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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.

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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).

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