How Banks Actually Organise Their Trading Books 🧵 Most people, even junior traders have no idea how a dealer bank actually structures its trading books. This structure determines risk, P&L, capital, limits, and even who gets paid bonuses. Here’s the real breakdown 👇
External Books - The Only “Real” Risk External books contain trades with: •clients •other banks •exchanges/CCPs Whatever sits here is true economic exposure. This is what drives: •VaR •stress tests •regulatory capital •liquidity requirements
If it’s not in an external book, regulators don’t care and neither should the firm.
Internal Books - The Hidden Plumbing These are trades between desks inside the bank: Sales → Trading Exotics → Vanilla Vanilla → Delta-one Trading → XVA Trading → Treasury
Internal books MUST net to zero across the firm. If they don’t, your risk reporting is already broken.
Purpose: •reassign risk to the right desk •transfer P&L fairly •consolidate expertise (e.g., vanilla desk manages vega) •save bid–ask by using internal liquidity before hitting the market They change who owns the risk, not how much risk the firm has.
Dummy Books These exist solely for: •testing new products •testing valuation/P&L changes •running model upgrades •verifying booking workflows
They should NEVER appear in: •real P&L •VaR •limits •capital •trader dashboards If dummy books leak into risk? Your entire risk system’s credibility collapses.
The Book Hierarchy Inside a Dealer Bank All books roll up into a structured tree: Global Markets → Equities → Derivatives → Index Options → Trader_A_Book
Risk & P&L are aggregated up this hierarchy for: •desk limits •business-unit limits •firm-wide reporting •CEO/CRO dashboards This is why even the naming convention of a book matters.
Why This Structure Exists Risk must sit with the desk best equipped to manage it (Exotics handle path-dependent risk, Vanilla handles vega, Delta-one handles linear risk) Regulators want visibility only on external exposure
Internal P&L must reflect actual desk contribution, not noise A clean book structure is the backbone of a professional trading operation.
The One Mistake Juniors Always Make They think: “If Sales trades with Trading, the firm has two trades.”
Wrong. Internal trades wash out. The firm’s only exposure is to the external counterparty. Miss this concept and you’ll never understand how banks manage risk.
Summary The entire trading organisation rests on three book types: External = real market/credit risk Internal = risk transfer inside the bank Dummy = testing only
This structure decides: •who owns what •who gets paid •how much capital the bank must hold •and ultimately, the bank’s survival Yet most people on the outside never see this.