FINANCIAL
RISK AND
REGULATION
(FRR)® SERIES
FRR
STUDY GUIDE
AND LEARNING
OBJECTIVES
FRR Study Guide and Learning Objectives
Financial Risk and
Regulation (FRR®) Series
The broad areas of knowledge covered in the FRR Series Course curriculum include the following:
Book 1: Credit Risk Management
CREDIT RISK ASSESSMENT
This chapter introduces the core notions of credit risk and the standard quantitative methods for assessing it.
The difference between expected credit loss and unexpected credit loss is outlined.
THE RISKS OF CREDIT PRODUCTS
Credit risks in multiple bank business lines are outlined in this chapter, including retail, SME, large corporate,
and sovereign exposures. Credit risk models, including scorecard and distance-to-default, are covered and credit
valuation adjustment (CVA) is introduced.
CREDIT RISK PORTFOLIO MANAGEMENT
Whereas the previous two chapters cover single event credit risk, this chapter focuses on the portfolio view of
credit risk. Correlation in credit risk is introduced, as are credit default swaps (CDS), both in single-name and index
versions. The chapter ends with a discussion around problem assets and bad loans.
THE REGULATORY VIEW OF CREDIT RISK
The final chapter in this book outlines the evolution of the Basel Accords I, II and III, as well as the subsequent Basel
Framework. The shortcomings of each accord are outlined and an explanation of the incremental steps to overcome
them is provided. The Basel Framework is updated to the final agreed version from January 2023; changes are
mandated to be fully implemented by 2028. The chapter ends with a discussion of stress-testing capital, as well as
an overview of U.S. and international regulations and regulatory institutions.
Book 2: Market Risk Management
INTRODUCTION TO MARKET RISK MANAGEMENT
This chapter outlines the five main classes of market risk and introduces risk expressed in implied volatility and
implied correlation.
FOREIGN EXCHANGE MARKETS, INSTRUMENTS, AND RISKS
This chapter reviews the standard instruments in the global foreign exchange (FX) markets and discusses
how foreign exchange risk arises. Vanilla and exotic options are introduced, and their more sophisticated risks
are displayed.
INTEREST RATE MARKETS, INSTRUMENTS, AND RISKS
This chapter covers both short- and long-term interest rate risk, which is expressed through changes in the yield
curve. The cessation of LIBOR is described, and the replacement benchmark rates in the main markets are discussed.
Duration and PV01 are described as basic tools for quantifying interest rate risk. The chapter ends with an overview
of the main derivative instruments used to manage interest rate risk.
FRR Study Guide and Learning Objectives [Link] | 1
EQUITY AND COMMODITY MARKETS, INSTRUMENTS, AND RISKS
This chapter covers market risk in the equity, commodities, and credit spread markets, in both cash and derivatives
form. An outline of the value drivers in the equity and commodity and credit spread markets is followed by a
discussion of exposure and risk characteristics in exchange-traded derivatives as compared to those for their over-
the-counter counterparts.
THE RISK MEASUREMENT PROCESS
This chapter covers value-at-risk (VaR) as the key market risk measurement methodology over the past quarter
century. The discussion outlines the differences between the three classic VaR analytical methods and points to the
shortcomings of each. It is explained how using both VaR and expected shortfall (ES) are better for assessing market
risk than using VaR alone.
RISKS IN BANK TRADING STRATEGIES
This chapter begins with an overview of the internal considerations relevant to a bank with a trading operation.
It continues with a focus on standard trading strategies and outlines the risks inherent in each. External risks are
covered thereafter, including market liquidity and behavior. The chapter ends with a section about how to manage
market risk in a trading operation.
MARKET RISK ORGANIZATION AND REPORTING
The final chapter in this book covers the internal organizational aspects of managing a trading operation. Topics
include market risk governance, the tools used in market risk analysis, and market risk monitoring and control. The
chapter ends with a discussion of the users and uses of market.
Book 3: Operational Risk Management
OPERATIONAL RISK MANAGEMENT
This chapter gives an overview of operational risk in financial institutions and discusses its relationship with
other types of risk. Emphasis is placed on how an operational risk framework can help establish and maintain an
appropriate management process. The governance section explains who in the organization should “own” the
operational risk management (ORM) function, as well as the relationship among disclosure, compliance, internal
audit, and supervisors.
