sophisticated data sourcing and statistical modeling with lower, more accurate capital requirements.

Yet, this advanced system has a critical dependency ▴ a continuous supply of robust, observable market data. For certain illiquid portfolios, this dependency becomes the system’s vulnerability, creating specific, counter-intuitive scenarios where the regulator-prescribed, less complex SA yields a more favorable capital outcome.

The global financial crisis of 2008 revealed significant weaknesses in the market risk frameworks, prompting a comprehensive overhaul by the Basel Committee on [Banking Supervision](https://prime.greeks.live/area/banking-supervision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (BCBS), known as the Fundamental Review of the Trading Book (FRTB). This new framework redefines the methodologies for calculating minimum [capital requirements](https://prime.greeks.live/area/capital-requirements/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for market risk, establishing a stricter boundary between the trading and banking books and introducing more rigorous calculation approaches. The FRTB framework offers banks a choice between two primary methodologies for their trading desks ▴ the SA and the IMA. The SA is a regulator-defined methodology that calculates capital requirements using prescribed risk weights and correlations.

Its [Sensitivities-Based Method](https://prime.greeks.live/area/sensitivities-based-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (SBM) is complex but universal, requiring banks to calculate sensitivities to a predefined set of risk factors. The IMA, conversely, allows banks to use their own internal statistical models to calculate capital, primarily using an [Expected Shortfall](https://prime.greeks.live/area/expected-shortfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (ES) measure. This approach is intended to be more risk-sensitive and, for most liquid and diversified portfolios, results in lower capital charges. However, the approval to use the IMA is stringent, requiring desks to pass both qualitative and quantitative tests, including a rigorous profit and loss (P&L) attribution test.

> The core issue arises from the FRTB’s treatment of positions that cannot be reliably modeled due to a lack of market data.

The central challenge emerges with portfolios containing illiquid or esoteric assets. These instruments often lack the deep, observable markets necessary to generate the “real price observations” that underpin the validity of an internal model. The FRTB framework directly addresses this issue within the IMA through the concept of [Non-Modellable Risk Factors](https://prime.greeks.live/area/non-modellable-risk-factors/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (NMRFs). When a risk factor within a bank’s internal model fails the [Risk Factor Eligibility Test](https://prime.greeks.live/area/risk-factor-eligibility-test/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (RFET) due to insufficient pricing data, it is deemed non-modellable.

This classification fundamentally alters its treatment, removing it from the sophisticated ES model and subjecting it to a separate, often punitive, [capital charge](https://prime.greeks.live/question/how-does-the-basel-iii-cva-capital-charge-incentivize-central-clearing-for-otc-derivatives/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). It is this punitive treatment of NMRFs that opens the door for the SA to become the more capital-efficient choice.

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## Strategy

The strategic decision to favor the Standardised Approach over the Internal Models Approach for a given portfolio is a function of the trade-off between model sophistication and the [punitive capital](https://prime.greeks.live/question/under-what-circumstances-might-a-court-award-punitive-damages-for-a-stay-violation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) treatment of data scarcity. While the IMA offers diversification benefits and potentially lower capital for well-behaved, liquid risk factors, its handling of illiquidity through the [Non-Modellable Risk Factor](https://prime.greeks.live/area/non-modellable-risk-factor/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) framework can lead to disproportionately high capital add-ons. For portfolios heavily weighted towards assets with poor price transparency, the certainty and prescribed calculations of the SA can offer a more capital-efficient path.

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## The Decisive Impact of Non-Modellable Risk Factors

Under the FRTB’s IMA, the entire capital calculation hinges on the ability to validate risk factors with a sufficient history of [real price observations](https://prime.greeks.live/area/real-price-observations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). A risk factor, such as the credit spread for a specific [illiquid corporate bond](https://prime.greeks.live/area/illiquid-corporate-bond/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), must pass the RFET to be included in the main Expected Shortfall calculation. If it fails, it is classified as an NMRF. The consequence of this classification is severe.

The risk associated with the NMRF is capitalized outside the main model through a stress scenario framework. This framework requires the bank to apply stress scenarios that are calibrated to be at least as conservative as the ES calibration, but without the diversification benefits inherent in the main model. The result is a capital charge for that specific [risk factor](https://prime.greeks.live/area/risk-factor/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) that can be exceptionally high, often negating the capital savings achieved on the modellable parts of the portfolio.

