# How Does the Frtb Specifically Impact Bank Market Making in Derivatives? ▴ Question

**Published:** 2025-08-13
**Categories:** Question

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## Concept

The [Fundamental Review](https://prime.greeks.live/question/how-does-the-fundamental-review-of-the-trading-book-affect-capital-requirements/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) of the Trading Book (FRTB) represents a systemic recalibration of the [market risk capital](https://prime.greeks.live/area/market-risk-capital/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) framework for banking institutions. Its introduction stems from a recognition that the preceding Basel II.5 standards, while a step forward, inadequately captured the tail risks that materialized during the 2008 financial crisis. The FRTB is an architectural redesign intended to create a more robust and granular quantification of the risks inherent in a bank’s trading activities.

At its core, the framework establishes a far stricter demarcation between the [trading book](https://prime.greeks.live/area/trading-book/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and the banking book, mitigating the potential for regulatory arbitrage that existed under previous regimes. This clear delineation ensures that instruments are classified based on the intent to trade rather than for achieving a more favorable capital outcome.

A central pillar of this new architecture is the replacement of Value-at-Risk (VaR) with [Expected Shortfall](https://prime.greeks.live/area/expected-shortfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (ES) as the primary metric for [internal models](https://prime.greeks.live/question/what-are-the-primary-drivers-of-valuation-differences-between-internal-models-and-vendor-quotes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). VaR calculates the potential loss over a certain period within a given confidence interval, but it does not specify the magnitude of the loss should that threshold be breached. ES, conversely, measures the expected value of losses beyond the VaR threshold, providing a more comprehensive view of tail risk ▴ the probability of rare, high-impact events.

This methodological shift forces a more conservative capital posture, compelling market-making desks to account for the severity of losses in stressed market conditions, not just their probability. The framework also introduces varying liquidity horizons for different asset classes, acknowledging that liquidating a position in a corporate bond is a different proposition from unwinding a G7 currency future, especially during market turmoil.

> The FRTB fundamentally re-architects market risk capital, shifting from probability-based risk measures to a framework that rigorously quantifies the expected magnitude of losses in severe market stress.

The implications for [derivatives market-making](https://prime.greeks.live/question/how-do-mifid-ii-market-making-obligations-impact-hft-liquidity-provision-during-market-stress/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) are direct and profound. Derivatives, by their nature, are instruments whose value is derived from underlying assets, often exhibiting complex, non-linear risk profiles. The FRTB’s design directly targets this complexity. The framework is bifurcated into two primary methodologies for calculating capital requirements ▴ a revised Standardised Approach (SA) and a more stringent [Internal Models Approach](https://prime.greeks.live/area/internal-models-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (IMA).

Every bank must calculate its capital requirements using the SA, which is designed to be significantly more risk-sensitive than its predecessor. Banks with sophisticated risk management capabilities can apply for [IMA](https://prime.greeks.live/area/ima/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) approval on a desk-by-desk basis, a granular approach that prevents firm-wide approval and demands rigorous, ongoing validation. This dual structure creates a significant operational and strategic challenge for banks, forcing a detailed evaluation of the costs and benefits of maintaining complex trading operations. The capital required to support a derivatives market-making business is now tied directly to the demonstrated ability to model its risks with precision and to the inherent liquidity of the instruments being traded.

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## Strategy

The implementation of the FRTB compels a fundamental strategic reassessment for any bank engaged in derivatives market-making. The central decision revolves around the adoption of the [Standardised Approach](https://prime.greeks.live/question/what-are-the-primary-drivers-for-banks-choosing-the-standardised-approach-over-the-internal-model-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) versus the Internal [Models Approach](https://prime.greeks.live/question/what-are-the-primary-drivers-for-banks-choosing-the-standardised-approach-over-the-internal-model-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) for each trading desk. This choice is not merely operational; it is a strategic determination that shapes the bank’s capacity to compete in various derivatives markets. The IMA promises greater capital efficiency, as a bank’s own calibrated models can result in lower risk-weighted assets (RWAs) compared to the SA.

However, achieving and maintaining IMA status is an expensive and resource-intensive undertaking. It requires significant investment in technology and data infrastructure to perform daily Profit and Loss Attribution (P&L) tests and rigorous backtesting to prove the model’s accuracy.