OPERATIONAL RISK: IDENTIFICATION AND ASSESSMENT
Following a classification of operational risk, this chapter discusses risk and control self-assessments (RCSAs) as
a method for generating reliable insights into an organization’s operational risk exposures, including potential and
actual risk events.
OPERATIONAL RISK: MEASUREMENT
The quality of operational risk loss data is important, and this chapter covers both internally and externally
generated data. Internally generated loss data, which is better under almost any scenario than externally generated
data, is covered in the first half of the chapter. Externally generated data, which has validity for smaller organizations
and for those with a limited exposure to esoteric operational risk event types, is discussed in the second half of
the chapter.
OPERATIONAL RISK: MITIGATION AND CONTROL
This chapter starts with a brief overview of the classic “three lines of defense” approach to organizing risk
management responsibilities as well as a look at the concept of operational risk insurance. The remainder of the
chapter discusses control points in several common scenarios.
FRR Study Guide and Learning Objectives [Link] | 2
OPERATIONAL RISK: MONITORING AND REPORTING
The first half of this chapter illustrates how key risk indicators (KRI) can be used when monitoring operational risk in
a financial institution. The second half of this chapter covers common risk reporting requirements.
Book 4: Asset and Liability Management
ALCO AND THE ROLE OF THE TREASURY FUNCTION
This chapter covers the central role of the treasury function in any financial institution or corporate entity, followed
by insights into what constitutes treasury risk. It also identifies the role of the asset and liability management
committee (ALCO) and how it is guided by both asset and liability management (ALM) policies. A section outlining
classic ALM reports follows, and the chapter ends with a description of common limit structures designed to control
ALM risk.
INTEREST RATE RISK IN THE BANKING BOOK
This chapter covers two important aspects of interest rate risk in the banking book (IRRBB): net interest income (NII)
and economic value of equity (EVE). It first looks at the basic NII risk model and discusses criticisms raised against
it. Then, it discusses EVE and the impact it can have on the economic value of a bank. The chapter ends with an
overview of the Basel IRRBB framework.
LIQUIDITY RISK IN THE BANKING BOOK
This chapter covers liquidity risk in the banking book and discusses the two different ways to understand it. It
illustrates methods for quantifying this risk and managing exposures to it, followed by a section that discusses funds
transfer pricing (FTP) as a central liquidity management tool. The chapter ends with a review of the two Basel III
liquidity measures banks are obligated to adopt and report.
BANK CAPITAL MANAGEMENT
This chapter begins with a distinction between economic and regulatory capital and extends into a deeper coverage
of economic capital. Thereafter, it follows an in-depth coverage of Basel II and Basel III regulatory capital, including
a section on “bail-in” capital. The chapter ends with an overview of the differences between return on equity (ROE)
and risk-adjusted return on capital (RAROC).
OTHER NON-TRADING MARKET RISK IN THE BANKING BOOK
The final chapter of this book reviews specific market risk exposures that are not generated from trading operations.
These include credit spread market risk applicable to non-traded credit risky positions, foreign exchange risk in
foreign subsidiary company stock values, investment risk in strategic and alternative long-term equity investments,
pension risk applicable to defined benefit staff pension schemes, guaranteed product value risks in customer
portfolios, and economic capital consumption in non-traded market risk positions.
