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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 assigning instruments to the trading book or banking book is used to determine the boundary?

FRTB uses a presumptive list of instruments for each book together with evidence-based rules and supervisory approval for any exceptions. This reduces capital arbitrage that arose when the boundary depended mainly on management's stated intent, which was easy to manipulate.

  1. AA purely accounting-based test that follows the fair value classification
  2. BA list of instruments presumed to belong to each book, combined with evidence-based supervisory rules for exceptionsCorrect
  3. CFree choice by bank management based on the bank's stated intent at inception
  4. DA test based only on the maturity of the instrument

Explanation

FRTB replaced the intent-only approach with a presumptive list of instruments assigned to each book, plus strict criteria and supervisory approval for deviations. Management intent alone proved easy to manipulate for capital arbitrage, so it is not sufficient. Accounting classification and maturity are not the determining test.

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