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FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book

A bank holds an equity investment in an unconsolidated fund that is not eligible for look-through treatment, and also holds a listed equity position intended for short-term profit from price movements. Under the FRTB boundary rules, which classification is most appropriate?

The listed equity held for short-term profit is presumed to belong in the trading book, whereas equity investments in funds where the bank cannot look through to the underlying holdings, or lacks the needed pricing data, are assigned to the banking book under FRTB's boundary rules.

  1. ABoth positions are banking book
  2. BThe short-term listed equity is presumed trading book, while equity investments in funds that cannot be looked through (or whose risk cannot be mandated) are required to be in the banking bookCorrect
  3. CBoth positions are trading book
  4. DThe fund investment is trading book and the listed equity is banking book

Explanation

Short-term profit-seeking positions fall on the presumptive trading book list. Equity investments in funds where the bank cannot look through or obtain daily prices/mandate data are assigned to the banking book under FRTB. So the split classification is correct.

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