FRR Study Guide and Learning Objectives [Link] | 3
Financial Risk and
Regulation Series
5 Credit Risk Management
7 Market Risk Management
10 Operational Risk Management
12 Asset and Liability Management
FRR Study Guide and Learning Objectives [Link] | 4
Credit Risk Management
EXAM WEIGHT | 25% (CRM)
The readings that you should focus on for this section and the specific learning objectives that should be achieved
with each reading are:
CHAPTER 1. CREDIT RISK ASSESSMENT
After completing this reading, you should be able to:
• Differentiate between credit risk and market risk
• Estimate expected credit losses
• Understand the mission and objectives of the credit portfolio
• Interpret lending guidelines
• Explain the relationship between credit risk and loan pricing
• Interpret inputs to credit risk models
• Explain the meaning of probability of default (PD)
• Differentiate exposure at default (EAD) for loans versus derivative contracts
• Compute the recovery rate and loss given default (LGD) for an obligor
CHAPTER 2. THE RISKS OF CREDIT PRODUCTS
After completing this reading, you should be able to:
• Explain features of credit products
• Understand consumer credit risk
• Understand the purpose of consumer credit scoring
• Describe sensible credit score factors
• Design credit scorecards for the SME sector
• Explain credit scoring benefits
• Analyze corporate credit risk models
• Explain how counterparty credit differs from corporate credit
• Calculate a simple credit valuation adjustment (CVA) measure
• Explain elements of sovereign credit risk
• Illustrate the relationship between sovereign ratings and corporate ratings
• Assess the regulatory treatment of sovereign exposures
FRR Study Guide and Learning Objectives [Link] | 5
CHAPTER 3. CREDIT RISK PORTFOLIO MANAGEMENT
After completing this reading, you should be able to:
• Describe evolution of credit risk management
• Understand the purpose of correlation in credit analysis
• Examine risk management of a credit portfolio
• Illustrate the elements of asset securitization
• Explain how credit derivatives work
• Describe the purpose and structure of CDS indices
• Explain elements of how collateral works
• Provide an overview of credit portfolio management models
• Describe potential problems with credit portfolio models
• Assess the purpose of asset management companies or bad banks
• Describe methods used to avoid bad loans
• Describe a broad range of credit risk reports and their purpose
• Estimate recovery rates on problem assets
• Define the benefits of external credit and loan review
• Investigate the elements of a stress test
CHAPTER 4. THE REGULATORY VIEW OF CREDIT RISK
After completing this reading, you should be able to:
• Understand the link between capital and credit risk
• Identify the shortcomings of and criticize Basel I
• Explain elements of the Basel II framework
• Explain the elements of the Basel III framework
• Describe the Standardized Approach (SA) for credit risk
• Describe the Internal Ratings Based approaches (IRB) for credit risk
• Explain why Basel III contains a revised SA for credit risk
• Explain the need to revise the Basel III IRB approaches
• Identify key elements of the Basel III securitization framework
• Investigate the link between stress testing and regulatory capital
• Differentiate between EL and UL models
• Discuss methods for credit risk mitigation
• Describe the SA for counterparty credit risk (CCR)
• Differentiate between SA and IMM for CCR
• Explain the features and risks in leveraged lending
• Describe different types of stress testing
• Evaluate differences in global regulatory stress testing requirements
• Explain differences of approach between global regulatory agencies
FRR Study Guide and Learning Objectives [Link] | 6
Market Risk Management
EXAM WEIGHT | 25% (MRM)
The readings that you should focus on for this section and the specific learning objectives that should be achieved
with each reading are:
CHAPTER 1. INTRODUCTION TO MARKET RISK MANAGEMENT
After completing this reading, you should be able to:
• Provide a definition of market risk
• Illustrate implied volatility price risk
• Interpret implied correlation risk
• Describe what impact the Basel III finalization has had on market risk management
CHAPTER 2. FOREIGN EXCHANGE MARKETS, INSTRUMENTS, AND RISKS
After completing this reading, you should be able to:
• Explain the drivers of foreign exchange rates
• Calculate a cross-currency spot contract price
• Calculate a currency forward contract price
• Outline the market risks in foreign exchange forwards
• Describe the differences between currency forward and futures
• Explain the features and benefits of derivative contracts
• Describe the elements of a currency swap
• Explain option market pricing dynamics
• Evaluate the risks in option trading
• Identify exotic options variants
• Deduce the risks in trading exotic options
CHAPTER 3. INTEREST RATE MARKETS, INSTRUMENTS, AND RISKS
After completing this reading, you should be able to:
• Describe rate setting standards for loans and deposits in the interbank market
• Understand the reasons behind the LIBOR cessation
• Explain the rate setting methodology behind the new benchmark interest rates
