A financial institution’s trading book comprises assets intended for active trading. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts. The portfolio of financial instruments in the trading book may be resold to benefit from short-term price fluctuations, used for hedging or traded to fulfil the firm’s or clients’ needs. The fluctuations in the portfolio value must also be recorded on a daily basis and recognised in the profit and loss (P&L). As opposed to assets in the banking book, which are presumed to be held until maturity, the value of assets in the trading book must be marked-to-market. The allocation of assets into the trading book has a significant impact on a firm’s regulatory risk capital requirements. Banks are strictly prohibited from re-allocating an instrument in the trading book into the banking book for regulatory arbitrage benefits. If such a switch happens, the difference in capital will be recorded as a Pillar 1 capital surcharge.
TRADING BOOK