> For specific illiquid assets, the punitive capital add-on for a Non-Modellable Risk Factor under the IMA can exceed the entire capital charge calculated under the more prescriptive Standardised Approach.

The Standardised Approach, in contrast, does not distinguish between modellable and non-modellable risks in the same way. The Sensitivities-Based Method calculates capital by applying regulator-prescribed [risk weights](https://prime.greeks.live/area/risk-weights/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to the sensitivities of a trading position. While these risk weights are designed to be conservative, they are fixed and predictable. For an illiquid corporate bond, the SA would assign a specific risk weight to its [credit spread](https://prime.greeks.live/area/credit-spread/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) sensitivity.

This calculation is straightforward and does not involve a separate, punitive add-on for the lack of price observability. The strategic analysis, therefore, becomes a direct comparison ▴ is the known, prescribed capital charge under the SA lower than the sum of the ES charge for modellable factors and the punitive NMRF charge under the IMA?

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## A Comparative View of Capital Treatment

The table below illustrates a simplified comparison for a hypothetical illiquid credit position, showing how the capital treatment diverges between the two approaches.

| Aspect | Internal Models Approach (IMA) | Standardised Approach (SA) |
| --- | --- | --- |
| Primary Calculation Method | Expected Shortfall (ES) for modellable factors. | Sensitivities-Based Method (SBM) using prescribed risk weights. |
| Treatment of Illiquid Risk Factor | Classified as a Non-Modellable Risk Factor (NMRF) if it fails the Risk Factor Eligibility Test. | Treated with a standard, regulator-prescribed risk weight. No distinction for data scarcity. |
| Capital for Illiquid Component | A separate, punitive capital charge is calculated using stress scenarios. No diversification benefit. | Capital is based on a fixed risk weight applied to the credit spread sensitivity. |
| Potential for Higher Capital | The NMRF add-on can be extremely high, potentially making the total capital charge greater than the SA. | Capital is predictable but may be overly conservative for genuinely low-risk assets. |

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## Which Strategic Factors Influence the Decision?

A bank’s choice of methodology for a particular trading desk is a significant strategic decision with long-term implications for capital, technology, and operations. Several factors must be weighed when a portfolio contains illiquid instruments.

- **Concentration of Illiquidity** ▴ A portfolio with a small, incidental exposure to an illiquid asset might absorb the NMRF charge within the IMA without issue. A desk specializing in distressed debt or exotic derivatives, however, may find the majority of its [risk factors](https://prime.greeks.live/area/risk-factors/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) classified as non-modellable, making the IMA economically unviable.

- **Data Acquisition and Management Costs** ▴ To avoid NMRF classification, a bank must invest heavily in sourcing and managing price data. The cost and effort to make a risk factor “modellable” must be weighed against the potential capital savings from using the IMA. For some esoteric assets, sufficient data may simply not exist at any price.

- **Operational Simplicity and Predictability** ▴ The SA, while complex, provides a predictable and transparent capital calculation. The IMA introduces model risk, validation overhead, and the uncertainty of passing the P&L attribution test and RFET. For some institutions, the operational simplicity of the SA may be preferable, even at the cost of slightly higher capital on average.

- **The SA as a Capital Floor** ▴ The [FRTB](https://prime.greeks.live/area/frtb/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) mandates that the total capital requirement under the IMA cannot be less than a certain percentage (phased in to 72.5%) of the capital requirement calculated under the SA. This “output floor” means that even banks approved for the IMA must calculate and report SA capital, reducing the relative benefit of the IMA.

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## Execution

The execution of a capital strategy involving [illiquid assets](https://prime.greeks.live/area/illiquid-assets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) requires a granular, data-driven process. The determination of whether the Standardised Approach is more capital efficient than the [Internal Models](https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Approach moves from a strategic assessment to a quantitative exercise, centered on the rigorous identification of Non-Modellable Risk Factors and the precise calculation of their punitive capital impact. This operational reality forces a bank to maintain the infrastructure for both methodologies and run them in parallel to make an informed decision.

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## The Operational Playbook for NMRF Identification

The process of classifying a risk factor as modellable or non-modellable is a critical execution step that dictates the capital outcome under the IMA. This is not a discretionary exercise; it follows a strict procedure mandated by regulators.

- **Risk Factor Definition** ▴ The bank must first decompose its portfolio positions into a set of granular risk factors. For an illiquid bond, this would include risk factors for [interest rate risk](https://prime.greeks.live/area/interest-rate-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (e.g. specific tenor points on a government curve) and [credit spread risk](https://prime.greeks.live/area/credit-spread-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (e.g. the spread for that specific issuer and seniority).

