FRTB trading book / banking book boundary

• Trading book — instruments held with trading intent: to benefit from short-term price movements, to hedge other trading book positions, or as market-making/arbitrage positions. Held on the presumption of liquid markets; positions are marked to market (MtM) daily, and market risk capital is computed under the FRTB rules (the standardised approach, SA, or an approved internal models approach, IMA).
• Banking book — everything else: instruments held to maturity or for balance-sheet management, such as most loans, deposits, and hold-to-collect securities. Accounted for on an accrual basis, not MtM. Subject to credit risk capital rules (and, since Basel III/IV, a market risk charge too for certain positions such as FX and commodities exposure in the banking book).
• Derivatives are, in practice, always trading book — the presumptive lists below place them there by default, and banking-book treatment of a derivative would be an exceptional, heavily scrutinised case.

Classification is based on management intent at the point a position is taken on, not on the instrument type alone. A bond can sit in either book depending on why it is held. To constrain discretion, FRTB defines presumptive lists:

• Instruments presumed trading book unless a bank can justify otherwise to its supervisor: positions resulting from market-making, positions in the correlation trading portfolio, positions that would be trading book under a bank's own accounting classification as held-for-trading, and instruments held as hedges of other trading book positions.
• Instruments presumed banking book unless a bank can justify otherwise: unlisted equities, positions intended for securitisation warehousing, real estate holdings, retail and SME credit exposures, and instruments held for hedging banking book credit risk.

Supervisors can override a bank's self-classification, and a bank must be able to demonstrate the classification is consistent with its own internal risk management of the position — the boundary is not self-certifying.

FRTB requires classification at the level of a formally defined trading desk — a coherent unit with its own risk management structure, a clear reporting line, and a trading mandate approved by senior management — not merely at the individual instrument level. Each desk is itself in or out of scope for the trading book, and desk definitions must be validated by supervisors before internal-models capital treatment is permitted for that desk.

The boundary is consequential precisely because the two capital regimes are computed so differently:

• Trading book: market risk capital under FRTB SA/IMA, driven by sensitivities (delta, vega, curvature) under the SA, or by Expected Shortfall (replacing VaR) under IMA, subject to a standalone Profit and Loss Attribution (PLA) test that a desk must pass to remain on IMA.
• Banking book: credit risk capital under the standardised or internal ratings-based (IRB) approaches, plus (since Basel III/IV) a market risk capital charge on FX and commodity exposures specifically, even though the bulk of the book is accrual-accounted.

Because the two regimes can produce very different capital numbers for economically similar exposures, the boundary is a well-known locus of regulatory arbitrage pressure — the reason FRTB tightened it so heavily compared to the pre-2019 rules.

Moving an instrument between books after initial designation is deliberately restricted and heavily disincentivised: a switch generally requires supervisory approval, must be justified by a genuine change in intent (not a capital-driven decision), and — if approved — the capital benefit of a favourable switch is typically required to be held as a capital surcharge rather than released, removing the incentive to reclassify purely to reduce capital.