BIPRU 1
Application
BIPRU 1.1
Application
- 01/01/2007
BIPRU 1.1.1
See Notes
There is no overall application statement for BIPRU. Each chapter or section has its own application statement. Broadly speaking however, BIPRU applies to:
- (1) a bank;
- (2) a building society;
- (3) a BIPRU investment firm; and
- (4) groups containing such firms.
BIPRU 1.1.2
See Notes
BIPRU 1.1.3
See Notes
Purpose
BIPRU 1.1.4
See Notes
Guidance on the categorisation of BIPRU investment firms
BIPRU 1.1.5
See Notes
The definition of a BIPRU firm
BIPRU 1.1.6
See Notes
Subject to BIPRU 1.1.7 R, a BIPRU firm means a firm that is:[deleted]
- (1) a building society; or
- (2) a bank; or
- (3) a full scope BIPRU investment firm; or
- (4) a BIPRU limited licence firm; or
- (5) a BIPRU limited activity firm.
BIPRU 1.1.7
See Notes
None of the following is a BIPRU firm and each of the following is excluded from each of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3) to BIPRU 1.1.6R (5) and BIPRU 1.1.18 R (2) to (4):
- (1) an incoming EEA firm;
- (2) an incoming Treaty firm;
- (3) any other overseas firm;
- (4) an ELMI;
- (5) an insurer; and
- (6) an ICVC.
BIPRU 1.1.8
See Notes
BIPRU 1.1.9
See Notes
BIPRU 1.1.10
See Notes
- (1) This paragraph applies to an undertaking that would be a third country BIPRU firm if it were authorised under the Act.
- (2) Except in exceptional circumstances, it is the appropriate regulator's policy that it will not give an overseas applicant a Part 4A permission unless the appropriate regulator is satisfied that the applicant will be subject to prudential regulation by its home state regulatory body that is broadly equivalent to that provided for in the Handbook and the applicable EEA prudential sectoral legislation. The appropriate regulator will take into account not only the requirements to which the firm is subject but how they are enforced. The appropriate regulator will also take into account the laws, regulations and administrative provisions to which it is subject in its home state. The reasons for that policy include:
- (a) it is unlikely that a firm that is not subject to equivalent supervision will be able to satisfy the threshold conditions (and in particular threshold condition 5 (Suitability)) and it is unlikely that it will be possible to establish that the firm does satisfy them;
- (b) such a firm is likely to pose a threat to the interests of consumers and potential consumers, particularly as effective supervision of an overseas firm depends on cooperation between the appropriate regulator and the regulatory body that authorises the firm in its home country and on the appropriate regulator being able to place appropriate reliance on the supervision carried out by such regulatory body; and
- (c) under Article 38(1) of the Banking Consolidation Directive the appropriate regulator should not apply to branches of credit institutions having their head office outside the EEA, when commencing or carrying on their business, provisions which result in more favourable treatment than that accorded to branches of credit institutions having their head office in the EEA.
- (3) If an undertaking is not subject to equivalent supervision in its home state and it wishes to carry on in the United Kingdom regulated activities coming within the scope of the activities that define a BIPRU firm it should establish a subsidiary undertaking in the United Kingdom. Such a subsidiary undertaking should be able to show, amongst other things, how it would comply with the threshold conditions (and in particular threshold conditions 3 (Close links) and 5 (Suitability)).
- (4) If in exceptional circumstances the appropriate regulator does grant a Part 4A permission to an undertaking that is not subject to equivalent prudential regulation the appropriate regulator is likely to take measures under the regulatory system to compensate for the lack of equivalent supervision. These may include applying the prudential requirements for BIPRU firms to the firm.
- (5) An overseas firm that is subject to equivalent supervision is subject to the threshold conditions and the Principles. BIPRU and GENPRU do not generally apply. However BIPRU 12 applies to a credit institution with respect to liquidity risk in relation to its United Kingdom branch.
Types of investment firm: Limited activity firms
BIPRU 1.1.11
See Notes
A limited activity firm means (as specified by Article 20(3) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that satisfies the following conditions:
- (1) it meets the criteria in (a) or the criteria in (b):
- (a) it deals on own account only:
- (i) for the purpose of fulfilling or executing a client order; or
- (ii) for the purpose of gaining entrance to a clearing and settlement system or a recognised investment exchange or designated investment exchange when acting in an agency capacity or executing a client order; or
- (b) it satisfies the following conditions:
- (i) it does not hold client money or securities in relation to investment services that it provides and is not authorised to do so;
- (ii) the only investment service it undertakes is dealing on own account;
- (iii) it has no external customers in relation to investment services it provides; and
- (iv) the execution and settlement of its transactions in relation to investment services it provides takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution;
- (2) (in the case of a CAD investment firm that is a BIPRU investment firm) its base capital resources requirement is €730,000;
- (3) (in the case of a CAD investment firm that is an EEA firm) it is subject to the CRD implementation measures of its Home State for Article 9 of the Capital Adequacy Directive (Initial capital requirement of €730,000); and
- (4) (in the case of any other CAD investment firm) its base capital resources requirement would be €730,000 if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14 R (3)(b).
Types of investment firm: Limited licence firms
BIPRU 1.1.12
See Notes
A limited licence firm means (as specified by Article 20(2) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that is not authorised to:
- (1) deal on own account; or
- (2) provide the investment services of underwriting or placing financial instruments (as referred to in point 6 of Section A of Annex I of MiFID) on a firm commitment basis.
Types of investment firm: CAD full scope firm
BIPRU 1.1.13
See Notes
Types of investment firm: CAD investment firm
BIPRU 1.1.14
See Notes
- (1) In accordance with Article 3(1)(b) of the Capital Adequacy Directive, a person is a CAD investment firm if it falls into (2) or (3).
- (2) A person whose head office is in an EEA State is a CAD investment firm if it is an investment firm that is subject to the requirements imposed by MiFID but excludes the following:
- (a) a bank, a building society or an ELMI;
- (b) a credit institution;
- (c) a local; and
- (d) an exempt CAD firm.
- (3) An investment firm whose head office is not in an EEA State is a CAD investment firm if it would have fallen into (2) if:
BIPRU 1.1.15
See Notes
The following are excluded from the definition of a CAD investment firm and hence from the definition of BIPRU investment firm:
- (1) an investment firm to which MiFID does not apply under Article 2(1); and
- (2) an investment firm with the benefit of an exemption pursuant to Article 3 of MiFID.
Types of investment firm: Exempt CAD firm
BIPRU 1.1.16
See Notes
In accordance with Article 3(1)(b)(iii) of the Capital Adequacy Directive (Definitions), an exempt CAD firm means an investment firm that satisfies the following conditions:
- (1) it would have been a CAD investment firm if exempt CAD firms were not excluded from the definition; and
- (2) it is only authorised to provide the service of investment advice and/or receive and transmit orders from investors (as referred to in Section A of Annex I of MiFID) without in both cases holding money or securities belonging to its clients and which for that reason may not at any time place itself in debit with its clients.
Types of BIPRU investment firm
BIPRU 1.1.17
See Notes
- (1) A BIPRU limited licence firm means a limited licence firm that falls into (4).
- (2) A BIPRU limited activity firm means a limited activity firm that falls into (4).
- (3) A full scope BIPRU investment firm means a CAD full scope firm that falls into (4).
- (4) A limited licence firm, limited activity firm or CAD full scope firm falls into (4) if:
- (a) it is a firm; and
- (b) its head office is in the United Kingdom and it is not otherwise excluded from the definition of BIPRU firm under BIPRU 1.1.7 R.
Alternative classification of BIPRU investment firms
BIPRU 1.1.18
See Notes
BIPRU investment firm are divided into the following classes for the purposes of the calculation of the base capital resources requirement and for the purpose of any other provision of the Handbook that applies this classification:
- (1) a UCITS investment firm;
- (2) a BIPRU 50K firm;
- (3) a BIPRU 125K firm; and
- (4) a BIPRU 730K firm.
Types of investment firm: BIPRU 125K firm
BIPRU 1.1.19
See Notes
A BIPRU 125K firm means a BIPRU investment firm that satisfies the following conditions:
- (1) it does not:
- (a) deal on own account; or
- (b) underwrite issues of financial instruments (as referred in Section A of Annex I of MiFID) on a firm commitment basis;
- (2) it holds clients' money or securities in relation to investment services it provides or is authorised to do so;
- (3) it offers one or more of the following services (all as referred to in Section A of Annex I of MiFID):
- (a) reception and transmission of investors' orders for financial instruments; or
- (b) the execution of investors' orders for financial instruments; or
- (c) the management of individual portfolios of investments in financial instruments;
- (4) it is not a UCITS investment firm and;
- (5) it does not operate a multilateral trading facility.
Types of investment firm: BIPRU 50K firm
BIPRU 1.1.20
See Notes
A BIPRU 50K firm means a BIPRU investment firm that satisfies the following conditions:
- (1) it satisfies the conditions in BIPRU 1.1.19 R (1) and (3);
- (2) it does not hold clients' money or securities in relation to investment services it provides and it is not authorised to do so;
- (3) it is not a UCITS investment firm; and
- (4) it does not operate a multilateral trading facility.
Types of investment firm: 730K firm
BIPRU 1.1.21
See Notes
Types of investment firm: Part 4A permission
BIPRU 1.1.22
See Notes
Meaning of dealing on own account
BIPRU 1.1.23
See Notes
- (1) Dealing on own account means (for the purpose of GENPRU and BIPRU) the service of dealing in any financial instruments for own account as referred to in point 3 of Section A of Annex I to MiFID, subject to (2) and (3).