- **Price Observation Sourcing** ▴ For each risk factor, the bank must collect “real price observations.” A real price must be a traded price, a firm quote, or a committed quote from a third party. This data must be collected continuously and stored in a verifiable manner.

- **The Risk Factor Eligibility Test (RFET)** ▴ The collected data is subjected to the RFET. The test requires a risk factor to have at least 24 real price observations over the preceding 12-month period, with a maximum of one month between two consecutive observations. If a risk factor fails this test, it is designated an NMRF.

- **Capital Charge Calculation** ▴ For all passing risk factors, capital is calculated within the bank’s main ES model. For each NMRF, a separate stress scenario capital charge is calculated. This charge is typically determined by finding the most severe loss experienced for that factor over a period of extreme stress, scaled to a 97.5% confidence level.

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## Quantitative Modeling a Hypothetical Illiquid Portfolio

To illustrate the execution-level detail, consider a simplified portfolio consisting of a single $10 million position in a 5-year illiquid corporate bond. We will compare the capital charge under the SA’s Sensitivities-Based Method (SBM) and the IMA, assuming the bond’s credit spread is an NMRF.

| Risk Component | Internal Models Approach (IMA) Calculation | Capital ($) | Standardised Approach (SA) Calculation | Capital ($) |
| --- | --- | --- | --- | --- |
| Interest Rate Risk (DV01) | Assumed to be a modellable factor. Calculated within the main Expected Shortfall (ES) model with diversification benefits. | 150,000 | Calculated using prescribed risk weights for general interest rate risk (GIRR) based on the bond’s duration. | 200,000 |
| Credit Spread Risk (CS01) | Classified as an NMRF. Subject to a punitive stress scenario add-on. The scenario simulates a severe, undiversified widening of the spread. | 900,000 | Calculated using prescribed risk weights for Credit Spread Risk (CSR) based on the issuer’s credit rating and sector. | 650,000 |
| Total Capital Charge | Sum of ES capital for modellable risks and the NMRF add-on. | 1,050,000 | Sum of SBM capital charges for all relevant risk classes. | 850,000 |

In this scenario, the execution of the two methodologies produces a clear result. The IMA, despite its sophistication in modeling interest rate risk, becomes significantly more capital-intensive due to the punitive NMRF charge applied to the illiquid credit spread component. The $900,000 add-on, which lacks any diversification benefit, pushes the total IMA capital requirement well above the more predictable, albeit still conservative, SA calculation. A bank executing its capital management strategy would run this comparison and conclude that, for this specific position, the SA is the more efficient choice.

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## Why Is the NMRF Charge so Punitive?

The severity of the NMRF charge is a deliberate feature of the FRTB framework. It is designed to create a strong incentive for banks to either avoid accumulating risks they cannot reliably measure or to invest in the infrastructure needed to improve market transparency for those risks. The calculation methodology, based on stressing the factor in isolation, assumes the worst-case scenario with no offsetting diversification from other positions in the portfolio. This conservative stance reflects the regulator’s view that unmodellable risks represent a significant source of potential systemic vulnerability, as highlighted during the 2008 financial crisis when liquidity in many markets evaporated.

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## References

- Basel Committee on Banking Supervision. “Minimum capital requirements for market risk.” Bank for International Settlements, 2019.

- Basel Committee on Banking Supervision. “Fundamental review of the trading book.” Bank for International Settlements, 2014.

- Oprisor, Razvan, and Thierry-Tri-Tien Nguyen. “FRTB ▴ Internal Models Approach (IMA) vs. Standardised Approach (SA).” Murex, 2021.

- McKinsey & Company. “The Future of Bank Risk Management.” 2022.

- PricewaterhouseCoopers. “Navigating the FRTB ▴ A guide for banks.” 2020.

- Deloitte. “Fundamental Review of the Trading Book ▴ A new paradigm for market risk.” 2021.

- Ernst & Young. “FRTB ▴ The long journey to the January 2023 go-live.” 2022.

- Harris, Larry. “Trading and Exchanges ▴ Market Microstructure for Practitioners.” Oxford University Press, 2003.