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## The Desk-Level Decision Matrix

A bank’s strategy must become granular, analyzing each derivatives desk as a distinct business unit. For a high-volume, liquid rates-and-FX derivatives desk, the investment in IMA may be justifiable. The high turnover and deep data availability make it easier to pass the P&L attribution tests and demonstrate modelability of [risk factors](https://prime.greeks.live/area/risk-factors/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Conversely, for a desk dealing in exotic credit derivatives or less liquid emerging market options, the path to IMA is fraught with difficulty.

These instruments often suffer from a lack of continuously available, real-world pricing data, leading to the classification of their key drivers as [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). Each [NMRF](https://prime.greeks.live/area/nmrf/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) incurs a punitive capital add-on, potentially eroding any capital benefit the IMA might have offered over the SA. Consequently, banks may strategically opt to place these desks under the SA from the outset or even exit these business lines entirely if the capital costs render them unprofitable.

> Under FRTB, the viability of a derivatives market-making desk is determined by a direct trade-off between the capital efficiency of internal models and the operational cost of proving their validity.

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## Capital Implications across Approaches

The strategic choice between SA and IMA has tangible consequences for capital allocation. The Standardised Approach, through its [Sensitivities-Based Method](https://prime.greeks.live/area/sensitivities-based-method/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (SBM), applies regulator-prescribed risk weights and correlations. The Internal Models Approach allows the bank to use its own models, but the stringent validation requirements and NMRF charges can offset the benefits.

Consider the following comparison for a hypothetical derivatives portfolio:

| Derivative Type | Key Risk Factors | IMA Suitability | Primary Strategic Consideration |
| --- | --- | --- | --- |
| G10 Interest Rate Swap | Interest Rate Curves (Delta, Vega) | High | High-volume, liquid market justifies IMA investment. P&L attribution is generally achievable due to deep data pools. |
| Vanilla Equity Index Option | Equity Price (Delta), Volatility (Vega), Dividends | High | Similar to interest rate swaps, the liquidity and data availability for major indices support the use of internal models. |
| Corporate Bond CDS | Credit Spread (Delta), Recovery Rate | Medium | Modelability depends on the liquidity of the underlying corporate bond. Less liquid names may trigger NMRFs. |
| Exotic FX Option (e.g. Barrier) | FX Rate (Delta), Volatility (Vega), Correlation, Barrier Events | Low to Medium | The complexity and potential for non-linear payoffs make P&L attribution challenging. The barrier feature can introduce non-modellable risks. |
| Securitized Product (e.g. CLO Tranche) | Correlation, Default Rates, Prepayment Speeds | Low | These products are explicitly treated more punitively and are difficult to model, making them prime candidates for the SA and potentially uneconomical to trade. |

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## Recalibrating Business Models

The [FRTB](https://prime.greeks.live/area/frtb/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) framework forces a strategic re-evaluation of the entire market-making business model. The increased capital costs will likely be passed on to clients through wider bid-ask spreads, particularly for products that are more capital-intensive under the new rules. This could lead to a tiered market, where prime clients trading liquid, “vanilla” derivatives see minimal impact, while clients requiring bespoke or less-liquid products face significantly higher costs.

Banks will need to rationalize their product offerings, focusing on areas where they have a genuine competitive advantage, either through superior modeling capabilities (IMA) or sufficient scale to absorb the costs of the SA. This may also accelerate the trend toward central clearing for certain derivatives, as cleared products generally benefit from a more favorable capital treatment.

- 
**Product Rationalization** ▴ Banks must analyze the post-FRTB return on capital for each derivative product and make hard decisions about which markets to continue serving.

- 
**Client Pricing Tiers** ▴ The cost of providing liquidity will become more differentiated. Pricing models will need to incorporate the specific [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) associated with a client’s requested trade.

- 
**Investment in Technology** ▴ A core strategic pillar must be sustained investment in risk and data systems. This is not just a compliance exercise; it is a prerequisite for competing effectively in the new environment.

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## Execution

The execution of the FRTB framework within a bank’s derivatives market-making operation is a monumental undertaking, demanding a complete overhaul of risk measurement systems, data architecture, and desk-level operating models. The theoretical principles of the framework translate into highly granular, data-intensive calculations that must be performed daily.

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## Operationalizing the Standardised Approach

For desks operating under the Standardised Approach, the primary computational challenge is the Sensitivities-Based Method (SBM). This is not a simple, broad-brush calculation; it requires the bank to have the systems in place to calculate specific risk sensitivities for every instrument in the trading book. The three key sensitivity measures are:

- 
**Delta** ▴ The sensitivity of an instrument’s value to a change in an underlying risk factor (e.g. a one-basis-point change in an interest rate).