- (2) In accordance with article5(2) of the Capital Adequacy Directive (Definition of dealing on own account), a CAD investment firm that executes investors' orders for financial instruments and holds such financial instruments for its own account does not for that reason deal on own account if the following conditions are met:
- (a) such position only arise as a result of the CAD investment firm's failure to match investors' orders precisely;
- (b) the total market value of all such positions is no higher than 15% of the CAD investment firm's initial capital;
- (c) (in the case of a BIPRU investment firm) it complies with the main BIPRU firm Pillar 1 rules and BIPRU 10 (Large exposures requirements);
- (d) (in the case of a CAD investment firm that is an EEA firm) it complies with the CRD implementation measures of its Home State for Articles 18 and 20 (Minimum capital requirements) and 28 (Large exposures) of the Capital Adequacy Directive;
- (e) (in the case of any other CAD investment firm) it would comply with the rules in (2)(c) if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14R (3)(b); and
- (f) such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.
- (3) In accordance with Article 5(2) of the Capital Adequacy Directive, the holding of non-trading book positions in financial instruments in order to invest capital resources is not dealing on own account for the purposes referred to in BIPRU 1.1.18 R.
Interpretation of the definition of types of firm and undertaking
BIPRU 1.1.24
See Notes
For the purposes of the definitions in BIPRU 1.1, a person does any of the activities referred to in BIPRU 1.1 if:
- (1) it does that activity anywhere in the world; or
- (2) if its permission includes that activity; or
- (3) (in the case of an EEA firm) it is authorised by its Home State regulator to do that activity; or
- (4) (if the carrying on of that activity is prohibited in a state or territory without an authorisation in that state or territory) that firm has such an authorisation.
BIPRU 1.1.25
See Notes
For the purposes of the definitions in BIPRU 1.1, a person offers any of the services referred to in BIPRU 1.1.19 R (3) if:
- (1) it offers that service anywhere in the world; or
- (2) any of BIPRU 1.1.24 R (1) to BIPRU 1.1.24R (4) apply.
BIPRU 1.1.26
See Notes
BIPRU 1.2
Definition of the trading book
- 01/01/2007
Application
BIPRU 1.2.1
See Notes
Purpose
BIPRU 1.2.2
See Notes
Definition of the trading book: General
BIPRU 1.2.3
See Notes
The trading book of a firm consists of all position in CRD financial instrument and commodities held either with trading intent or in order to hedge other elements of the trading book and which are either free of any restrictive covenants on their tradability or able to be hedged.
Definition of the trading book: Positions
BIPRU 1.2.4
See Notes
The term position includes proprietary positions and positions arising from client servicing and market making.
BIPRU 1.2.5
See Notes
Definition of the trading book: Repos
BIPRU 1.2.6
See Notes
[Note: CAD Annex VII Part D point 4]
BIPRU 1.2.6A
See Notes
CRD financial instruments
BIPRU 1.2.7
See Notes
A CRD financial instrument means any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party.
BIPRU 1.2.8
See Notes
CRD financial instruments include both primary CRD financial instrument or cash instruments, and derivative CRD financial instruments the value of which is derived from the price of an underlying CRD financial instrument, a rate, an index or the price of another underlying item and include as a minimum the instruments specified in Section C of Annex I to the MIFID.
[Note: CAD Article 3(1) last paragraph]
BIPRU 1.2.9
See Notes
Generally, for the purpose of the definition of CRD financial instrument:
- (1) a financial asset means cash, the right to receive cash or another financial asset, the contractual right to exchange financial assets on potentially favourable terms or an equity instrument; and
- (2) a financial liability means the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.
Trading intent
BIPRU 1.2.10
See Notes
Positions held with trading intent for the purpose of the definition of the trading book are those held intentionally for short-term resale and/or with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations.
[Note: CAD Article 11(2) first sentence]
BIPRU 1.2.11
See Notes
Trading intent must be evidenced on the basis of the strategies, policies and procedures set up by the firm to manage the position or portfolio in accordance with BIPRU 1.2.12 R.
[Note: CAD 11(3)]
BIPRU 1.2.12
See Notes
Positions/portfolios held with trading intent must comply with the following requirements:
- (1) there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which must include the expected holding horizon;
- (2) there must be clearly defined policies and procedures to monitor the position against the firm's trading strategy including the monitoring of turnover and stale position in the firm's trading book; and
- (3) there must be clearly defined policies and procedures for the active management of the position, which must include the following:
- (a) position entered into on a trading desk;
- (b) position limits are set and monitored for appropriateness;
- (c) dealers have the autonomy to enter into/manage the position within agreed limits and according to the approved strategy;
- (d) positions are reported to senior management as an integral part of the firm's risk management process; and
- (e) positions are actively monitored with reference to market information sources and an assessment made of the marketability or hedge-ability of the position or its component risks, including the assessment of, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market.
[Note: CAD Annex VII Part A]
Internal hedges
BIPRU 1.2.13
See Notes
Internal hedges may be included in the trading book, in which case BIPRU 1.2.14 R to BIPRU 1.2.16 R apply.
BIPRU 1.2.14
See Notes
- (1) An internal hedge is a position that materially or completely offsets the component risk element of a non-trading book position or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:
- (a) internal hedges must not be primarily intended to avoid or reduce capital requirements;
- (b) internal hedges must be properly documented and subject to particular internal approval and audit procedures;
- (c) the internal transaction must be dealt with at market conditions;
- (d) the bulk of the market risk that is generated by the internal hedge must be dynamically managed in the trading book within the authorised limits; and
- (e) internal transactions must be carefully monitored.
- (2) Monitoring must be ensured by adequate procedures.
[Note: CAD Annex VII Part C point 1]
BIPRU 1.2.15
See Notes
The treatment referred to in BIPRU 1.2.14 R applies without prejudice to the capital requirements applicable to the "non-trading book leg" of the internal hedge.
BIPRU 1.2.16
See Notes
By way of derogation from BIPRU 1.2.14 R to BIPRU 1.2.15 R, when a firm hedges a non-trading book credit risk exposure using a credit derivative booked in its trading book (using an internal hedge), the non-trading book exposure is not deemed to be hedged for the purposes of calculating capital requirements unless the firm purchases from an eligible third party protection provider a credit derivative meeting the requirements set out in BIPRU 5.7.13 R (Additional requirements for credit derivatives) with regard to the non-trading book exposure. Without prejudice to the second sentence of BIPRU 14.2.10 R, where such third party protection is purchased and is recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, neither the internal nor external credit derivative hedge must be included in the trading book for the purposes of calculating capital requirements.
[Note: CAD Annex VII Part C point 3]
Size thresholds
BIPRU 1.2.17
See Notes
- (1) Subject to (3), a firm may calculate its capital requirements for its trading book business in accordance with the standardised approach to credit risk (or, if it has an IRB permission, the IRB approach) as it applies to the non-trading book where the size of the trading book business meets the following requirements:
- (a) the trading book business of the firm does not normally exceed 5% of its total business;
- (b) its total trading book position do not normally exceed €15 million; and
- (c) the trading book business of the firm never exceeds 6% of its total business and its total trading book positions never exceed €20 million.
- (2) Subject to (3), if (1) applies, the following are disapplied:
- (a) the rules relating to the interest rate PRR, the equity PRR, the CIU PRR and the PRR calculated under BIPRU 7.11 (Credit derivatives in the trading book);
- (b) the rules relating to the option PRR (but only in relation to positions which under BIPRU 7.6.5 R (Table: Appropriate calculation for an option or warrant) may be subject to one of the other PRR charges listed in (2)(a) or which would be subject to such a PRR charge if BIPRU 7.6.5 R did not require an option PRR to be calculated);
- (c) BIPRU 7.10 (Use of a Value at Risk Model) so far as BIPRU 7.10 relates to the risks covered by the requirements in (a) and (b); and
- (d) BIPRU 14 (Capital requirements for settlement and counterparty risk).
- (3) If (1) applies, the following continue to apply:
- (a) he rules relating to the commodity PRR and the foreign currency PRR;
- (b) the rules relating to the option PRR (so far as not disapplied under (2)(b);
- (c) BIPRU 7.10 (so far as not disapplied under (2)(c));
- (d) BIPRU 14.2.3 R to BIPRU 14.2.8 R (Credit derivatives); and
- (e) BIPRU 14.2.15 R to BIPRU 14.2.16 R (Collateral for repurchase transactions and other products).
[Note: CAD Article 18(2)]
BIPRU 1.2.18
See Notes
In order to calculate the proportion that trading book business bears to total business for the purpose of BIPRU 1.2.17 R (1)(a) to BIPRU 1.2.17R (1)(c) the firm must refer to the size of the combined on- and off-balance-sheet business. For this purpose, debt instruments must be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and short positions must be summed regardless of their signs.
BIPRU 1.2.19
See Notes
If a firm should happen for more than a short period to exceed either or both of the limits imposed in BIPRU 1.2.17 R (1)(a) and BIPRU 1.2.17R (1)(b) or either or both of the limits imposed in BIPRU 1.2.17 R (1)(c):
- (1) BIPRU 1.2.17 R ceases to apply; and
- (2) the firm must notify the appropriate regulator.
[Note: CAD Article 18(4)]
BIPRU 1.2.20
See Notes
Systems and controls for the trading book
BIPRU 1.2.21
See Notes
BIPRU 1.2.22
See Notes
A firm must establish and maintain systems and controls to manage its trading book, in accordance with the trading book systems and controls rules, BIPRU 1.2.6 R (Definition of the trading book: Repos) and the overall financial adequacy rule to BIPRU 1.2.27 R (Trading book policy statements).