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## Reflection

The analysis of [capital efficiency](https://prime.greeks.live/area/capital-efficiency/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) under the FRTB ultimately moves beyond a simple comparison of two calculation methodologies. It compels a deeper examination of an institution’s entire risk management architecture. The framework forces a clear-eyed assessment of the true cost of complexity. The decision to pursue the potential benefits of an Internal [Models Approach](https://prime.greeks.live/question/what-are-the-strategic-trade-offs-between-the-standardised-approach-and-the-internal-model-approach-under-frtb/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) must be weighed against the structural costs of data acquisition, model validation, and the profound capital impact of its inherent limitations when faced with illiquidity.

How does your own operational framework balance the pursuit of precision with the demand for resilience? The answer defines not just a capital strategy, but the very philosophy of risk appetite and management for the institution as a whole. The knowledge of these mechanics provides the components; the wisdom lies in assembling them into a superior and durable operational system.

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## Glossary

<a href="https://prime.greeks.live/area/internal-models-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Internal Models Approach

Meaning ▴ The Internal Models Approach (IMA) describes a regulatory framework, primarily within traditional banking, that permits financial institutions to use their proprietary risk models to calculate regulatory capital requirements for market risk, operational risk, or credit risk. </a><a href="https://prime.greeks.live/area/standardised-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two semi-transparent, curved elements, one blueish, one greenish, are centrally connected, symbolizing dynamic institutional RFQ protocols. This configuration suggests aggregated liquidity pools and multi-leg spread constructions](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-price-discovery-engine.jpg)

## Standardised Approach

Meaning ▴ A standardized approach refers to the adoption of uniform procedures, protocols, or methodologies across a system or industry, designed to ensure consistency, comparability, and interoperability. </a><a href="https://prime.greeks.live/area/capital-requirements/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Transparent conduits and metallic components abstractly depict institutional digital asset derivatives trading. Symbolizing cross-protocol RFQ execution, multi-leg spreads, and high-fidelity atomic settlement across aggregated liquidity pools, it reflects prime brokerage infrastructure](https://options.greeks.live/wp-content/uploads/2025/07/cross-protocol-rfq-execution-digital-asset-derivatives-microstructure-system.jpg)

## Capital Requirements

Meaning ▴ Capital Requirements, within the architecture of crypto investing, represent the minimum mandated or operationally prudent amounts of financial resources, typically denominated in digital assets or stablecoins, that institutions and market participants must maintain. </a><a href="https://prime.greeks.live/area/banking-supervision/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A translucent, faceted sphere, representing a digital asset derivative block trade, traverses a precision-engineered track. This signifies high-fidelity execution via an RFQ protocol, optimizing liquidity aggregation, price discovery, and capital efficiency within institutional market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-block-trade-high-fidelity-execution-protocol-prime-os-path.jpg)

## Banking Supervision

Meaning ▴ Banking Supervision, viewed through a systems architecture lens in the crypto domain, denotes the regulatory oversight framework applied to entities performing financial services involving digital assets. </a><a href="https://prime.greeks.live/area/sensitivities-based-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central dark nexus with intersecting data conduits and swirling translucent elements depicts a sophisticated RFQ protocol's intelligence layer. This visualizes dynamic market microstructure, precise price discovery, and high-fidelity execution for institutional digital asset derivatives, optimizing capital efficiency and mitigating counterparty risk](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-visualizing-high-fidelity-execution-and-market-microstructure-dynamics.jpg)

## Sensitivities-Based Method

Meaning ▴ The sensitivities-based method is a quantitative risk management approach, widely applied in finance and adapted for crypto investing and options trading, that quantifies how a portfolio's value responds to marginal changes in various market parameters, often termed "sensitivities" or "Greeks. </a><a href="https://prime.greeks.live/area/expected-shortfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Stacked precision-engineered circular components, varying in size and color, rest on a cylindrical base. This modular assembly symbolizes a robust Crypto Derivatives OS architecture, enabling high-fidelity execution for institutional RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-protocol-architecture-optimized-for-high-fidelity-execution.jpg)

## Expected Shortfall

Meaning ▴ Expected Shortfall (ES), also known as Conditional Value-at-Risk (CVaR), is a coherent risk measure employed in crypto investing and institutional options trading to quantify the average loss that would be incurred if a portfolio's returns fall below a specified worst-case percentile. </a><a href="https://prime.greeks.live/area/risk-factor-eligibility-test/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Risk Factor Eligibility Test

