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

Under the Fundamental Review of the Trading Book (FRTB), which approach to defining the boundary between the trading book and the banking book replaced the earlier reliance on a bank's subjective 'trading intent' test?

FRTB uses a presumptive list approach: certain instruments, such as those held for short-term resale or market-making, are presumed trading book, while others are presumed banking book. Deviations need supervisory approval. This is more objective than the earlier trading-intent test and limits discretionary regulatory arbitrage.

  1. AA presumptive list of instruments that must be assigned to the trading book, together with a limited list of instruments that must be in the banking book, subject to supervisory overrideCorrect
  2. BComplete discretion for the bank's senior management to assign instruments based on accounting classification alone
  3. CA rule that all instruments with maturity under one year belong in the trading book
  4. DA rule that all instruments valued using internal models belong in the banking book

Explanation

FRTB moved to a more objective boundary, with a presumptive list of trading book instruments (e.g., instruments held for short-term resale, market-making, or profiting from price movements) and banking book instruments, with supervisory approval needed for exceptions. Management discretion, maturity, and valuation method are not the basis for the boundary.

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