Module: | MODULE B: RISK MANAGEMENT
Q333: Consider the following statements regarding the classification of portfolios into the Trading Book and Banking Book under the Fundamental Review of the Trading Book (FRTB) framework:
1. Financial instruments held with trading intent or to hedge other elements of the trading book must be classified under the Trading Book.
2. Instruments in the Banking Book are primarily held until maturity and are generally immune to daily mark-to-market valuation fluctuations.
3. The FRTB guidelines permit banks to freely reclassify instruments between the Trading Book and Banking Book to optimize their capital adequacy ratios.
2. Instruments in the Banking Book are primarily held until maturity and are generally immune to daily mark-to-market valuation fluctuations.
3. The FRTB guidelines permit banks to freely reclassify instruments between the Trading Book and Banking Book to optimize their capital adequacy ratios.
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Under FRTB and RBI guidelines, the Trading Book consists of positions in financial instruments and commodities held either with trading intent or to hedge other elements of the trading book.
Statement 2 is correct: The Banking Book comprises assets generally held till maturity, such as standard loans and advances, and these are recorded at historical cost or amortized cost, not subjected to daily mark-to-market (MTM) like the trading book.
Statement 3 is incorrect: The FRTB strictly restricts the reclassification of instruments between the Trading Book and Banking Book to prevent capital arbitrage.
Shifting is only permitted under extraordinary circumstances, such as a major restructuring or closure of a trading desk, and requires explicit prior approval from the regulator (RBI).
Statement 2 is correct: The Banking Book comprises assets generally held till maturity, such as standard loans and advances, and these are recorded at historical cost or amortized cost, not subjected to daily mark-to-market (MTM) like the trading book.
Statement 3 is incorrect: The FRTB strictly restricts the reclassification of instruments between the Trading Book and Banking Book to prevent capital arbitrage.
Shifting is only permitted under extraordinary circumstances, such as a major restructuring or closure of a trading desk, and requires explicit prior approval from the regulator (RBI).