The trading book boundary · RiskAtoms Academy

By the end you will be able to

1Explain where the trading book boundary runs: trading intent, the instruments presumed in each book, and how a presumption is rebutted.
2Say why each of RiskAtoms Bank's positions sits in the trading book, desk by desk, and what makes a trading desk.
3Explain internal risk transfers, and why the bank's client derivatives carry no market risk capital only if they are hedged back to back.
4Work out the capital surcharge when a position is switched between books, and show it in RWA.

Why it matters

RiskAtoms Bank plc's credit desk holds £80m of BBB corporate bonds. In the trading book they need market risk capital: credit spread risk, rate risk and a default charge. In the banking book they would need 75% × 8% of their value, £4.8m. Moving them would cut the bank's capital by £7.86m. The Basel boundary rules exist so that such a move buys nothing: the £7.86m comes straight back as a surcharge.

Core explanation

One line, two capital regimes

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Market risk in Module 4.3. The positions are the Level 3 trading desk (M3.2: Market risk): eight positions in four books, Equities, Rates, FX and commodities, and Credit, valued by full revaluation on eight risk factors. The client derivatives are the four netting sets of M3.4: Counterparty credit risk. The £417.7m of market risk RWA in L4.1.04: Risk-weighted assets is the sensitivities-based method only: it leaves out the default risk charge and the residual risk add-on, which this module adds. No position has been changed; where a lesson adds one to teach a rule, it is labelled illustrative.

Two books

L3.2.01: What a trading desk does drew the line between the trading book and the banking book. The capital rules make it precise, because the two sides are charged in completely different ways: the trading book under the market risk framework of this module, the banking book under the credit risk rules of M4.2: Credit risk capital and the rate risk rules of M4.5: Liquidity and IRRBB regulation. The rules are in chapter RBC25 of the Basel Framework. Two conditions come first: an instrument may go in the trading book only if nothing legally stops the bank selling or fully hedging it (RBC25.3), and it must be fair valued every day with the changes in profit and loss (RBC25.4).

Trading intent

The test is why the bank holds the instrument. Anything held for one of four purposes must be designated as trading book when it is first booked: short-term resale, profiting from short-term price moves, locking in arbitrage profits, or hedging risks from positions held for those purposes (RBC25.5). That is trading intent. Anything else goes in the banking book (RBC25.7).

Intent is hard to see, so the rules add two lists. Some instruments are presumed to be in the trading book, and the bank can rebut the presumption only with the supervisor's explicit approval and evidence that it holds them for none of the four purposes (RBC25.9–25.10). Others must be in the banking book, full stop (RBC25.8):

Presumed trading book (RBC25.9)	Must be banking book (RBC25.8)
Accounting trading assets and liabilities	Unlisted equities
Instruments from market-making activities	Instruments designated for securitisation warehousing
Listed equities	Real estate holdings
Equity investments in funds, with conditions	Retail and SME credit
Trading-related repo-style transactions	Equity investments in hedge funds
Options, including some embedded in the bank's own banking book issues	Derivatives and funds on the items above, and hedges of them

A third rule closes a loophole: an instrument that would leave a net short credit or equity position in the banking book is treated as trading book (RBC25.6). Supervisors can move instruments either way if the evidence does not support the bank's choice (RBC25.11–25.12), and the bank must have written policies for the whole boundary, checked by internal audit at least once a year (RBC25.13).

Sort itTrading book or banking book?

Put each position on its side of the line, then check.

Listed equities bought by the equity desk
A mortgage to a retail customer
Swaps the desk enters as a market-maker for clients
The bank's own office building
A bond the accounts classify as held for trading
A stake in a hedge fund
Gilts held in the liquidity buffer to collect their coupons
Index puts bought to hedge the desk's index futures

FX and commodities reach across the line

The market risk rules also charge the foreign exchange and commodity risk of banking book positions. The PRA's rule applies the standardised approach to a portfolio of “trading book positions” or “non-trading book positions that are subject to foreign exchange or commodity risk” (Market Risk: Advanced Standardised Approach (CRR) Part, Article 325c(2)). This is the promise of L3.2.05: FX and commodity risk. A dollar loan funded in pounds sits in the banking book for credit risk and still feeds the FX charge.

Trading desks

Inside the trading book, the rules work desk by desk. A trading desk is a group of traders or trading accounts that implements a well-defined business strategy within a clear risk management structure (MAR12.1). It needs one head trader, or at most two with clear roles, a documented business strategy with an annual budget, and trading limits set from that strategy and reviewed at least once a year (MAR12.4). Desks matter most for internal models, which are approved and tested one desk at a time (L4.3.07: Backtesting and the P&L attribution test). RiskAtoms Bank uses the standardised approach, and its four Level 3 books serve as its four desks:

ExploreRiskAtoms Bank's four trading desks

Click a desk to see its positions and why each one is in the trading book.