Meaning ▴ A Risk Factor Eligibility Test, relevant in institutional crypto trading and portfolio management, is a systematic assessment determining if a crypto asset or derivative meets predefined criteria for inclusion in a strategy, portfolio, or risk model. </a><a href="https://prime.greeks.live/area/non-modellable-risk-factors/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Non-Modellable Risk Factors

Meaning ▴ Non-modellable risk factors are elements of financial risk that cannot be accurately captured or quantified by existing quantitative risk models due to insufficient historical data, extreme market conditions, or the inherently unpredictable nature of certain events. </a><a href="https://prime.greeks.live/question/how-does-the-basel-iii-cva-capital-charge-incentivize-central-clearing-for-otc-derivatives/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Capital Charge

The Basel III CVA capital charge incentivizes central clearing by imposing a significant capital cost on bilateral trades that is eliminated for centrally cleared transactions. </a><a href="https://prime.greeks.live/area/non-modellable-risk-factor/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A modular component, resembling an RFQ gateway, with multiple connection points, intersects a high-fidelity execution pathway. This pathway extends towards a deep, optimized liquidity pool, illustrating robust market microstructure for institutional digital asset derivatives trading and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocol-layer-connecting-institutional-digital-asset-liquidity-pools.jpg)

## Non-Modellable Risk Factor

Meaning ▴ A non-modellable risk factor refers to a source of potential loss or uncertainty that cannot be adequately quantified or predicted using conventional statistical or mathematical models due to insufficient data, extreme complexity, or unprecedented nature. </a><a href="https://prime.greeks.live/question/under-what-circumstances-might-a-court-award-punitive-damages-for-a-stay-violation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sharp, crystalline spearhead symbolizes high-fidelity execution and precise price discovery for institutional digital asset derivatives. Resting on a reflective surface, it evokes optimal liquidity aggregation within a sophisticated RFQ protocol environment, reflecting complex market microstructure and advanced algorithmic trading strategies](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-precision-execution.jpg)

## Punitive Capital

A court awards punitive damages when a creditor's willful stay violation is so egregious it functions as a systemic threat to the court's authority. </a><a href="https://prime.greeks.live/area/illiquid-corporate-bond/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated metallic mechanism, split into distinct operational segments, represents the core of a Prime RFQ for institutional digital asset derivatives. Its central gears symbolize high-fidelity execution within RFQ protocols, facilitating price discovery and atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/precision-rfq-engine-for-institutional-digital-asset-derivatives-trading.jpg)

## Illiquid Corporate Bond

Meaning ▴ An illiquid corporate bond, in its general financial definition and as it conceptually applies to nascent or specialized digital asset markets, refers to a debt instrument issued by a corporation that experiences limited trading activity. </a><a href="https://prime.greeks.live/area/real-price-observations/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric forms depict institutional digital asset derivatives trading. A dark, speckled surface represents fragmented liquidity and complex market microstructure, interacting with a clean, teal triangular Prime RFQ structure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-system-for-prime-os-liquidity-pool.jpg)

## Real Price Observations

Meaning ▴ Real Price Observations refer to the actual, verifiable prices at which assets, specifically digital assets, are traded and recorded within a market or on a blockchain. </a><a href="https://prime.greeks.live/area/risk-factor/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, split capsule object reveals an internal glowing teal light connecting its two halves, symbolizing a secure, high-fidelity RFQ protocol facilitating atomic settlement for institutional digital asset derivatives. This represents the precise execution of multi-leg spread strategies within a principal's operational framework, ensuring optimal liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-system-2.jpg)

## Risk Factor

Meaning ▴ In the context of crypto investing, RFQ crypto, and institutional options trading, a Risk Factor is any identifiable event, condition, or exposure that, if realized, could adversely impact the value, security, or operational integrity of digital assets, investment portfolios, or trading strategies. </a><a href="https://prime.greeks.live/area/credit-spread/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A luminous central hub, representing a dynamic liquidity pool, is bisected by two transparent, sharp-edged planes. This visualizes intersecting RFQ protocols and high-fidelity algorithmic execution within institutional digital asset derivatives market microstructure, enabling precise price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-protocols-microstructure-engine.jpg)

## Credit Spread

Meaning ▴ A credit spread, in financial derivatives, represents a sophisticated options trading strategy involving the simultaneous purchase and sale of two options of the same type (both calls or both puts) on the same underlying asset with the same expiration date but different strike prices. </a><a href="https://prime.greeks.live/area/risk-weights/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sphere split into light and dark segments, revealing a luminous core. This encapsulates the precise Request for Quote RFQ protocol for institutional digital asset derivatives, highlighting high-fidelity execution, optimal price discovery, and advanced market microstructure within aggregated liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-execution-framework-for-institutional-digital-asset-derivatives-request-for-quote-protocol-optimization.jpg)

