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

A supervisor finds that a bank has placed a position in the banking book that meets the criteria of the presumptive trading book list, and the bank cannot provide evidence to rebut the presumption. What action can the supervisor require under FRTB?

The supervisor can require the bank to move the position to the trading book if the bank cannot rebut the presumption. The bank must bear any resulting increase in capital, and any capital reduction from the reassignment is not recognized, which discourages boundary arbitrage.

  1. ANothing, as the bank's designation is final
  2. BRequire the bank to reassign the position to the trading book, and the bank bears any capital increase without recognizing any capital benefit that would arise from the reverse moveCorrect
  3. CRequire the bank to sell the position within one day
  4. DRequire the bank to reclassify only if the position loses value

Explanation

Under FRTB, supervisors can require reassignment of positions to the trading book when the bank cannot justify its deviation from the presumptive list. If the reassignment raises capital, the bank bears the increase; any reduction would not be recognized. Designation is not final, and no forced sale applies.

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