BIPRU 1.2.23
See Notes
BIPRU 1.2.24
See Notes
Systems and controls must include at least the following elements:
- (1) documented policies and procedures for the process of valuation (including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures); and
- (2) reporting lines for the department accountable for the valuation process that are clear and independent of the front office.
[Note: CAD Annex VII Part B point 2]
BIPRU 1.2.25
See Notes
The reporting line in relation to the matters covered by BIPRU 1.2.21 R to BIPRU 1.2.24 R must ultimately be to an executive director on the firm's governing body.
Trading book policy statements
BIPRU 1.2.26
See Notes
A firm must have clearly defined policies and procedures for determining which positions to include in the trading book for the purposes of calculating its capital requirements, consistent with the criteria set out in BIPRU 1.2.3 R to BIPRU 1.2.4 R, BIPRU 1.2.10 R to BIPRU 1.2.11 R, BIPRU 1.1.13 R and BIPRU 1.2.22 R and taking into account the firm's risk management capabilities and practices. Compliance with these policies and procedures must be fully documented and subject to periodic internal audit.
BIPRU 1.2.27
See Notes
A firm must have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures must address:
- (1) the activities the firm considers to be trading and as constituting part of the trading book for capital requirement purposes;
- (2) the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;
- (3) for positions that are marked-to-model, the extent to which the firm can:
- (a) identify all material risks of the position;
- (b) hedge all material risks of the position with instruments for which an active, liquid two-way market exists; and
- (c) derive reliable estimates for the key assumptions and parameters used in the model;
- (4) the extent to which the firm can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;
- (5) the extent to which legal restrictions or other operational requirements would impede the firm's ability to effect a liquidation or hedge of the position in the short term;
- (6) the extent to which the firm can, and is required to, actively risk manage the position within its trading operation; and
- (7) the extent to which the firm may transfer risk or positions between the non-trading book and trading book and the criteria for such transfers.
[Note: CAD Annex VII Part D point 2]
BIPRU 1.2.28
See Notes
The policies and procedures referred to in BIPRU 1.2.27 R (1) should cover:
- (1) the CRD financial instrument and commodities that the firm proposes to trade in, including the currencies, maturities, issuers and quality of issues; and
- (2) any instruments to be excluded from its trading book.
BIPRU 1.2.29
See Notes
- (1) The policies and procedures referred to in the overall financial adequacy rule and BIPRU 1.2.27 R must be recorded in a single written document. A firm may record those policies and procedures in more than one written document if the firm has a single written document that identifies:
- (a) all those other documents; and
- (b) the parts of those documents that record those policies and procedures.
- (2) A trading book policy statement means the single document referred to in this rule.
BIPRU 1.2.30
See Notes
- (1) A firm must notify the appropriate regulator as soon as is reasonably practicable when it adopts a trading book policy statement.
- (2) A firm must notify the appropriate regulator as soon as is reasonably practicable if the trading book policy statement is subject to significant changes.
BIPRU 1.2.31
See Notes
BIPRU 1.2.32
See Notes
BIPRU 1.2.33
See Notes
Treatments common to the trading book and the non-trading book
BIPRU 1.2.34
See Notes
Trading book treatments
BIPRU 1.2.35
See Notes
Non-trading book treatments
BIPRU 1.2.36
See Notes
BIPRU 1.3
Applications for advanced approaches and waivers
- 31/12/2010
- Past version of BIPRU 1.3 before 31/12/2010
Application
BIPRU 1.3.1
See Notes
Purpose
BIPRU 1.3.2
See Notes
- (1) A firm may apply for an Article 129 permission or a waiver in respect of:
- (a) the IRB approach;
- (b) the advanced measurement approach;
- (c) the CCR internal model method; and
- (d) the VaR model approach.
- (2) A firm should apply for a waiver if it wants to:
- (a) apply the CAD 1 model approach; or
- (b) apply the master netting agreement internal models approach; or
- (c) disapply consolidated supervision under BIPRU 8 for its UK consolidation group or non-EEA sub-group; or
- (d) apply the treatment in BIPRU 2.1 (Solo-consolidation waiver); or
- (da) apply the treatment for a core UK group in BIPRU 3.2.25 R (Zero risk-weighting for intra-group exposures) or in BIPRU 10.8A (Intra-group exposures: core UK group); or
- (e) apply the treatment for a non-core large exposures group in BIPRU 10.9A (Intra-group exposures: non-core large exposures group); or
- (f) apply the treatment in BIPRU 10.6.35 R (Sovereign large exposure waiver).
Article 129
BIPRU 1.3.3
See Notes
BIPRU 1.3.4
See Notes
BIPRU 1.3.5
See Notes
BIPRU 1.3.6
See Notes
Article 129 permissions and waivers - specific conditions
BIPRU 1.3.7
See Notes
[Note: BCD Article 105(2)]
BIPRU 1.3.8
See Notes
[Note: BCD annex X Part 3 point 30]
BIPRU 1.3.9
See Notes
[Note: BCD annex X Part 3 point 31]
Waiver - general
BIPRU 1.3.10
See Notes
As explained in SUP 8, under sections 138A and 138B of the Act, the appropriate regulator may not grant a waiver to a firm unless it is satisfied that:
BIPRU 1.3.11
See Notes
BIPRU 1.3.12
See Notes
Forms and method of application
BIPRU 1.3.13
See Notes
BIPRU 1.3.14
See Notes
BIPRU 1.3.15
See Notes
BIPRU 1.3.16
See Notes
BIPRU 1.3.17
See Notes
BIPRU 1.3.18
See Notes
BIPRU 1.3.19
See Notes
BIPRU 1.3.20
See Notes
BIPRU 1.3.21
See Notes
BIPRU 1.4
Actions for damages
- 01/01/2007
BIPRU 1.4.1
See Notes
BIPRU 1 Annex 1D
Application form to apply the advanced measurement approach
- 01/01/2007
See Notes
This annex consists only of one or more forms. Forms |
BIPRU 1 Annex 2D
Application form to apply the IRB approach
- 01/01/2007
See Notes
This annex consists only of one or more forms. Forms |
BIPRU 1 Annex 3D
Application form to apply the CCR internal model method approach
- 01/01/2007
See Notes
This annex consists only of one or more forms. Forms |
BIPRU 2
Capital
BIPRU 2.1
Solo consolidation
- 01/01/2007
Application
BIPRU 2.1.1
See Notes
Purpose
BIPRU 2.1.2
See Notes
BIPRU 2.1.3
See Notes
Applying for a solo consolidation waiver
BIPRU 2.1.4
See Notes
General
BIPRU 2.1.5
See Notes
BIPRU 2.1.6
See Notes
The basic rules for solo consolidation
BIPRU 2.1.7
See Notes
BIPRU 2.1.8
See Notes
- (1) A firm that has a solo consolidation waiver must meet the obligations in SYSC 12.1.13 R (Application of certain systems and controls rules on a consolidated basis) on a consolidated basis with respect to the firm and each subsidiary undertaking to which the firm's solo consolidation waiver applies.
- (2) If (1) applies, SYSC 12.1.13 R applies to the group made up of the firm and its subsidiary undertakings referred to in (1) in the same way as it applies to a UK consolidation group or non-EEA sub-group.
- (3) If (1) applies, the provisions of SYSC and BIPRU listed in SYSC 12.1.13 R do not apply to the firm on a solo basis.
Solo consolidation and capital and concentration risk requirements
BIPRU 2.1.9
See Notes
BIPRU 2.1.10
See Notes
BIPRU 2.1.11
See Notes
BIPRU 2.1.12
See Notes
BIPRU 2.1.13
See Notes
BIPRU 2.1.14
See Notes
BIPRU 2.1.15
See Notes
BIPRU 2.1.16
See Notes
BIPRU 2.1.17
See Notes
BIPRU 2.1.18
See Notes
Minimum standards
BIPRU 2.1.19
See Notes
BIPRU 2.1.20
See Notes
BIPRU 2.1.21
See Notes
BIPRU 2.1.22
See Notes
BIPRU 2.1.23
See Notes
BIPRU 2.1.24
See Notes
BIPRU 2.1.25
See Notes
The following are the criteria that the appropriate regulator will take into account when considering whether the condition in BIPRU 2.1.24 R is going to be met:
- (1) the speed with which funds can be transferred or liabilities repaid to the firm and the simplicity of the method for the transfer or repayment;
- (2) whether there are any interests other than those of the firm in the subsidiary undertaking and what impact those other interests may have on the firm's control over the subsidiary undertaking and on the ability of the firm to require a transfer of funds or repayment of liabilities;
- (3) whether the prompt transfer of funds or repayment of liabilities to the firm might harm the reputation of the firm or its subsidiary undertakings;
- (4) whether there are any tax disadvantages for the firm or the subsidiary undertaking as a result of the transfer of funds or repayment of liabilities;
- (5) whether there are any exchange controls that may have an impact on the transfer of funds or repayment of liabilities;
- (6) whether there are assets in the subsidiary undertaking available either to be transferred or liquidated for the purposes of the transfer of funds or repayment of liabilities;
- (7) whether any regulatory requirements impact on the ability of the subsidiary undertaking to transfer funds or repay liabilities promptly;
- (8) whether the purpose of the subsidiary undertaking prejudices the prompt transfer of funds or repayment of liabilities;
- (9) whether the legal structure of the subsidiary undertaking prejudices the prompt transfer of funds or repayment of liabilities;
- (10) whether the contractual relationships of the subsidiary undertaking with the firm and other third parties prejudices the prompt transfer of funds or repayment of liabilities;
- (11) whether past and proposed flows of funds between the subsidiary undertaking and the firm demonstrate the ability to make prompt transfer of funds or repayment of liabilities; and
- (12) whether the degree of solo consolidation by the firm undermines the appropriate regulator's ability to assess the soundness of the firm as a legal entity (taking into account any other subsidiary undertakings to which BIPRU 2.1 is being applied).
