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

A bank wishes to move a bond portfolio from the trading book to the banking book because the trading book charge is higher. Under FRTB boundary rules, which statement is correct?

Reclassification between books is allowed only in extraordinary circumstances with supervisory approval. If it reduces capital, the bank must hold the difference as an additional capital requirement, so there is no benefit from arbitrage. Documentation, accounting changes or disclosure alone are insufficient.

  1. AManagement may switch freely at each quarter end if it documents the reason
  2. BSwitching is permitted only in extraordinary circumstances, requires supervisory approval, and any capital benefit is not allowed to be retainedCorrect
  3. CSwitching is permitted whenever the instrument's accounting classification changes
  4. DSwitching is permitted if the bank discloses it in its Pillar 3 report

Explanation

FRTB restricts reclassification to extraordinary circumstances with supervisory approval and public disclosure. If the switch lowers capital, the difference is imposed as an additional capital requirement, removing the incentive. Accounting changes or disclosure alone do not permit a switch.

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