What is the P&L attribution test under FRTB, and what happens when a desk fails it?

The P&L Attribution Test (PLAT) verifies that a desk's risk management model accurately captures the sources of actual daily P&L. If the hypothetical P&L from the risk model diverges significantly from the actual P&L, the desk loses the right to use the Internal Models Approach.\n\nWhat PLAT Compares:\n\n- Actual P&L (APL): The real daily profit or loss from the desk's positions, including all market movements\n- Risk-Theoretical P&L (RTPL): The P&L predicted by the desk's risk management model using the same risk factors that feed the ES model\n\nThe test assesses whether the risk model's risk factors adequately explain actual trading outcomes.\n\nTwo Statistical Tests:\n\n| Test | Metric | Green Zone | Amber Zone | Red Zone |\n|---|---|---|---|---|\n| Spearman Correlation | Rank correlation of APL vs RTPL | >= 0.80 | 0.70 - 0.80 | < 0.70 |\n| Kullback-Leibler Divergence | Distribution similarity | KL < threshold | Intermediate | KL > threshold |\n\nThe Spearman correlation measures whether APL and RTPL move in the same direction with similar ranking, while KL divergence measures whether the distribution shapes match.\n\nTraffic Light Classification:\n\n`mermaid\ngraph TD\n A[\"PLAT Results\"] --> B{\"Both metrics
in Green Zone?\"}\n B -->|Yes| C[\"GREEN
IMA approved
No surcharge\"]\n B -->|No| D{\"Either metric
in Red Zone?\"}\n D -->|No| E[\"AMBER
IMA with capital surcharge
50% SA add-on\"]\n D -->|Yes| F[\"RED
Desk fails PLAT
Falls back to SA\"]\n F --> G[\"Desk uses Standardized Approach
for 12-month remediation period\"]\n E --> H[\"Capital = IMA + 50% x (SA - IMA)
if SA > IMA\"]\n`\n\nConsequences of Failure:\n- Red zone: The desk must revert to the Standardized Approach (SA), which typically produces higher capital requirements. The desk enters a 12-month remediation period.\n- Amber zone: The desk retains IMA but incurs a capital surcharge blending IMA and SA capital.\n- Green zone: Full IMA benefits with no surcharge.\n\nWorked Example:\nBriarwood Capital's rates desk runs PLAT over the most recent 250 trading days.\n\nSpearman correlation between APL and RTPL: 0.76\nKL divergence: within green threshold\n\nResult: Spearman is in amber (0.70-0.80), KL is green. Overall classification: AMBER\n\nIMA capital: $45M\nSA capital: $62M\n\nCapital surcharge: 50% x max($62M - $45M, 0) = 50% x $17M = $8.5M\nTotal capital requirement: $45M + $8.5M = $53.5M\n\nIf the desk had scored 0.68 on Spearman (red), it would face the full SA capital of $62M.\n\nWhy Desks Fail PLAT:\n- Missing risk factors in the model (e.g., ignoring basis risk or cross-gamma)\n- Valuation adjustments (XVA) captured in APL but not in RTPL\n- Intraday trading P&L that cannot be explained by end-of-day risk factors\n- Model simplifications (linear approximations for convex exposures)\n\nMaster FRTB model validation in our FRM Part II course.