• Explain interest rate spreads for loans and bonds
• Distinguish between major bond classifications
• Compute prices for cash fixed income instruments
• Relate theories of the term structure of interest rates to pricing dynamics in the market
• Compare the impact of major drivers of interest rates
• Understand drivers of credit spreads
• Calculate the present value of a basis point (PVBP/PV01) for a bond
• Compute modified duration and Macaulay duration and Modified duration
• Describe the effects of convexity in a fixed income position
• Explain the difference between forward rate agreements and short-term interest rate futures
• Determine how interest rate swaps are valued and describe their risks
• Describe the structure and pricing of currency swaps
• Identify fixed income options and exotic instruments
FRR Study Guide and Learning Objectives [Link] | 7
CHAPTER 4. EQUITY AND COMMODITY MARKETS, INSTRUMENTS, AND RISKS
After completing this reading, you should be able to:
• Explain the features and value drivers in equity instruments
• Understand the pricing of equity forwards and futures contracts
• Explain the elements of equity index and total return swaps
• Compare equity index futures to balanced equity portfolios
• Identify the main features of equity options
• Assess the main physical commodity risk drivers
• Understand commodity derivative risks
• Analyze the main credit derivative instruments
CHAPTER 5. THE RISK MEASUREMENT PROCESS
After completing this reading, you should be able to:
• Provide an accurate definition of value-at-risk (VaR)
• Estimate parametric VaR using the normal distribution
• Describe how VaR can be estimated from historical data
• Understand how VaR can be calculated with Monte Carlo simulation
• Identify the main VaR shortcomings
• Assess VaR for multiple factors
• Describe how option positions are converted for VaR estimation
• Describe the daily VaR process
• Explain how expected shortfall (ES) can be a solution to the VaR model coherence problem
• Define the purpose of stressed VaR
• Evaluate the significance of the Basel incremental risk charge (IRC)
• Describe the Basel comprehensive risk measure (CRM)
• Examine the robustness of credit valuation adjustment (CVA) as a risk quantification method
• Identify the minimum Basel capital requirements for market risk
CHAPTER 6. RISKS IN BANK TRADING STRATEGIES
After completing this reading, you should be able to:
• Describe position management and hedging
• Explain risks in leveraged trading
• Identify the risks in carry trades
• Explain risk dynamics in financial markets
• Assess the relative magnitude of risks in basis trading
• Evaluate the consequences of failure of trading controls
• Describe the problems with the mark-to-market process
• Define the risks associated with the portfolio diversification approach
• Deduce primary and secondary risks with the hedging approach
• Explain the potential risks connected with the synthetic portfolio approach
FRR Study Guide and Learning Objectives [Link] | 8
CHAPTER 7. MARKET RISK ORGANIZATION AND REPORTING
After completing this reading, you should be able to:
• Describe the governance of market risk
• Explain the purpose of VaR back-testing
• Assess the unintended impact of debit valuation adjustment (DVA)
• Deduce the meaning of loss advisories and drawdowns
• Investigate the weaknesses of economic value (EV) stress testing
• Evaluate Earnings-at-Risk stress testing
• Describe the main elements of model risk
• Describe risk identification for large exposures
• Identify uses and users of market risk reports
FRR Study Guide and Learning Objectives [Link] | 9
Operational Risk Management
EXAM WEIGHT | 25% (ORM)
The readings that you should focus on for this section and the specific learning objectives that should be achieved
with each reading are:
CHAPTER 1. OPERATIONAL RISK MANAGEMENT
After completing this reading, you should be able to:
• Describe what operational risk means in the finance industry
• Explain the relationship between operational risk management and other risk types
• Define the core purpose of operational risk management
• Identify obstacles to successful operational risk measurement
• Give an operational risk framework overview
• Determine who should own the operational risk function
• Explain the role of supervisors in the operational risk function
• Illustrate how lack of risk culture and awareness is the greatest impediment to successful
operational risk management (ORM)
CHAPTER 2. OPERATIONAL RISK: IDENTIFICATION AND ASSESSMENT
After completing this reading, you should be able to:
• Differentiate between inherent, residual, and secondary risks
• Assess the complete risk identification process
• Explain the purpose of risk registers
• Evaluate the strengths and weaknesses of risk and control self-assessments (RCSA)
• Explain the RCSA questionnaire approach
• Examine the RCSA workshop approach
• Compare RCSA scoring methods
CHAPTER 3. OPERATIONAL RISK: MEASUREMENT
After completing this reading, you should be able to:
• Differentiate between expected and unexpected losses
• Quantify operational risk losses
• Identify what should be collected in the loss data program