BIPRU 2.1.26
See Notes
BIPRU 2.1.27
See Notes
BIPRU 2.1.28
See Notes
BIPRU 2.2
Internal capital adequacy standards
- 01/01/2007
Application
BIPRU 2.2.1
See Notes
Purpose
BIPRU 2.2.2
See Notes
- (1) BIPRU 2.2 sets out guidance on GENPRU 1.2 (Adequacy of financial resources) so far as it applies to a BIPRU firm. In particular it sets out guidance on how a firm should carry out its ICAAP, as well as some factors the appropriate regulator will take into consideration when undertaking a SREP. The terms ICAAP and SREP are explained in BIPRU 2.2.4 G. BIPRU 2.2.41 R-BIPRU 2.2.43 R are rules that apply to a firm with an IRB permission.
- (2) BIPRU 2.2 is for the most part written on the basis that GENPRU 1.2 (Adequacy of financial resources) applies to a firm on a solo basis. However it is still relevant when GENPRU 1.2 applies on a consolidated basis. When GENPRU 1.2 applies on a consolidated basis, BIPRU 2.2 should be read with appropriate adjustments.
Meaning of capital
BIPRU 2.2.3
See Notes
The ICAAP and the SREP: Introduction
BIPRU 2.2.4
See Notes
The adequacy of a firm's capital needs to be assessed both by a firm and the appropriate regulator. This process involves:
- (1) an internal capital adequacy assessment process (ICAAP), which a firm is obliged to carry out in accordance with the ICAAP rules; and
- (2) a supervisory review and evaluation process (SREP), which is conducted by the appropriate regulator.
The ICAAP and the SREP: The ICAAP
BIPRU 2.2.5
See Notes
The obligation to conduct an ICAAP, includes requirements on a firm to:
- (1) carry out regularly assessments of the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover the nature and level of the risks to which it is or might be exposed (GENPRU 1.2.30 R to GENPRU 1.2.41 G (the overall Pillar 2 rule and related rules);
- (2) identify the major sources of risk to its ability to meet its liabilities as they fall due (the overall Pillar 2 rule);
- (3) conduct stress and scenario tests (the general stress and scenario testing rule), taking into account, in the case of a firm with an IRB permission, the stress test required by BIPRU 4.3.39 R to BIPRU 4.3.40 R (Stress tests used in assessment of capital adequacy for a firm with an IRB permission);
- (4) ensure that the processes, strategies and systems required by the overall Pillar 2 rule and used in its ICAAP, are both comprehensive and proportionate to the nature, scale and complexity of that firm's activities (GENPRU 1.2.35 R); and
- (5) document its ICAAP (GENPRU 1.2.60 R).
BIPRU 2.2.6
See Notes
BIPRU 2.2.7
See Notes
A firm should ensure that its ICAAP is:
- (1) the responsibility of the firm's governing body;
- (2) reported to the firm's governing body; and
- (3) forms an integral part of the firm's management process and decision-making culture.
The ICAAP and the SREP: The SREP
BIPRU 2.2.8
See Notes
BIPRU 2.2.9
See Notes
The SREP is a process under which the appropriate regulator:
- (1) reviews the arrangements, strategies, processes and mechanisms implemented by a firm to comply with GENPRU, BIPRU and SYSC and with requirements imposed by or under the regulatory system and evaluates the risks to which the firm is or might be exposed;
- (2) determines whether the arrangements, strategies, processes and mechanisms implemented by the firm and the capital held by the firm ensures a sound management and coverage of the risks in (1); and
- (3) (if necessary) requires the firm to take the necessary actions or steps at an early stage to address any failure to meet the requirements referred to in (1).
BIPRU 2.2.10
See Notes
BIPRU 2.2.11
See Notes
BIPRU 2.2.12
See Notes
BIPRU 2.2.12A
See Notes
BIPRU 2.2.12B
See Notes
BIPRU 2.2.12C
See Notes
BIPRU 2.2.13
See Notes
BIPRU 2.2.13A
See Notes
BIPRU 2.2.14
See Notes
BIPRU 2.2.15
See Notes
The drafting of individual capital guidance and capital planning buffer
BIPRU 2.2.16
See Notes
BIPRU 2.2.17
See Notes
- (1) Individual capital guidance may refer to two types of capital resources.
- (2) The first type is referred to as general capital. It refers to total tier one capital resources and tier two capital resources after deductions.
- (3) The second type is referred to as total capital. It refers to total tier one capital resources, tier two capital resources and tier three capital resources after deductions.
BIPRU 2.2.18
See Notes
- (1) In both of the cases in BIPRU 2.2.17 G capital resources should be calculated in the same way as they are in GENPRU 2.2 (Capital resources). This includes the rules limiting the amount of capital that can be included in the various tiers of capital when capital resources are being calculated.
- (2) GENPRU 2.2.42 R does not allow innovative tier one capital to count as tier one capital resources for certain purposes. This restriction does not apply for the purposes in BIPRU 2.2.17 G.
BIPRU 2.2.19
See Notes
- (1) Individual capital guidance may also be given with respect to group capital resources. This paragraph explains how such guidance should be interpreted unless the individual capital guidance specifies another interpretation.
- (2) If BIPRU 8.2.1 R (General consolidation rule for a UK consolidation group) applies to the firm the guidance relates to its UK consolidation group. If BIPRU 8.3.1 R (General consolidation rule for a non-EEA sub-group) applies to the firm the guidance relates to its non-EEA sub-group. If both apply to the firm the guidance relates to its UK consolidation group and to its non-EEA sub-group.
- (3) The guidance will be on the overall financial adequacy rule as it applies on a consolidated basis under GENPRU 1.2.59 R (Application of GENPRU 1.2 on a solo and consolidated basis: Adequacy of resources) and insofar as it refers to capital resources.
- (4) BIPRU 2.2.16 G to BIPRU 2.2.18 G apply for the purpose of this paragraph as they apply to guidance given on a solo basis. References to capital resources should be read as being to consolidated capital resources.
BIPRU 2.2.19A
See Notes
BIPRU 2.2.19B
See Notes
Failure to meet individual capital guidance and monitoring and reporting on the capital planning buffer
BIPRU 2.2.20
See Notes
A firm's continuing to hold capital in accordance with its individual capital guidance and its ability to carry on doing so is a fundamental part of the appropriate regulator's supervision of that firm. Therefore if a firm's capital resources have fallen, or are expected to fall, below the level advised in individual capital guidance, then, consistent with Principle 11 (Relations with regulators), a firm should inform the appropriate regulator of this fact as soon as practicable, explaining why this has happened or is expected to happen and:
- (1) what action the firm intends to take to increase its capital resources or to reduce its risks and hence its capital requirements; or
- (2) what modification the firm considers should be made to the individual capital guidance which it has been given.
BIPRU 2.2.21
See Notes
BIPRU 2.2.22
See Notes
BIPRU 2.2.23
See Notes
BIPRU 2.2.23A
See Notes
Consistent with Principle 11 (Relations with regulators), a firm should notify the appropriate regulator as early as possible in advance where it has identified that it would need to use its capital planning buffer. The firm's notification should at least state:
- (1) what adverse circumstances are likely to force the firm to draw down its capital planning buffer;
- (2) how the capital planning buffer will be used up in line with the firm's capital planning projections; and
- (3) what plan is in place for the eventual restoration of the capital planning buffer.
BIPRU 2.2.23B
See Notes
BIPRU 2.2.23C
See Notes
BIPRU 2.2.23D
See Notes
BIPRU 2.2.23E
See Notes
BIPRU 2.2.23F
See Notes
Proportionality of an ICAAP
BIPRU 2.2.24
See Notes
BIPRU 2.2.25
See Notes
- (1) This paragraph applies to a small firm whose activities are simple and primarily not credit-related.
- (2) In carrying out its ICAAP it could:
- (a) identify and consider that firm's largest losses over the last 3 to 5 years and whether those losses are likely to recur;
- (b) prepare a short list of the most significant risks to which that firm is exposed;
- (c) consider how that firm would act, and the amount of capital that would be absorbed, in the event that each of the risks identified were to materialise;
- (d) consider how that firm's CRR might alter under the scenarios in (c) and how its CRR might alter in line with its business plans for the next 3 to 5 years;
- (e) consider whether any of the risks in the overall Pillar 2 rule is applicable to the firm (it is unlikely that any of those risks not already identified in (a) or (b) will apply to a firm whose activities are simple);
- (f) document the ranges of capital required in the scenarios identified and form an overall view on the amount and quality of capital which that firm should hold, ensuring that its senior management is involved in arriving at that view; and
- (g) (in order to determine the amount of capital that would be absorbed in the circumstances detailed in (c)) carry out simple sensitivity tests where the firm analyses the impact of a shift in the key risk parameters identified in (b) on the earnings of the firm.
- (3) A firm is also expected to form a view on the consolidated amount of capital it should hold as well as the capital required to be held in respect of each of the individual risks identified under the overall Pillar 2 rule. For that purpose, it may conservatively sum the results of the individual tests performed in (2)(c). If the firm chooses however to reduce that sum on the understanding that not all risks will materialise at the same time, then the firm should perform scenario tests that demonstrate that a reduction in capital is legitimate.