Equities

Risk scope: UK and US index equity, index options, the dollars of the US basket.

UK index futures (long £60m): Held for short-term price gains; derivative on listed equity (RBC25.5, 25.9).
US equity basket ($39m): Listed equities: presumed trading book (RBC25.9).
UK index puts (1,000 contracts): Options hedging the desk's index futures: hedge of trading positions (RBC25.5).

On its own the desk's sensitivities-based charge is £15.336m, with the high correlation scenario binding (L4.3.02: The sensitivities-based method: delta and vega).

The four desks' charges, each worked out alone, add up to £42.95m. The bank's charge on all of them together is £33.41m, because the desks hedge each other: the US basket's dollars on the equity desk are offset by the FX forward on the FX desk, and the corporate bonds' rate risk offsets part of the swap's. L4.3.02: The sensitivities-based method: delta and vega takes that apart.

Internal risk transfers

Banks move risk between books with internal trades. An internal risk transfer is an internal written record of such a move (RBC25.18), and the rules decide when it counts for capital:

From the trading book to the banking book: never. There is no capital recognition for it (RBC25.19).
Credit or equity risk from the banking book to the trading book: the banking book exposure counts as hedged only if the trading desk lays the risk off with an exact external hedge, bought from an eligible third party (RBC25.21–25.23).
Interest rate risk from the banking book: the internal trade counts in the trading book only if it is documented and booked with a dedicated internal risk transfer desk the supervisor has approved, which is then charged for market risk on its own (RBC25.25–25.26). The bank's banking book hedging swaps from M3.6: Interest rate risk in the banking book and ALM stay in the banking book: their rate risk is IRRBB, not market risk.

The client trades: hedged back to back

The bank's eight client derivatives from M3.4: Counterparty credit risk, with a manufacturer, a European bank, a hedge fund and a pension scheme, are trades it deals as a market-maker. They belong in the trading book (RBC25.5, 25.9). In L4.1.04: Risk-weighted assets they carry counterparty and CVA capital, and no market risk capital at all. That is right only if the bank passes their market risk straight on with offsetting cleared trades, a back-to-back hedge. The book assumes it does. If it did not, their sensitivities would join the desk's:

Trade	Counterparty	PV01 (£ per bp)	FX (£m per 100%)	Equity (£m per 100%)
T1 Receive-fixed swap, £100m, 7 years at 4.00%	Halvergate Moor Manufacturing plc	−60,021
T2 Buy $65m for pounds in 1 year (at market)	Halvergate Moor Manufacturing plc		47.8
T3 Pay-fixed swap, £250m, 10 years at 4.00%	Corriemoor Bank AG	202,772
T4 Receive-fixed swap, £150m, 5 years at 4.00%	Corriemoor Bank AG	−66,777
T5 Sell $130m for pounds in 3 years (at market)	Corriemoor Bank AG		−87.4
T6 Long 2-year index put, strike 7,200, 5,000 units at £10 a point	Saltney Capital LP			−104.7
T7 Pay-fixed swap, £80m, 5 years at 4.00%	Saltney Capital LP	35,615
T8 Pay-fixed swap, £300m, 10 years at 4.00%	Ebbsworth Pension Trustees Ltd	243,327
Net		354,916	−39.6	−104.7

PV01 is the value change for a 1bp rise in GBP rates; FX and equity are per 100% relative move, the units the standardised approach uses (L4.3.02: The sensitivities-based method: delta and vega). Through the delta charges alone the trades would need £47.70m of capital: rates £27.79m, FX £4.20m and equity £15.71m. That is £596.2m of RWA, more than the whole trading desk's £417.7m. The assumption carries a lot of weight, so the page states it rather than hides it.

Switching between books

The last set of rules is about moving an instrument after it has been booked, a reclassification. Switching is strictly limited, and switching for regulatory arbitrage is prohibited. Market events, a change in an instrument's liquidity or a change of trading intent alone are not valid reasons; switches should be rare and allowed only in extraordinary circumstances (RBC25.14). A switch needs senior management approval, the supervisor's prior approval and public disclosure, and it is irrevocable unless the position itself changes (RBC25.16–25.17). And above all: “Without exception, a capital benefit as a result of switching will not be allowed in any case or circumstance” (RBC25.15). Whatever capital the switch saves comes back as a capital surcharge.

