How does FRTB's desk-level opt-in work for choosing between IMA and the Standardized Approach?

FRTB introduces a desk-level architecture where each trading desk independently qualifies for (or is assigned to) either the Internal Models Approach (IMA) or the Standardized Approach (SA). This granular assignment replaces the old binary bank-wide model approval.\n\nEligibility Requirements for IMA:\n\nA desk must satisfy three conditions to use IMA:\n1. Pass the P&L Attribution Test (PLAT) — green or amber classification\n2. Pass backtesting — at most 12 exceptions in 250 days at 99% VaR\n3. Meet qualitative standards — independent risk management, model documentation, regular validation\n\nIf any condition fails, the desk reverts to SA.\n\nStrategic Opt-In Decision:\n\nEven if a desk qualifies for IMA, the bank may voluntarily choose SA if SA produces lower capital. This occurs when:\n- The desk trades simple, directional products where SA risk weights are favorable\n- IMA's NMRF charges are disproportionately large\n- The cost of maintaining IMA infrastructure exceeds the capital savings\n\n| Factor | Favors IMA | Favors SA |\n|---|---|---|\n| Portfolio complexity | High (captures diversification) | Low (simple products) |\n| NMRF exposure | Minimal NMRFs | Many NMRFs |\n| Risk factor observability | Rich data, liquid markets | Sparse data, illiquid |\n| Infrastructure cost | Justified by capital savings | Not worth the overhead |\n| Diversification benefit | Large cross-risk offsets | Limited offsets |\n\nWorked Example:\nFairmont Bank evaluates three desks:\n\n| Desk | IMA Capital | SA Capital | NMRFs | PLAT Status | Decision |\n|---|---|---|---|---|---|\n| Rates | $38M | $52M | 2 minor | Green | IMA (saves $14M) |\n| Credit Exotics | $71M | $55M | 8 major | Amber | SA (IMA is $16M higher) |\n| FX Options | $25M | $28M | 1 minor | Green | IMA (saves $3M) |\n\nThe Credit Exotics desk finds that its heavy NMRF charges push IMA capital above SA. Despite passing PLAT (amber), the bank rationally opts for SA.\n\nAggregate Capital Calculation:\n\nThe bank's total market risk capital combines:\n- Sum of IMA capital across opted-in desks\n- Sum of SA capital across opted-out (or failed) desks\n- No cross-desk diversification between IMA and SA pools\n\nTotal = Capital_IMA_desks + Capital_SA_desks\n\nThis lack of cross-pool diversification creates a penalty for mixed approaches, incentivizing banks to push more desks into one framework.\n\nOngoing Monitoring:\n- PLAT and backtesting are performed continuously (rolling 12-month windows)\n- A desk can lose IMA status at any quarterly review\n- Once reverted to SA, the desk must demonstrate 12 months of compliance to return to IMA\n- Supervisors can override desk-level assignments\n\nExplore FRTB implementation strategies in our FRM Part II materials.