## Risk Weights

Meaning ▴ Risk weights are specific factors assigned to different asset classes or financial exposures, reflecting their relative degree of risk, primarily utilized in determining regulatory capital requirements for financial institutions. </a><a href="https://prime.greeks.live/area/risk-factors/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central control knob on a metallic platform, bisected by sharp reflective lines, embodies an institutional RFQ protocol. This depicts intricate market microstructure, enabling high-fidelity execution, precise price discovery for multi-leg options, and robust Prime RFQ deployment, optimizing latent liquidity across digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-rfq-digital-asset-derivatives-execution-engine-core-microstructure.jpg)

## Risk Factors

Meaning ▴ Risk Factors, within the domain of crypto investing and the architecture of digital asset systems, denote the inherent or external elements that introduce uncertainty and the potential for adverse outcomes. </a><a href="https://prime.greeks.live/area/frtb/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract system interface with translucent, layered funnels channels RFQ inquiries for liquidity aggregation. A precise metallic rod signifies high-fidelity execution and price discovery within market microstructure, representing Prime RFQ for digital asset derivatives with atomic settlement](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocol-optimized-high-fidelity-execution-interface.jpg)

## Frtb

Meaning ▴ FRTB, the Fundamental Review of the Trading Book, is an international regulatory standard by the Basel Committee on Banking Supervision (BCBS) for market risk capital requirements. </a><a href="https://prime.greeks.live/area/internal-models/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, segmented capsule, slightly ajar, embodies a secure RFQ protocol for institutional digital asset derivatives. It facilitates private quotation and high-fidelity execution of multi-leg spreads a blurred blue sphere signifies dynamic price discovery and atomic settlement within a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-3.jpg)

## Internal Models

Meaning ▴ Within the sophisticated systems architecture of institutional crypto trading and comprehensive risk management, Internal Models are proprietary computational frameworks developed and rigorously maintained by financial firms. </a><a href="https://prime.greeks.live/area/illiquid-assets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![An abstract visual depicts a central intelligent execution hub, symbolizing the core of a Principal's operational framework. Two intersecting planes represent multi-leg spread strategies and cross-asset liquidity pools, enabling private quotation and aggregated inquiry for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-protocol-engine-for-institutional-digital-asset-derivatives.jpg)

## Illiquid Assets

Meaning ▴ Illiquid Assets are financial instruments or investments that cannot be readily converted into cash at their fair market value without significant price concession or undue delay, typically due to a limited number of willing buyers or an inefficient market structure. </a><a href="https://prime.greeks.live/area/credit-spread-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract RFQ engine, transparent blades symbolize multi-leg spread execution and high-fidelity price discovery. The central hub aggregates deep liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-engine-for-crypto-derivatives-high-fidelity-block-trade.jpg)

## Credit Spread Risk

Meaning ▴ Credit spread risk in crypto investing refers to the potential for adverse changes in the difference between the yield of a credit-sensitive digital asset and a benchmark risk-free rate. </a><a href="https://prime.greeks.live/area/interest-rate-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision-engineered metallic and glass system depicts the core of an Institutional Grade Prime RFQ, facilitating high-fidelity execution for Digital Asset Derivatives. Transparent layers represent visible liquidity pools and the intricate market microstructure supporting RFQ protocol processing, ensuring atomic settlement capabilities](https://options.greeks.live/wp-content/uploads/2025/08/robust-institutional-digital-asset-derivatives-trading-platform-for-optimized-rfq-protocol-execution-and-deep-liquidity-access.jpg)

## Interest Rate Risk

Meaning ▴ Interest Rate Risk, within the crypto financial ecosystem, denotes the potential for changes in market interest rates to adversely affect the value of digital asset holdings, particularly those involved in lending, borrowing, or fixed-income-like instruments. </a><a href="https://prime.greeks.live/area/capital-efficiency/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A bifurcated sphere, symbolizing institutional digital asset derivatives, reveals a luminous turquoise core. This signifies a secure RFQ protocol for high-fidelity execution and private quotation](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-orchestration.jpg)

