A trading book is the portfolio of financial instruments held by a. The difference between the trading and banking book. The trading book is required under basel ii and iii to be marked to market daily. Basel iv revised trading and banking book boundary for. Proprietary trading refers to a financial firm or commercial bank that invests for direct market gain rather than earning commission dollars by trading on behalf of clients. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts. Financial instruments in a trading book are purchased or sold for several reasons. The valueatrisk var for assets in the trading book is measured on a.
A trading book is the portfolio of financial instruments held by a brokerage or bank. Trading book assets are traditionally markedtomarket on timely basis whereas the banking book assets are held until maturity. Under this approach, irrbb is measured by means of the following six scenarios. However, in times of stress, diversification benefits go away and. The portfolio of financial instruments in the trading book may be resold to benefit from shortterm price fluctuations. Before we go into the differences, lets reflect on the main differences between the trading and banking books. The trading book refers to assets held by a bank that are available for sale and hence regularly traded. Trading capital definition and meaning collins english. Traditionally, trading book portfolios consisted market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. Its the amount of money available to a company or individual for the buying and selling of various assets. An accounting book that includes all securities that the institution regularly buys and sells on the stock market. The allocation of assets into the trading book has a significant impact on a firms regulatory risk capital requirements. These regulations defined the minimum capital requirements for banks. The trading book is an accounting term that refers to assets held by a.
One of the most apparent changes to the trading book regime is the revised trading. Within the definitions of the revised trading book boundary an instrument that is. Rbc25 boundary between the banking book and the trading book. What is the definition of tradingrelated repostyle transactions. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. A financial institutions trading book comprises assets intended for active trading. Its definition is therefore crucial in guiding the design of other key elements of the trading book framework including. From a regulatory perspective, market risk stems from all the. Differences between interest rate risk irr in the banking and. Trading books benefit in capital reduction by hedging their portfolios and by incorporating diversification in their portfolios. The difference between the trading and banking book blogger. The trading book is required under basel ii and iii to be markedtomarket on a daily basis.
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