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

A bank reassigns a portfolio of bonds from the trading book to the banking book after a period of market stress, when it expects the portfolio to be held to maturity. Under FRTB, which treatment applies to this reclassification?

Under FRTB, switching between books after initial designation is allowed only in extraordinary circumstances with supervisory approval and disclosure. If the move reduces capital requirements, the bank must hold an additional capital charge that offsets the benefit, so the reclassification gives no capital arbitrage.

  1. AIt is permitted at management's discretion, and any capital benefit from the move is retained
  2. BIt is permitted only in extraordinary circumstances with supervisory approval, and any capital benefit from the move must be disclosed and removed by a capital charge so total capital does not fallCorrect
  3. CIt is prohibited in all circumstances, and the bank must sell the bonds
  4. DIt is permitted without approval if the bonds are investment grade

Explanation

FRTB restricts switching after initial designation to extraordinary circumstances, requires supervisory approval and public disclosure, and prevents capital arbitrage by imposing a capital add-on if the switch would reduce capital. Discretionary or credit-quality-based switching is not allowed.

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