Skip to content
All library documents

FRTB Internal Risk Transfers Versus Book Redesignation

Article Quant Q&A · Author: AfterWorkGuinness
Read the original

Summary

The document distinguishes changing an asset’s regulatory classification from transferring risk between banking and trading books. Redesignation means moving an asset from one book to the other. An internal risk transfer instead uses an internal trade to shift exposure while the asset remains in its original book; for example, the trading book may take a hedge against credit risk held in the banking book.

The explanation says capital rules require the internal hedge to be matched by a trade with external counterparties, potentially at portfolio level and across multiple parties. This requirement is intended to prevent internal transfers from being used for capital arbitrage. The document gives a concise conceptual distinction, but no detailed regulatory analysis, worked example, or discussion of the applicable conditions and exceptions. Readers should consult the relevant FRTB provisions for implementation details.

Key ideas

  • Redesignation changes which book holds an asset.
  • An internal risk transfer shifts exposure through a trade between books.
  • A banking book credit exposure can be hedged internally by a trading book position.
  • External trades are required to match internal risk transfers to limit capital arbitrage.

Tags

Risk managementFixed incomeArbitrage
Full text
# How is internal risk transfer different than moving from banking book to trading book?


# How is internal risk transfer different than moving from banking book to trading book?












Reading the FRTB paper, I'm not clear on what an internal risk transfer is. To me, it sounds like moving an asset from the banking book to the trading book or vice versa.

## Answer by Magic is in the chain (score 2, accepted)

https://quant.stackexchange.com/a/41881

Moving assets between banking and trading books would count as redesignation (paragraph 29). Internal risk transfer is the transfer of risk between the books (say banking and trading books) via an internal trade. Say you have credit risk exposure in the banking book, and you book a hedging trade with the trading book, then this would be an internal risk transfer. The standards just want to mitiagte the risk of this kinda transfer being used for capital arbitrage by requiring a matching trade with the external parties (though this could be at portfolio level and with multiple parties).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.