- 
**Vega** ▴ The sensitivity of an option’s value to a change in the implied volatility of its underlying asset.

- 
**Curvature** ▴ A measure designed to capture the non-linear price movements that delta alone does not, particularly for options. It involves calculating the impact of a large, upward and downward shock to a risk factor, beyond what is captured by delta.

These sensitivities are then aggregated within specific “buckets” (e.g. by currency, by credit quality) and across seven regulatory-defined risk classes, using prescribed correlation factors. The final capital charge is a sum of these aggregated risks, plus a [Default Risk Charge](https://prime.greeks.live/area/default-risk-charge/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) (DRC) and a Residual Risk Add-on (RRA) for exotic exposures.

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## Illustrative SBM Calculation

The following table provides a simplified illustration of how the SBM capital charge might be calculated for a single position, such as a 5-year, $100 million USD interest rate swap. This demonstrates the level of detail required for just one component of the overall capital calculation.

| Component | Description | Hypothetical Value | Regulatory Risk Weight | Risk Capital |
| --- | --- | --- | --- | --- |
| Delta Risk | Sensitivity to a 1bp change in the 5-year interest rate. A DV01 (dollar value of a basis point) is calculated. | $45,000 per 1% change | 1.7% (for a 5yr G10 currency) | $765 |
| Curvature Risk | Captures non-linear risk from a large rate shock. Assumes a shock to the 5-year rate. | $2,000 loss after delta move | (Determined by formula) | $2,000 |
| Total SBM Charge | Sum of risk components (simplified for illustration). | N/A | N/A | $2,765 |

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## The Rigors of the Internal Models Approach

For a bank to execute a derivatives market-making strategy using the IMA, it must build and maintain a far more complex operational infrastructure. The two most significant hurdles are the P&L Attribution test and the management of Non-Modellable Risk Factors.

- 
**P&L Attribution ([PLAT](https://prime.greeks.live/area/plat/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite))** ▴ This is a daily test at the trading desk level. The bank must compare the “hypothetical P&L” (HPL) generated by the front-office pricing models with the “risk-theoretical P&L” produced by the risk management models. If there are significant, unexplained discrepancies between these two P&L figures, the desk fails the test. Two metrics are used ▴ the Spearman correlation to assess the association between the two P&Ls and the Kolmogorov-Smirnov test to check if the distributions are similar. A desk failing PLAT must revert to the more punitive Standardised Approach, potentially jeopardizing its business model.

- 
**Non-Modellable Risk Factors (NMRF)** ▴ A risk factor is deemed “modellable” only if it has a sufficient number of real, observable prices over a given period. For many derivatives, especially those on less liquid underlyings, certain risk factors (e.g. the volatility of an off-the-run bond, the correlation between two emerging market currencies) will fail this test. Each NMRF is then subject to a separate capital charge calculated under a stress scenario, which can become prohibitively expensive. Managing NMRFs requires a sophisticated data strategy to source and validate pricing information, as well as a governance process to justify which factors are truly modellable.

The operational reality of the FRTB is that it transforms [market risk](https://prime.greeks.live/area/market-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) management from a periodic, portfolio-level exercise into a daily, highly granular, data-driven process at the level of individual trading desks and risk factors. This requires not just new models, but a new class of integrated technology platforms that can handle vast amounts of data, perform complex calculations in near-real time, and provide the transparency required for both internal management and regulatory scrutiny.

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## References

- SIFMA. “The Fundamental Review of the Trading Book (FRTB) ▴ An Introductory Guide.” 8 September 2021.

- swissQuant. “Yet Another Review of the Fundamental Review of the Trading Book (FRTB).” 28 May 2025.

- Deloitte. “Implementing the Fundamental Review of the Trading Book ▴ state of play and key challenges ahead.” 28 November 2022.

- International Capital Market Association. “Fundamental Review of the Trading Book (FRTB).” Accessed 13 August 2025.

- Banking Hub. “FRTB ▴ New Market Risk Framework polarizes Regulators and Institutions.” 31 August 2015.