The formal version

For a switch approved under RBC25.14–25.16, compare the bank's total capital requirement, across the banking book and the trading book, before and immediately after the switch. The surcharge is the fall, if there is one (RBC25.15; in the UK, Trading Book (CRR) Part Article 104a(4)):

\begin{aligned} K_{\text{before}} &= \text{SBM} + \text{DRC} + \text{RRAO} \quad\text{(all positions in the trading book)} \\ K_{\text{after}} &= \text{SBM}' + \text{DRC}' + \text{RRAO}' \;+\; 8\% \times \text{RW} \times E \\ \text{Surcharge} &= \max\left(K_{\text{before}} - K_{\text{after}},\; 0\right), \quad \text{fixed until the positions mature or expire} \end{aligned}

$\text{SBM},\ \text{DRC},\ \text{RRAO}$ : the three parts of the standardised approach, taught in L4.3.02: The sensitivities-based method: delta and vega to L4.3.04: Default risk charge and residual risk add-on; the primes mark them recomputed without the moved positions.
$E$ : the banking book exposure of the moved positions, here their value; $\text{RW}$ : their standardised credit risk weight (L4.2.01: The standardised approach: corporates, banks and sovereigns).
The surcharge is disclosed and is a Pillar 1 requirement. It does not move with the market: it is the number fixed on the day of the switch, running off only as the positions mature or expire (RBC25.15).

Try it

Move the bonds a share at a time. Watch market risk fall faster than credit risk rises, and the surcharge soak up the difference. Then set the rating to BB, the heaviest banking book weight, and move only 5%: the saving shrinks to £0.494m but stays positive. On this book every move cuts capital, so every move brings a surcharge. A switch that raised capital would bring none, since the surcharge is never negative: the bank would simply hold more.

Try itMove the bonds to the banking book

Share of the £80m bond book moved100%

Rating of the bonds (sets the banking book risk weight)

Before: SA market risk£39.657m

After: SA market risk£27.000m

After: credit risk on the moved bonds£4.800m

After, before any surcharge£31.800m

Capital that would be saved£7.857m

Surcharge = max(0, saving)£7.857m

Before the move

£39.66m

After, no surcharge

£31.80m

After, with the surcharge

£39.66m

The move would cut capital by £7.86m, so the whole cut comes back as a fixed Pillar 1 surcharge, disclosed, that runs off only as the bonds mature. Capital stays at £39.66m.

Market risk is the full standardised approach (SBM, DRC and the two illustrative RRAO items) on the positions left, computed for each 5% step. Credit risk uses the standardised weight of a rated corporate. Illustrative, £ millions; the switch would also need senior management and PRA approval.

Worked example

Switching the £80m of corporate bonds

Suppose the PRA approved moving all of the credit desk's BBB corporate bonds to the banking book, say because the bank closed the desk. £ millions, capital.

From the switch to the surcharge

Step 1 of 4

1
Before
$K_{\text{before}} = 33.412 + 6.140 + 0.105 = 39.657$
The SBM is the £33.412m of L4.1.04: Risk-weighted assets. The DRC and the RRAO are added in L4.3.04: Default risk charge and residual risk add-on; the RRAO here is on two small illustrative positions.

A switch the other way, from the banking book into the trading book, works the same way: if the trading book charge were lower, the difference would come back as a surcharge. The reclassification is illustrative; the book keeps the bonds on the credit desk.

Regulatory lens

The boundary is RBC25; desks are MAR12. Statements on jurisdictions are as at 3 November 2026 as at 3 Nov 2026.

In the UK

The boundary rules are in the PRA's Trading Book (CRR) Part, in the version that applies from 1 January 2027, with Basel 3.1 (PS1/26, para 1.23). Article 104 lists what must go in each book; Article 104a forbids reassigning a position unless conditions are met, makes a permitted reassignment irrevocable, and requires “an additional own funds requirement” held until the reassigned positions mature or expire; Article 106 sets the conditions for internal hedges. Trading desks (Article 104b) are required for firms using the internal model approach, which the UK starts on 1 January 2028 (PS1/26, para 1.24).

In the EU

CRR2 and CRR3 brought in the FRTB boundary (CRR Articles 104, 104a and 106), but the FRTB itself has been postponed in the EU (L4.3.11: Market risk and CVA capital: what changes from 2027). In an opinion of 3 August 2026 (EBA/Op/2026/08) the EBA asked supervisors not to prioritise any supervisory or enforcement action on the new boundary framework until 31 December 2029 or until a legislative change takes effect, if earlier. It said banks using the EU's new market risk multiplier should calculate own funds on the earlier (CRR2) boundary rules, and that other banks may do so too.