- (4) A firm should conduct stress tests and scenario analyses in accordance with GENPRU 1.2.42 R to assess how that firm's capital and CRR would alter and what that firm's reaction might be to a range of adverse scenarios, including operational and market events. Where relevant, a firm should also consider the impact of a severe economic or industry downturn on its future earnings, capital resources and capital resources requirement, taking into account its business plans. The downturn scenario should be based on forward looking hypothetical events calibrated against the most adverse movements in individual risk drivers experienced over a long historical period.
BIPRU 2.2.26
See Notes
In relation to a firm whose activities are moderately complex, in carrying out its ICAAP, BIPRU 2.2.25 G (3) to (4) apply. In addition, it could:
- (1) having consulted the management in each major business line, prepare a comprehensive list of the major risks to which the business is exposed;
- (2) estimate, with the aid of historical data, where available, the range and distribution of possible losses which might arise from each of those risks and consider using shock stress tests to provide risk estimates;
- (3) consider the extent to which that firm's CRR adequately captures the risks identified in (1) and (2);
- (4) for areas in which the CRR is either inadequate or does not address a risk, estimate the additional capital (if any) needed to protect that firm and its customers, in addition to any other risk mitigation action that firm plans to take;
- (5) consider the risk that that firm's own analyses of capital adequacy may be inaccurate and that it may suffer from management weaknesses, which affect the effectiveness of its risk management and mitigation;
- (6) project that firm's business activities forward in detail for one year and in less detail for the next 3 to 5 years and estimate how that firm's capital and CRR would alter, assuming that business develops as expected;
- (7) assume that business does not develop as expected and consider how that firm's capital and CRR would alter and what that firm's reaction to a range of adverse economic scenarios might be (see GENPRU 1.2.30 R to GENPRU 1.2.43 G (the overall Pillar 2 rule and related rules and guidance)). Where appropriate, the adverse scenarios should consider the impact of market events that are instantaneous or occur over an extended period of time but which are nevertheless still co-dependent on movements in economic conditions;
- (8) document the results obtained from the analyses in (2), (4), (6), and (7) in a detailed report for that firm's senior management, and, where relevant, its governing body; and
- (9) ensure that systems and processes are in place to review against performance the accuracy of the estimates made in (2), (4), (6) and (7).
BIPRU 2.2.27
See Notes
- (1) This paragraph applies to a proportional ICAAP in the case of a firm whose activities are complex.
- (2) A proportional approach to that firm's ICAAP should cover the matters identified in BIPRU 2.2.26 G, but is likely also to involve the use of models, most of which will be integrated into its day-to-day management and operation.
- (3) Models of the sort referred to in (2) may be linked so as to generate an overall estimate of the amount of capital that a firm considers appropriate to hold for its business needs. For example, a firm is likely to use value at risk models for market risk (see BIPRU 7.10), advanced modelling approaches for credit risk (see BIPRU 4) and, possibly, advanced measurement approaches for operational risk (see BIPRU 6.5). A firm might also use economic scenario generators to model stochastically its business forecasts and risks. A firm may also link such models to generate information on the economic capital desirable for that firm. A model which a firm uses to generate its target amount of economic capital is known as an economic capital model (ECM). Economic capital is the target amount of capital which maximises the return for a firm's stakeholders for a desired level of risk.
- (4) A firm is also likely to be part of a group and to be operating internationally. There is likely to be centralised control over the models used throughout the group, the assumptions made and their overall calibration.
- (5) The more a firm integrates into its business such economic capital modelling, the more it is likely to focus on managing risks for the benefit of its stakeholders. Consequently, ECMs may produce capital estimates that differ from the amount of capital needed for regulatory purposes. For the appropriate regulator to rely on the results of a firm's models, including ECMs, a firm should be able to explain the basis and results of its models and how the amount of capital produced by its models reflects the amount of capital needed for regulatory purposes. It may be that those amounts are not equal. Where they are not equal, the appropriate regulator will expect a firm to discuss any differences with the appropriate regulator. However, it may prove difficult to reconcile the outcome of a firm's modelling with the appropriate regulator's own assessment of the adequacy of that firm's capital. This may be the case when, for instance, matters of judgment are involved in arriving at a firm's capital assessment, or the appropriate regulator relies on information which cannot be fully disclosed to the firm (for example comparisons with the firm's peers). Nevertheless, a firm whose ECM produces a different amount of capital to that required for regulatory purposes is still obliged to comply with the overall Pillar 2 rule. A firm should therefore be able to explain to the appropriate regulator how the outcome of its ECM is adjusted so that it complies with the overall financial adequacy rule and the overall Pillar 2 rule.
- (6) Stress testing should provide senior management with a consolidated view of the amount of risk the firm is or might be exposed to under the chosen stress events. Senior management should therefore be presented with information that considers the possibility of the risks materialising simultaneously in various proportions. For instance, it would be misrepresentative to simulate market risk stressed events without considering that, in those circumstances, market counterparties may be more likely to default. Accordingly, a firm could:
- (a) carry out combined stress tests where assets and liabilities are individually subjected to simultaneous changes in two or more risk drivers; for instance, the change in value of each loan made by a firm may be estimated using simultaneous changes to both interest rates and stock market or property values;
- (b) integrate the results of market and credit risk models rather than aggregating the results of each model separately; and
- (c) consider scenarios which include systemic effects on the firm of wider failures in the firm's market or systems upon which the firm depends and also any possible systemic effects caused by the firm itself suffering losses which affect other market participants which in turn exacerbate the firm's position.
- (7) Furthermore, if a complex firm uses an ECM it should validate the assumptions of the model through a comprehensive stress testing programme. In particular this validation should:
- (a) test correlation assumptions (where risks are aggregated in this way) using combined stresses and scenario analyses;
- (b) use stress tests to identify the extent to which the firm's risk models omit non-linear effects, for instance the behaviour of derivatives in market risk models; and
- (c) consider not just the effect of parallel shifts in interest rate curves, but also the effect of curves becoming steeper or flatter.
Guidance on risks to be covered in an ICAAP
BIPRU 2.2.28
See Notes
BIPRU 2.2.29
See Notes
- (1) A firm may take into account factors other than those identified in the overall Pillar 2 rule when it assesses the level of capital it wishes to hold. These factors might include external rating goals, market reputation and its strategic goals. However, a firm should be able to distinguish, for the purpose of its dialogue with the appropriate regulator, between capital it holds in order to comply with the overall financial adequacy rule, capital that it holds as a capital planning buffer and capitalheld for other purposes.
- (2) The calibration of the CRR assumes that a firm's business is well-diversified, well-managed with assets matching its liabilities and good controls, and stable with no large, unusual or high risk transactions. A firm may find it helpful to assess the extent to which its business in fact differs from these assumptions and therefore what adjustments it might be reasonable for it to make to the CRR to arrive at an adequate level of capital resources.
Interest rate risk arising from non-trading book activities
BIPRU 2.2.30
See Notes
Securitisation risk
BIPRU 2.2.31
See Notes
Residual risk
BIPRU 2.2.32
See Notes
Concentration risk
BIPRU 2.2.33
See Notes
Liquidity risk
BIPRU 2.2.34
See Notes
BIPRU 2.2.35
See Notes
BIPRU 2.2.36
See Notes
BIPRU 2.2.37
See Notes
Some further areas to consider in developing the liquidity risk scenario might include:
- (1) any mismatching between expected asset and liability cash flows;
- (2) the inability to sell assets quickly;
- (3) the extent to which a firm's assets have been pledged; and
- (4) the possible need to reduce large asset positions at different levels of market liquidity and the related potential costs and timing constraints.
Business risk: General
BIPRU 2.2.38
See Notes
BIPRU 2.2.39
See Notes
BIPRU 2.2.40
See Notes
Business risk: Stress tests for firms using the IRB approach
BIPRU 2.2.41
See Notes
BIPRU 2.2.42
See Notes
BIPRU 2.2.43
See Notes
If BIPRU 2.2.41 R applies to a firm on a consolidated basis the following adjustments are made to BIPRU 2.2.41 R in accordance with the general principles of BIPRU 8 (Group risk - consolidation):
- (1) references to capital resources are to the consolidated capital resources of the firm's UK consolidation group or, as the case may be, its non-EEA sub-group; and
- (2) references to the capital requirements in GENPRU 2.1 (Calculation of capital resources requirements) are to the consolidated capital requirements with respect to the firm's UK consolidation group or, as the case may be, its non-EEA sub-group under BIPRU 8 (Group risk - consolidation).
BIPRU 2.2.44
See Notes
BIPRU 2.2.45
See Notes
Systems and controls
BIPRU 2.2.46
See Notes
A firm may decide to hold additional capital to mitigate any weaknesses in its overall control environment. These weaknesses might be indicated by the following:
- (1) a failure by a firm to complete an assessment of its systems and controls to establish whether they comply with SYSC; or
- (2) a failure by a firm's senior management to approve its financial results; or
- (3) a failure by a firm to consider an analysis of relevant internal and external information on its business and control environment.
BIPRU 2.2.47
See Notes
Risks which may be considered according to the nature of the activities of a firm
BIPRU 2.2.48
See Notes
- (1) BIPRU 2.2.49 G to BIPRU 2.2.70 G set out guidance for:
- (a) a bank or building society;
- (b) an asset management firm; and
- (c) a securities firm;
- whose activities are either simple or moderately complex.
- (2) BIPRU 2.2.49 G to BIPRU 2.2.70 G provide examples of the sorts of risks which such a firm might typically face and of stress tests or scenario analyses which it might carry out as part of its ICAAP.
- (3) The material on securities firms is also relevant to a commodities firm.