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## Reflection

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## From Regulatory Mandate to Systemic Advantage

The intricate web of calculations and protocols that constitute the Fundamental Review of the Trading Book can be viewed as a compliance burden. An alternative perspective frames it as a catalyst for profound institutional change. The framework’s insistence on granular data, daily model validation, and a clear-eyed assessment of liquidity risk provides the necessary blueprint for constructing a superior operational system for market-making. The process of adhering to the FRTB, while arduous, forces an institution to develop a deeper, more mechanistic understanding of its own risk exposures.

The very systems built to satisfy regulatory requirements ▴ the integrated data platforms, the real-time sensitivity calculators, the P&L attribution engines ▴ become the core components of a more advanced trading apparatus. The ultimate impact of this regulation, therefore, may be measured not by the capital it requires, but by the operational discipline it instills and the competitive differentiation it creates for those institutions that master its complexity.

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## Glossary

<a href="https://prime.greeks.live/area/market-risk-capital/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Market Risk Capital

Meaning ▴ Market Risk Capital represents the specific quantum of capital an institution is mandated to hold against potential losses arising from adverse movements in market prices across its trading book, encompassing digital asset derivatives. </a><a href="https://prime.greeks.live/question/how-does-the-fundamental-review-of-the-trading-book-affect-capital-requirements/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Fundamental Review

The Fundamental Review of the Trading Book re-architects market risk capital through more stringent modeling, data, and boundary definitions. </a><a href="https://prime.greeks.live/area/trading-book/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract spheres and a translucent flow visualize institutional digital asset derivatives market microstructure. It depicts robust RFQ protocol execution, high-fidelity data flow, and seamless liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/precision-market-microstructure-for-institutional-digital-asset-derivatives-leveraging-rfq-protocols-and-atomic-settlement-across-prime-os.jpg)

## Trading Book

Meaning ▴ A Trading Book represents a structured aggregation of financial positions held by an institution, primarily for the purpose of profiting from short-term market movements or arbitrage opportunities. </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">
![A multi-segmented sphere symbolizes institutional digital asset derivatives. One quadrant shows a dynamic implied volatility surface](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-liquidity-management.jpg)

## Expected Shortfall

Meaning ▴ Expected Shortfall, often termed Conditional Value-at-Risk, quantifies the average loss an institutional portfolio could incur given that the loss exceeds a specified Value-at-Risk threshold over a defined period. </a><a href="https://prime.greeks.live/question/what-are-the-primary-drivers-of-valuation-differences-between-internal-models-and-vendor-quotes/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sharp, transparent, teal structures and a golden line intersect a dark void. This symbolizes market microstructure for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-precision-execution-leveraging-granular-market-microstructure-intelligence.jpg)

## Internal Models

Valuation differences are driven by the systemic divergence in data, models, and risk adjustments between a bespoke internal view and a generalized vendor consensus. </a><a href="https://prime.greeks.live/question/how-do-mifid-ii-market-making-obligations-impact-hft-liquidity-provision-during-market-stress/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Derivatives Market-Making

MiFID II contractually binds HFTs to provide liquidity, creating a system of mandated stability that allows for strategic, protocol-driven withdrawal only under declared "exceptional circumstances.". </a><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) defines a sophisticated regulatory framework allowing financial institutions to calculate their market risk capital requirements using proprietary, approved quantitative models rather than relying on standardized regulatory formulas. </a><a href="https://prime.greeks.live/area/ima/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Ima

Meaning ▴ Intelligent Market Access, or IMA, designates a sophisticated, data-driven algorithmic framework engineered for the optimal routing and execution of institutional orders across fragmented digital asset markets. </a><a href="https://prime.greeks.live/question/what-are-the-primary-drivers-for-banks-choosing-the-standardised-approach-over-the-internal-model-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Standardised Approach

The shift to the Standardised Approach is driven by its operational simplicity and regulatory certainty in an era of rising model complexity and cost. </a><a href="https://prime.greeks.live/question/what-are-the-primary-drivers-for-banks-choosing-the-standardised-approach-over-the-internal-model-approach/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Models Approach

The shift to the Standardised Approach is driven by its operational simplicity and regulatory certainty in an era of rising model complexity and cost. </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">
![An intricate, transparent cylindrical system depicts a sophisticated RFQ protocol for digital asset derivatives. Internal glowing elements signify high-fidelity execution and algorithmic trading](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-protocol-architecture.jpg)

