Question ID:
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Market risk
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Not applicabile
Disclose name of institution / entity:
Type of submitter:
Consultancy firm
Subject Matter:
Boundary between the banking book and the trading book

A bond issued that has an automatic early redemption option linked to an equity index can be treated as follows:
- the market value net of the embedded option related to early redemption is included in the banking book;
- the option related to early redemption is unbundled and placed in the trading book so that all risks participate in the market risk requirement?

In the case of not being able to unbundle the option related to early redemption and thus placing the equity risk in the trading book, should the institution move the entire bond within the trading book? Or does the bond remain in the banking book and can the early redemption risk from the equity index be managed in the banking book?

Background on the question:

The Basel Committee on Banking Supervision reports in the document "Minimum Capital Requirements for Market Risk," which introduces the new FRTB regulations, that options that include embedded derivatives of instruments issued by the institution and that relate to credit risk or equity risk should be included in the trading book.
This means that banks should split the liability into two components: (i) the embedded derivative, which is assigned to the trading book; and (ii) the residual liability, which is kept in the banking book. No internal risk transfers are required for this bifurcation.
However, the case where the institution is unable to perform this bifurcation is not specified.

Date of submission:
Published as Rejected Q&A
Rationale for rejection:

This question has been rejected because the matter it refers to is related to aspects of the regulatory framework which are not yet in force. The matter it refers to is related to the potential amendments to CRR, known as CRR3 amendments, which have not been yet finalised and adopted. For further information on the purpose of this tool and on how to submit questions, please see 'Additional background and guidance for asking questions'.

Rejected question