Banks and building societies
BIPRU 2.2.49
See Notes
BIPRU 2.2.50
See Notes
BIPRU 2.2.51
See Notes
BIPRU 2.2.52
See Notes
BIPRU 2.2.53
See Notes
BIPRU 2.2.54
See Notes
BIPRU 2.2.55
See Notes
BIPRU 2.2.56
See Notes
BIPRU 2.2.57
See Notes
BIPRU 2.2.58
See Notes
BIPRU 2.2.59
See Notes
BIPRU 2.2.60
See Notes
Capital models
BIPRU 2.2.71
See Notes
BIPRU 2.2.72
See Notes
BIPRU 2.2.73
See Notes
There is no prescribed approach as to how a firm should develop its internal capital model. However, a firm should be able to demonstrate:
- (1) the confidence levels set and whether these are linked to its corporate strategy;
- (2) the time horizons set for the different types of business that it undertakes;
- (3) the extent of historic data used and back-testing carried out;
- (4) that it has in place a process to verify the correctness of the model's outputs; and
- (5) that it has the skills and resources to operate, maintain and develop the model.
BIPRU 2.2.74
See Notes
In relation to the use of an ECM (see BIPRU 2.2.27 G), the appropriate regulator is likely to place more reliance on a firm's ICAAP if the firm provides the following information:
- (1) a comparison of the amount of capital that the ECM generates in respect of each of the risks captured in the CRR before aggregation with the corresponding components of the CRR calculation; and
- (2) evidence that the guidance in BIPRU 2.2.71 G to BIPRU 2.2.78 G has been followed.
BIPRU 2.2.75
See Notes
BIPRU 2.2.76
See Notes
BIPRU 2.2.77
See Notes
BIPRU 2.2.78
See Notes
BIPRU 2.3
Interest rate risk in the non-trading book
- 01/01/2007
Application
BIPRU 2.3.1
See Notes
BIPRU 2.3.2
See Notes
- (1) Interest rate risk in the non-trading book will normally be a major source of risk for:
- (a) a bank;
- (b) a building society; and
- (c) a BIPRU investment firm that deals on own account (including underwriting on a firm commitment basis) and whose non-trading book business equals or exceeds 15% of its total business.
- (2) However it will not normally be a significant risk for any other BIPRU investment firm.
- (3) The test in (1)(c) should be carried out in the same way as it is for the purpose of the 5% test in BIPRU 1.2.17 R (Definition of the trading book).
- (4) Where BIPRU 2.3 is applied on a consolidated basis (see BIPRU 2.3.13 R) the test in (1)(c) should be carried out in the same way as it is under BIPRU 8.7.24 R (Trading book size for the purposes of consolidation).
BIPRU 2.3.3
See Notes
Interest rate risk in the non-trading book may arise from a number of sources for example:
- (1) risks related to the mismatch of repricing of assets and liabilities and off balance sheet short and long-term positions;
- (2) risks arising from hedging exposure to one interest rate with exposure to a rate which reprices under slightly different conditions;
- (3) risk related to the uncertainties of occurrence of transactions e.g. when expected future transactions do not equal the actual transactions; and
- (4) risks arising from consumers redeeming fixed rate products when market rates change.
Purpose
BIPRU 2.3.4
See Notes
BIPRU 2.3.5
See Notes
Proportionality
Stress testing for interest rate risk: General requirement
BIPRU 2.3.7
See Notes
- (1) As part of its obligations under GENPRU 1.2.30 R (Processes, strategies and systems for risks) and GENPRU 1.2.36 R (Stress and scenario tests) a firm must carry out an evaluation of its exposure to the interest rate risk arising from its non-trading activities.
- (2) The evaluation under (1) must cover the effect of a sudden and unexpected parallel change in interest rates of 200 basis points in both directions.
- (3) A firm must immediately notify the appropriate regulator if any evaluation under this rule suggests that, as a result of the change in interest rates described in (2), the economic value of the firm would decline by more than 20% of its capital resources.
BIPRU 2.3.8
See Notes
BIPRU 2.3.9
See Notes
For a larger and/or more complex firm, appropriate systems to evaluate and manage interest rate risk in the non-trading book should include:
- (1) the ability to measure the exposure and sensitivity of the firm's activities, if material, to repricing risk, yield curve risk, basis risk and risks arising from embedded optionality (for example, pipeline risk, prepayment risk) as well as changes in assumptions (for example those about customer behaviour);
- (2) consideration as to whether a purely static analysis of the impact on their current portfolio of a given shock or shocks should be supplemented by a more dynamic simulation approach; and
- (3) scenarios in which different interest rate paths are computed and in which some of the assumptions (e.g. about behaviour, contribution to risk and balance sheet size and composition) are themselves functions of interest rate level.
BIPRU 2.3.10
See Notes
Under GENPRU 1.2.60 R, a firm is required to make a written record of its assessments made under GENPRU 1.2. A firm's record of its approach to evaluating and managing interest rate risk as it affects the firm's non-trading activities should cover the following issues:
- (1) the internal definition of and boundary between "banking book" and "trading activities" (see BIPRU 1.2);
- (2) the definition of economic value and its consistency with the method used to value assets and liabilities (e.g. discounted cashflows);
- (3) the size and the form of the different shocks to be used for internal calculations;
- (4) the use of a dynamic and / or static approach in the application of interest rate shocks;
- (5) the treatment of commonly called "pipeline transactions" (including any related hedging);
- (6) the aggregation of multicurrency interest rate exposures;
- (7) the inclusion (or not) of non-interest bearing assets and liabilities (including capital and reserves);
- (8) the treatment of current and savings accounts (i.e. the maturity attached to exposures without a contractual maturity);
- (9) the treatment of fixed rate assets (liabilities) where customers still have a right to repay (withdraw) early;
- (10) the extent to which sensitivities to small shocks can be scaled up on a linear basis without material loss of accuracy (i.e. covering both convexity generally and the non-linearity of pay-off associated with explicit option products);
- (11) the degree of granularity employed (for example offsets within a time bucket); and
- (12) whether all future cash flows or only principal balances are included.
BIPRU 2.3.11
See Notes
Stress testing for interest rate risk: Frequency
BIPRU 2.3.12
See Notes
- (1) A firm must carry out the evaluations required by BIPRU 2.3.7 R as frequently as necessary for it to be reasonably satisfied that it has at all times a sufficient understanding of the degree to which it is exposed to the risks referred to in that rule and the nature of that exposure. In any case it must carry out those evaluations no less frequently than required by (2) or (3).
- (2) The minimum frequency of the evaluation in BIPRU 2.3.7 R (1) is once each year.
- (3) The minimum frequency of the evaluation in BIPRU 2.3.7 R (2) is once each quarter.
Consolidation
BIPRU 2.3.13
See Notes
BIPRU 3
Standardised credit risk
BIPRU 3.1
Application and purpose
- 01/01/2007
Application
BIPRU 3.1.1
See Notes
Purpose
BIPRU 3.1.2
See Notes
BIPRU 3 implements:
- (1) Articles 78 to 80, paragraph (1) of Article 81, Article 83, Annex II and Parts 1 and 3 of Annex VI of the Banking Consolidation Directive;
- (2) Article 18 of the Capital Adequacy Directive so far as it applies Articles 78 to 80, paragraph (1) of Article 81, Article 83 and Parts 1 and 3 of Annex VI of the Banking Consolidation Directive to investment firms; and
- (3) Article 40 of the Capital Adequacy Directive for the purposes of the calculation of credit risk under the Banking Consolidation Directive.
BIPRU 3.1.3
See Notes
BIPRU 3.1.4
See Notes
Calculation of the credit risk capital component
BIPRU 3.1.5
See Notes
BIPRU 3.1.6
See Notes
An exposure falls into this rule if:
- (1) it is in a firm's non-trading book; and
- (2) it has not been deducted from the firm's capital resources under GENPRU 2.2.
BIPRU 3.2
The central principles of the standardised approach to credit risk
- 01/01/2007
BIPRU 3.2.1
See Notes
Subject to BIPRU 13:
- (1) the exposure value of an asset item must be its balance-sheet value, subject to any value adjustments required by GENPRU 1.3; and
- (2) the exposure value of an off-balance sheet item listed in the table in BIPRU 3.7.2 R must be the percentage of its value set out in that table.
[Note: BCD Article 78(1) part]
BIPRU 3.2.2
See Notes
The off-balance sheet items listed in the table in BIPRU 3.7.2 R must be assigned to the risk categories as indicated in that table.
[Note: BCD Article 78(1) part]
BIPRU 3.2.3
See Notes
Where an exposure is subject to funded credit protection, a firm may modify the exposure value applicable to that item in accordance with BIPRU 5.
BIPRU 3.2.4
See Notes
BIPRU 13 sets out the method for determination of the exposure value of a financial derivative instrument, with the effects of contracts of novation and other netting agreements taken into account for the purposes of that method in accordance with BIPRU 13.7.
BIPRU 3.2.5
See Notes
BIPRU 13.3 and BIPRU 13.8 set out the provisions applying to the treatment and determination of the exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions (SFTs).
BIPRU 3.2.6
See Notes
BIPRU 3.2.7
See Notes
BIPRU 13.8 provides that, in the case of a firm using the financial collateral comprehensive method under BIPRU 5, where an exposure takes the form of an SFT, the exposure value should be increased by the volatility adjustment appropriate to such securities or commodities set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R (Supervisory volatility adjustments approach and the own estimates of volatility adjustments approach).
BIPRU 3.2.8
See Notes
BIPRU 13.3.13 R and BIPRU 13.8.8 R set out the provisions relating to determination of the exposure value of certain credit risk exposures outstanding with a central counterparty, where the central counterparty credit risk exposures with all participants in its arrangements are fully collateralised on a daily basis.