## Risk Factors

Meaning ▴ Risk factors represent identifiable and quantifiable systemic or idiosyncratic variables that can materially impact the performance, valuation, or operational integrity of institutional digital asset derivatives portfolios and their underlying infrastructure, necessitating their rigorous identification and ongoing measurement within a comprehensive risk framework. </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">
![A central core, symbolizing a Crypto Derivatives OS and Liquidity Pool, is intersected by two abstract elements. These represent Multi-Leg Spread and Cross-Asset Derivatives executed via RFQ Protocol](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocol-multi-leg-spread-execution.jpg)

## Non-Modellable Risk Factors

Meaning ▴ Non-Modellable Risk Factors denote those elements of market exposure that resist accurate quantification or prediction through standard computational models due to data scarcity, inherent complexity, or unique market characteristics. </a><a href="https://prime.greeks.live/area/nmrf/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting abstract geometric planes depict institutional grade RFQ protocols and market microstructure. Speckled surfaces reflect complex order book dynamics and implied volatility, while smooth planes represent high-fidelity execution channels and private quotation systems for digital asset derivatives within a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocols-digital-asset-microstructure-execution.jpg)

## Nmrf

Meaning ▴ NMRF, or Net Margin Risk Factor, quantifies the residual risk exposure within a derivatives portfolio after accounting for initial margin, variation margin, and the netting benefits across eligible positions and collateral. </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">
![Internal hard drive mechanics, with a read/write head poised over a data platter, symbolize the precise, low-latency execution and high-fidelity data access vital for institutional digital asset derivatives. This embodies a Principal OS architecture supporting robust RFQ protocols, enabling atomic settlement and optimized liquidity aggregation within complex market microstructure](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-precision-execution-system-microstructure.jpg)

## Sensitivities-Based Method

Meaning ▴ The Sensitivities-Based Method represents a computational approach for quantifying the exposure of a financial instrument or portfolio to changes in underlying market variables. </a><a href="https://prime.greeks.live/area/frtb/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A macro view of a precision-engineered metallic component, representing the robust core of an Institutional Grade Prime RFQ. Its intricate Market Microstructure design facilitates Digital Asset Derivatives RFQ Protocols, enabling High-Fidelity Execution and Algorithmic Trading for Block Trades, ensuring Capital Efficiency and Best Execution](https://options.greeks.live/wp-content/uploads/2025/07/precision-engineered-core-system-for-institutional-digital-asset-derivatives-rfq-protocol-execution-and-advanced-market-microstructure-optimization.jpg)

## Frtb

Meaning ▴ FRTB, or the Fundamental Review of the Trading Book, constitutes a comprehensive set of regulatory standards established by the Basel Committee on Banking Supervision (BCBS) to revise the capital requirements for market risk. </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">
![A sharp, teal blade precisely dissects a cylindrical conduit. This visualizes surgical high-fidelity execution of block trades for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-precision-execution-microstructure.jpg)

## 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/default-risk-charge/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precisely engineered multi-component structure, split to reveal its granular core, symbolizes the complex market microstructure of institutional digital asset derivatives. This visual metaphor represents the unbundling of multi-leg spreads, facilitating transparent price discovery and high-fidelity execution via RFQ protocols within a Principal's operational framework](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-protocols-revealing-market-microstructure-for-high-fidelity-execution-and-atomic-settlement-within-principals-operational-framework.jpg)

## Default Risk Charge

Meaning ▴ Default Risk Charge defines a specific capital requirement designed to absorb potential losses arising from a counterparty's failure to meet its financial obligations within a derivatives transaction. </a><a href="https://prime.greeks.live/area/plat/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A precision optical component on an institutional-grade chassis, vital for high-fidelity execution. It supports advanced RFQ protocols, optimizing multi-leg spread trading, rapid price discovery, and mitigating slippage within the Principal's digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-optical-component-prime-os.jpg)

## Plat

Meaning ▴ The PLAT, understood as a Platform Layer for Automated Trading, represents a critical architectural component designed to centralize and optimize the execution of institutional digital asset derivatives across disparate market venues. </a><a href="https://prime.greeks.live/area/market-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Engineered components in beige, blue, and metallic tones form a complex, layered structure. This embodies the intricate market microstructure of institutional digital asset derivatives, illustrating a sophisticated RFQ protocol framework for optimizing price discovery, high-fidelity execution, and managing counterparty risk within multi-leg spreads on a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-rfq-protocol-stack-optimization.jpg)