## Capital Efficiency

Meaning ▴ Capital efficiency, in the context of crypto investing and institutional options trading, refers to the optimization of financial resources to maximize returns or achieve desired trading outcomes with the minimum amount of capital deployed. </a><a href="https://prime.greeks.live/question/what-are-the-strategic-trade-offs-between-the-standardised-approach-and-the-internal-model-approach-under-frtb/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Precision-engineered modular components, with transparent elements and metallic conduits, depict a robust RFQ Protocol engine. This architecture facilitates high-fidelity execution for institutional digital asset derivatives, enabling efficient liquidity aggregation and atomic settlement within market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-optimizing-high-fidelity-execution-and-liquidity-aggregation.jpg)

## Models Approach

The choice between FRTB's Standardised and Internal Model approaches is a strategic trade-off between operational simplicity and capital efficiency. </a>

**Tags:** [Expected Shortfall](https://options.greeks.live/area/expected-shortfall/), [Credit Spread Risk](https://options.greeks.live/area/credit-spread-risk/), [Risk Factor](https://options.greeks.live/area/risk-factor/), [Capital Efficiency](https://options.greeks.live/area/capital-efficiency/), [Basel Committee](https://options.greeks.live/area/basel-committee/), [Regulatory Capital](https://options.greeks.live/area/regulatory-capital/)	

## Discover More

- 
### [What Are the Primary Drivers of Rwa Variability between Different Banks?](https://options.greeks.live/question/what-are-the-primary-drivers-of-rwa-variability-between-different-banks/)
![A central RFQ aggregation engine radiates segments, symbolizing distinct liquidity pools and market makers. This depicts multi-dealer RFQ protocol orchestration for high-fidelity price discovery in digital asset derivatives, highlighting diverse counterparty risk profiles and algorithmic pricing grids.](https://options.greeks.live/wp-content/uploads/2025/07/centralized-digital-asset-rfq-orchestration-for-multi-venue-liquidity-aggregation-and-high-fidelity-execution-across-diverse-counterparties.jpg)

RWA variability arises from bank-specific model choices, diverse business strategies, and fragmented regulatory oversight.

- 
### [What Are the Primary Obstacles for a Bank Attempting to Pool Data for NMRF Remediation?](https://options.greeks.live/question/what-are-the-primary-obstacles-for-a-bank-attempting-to-pool-data-for-nmrf-remediation/)
![Abstract geometric forms depict institutional digital asset derivatives trading. A dark, speckled surface represents fragmented liquidity and complex market microstructure, interacting with a clean, teal triangular Prime RFQ structure. This symbolizes high-fidelity execution via RFQ protocols, ensuring efficient price discovery and atomic settlement for block trades.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-system-for-prime-os-liquidity-pool.jpg)

The primary obstacles to pooling bank data for NMRF remediation are systemic, stemming from fragmented technology and siloed organizational structures.

- 
### [What Are the Primary Differences between Span and Stans Methodologies?](https://options.greeks.live/question/what-are-the-primary-differences-between-span-and-stans-methodologies/)
![Abstract geometric representation of an institutional RFQ protocol for digital asset derivatives. Two distinct segments symbolize cross-market liquidity pools and order book dynamics. A central, illuminated conduit signifies high-fidelity execution, price discovery, and algorithmic trading within a Principal's operational framework, optimizing block trade settlement and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-2.jpg)

SPAN is a deterministic scenario analysis, while STANS is a probabilistic Monte Carlo simulation for derivatives risk margining.

- 
### [What Are the Main Differences between Risk-Based Capital Requirements and the Leverage Ratio?](https://options.greeks.live/question/what-are-the-main-differences-between-risk-based-capital-requirements-and-the-leverage-ratio/)
![A polished, teal-hued digital asset derivative disc rests upon a robust, textured market infrastructure base, symbolizing high-fidelity execution and liquidity aggregation. Its reflective surface illustrates real-time price discovery and multi-leg options strategies, central to institutional RFQ protocols and principal trading frameworks.](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocols-high-fidelity-institutional-execution.jpg)

Risk-based capital aligns capital with asset risk, while the leverage ratio provides a simple backstop based on total exposure.

- 
### [What Are the Primary Differences between the Standardized and Internal Model Approaches?](https://options.greeks.live/question/what-are-the-primary-differences-between-the-standardized-and-internal-model-approaches/)
![Precision-engineered metallic discs, interconnected by a central spindle, against a deep void, symbolize the core architecture of an Institutional Digital Asset Derivatives RFQ protocol. This setup facilitates private quotation, robust portfolio margin, and high-fidelity execution, optimizing market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-core-infrastructure.jpg)

The standardized approach uses regulator-set risk weights, while the internal model approach allows banks to use their own approved models.