In the US

The US market risk rule charges “covered positions”: trading positions, held for short-term resale, to benefit from short-term price moves or to lock in arbitrage, and their hedges, plus foreign exchange and commodity positions whether or not they are trading assets, bar structural currency positions excluded with supervisory approval (12 CFR 217.202). On 19 March 2026 the agencies proposed to revise the market risk rule, moving models to expected shortfall and adding a standardised approach as a fall-back (Federal Reserve fact sheet); as far as we could find, no final rule had been published by 3 November 2026.

Spark Atoms

Spark AtomWhy the line was redrawn

When the Basel Committee issued the revised market risk framework on 14 January 2016, the first item on its list of changes was “a revised boundary between the trading book and banking book”, saying that a better defined boundary “will serve to reduce incentives to arbitrage between the regulatory banking and trading books”. In the same release it estimated a weighted average increase of about 40% in total market risk capital requirements (BCBS press release, 14 January 2016).

Spark AtomA surcharge that does not move

The surcharge is fixed on the day of the switch. If spreads later widen and the bonds would have needed more market risk capital, the bank does not pay it; if they would have needed less, it gets no relief. The rule removes the reason to switch rather than tracking what might have been.

Key takeaways

The trading book holds instruments held with trading intent: short-term resale, short-term price gains, arbitrage, or hedges of those (RBC25.5). Everything else is banking book.
Some instruments are presumed trading book (listed equities, accounting trading assets, market-making) and some must be banking book (unlisted equities, retail and SME credit, real estate, hedge fund stakes).
RiskAtoms Bank's eight desk positions are all in the trading book, run by four desks whose stand-alone charges (£42.95m) exceed the bank's £33.41m.
Internal risk transfers count only under strict conditions; the client trades carry no market risk only because they are hedged back to back. Unhedged: £47.70m of SBM.
A switch between books needs the supervisor's approval, is disclosed, and earns no capital benefit: moving the bonds would bring a surcharge of £7.857m.

Reaction

Check what stuck

Glossary

Trading book: Trading book: the instruments a bank holds with trading intent, valued at fair value every day through profit and loss. Its capital is market risk capital.
Banking book: Banking book: everything else, such as loans and the securities held to collect their cash flows. Its capital is credit risk capital, and its rate risk is IRRBB.
Trading intent: Trading intent: holding an instrument for short-term resale, to profit from short-term price moves, to lock in arbitrage, or to hedge positions held for those reasons (RBC25.5).
Trading desk: Trading desk: a group of traders or trading accounts that runs one well-defined business strategy inside a clear risk management structure, with a head trader and its own limits (MAR12.1, 12.4).
Internal risk transfer: Internal risk transfer: an internal written record of risk moved from one book or desk to another. It earns capital relief only under strict conditions, and never from the trading book to the banking book (RBC25.18–25.19).
Back-to-back hedge: Back-to-back hedge: an offsetting trade with matching terms, so the client trade's market risk is passed straight on and the pair together carries none.
Reclassification: Reclassification (switching): moving an instrument from one book to the other after it was first booked. Allowed only in extraordinary circumstances, with supervisory approval, and never for a capital benefit (RBC25.14–25.16).
Capital surcharge: Capital surcharge: the capital a switch would have saved, imposed back as a fixed, disclosed Pillar 1 charge that runs off as the positions mature or expire (RBC25.15).

Deep Dives & Origins

Deep Dives

Basel Committee on Banking Supervision, RBC25: Boundary between the banking book and the trading book: the whole chapter is short and readable, including the internal risk transfer rules left out here. Intermediate.
M4.7: Accounting for risk: prudent valuation, the other place where fair-valued positions meet capital. Intermediate.

Origins

Basel Committee on Banking Supervision, RBC25: Boundary between the banking book and the trading book, paras 25.1–25.26, bis.org.
Basel Committee on Banking Supervision, MAR12: Definition of trading desk, paras 12.1 and 12.4 (Swiss SIF copy).
Basel Committee on Banking Supervision, “Revised framework for market risk capital requirements issued by the Basel Committee”, press release, 14 January 2016.
Prudential Regulation Authority, PRA Rulebook, Trading Book (CRR) Part, Articles 104, 104a, 104b and 106, version from 1 January 2027; Market Risk: Advanced Standardised Approach (CRR) Part, Article 325c(2); PS1/26, paras 1.23–1.24, January 2026.
European Banking Authority, Opinion on the boundary between the trading and banking books and internal risk transfer, EBA/Op/2026/08, August 2026.
12 CFR 217.202, Definitions (market risk), law.cornell.edu.
Board of Governors of the Federal Reserve System, Fact sheet on the capital proposals, 19 March 2026.

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