## Market Risk

Meaning ▴ Market risk represents the potential for adverse financial impact on a portfolio or trading position resulting from fluctuations in underlying market factors. </a>

**Tags:** [Expected Shortfall](https://options.greeks.live/area/expected-shortfall/), [Internal Models Approach](https://options.greeks.live/area/internal-models-approach/), [ES](https://options.greeks.live/area/es/), [FRTB](https://options.greeks.live/area/frtb/), [Market Making](https://options.greeks.live/area/market-making/), [Risk Factors](https://options.greeks.live/area/risk-factors/)	

## Discover More

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### [Crypto Options RFQ Your Gateway to Strategic Advantage](https://options.greeks.live/guide/crypto-options-rfq-your-gateway-to-strategic-advantage/)
![A multi-faceted crystalline form with sharp, radiating elements centers on a dark sphere, symbolizing complex market microstructure. This represents sophisticated RFQ protocols, aggregated inquiry, and high-fidelity execution across diverse liquidity pools, optimizing capital efficiency for institutional digital asset derivatives within a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocols-for-institutional-digital-asset-derivatives-price-discovery.jpg)

Unlock superior crypto options execution and command market liquidity with RFQ for definitive strategic advantage.

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A factor model isolates skill (alpha) by quantifying and removing performance attributable to known risk exposures (betas).

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### [How Do Dark Pools Influence Block Trade Liquidity Sourcing?](https://options.greeks.live/question/how-do-dark-pools-influence-block-trade-liquidity-sourcing/)
![A precisely engineered system features layered grey and beige plates, representing distinct liquidity pools or market segments, connected by a central dark blue RFQ protocol hub. Transparent teal bars, symbolizing multi-leg options spreads or algorithmic trading pathways, intersect through this core, facilitating price discovery and high-fidelity execution of digital asset derivatives via an institutional-grade Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-facilitating-high-fidelity-multi-leg-options-spread-execution-best-price-discovery-and-latent-liquidity-access-for-prime-brokerage.jpg)

Dark pools enable institutional block trade execution with discretion, minimizing market impact and preserving alpha through strategic liquidity sourcing.

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### [How Do Funding Rates on Perpetual Swaps Impact Delta Hedging Costs in Crypto Options?](https://options.greeks.live/question/how-do-funding-rates-on-perpetual-swaps-impact-delta-hedging-costs-in-crypto-options/)
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Funding rates on perpetual swaps introduce a variable financing cost or revenue stream to the delta hedging of crypto options.

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### [What Is the Quantitative Impact of Basel III Capital Requirements on Bond Market Liquidity?](https://options.greeks.live/question/what-is-the-quantitative-impact-of-basel-iii-capital-requirements-on-bond-market-liquidity/)
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Basel III's capital rules increase the cost of market-making, reducing bond liquidity and requiring new data-driven trading systems.

- 
### [What Are the Quantitative Metrics for Assessing Latency’s Impact on Block Trade Execution Quality?](https://options.greeks.live/question/what-are-the-quantitative-metrics-for-assessing-latencys-impact-on-block-trade-execution-quality/)
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Latency's quantitative impact on block trade execution quality manifests as increased slippage, market impact, and opportunity costs.

- 
### [How Do Basel III Capital Requirements Specifically Influence Block Trade Market-Making Capacity?](https://options.greeks.live/question/how-do-basel-iii-capital-requirements-specifically-influence-block-trade-market-making-capacity/)
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Basel III mandates elevate capital costs for market makers, constraining block trade capacity through stringent market and counterparty risk charges.

- 
### [How Does the Standardised Approach for CVA Differ from the Basic Approach?](https://options.greeks.live/question/how-does-the-standardised-approach-for-cva-differ-from-the-basic-approach/)
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The Standardised Approach for CVA is a sensitivity-based method rewarding hedging, unlike the simpler, formulaic Basic Approach.

- 
### [What Are the Primary Drivers for Banks Choosing the Standardised Approach over the Internal Model Approach?](https://options.greeks.live/question/what-are-the-primary-drivers-for-banks-choosing-the-standardised-approach-over-the-internal-model-approach/)
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The shift to the Standardised Approach is driven by its operational simplicity and regulatory certainty in an era of rising model complexity and cost.

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---

**Original URL:** https://options.greeks.live/question/how-does-the-frtb-specifically-impact-bank-market-making-in-derivatives/