Exposure Classes
BIPRU 3.2.9
See Notes
A firm must assign each exposure to one of the following exposure classes:
- (1) claims or contingent claims on central governments or central banks;
- (2) claims or contingent claims on regional governments or local authorities;
- (3) claims or contingent claims on administrative bodies and non-commercial undertakings;
- (4) claims or contingent claims on multilateral development banks;
- (5) claims or contingent claims on international organisation;
- (6) claims or contingent claims on institutions;
- (7) claims or contingent claims on corporates;
- (8) retail claims or contingent retail claims;
- (9) claims or contingent claims secured on real estate property;
- (10) past due items;
- (11) items belonging to regulatory high-risk categories;
- (12) claims in the form of covered bonds;
- (13) securitisation positions;
- (14) short-term claims on institutions and corporates;
- (15) claims in the form of CIUs; or
- (16) other items.
[Note: BCD Article 79(1)]
BIPRU 3.2.10
See Notes
To be eligible for the retail exposure class, an exposure must meet the following conditions:
- (1) the exposure must be either to an individual person or persons, or to a small or medium sized entity;
- (2) the exposure must be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced; and
- (3) the total amount owed to the firm, its parent undertakings and its subsidiary undertakings, including any past due exposure, by the obligor client or group of connected clients, but excluding claims or contingent claims secured on residential real estate collateral, must not, to the knowledge of the firm, exceed €1 million.
[Note: BCD Article 79(2)]
BIPRU 3.2.11
See Notes
A firm must take reasonable steps to acquire the knowledge referred to in BIPRU 3.2.10 R (3).
BIPRU 3.2.12
See Notes
Securities are not eligible for the retail exposure class.
BIPRU 3.2.13
See Notes
The present value of retail minimum lease payments is eligible for the retail exposure class.
[Note: BCD Article 79(3)]
Retail exposures: Significance
BIPRU 3.2.14
See Notes
Retail exposures: Aggregation: Reasonable steps
BIPRU 3.2.15
See Notes
Retail exposures: Aggregation: Single risk
BIPRU 3.2.16
See Notes
- (1) The definition of group of connected clients is set out in the Glossary. Paragraph (2) of that definition is "two or more persons ... who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties".
- (2) Say that a firm has exposures to A and B. When deciding whether A and B come within paragraph (2) of the definition two conditions should be satisfied. Firstly the connections between A and B should mean that if A experiences financial problems, B should be likely to encounter repayment difficulties. Secondly, the connections between A and B should mean that if B experiences financial problems, A should be likely to encounter repayment difficulties.
- (3) The guidance in BIPRU 3.2.16 G is provided for the purpose of BIPRU 3.2.10 R only and not for the purposes of any other provision in the Handbook that uses the defined term group of connected clients.
Retail exposures: Aggregation: Personal and business exposures
BIPRU 3.2.17
See Notes
Retail exposures: Exchange rate
BIPRU 3.2.18
See Notes
Retail exposures: Frequency of monitoring
BIPRU 3.2.19
See Notes
BIPRU 3.2.20
See Notes
- (1) To calculate risk weighted exposure amounts, risk weights must be applied to all exposures, unless deducted from capital resources, in accordance with the provisions of BIPRU 3.4.
- (2) The application of risk weights must be based on the standardised credit risk exposure class to which the exposure is assigned and, to the extent specified in BIPRU 3.4, its credit quality.
- (3) Credit quality may be determined by reference to:
- (a) the credit assessments of eligible ECAIs in accordance with the provisions of BIPRU 3; or
- (b) the credit assessments of export credit agencies as described in BIPRU 3.4.
[Note: BCD Article 80(1)]
BIPRU 3.2.21
See Notes
For the purposes of applying a risk weight, as referred to in BIPRU 3.2.20 R, the exposure value must be multiplied by the risk weight specified or determined in accordance with the standardised approach.
BIPRU 3.2.22
See Notes
Notwithstanding BIPRU 3.2.20 R, where an exposure is subject to credit protection the risk weight applicable to that item may be modified in accordance with BIPRU 5.
BIPRU 3.2.23
See Notes
Risk weighted exposure amounts for securitised exposures must be calculated in accordance with BIPRU 9.
BIPRU 3.2.24
See Notes
Exposures the calculation of risk weighted exposure amounts for which is not otherwise provided for under the standardised approach must be assigned a risk weight of 100%.
[Note: BCD Article 80(6)]
Zero risk-weighting for intra-group exposures: core UK group
BIPRU 3.2.25
See Notes
- (1) Subject to BIPRU 3.2.35 R, and with the exception of exposures giving rise to liabilities in the form of the items referred to in BIPRU 3.2.26 R, a firm is not required to comply with BIPRU 3.2.20 R (Calculation of risk weighted exposures amounts under the standardised approach) in the case of the exposures of the firm to a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking provided that the following conditions are met:
- (a) the counterparty is
- (i) a core concentration risk group counterparty; and
- (ii) an institution, financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements;
- (b) [deleted]
- (ba) (in relation to a subsidiary undertaking) 100% of the voting rights attaching to the shares in the counterparty's capital is held by the firm or a financial holding company (or a subsidiary undertaking of the financial holding company), whether individually or jointly, and that the firm or financial holding company (or its subsidiary undertaking) must have the right to appoint or remove a majority of the members of the board of directors, committee of management or other governing body of the counterparty;
- (c) the counterparty is subject to the same risk evaluation, measurement and control procedures as the firm;
- (d) the counterparty is incorporated in the United Kingdom; and
- (e) there is no current or foreseen material practical or legal impediment to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.
- (2) Where a firm chooses under (1) not to apply BIPRU 3.2.20 R, it must assign a risk weight of 0% to the exposure.
- (3) A firm need not apply the treatment in (1) and (2) to every exposure that is eligible for that treatment.
[Note: BCD Article 80(7)]
BIPRU 3.2.25A
See Notes
- (1) Firms are referred to BIPRU 10.8A (Intra-group exposures: core UK group) under which exposures within the core UK group are exempt from the limits described in BIPRU 10.5 (Limits on exposures) if they would be assigned a risk weight of 0% under BIPRU 3.2.25 R.
- (2) Therefore, a firm that is applying for a core UK group waiver should demonstrate that it meets the conditions in BIPRU 3.2.25 R and BIPRU 10.8A for establishing a core UK group. A firm that is granted a core UK group waiver may rely on it for the purpose of assigning a risk weight of 0% to exposures within its core UK group and for the purpose of exempting the exposures within the core UK group from the 25% large exposure limit.
BIPRU 3.2.26
See Notes
A firm must not apply the treatment in BIPRU 3.2.25 R to exposures giving rise to liabilities in the form of any of the following items:
- (1) in the case of a BIPRU firm, any tier one capital or tier two capital; and
- (2) in the case of any other undertaking, any item that would be tier one capital or tier two capital if the undertaking were a BIPRU firm.
[Note: BCD Article 80(7), part]
BIPRU 3.2.27A
See Notes
BIPRU 3.2.28
See Notes
BIPRU 3.2.29
See Notes
BIPRU 3.2.29A
See Notes
- (1) In relation to BIPRU 3.2.25 R (1)(ba), a subsidiary undertaking should generally be 100% owned and controlled by a single shareholder. However, if a subsidiary undertaking has more than one shareholder, that undertaking may be a member of the core UK group if all its shareholders are also members of the same core UK group.
- (2) For the purpose of BIPRU 3.2.25R (1)(d) (Incorporation in the UK), if a counterparty is of a type that falls within the scope of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC) and it is established in the United Kingdom other than by incorporation, a firm wishing to include that counterparty in its core UK group may apply to the appropriate regulator for a waiver of this condition if it can demonstrate fully to the appropriate regulator that the counterparty's centre of main interests is situated in the United Kingdom within the meaning of that Regulation.
BIPRU 3.2.30
See Notes
For the purpose of BIPRU 3.2.25R (1)(e) (Prompt transfer of capital resources):
- (1) in the case of an undertaking that is a firm the requirement in BIPRU 3.2.25R (1)(e) for the prompt transfer of capital resources refers to capital resources in excess of the capital and financial resources requirements to which it is subject under the regulatory system; and
- (2) the following guidance relating to the condition in BIPRU 10.8A.2 R (6) requiring the prompt transfer of capital resources within a core UK group as applicable for the exemption from large exposure limits is also relevant:
- (a) BIPRU 10.8A.6 G in respect of the criteria that the appropriate regulator will consider when assessing whether the condition requiring the prompt transfer of capital resources is going to be met; and
- (b) BIPRU 10.8A.7 G (2) in respect of the counterparty's obligation to increase the firm's capital resources and the limitations that may be permitted.
BIPRU 3.2.31
See Notes
BIPRU 3.2.32
See Notes
BIPRU 3.2.33
See Notes
BIPRU 3.2.34
See Notes
BIPRU 3.2.35
See Notes
- (1) A firm may not apply BIPRU 3.2.25 R unless it has a core UK group waiver.
- (2) [deleted]
- (3) A firm may stop applying BIPRU 3.2.25 R or may stop applying it to some exposures.
- (4) [deleted]
- (5) A firm must notify the appropriate regulator if it becomes aware that any exposure that it has treated as exempt under BIPRU 3.2.25 R has ceased to meet the conditions for exemption or if the firm ceases to treat an exposure under that rule.
BIPRU 3.2.37
See Notes
Exposures to recognized third-country investment firms, clearing houses and investment exchanges
BIPRU 3.2.38
See Notes
For the purposes of the standardised approach (including as it applies for the purposes of BIPRU 14) and without prejudice to BIPRU 13.3.13 R and BIPRU 13.8.8 R (Exposure to a central counterparty), exposures to recognised third country investment firms and exposures to recognised clearing houses, designated clearing houses, recognised investment exchanges and designated investment exchanges must be treated as exposures to institutions.