- 
### [How Does a Monte Carlo Simulation Improve the Accuracy of Portfolio Margin Requirements?](https://options.greeks.live/question/how-does-a-monte-carlo-simulation-improve-the-accuracy-of-portfolio-margin-requirements/)
![Abstract planes delineate dark liquidity and a bright price discovery zone. Concentric circles signify volatility surface and order book dynamics for digital asset derivatives. A central element represents algorithmic trading and high-fidelity execution via an RFQ protocol.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-execution-3.jpg)

Monte Carlo simulation enhances margin accuracy by modeling a full probability distribution of portfolio outcomes, capturing non-linear risks and correlations that static scenarios miss.

- 
### [What Are the Primary Differences in CVA Capital Treatment between US and EU Regulations?](https://options.greeks.live/question/what-are-the-primary-differences-in-cva-capital-treatment-between-us-and-eu-regulations/)
![A sleek, precision-engineered device with a split-screen interface displaying implied volatility and price discovery data for digital asset derivatives. This institutional grade module optimizes RFQ protocols, ensuring high-fidelity execution and capital efficiency within market microstructure for multi-leg spreads.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-module.jpg)

US and EU CVA rules diverge on scope and methodology, demanding a dual-track strategy for capital optimization.

- 
### [How Does the Shift from Value-At-Risk to Expected Shortfall Impact Hedging Strategies for CVA?](https://options.greeks.live/question/how-does-the-shift-from-value-at-risk-to-expected-shortfall-impact-hedging-strategies-for-cva/)
![A gold-hued precision instrument with a dark, sharp interface engages a complex circuit board, symbolizing high-fidelity execution within institutional market microstructure. This visual metaphor represents a sophisticated RFQ protocol facilitating private quotation and atomic settlement for digital asset derivatives, optimizing capital efficiency and mitigating counterparty risk.](https://options.greeks.live/wp-content/uploads/2025/08/institutional-grade-precision-execution-engine-optimizing-digital-asset-derivatives-rfq-protocols-within-market-microstructure.jpg)

The shift to Expected Shortfall compels CVA hedging to evolve from managing loss probability to controlling tail event severity.

- 
### [What Are the Main Challenges Banks Face When Implementing the Internal Models Approach?](https://options.greeks.live/question/what-are-the-main-challenges-banks-face-when-implementing-the-internal-models-approach/)
![A precision-engineered institutional digital asset derivatives execution system cutaway. The teal Prime RFQ casing reveals intricate market microstructure. Bright blue internal elements represent dynamic liquidity pools, enabling high-fidelity execution and efficient RFQ protocols for multi-leg spread strategies.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-rfq-protocol-core-engine.jpg)

Implementing the Internal Models Approach subjects a bank's entire risk architecture to intense, continuous validation under regulatory scrutiny.

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    "headline": "Can the Standardised Approach Ever Be More Capital Efficient than the IMA for Certain Illiquid Portfolios? \u25b4 Question",
    "description": "For portfolios with significant non-modellable risk factors, the Standardised Approach can be more capital efficient than the IMA. \u25b4 Question",
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    "datePublished": "2025-08-05T18:38:23+00:00",
    "dateModified": "2025-10-26T09:35:59+00:00",
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        "caption": "Precision-engineered multi-vane system with opaque, reflective, and translucent teal blades radiating from a central hub, abstractly represents Institutional Digital Asset Derivatives Market Microstructure. It embodies optimized RFQ execution for complex Multi-Leg Spreads, enabling efficient Price Discovery and enhanced Capital Efficiency. Varying blade transparency signifies dynamic liquidity channels, including Dark Pool access, ensuring Best Execution and robust Counterparty Risk mitigation within a cutting-edge Crypto Derivatives OS."
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        "Bank for International Settlements",
        "Banking Supervision",
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        "Expected Shortfall",
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        "Risk Factor",
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                "text": "A bank's choice of methodology for a particular trading desk is a significant strategic decision with long-term implications for capital, technology, and operations. Several factors must be weighed when a portfolio contains illiquid instruments."
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---

**Original URL:** https://options.greeks.live/question/can-the-standardised-approach-ever-be-more-capital-efficient-than-the-ima-for-certain-illiquid-portfolios/