• Evaluate sources of external loss event data
• Design individual scenario analysis methods
• Describe the Basel basic indicator approach (BI)
• Calculate OR capital using the Standardized Approach (SA)
• Assess the usefulness of the Alternative Standardized Approach (ASA)
• Explain the shortcomings of the Advanced Measurement Approach (AMA)
• Understand how to model operational risk capital
FRR Study Guide and Learning Objectives [Link] | 10
CHAPTER 4. OPERATIONAL RISK: MITIGATION AND CONTROL
After completing this reading, you should be able to:
• Define core objectives of operational risk mitigation
• Explain the workings of the three lines of defense
• Explain elements relating to risk appetite
• Explain the elements and purpose of due diligence
• Describe the benefits and disadvantages of operational risk insurance
• Evaluate the additional controls needed for outsourcing, vendor, and third-party risk
• Understand how governance, risk, and compliance (GRC) integrates ORM activities
CHAPTER 5. OPERATIONAL RISK: MONITORING AND REPORTING
After completing this reading, you should be able to:
• Define key operational risk indicators
• Identify key performance indicators
• Illustrate key control indicators
• Describe variants of key risk indicators (KRI)
• Assess loss data reporting
• Analyze action tracking reporting
• Explain risk and control self-assessment reporting
• Examine key risk indicator reporting
FRR Study Guide and Learning Objectives [Link] | 11
Asset and Liability Management
EXAM WEIGHT | 25% (ALM)
The readings that you should focus on for this section and the specific learning objectives that should be achieved
with each reading are:
CHAPTER 1. ALCO AND THE ROLE OF THE TREASURY FUNCTION
After completing this reading, you should be able to:
• Explain the role of the treasury in a bank and in a non-bank commercial organization
• Describe a commercial/retail-only bank model
• Illustrate the role of the treasury in a commercial/retail bank with an investment banking operation
• Evaluate interest rate risk and foreign currency (FX) risk in Treasury
• Evaluate a range of asset and liability management committee (ALCO) activities
• Produce a set of mismatch and gap reports
• Analyze classic asset and liability management (ALM) reports
• Distinguish between value limits and time limits
• Consider the usefulness of volatility limits in risk management
• Compare and contrast gross position versus net overall limits
CHAPTER 2. INTEREST RATE RISK IN THE BANKING BOOK
After completing this reading, you should be able to:
• Understand the basic net interest income (NII) risk model
• Describe examples of NII risk management
• Examine the level of critique raised against the basic NII risk model
• Assess the impact of economic value of equity (EVE) in a bank
• Explain how to hedge interest rate risk in order to mitigate changes in EVE
• Describe the Basel IRRBB Framework
CHAPTER 3 LIQUIDITY RISK IN THE BANKING BOOK
After completing this reading, you should be able to:
• Define two types of liquidity
• Evaluate sources of liquidity problems in banks
• Define and compute a liquidity ladder as an example of a static liquidity model
• Explain the function of probabilistic liquidity models
• Evaluate securitization as a form of liquidity management
• Describe the role of funds transfer pricing (FTP) in creating an effective treasury
• Compare the cost of funds method with the net funding method
• Contrast the pooled funding Method with the matched maturity method
• Assess the purpose and effectiveness of the Basel III liquidity measures
• Calculate the liquidity coverage ratio (LCR) for several balance sheet scenarios
• Describe the objective behind the net stable funding ratio (NSFR)
FRR Study Guide and Learning Objectives [Link] | 12
CHAPTER 4. BANK CAPITAL MANAGEMENT
After completing this reading, you should be able to:
• Distinguish between economic capital and regulatory capital
• Understand the link between economic capital and value-at-risk (VaR)
• Describe the background to economic capital methodology
• Outline several problems with measuring economic capital
• Identify the main components of regulatory capital
• Interpret the ratios between different tiers of capital
• Describe the Basel III capital rules in the context of “quality of capital”
• Describe the purpose of the Basel III leverage rule
• Illustrate how “bail-in” capital can be better than “bail-out” capital
• Calculate risk-adjusted return on capital (RAROC) for a single transaction
CHAPTER 5. OTHER NON-TRADING MARKET RISK IN THE BANKING BOOK
After completing this reading, you should be able to:
• Understand how credit spread risk apply to non-traded credit risky positions
• Explain how foreign exchange risk arises in foreign subsidiary company stock values
• Analyze investment risk in strategic and alternative long-term equity investments
• Describe how defined benefit staff pension schemes for employees give rise to pension risk
• Identify guaranteed product value risks in customer portfolios
• Determine economic capital consumption in non-traded market risk positions
FRR Study Guide and Learning Objectives [Link] | 13
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