BIPRU 3.3
The use of the credit assessments of ratings agencies
- 01/01/2007
BIPRU 3.3.1
See Notes
An external credit assessment may be used to determine the risk weight of an exposure in accordance with BIPRU 3.2.20 R to BIPRU 3.2.26 R only if the ECAI which provides it is recognised by the appropriate regulator as an eligible ECAI for the purposes of the standardised approach to credit risk.
Recognition of ratings agencies
BIPRU 3.3.2
See Notes
BIPRU 3.3.3
See Notes
BIPRU 3.3.4
See Notes
BIPRU 3.3.5
See Notes
BIPRU 3.3.6
See Notes
Mapping of credit assessments
BIPRU 3.3.7
See Notes
BIPRU 3.3.8
See Notes
BIPRU 3.3.9
See Notes
The table mapping the credit assessments of eligible ECAIs to credit quality steps is published on the appropriate regulator's website and amended from time to time in line with additions to and deletions from the list of eligible ECAIs. The table includes mappings made by a competent authority of another EEA State which are subsequently recognised by the appropriate regulator without carrying out its own determination process under Regulation 22(5) of the Capital Requirements Regulations 2006.
BIPRU 3.4
Risk weights under the standardised approach to credit risk
- 01/01/2007
Risk weights: Exposures to central governments or central banks: Treatment
BIPRU 3.4.1
See Notes
Without prejudice to BIPRU 3.4.2 R to BIPRU 3.4.9 R, exposures to central governments and central banks must be assigned a 100% risk weight.
[Note: BCD Annex VI Part 1 point 1]
BIPRU 3.4.2
See Notes
Subject to BIPRU 3.4.4 R, exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.3 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
Table: Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available
BIPRU 3.4.3
See Notes
Credit quality step | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight | 0 % | 20 % | 50 % | 100 % | 100 % | 150 % |
BIPRU 3.4.4
See Notes
Exposures to the European Central Bank must be assigned a 0% risk weight.
Exposures in the national currency of the borrower
BIPRU 3.4.5
See Notes
Exposures to EEA States' central governments and central banks denominated and funded in the domestic currency of that central government and central bank must be assigned a risk weight of 0%.
BIPRU 3.4.6
See Notes
When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA assign a risk weight which is lower than that indicated in BIPRU 3.4.1 R to BIPRU 3.4.3 R to exposures to their central government and central bank denominated and funded in the domestic currency, a firm may risk weight such exposures in the same manner.
Use of credit assessments by export credit agencies
BIPRU 3.4.7
See Notes
An export credit agency credit assessment may be recognised by a firm for the purpose of determining the risk weight to be applied to an exposure under the standardised approach if either of the following conditions is met:
- (1) the credit assessment is a consensus risk score from export credit agencies participating in the OECD "Arrangement on Guidelines for Officially Supported Export Credits"; or
- (2) the export credit agency publishes its credit assessments, and the export credit agency subscribes to the OECD agreed methodology, and the credit assessment is associated with one of the eight minimum export insurance premiums (MEIP) that the OECD agreed methodology establishes.
[Note: BCD Annex VI Part 1 point 6]
BIPRU 3.4.8
See Notes
Exposures for which a credit assessment by an export credit agency is recognised for risk weighting purposes must be assigned a risk weight according to the table in BIPRU 3.4.9 R.
Table: Exposure for which a credit assessment by an export credit agency is recognised
BIPRU 3.4.9
See Notes
MEIP | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Risk weight | 0% | 0% | 20% | 50% | 100% | 100% | 100% | 150% |
Exposures to regional governments or local authorities: General
BIPRU 3.4.10
See Notes
Without prejudice to BIPRU 3.4.15 R to BIPRU 3.4.19 R:
- (1) a firm must risk weight exposures to regional governments and local authorities in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R and BIPRU 3.4.19A R; and
- (2) the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.
[Note: BCD Annex VI Part 1 point 8]
Exposures to regional governments or local authorities: Central government risk weight based method
BIPRU 3.4.11
See Notes
- (1) Exposures to regional governments and local authorities must be assigned a risk weight according to the credit quality step to which exposures to the central government of the jurisdiction in which the regional government or local authority is established are assigned in accordance with the table in BIPRU 3.4.12 R.
- (2) Exposures to an unrated regional government or local authority must not be assigned a risk weight lower than that applied to exposures to its central government.
[Note: BCD Annex VI Part 1 points 25 and 26]
Table: Central government risk weight based method
BIPRU 3.4.12
See Notes
Credit quality step to which central government is assigned | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight of exposure | 20% | 50% | 100% | 100% | 100% | 150% |
BIPRU 3.4.13
See Notes
For exposures to regional governments and local authorities established in countries where the central government is unrated, the risk weight must be not more than 100%.
BIPRU 3.4.14
See Notes
For exposures to regional governments and local authorities with an original effective maturity of three months or less, the risk weight must be 20%.
BIPRU 3.4.15
See Notes
A firm must treat an exposure to a regional government or local authority of the United Kingdom listed in BIPRU 3 Annex 2 R as an exposure to the central government of the United Kingdom.
BIPRU 3.4.16
See Notes
The appropriate regulator will include a regional government or local authority in the list in BIPRU 3 Annex 2 R where there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the specific revenue-raising powers of the regional government or local authority, and the existence of specific institutional arrangements the effect of which is to reduce the risk of default.
[Note: BCD Annex VI Part 1 point 9]
BIPRU 3.4.17
See Notes
A firm must treat an exposure to a regional government or local authority of an EEA State other than the United Kingdom as an exposure to the central government in whose jurisdiction that regional government or local authority is established if that regional government or local authority is included on the list of regional governments and local authorities drawn up by the competent authority in that EEA State under a CRD implementation measure with respect to point 9 of Part 1 of Annex VI of the Banking Consolidation Directive.
BIPRU 3.4.18
See Notes
Exposures to churches or religious communities constituted in the form of a legal person under public law must, in so far as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to regional governments and local authorities, except that BIPRU 3.4.15 R and BIPRU 3.4.17 R do not apply.
BIPRU 3.4.19
See Notes
When competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA treat exposures to regional governments and local authorities as exposures to their central government, a firm may risk weight exposures to such regional governments and local authorities in the same manner.
BIPRU 3.4.19A
See Notes
Without prejudice to BIPRU 3.4.17 R to BIPRU 3.4.19 R, an exposure to a regional government or local authority of an EEA State denominated and funded in the domestic currency of that regional government or local authority must be assigned a risk weight of 20%.
[Note: BCD Annex VI Part 2(b)]
Exposures to administrative bodies and non-commercial undertakings
BIPRU 3.4.20
See Notes
Treatment
BIPRU 3.4.21
See Notes
Without prejudice to BIPRU 3.4.22 R to BIPRU 3.4.26 R, exposures to administrative bodies and non-commercial undertakings must be assigned a 100% risk weight.
Public sector entities
BIPRU 3.4.22
See Notes
Without prejudice to BIPRU 3.4.23 R to BIPRU 3.4.26 R, exposures to public sector entities must be assigned a 100% risk weight.
BIPRU 3.4.23
See Notes
A firm may treat an exposure to a public sector entity as an exposure to a regional government or local authority in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R.
BIPRU 3.4.24
See Notes
In exceptional circumstances a firm may treat an exposure to a public sector entity established in the United Kingdom as an exposure to the central government of the United Kingdom if there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the existence of an appropriate guarantee by the central government.
[Note: BCD Annex VI Part 1 point 15]
BIPRU 3.4.25
See Notes
Where a competent authority of another EEA State implements points 14 or 15 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to treat exposures to public sector entities as exposures to institutions or as exposures to the central government of the EEA State concerned, a firm may risk weight exposures to the relevant public sector entities in the same manner.
[Note: BCD Annex VI Part 1 point 16]
BIPRU 3.4.26
See Notes
When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA, treat exposures to public sector entities as exposures to institutions, a firm may risk weight exposures to the relevant public sector entities in the same manner.
[Note: BCD Annex VI Part 1 point 17]
Exposures to multilateral development banks: Treatment
BIPRU 3.4.27
See Notes
Without prejudice to BIPRU 3.4.28 R to BIPRU 3.4.29 R:
- (1) a firm must treat exposures to multilateral development banks in the same manner as exposures to institutions in accordance with BIPRU 3.4.34 R to BIPRU 3.4.39 R (Exposures to institutions: credit assessment based method); and
- (2) the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.
[Note: BCD Annex VI Part 1 point 19]
BIPRU 3.4.28
See Notes
An exposure to a multilateral development bank listed in point (1) of the definition in the Glossary must be assigned a 0% risk weight.
BIPRU 3.4.29
See Notes
A risk weight of 20% must be assigned to the portion of unpaid capital subscribed to the European Investment Fund.
Exposures to international organisations
BIPRU 3.4.30
See Notes
Exposures to the following international organisations must be assigned a 0% risk weight:
- (1) the EU;
- (2) the International Monetary Fund; and
- (3) the Bank for International Settlements.
[Note: BCD Annex VI Part 1 point 22]
Exposures to institutions: General
BIPRU 3.4.31
See Notes
Exposures to institutions: Treatment
BIPRU 3.4.32
See Notes
Without prejudice to BIPRU 3.4.33 R to BIPRU 3.4.47 R, exposures to financial institutions authorised and supervised by the competent authorities responsible for the authorisation and supervision of credit institutions and subject to prudential requirements equivalent to those applied to credit institutions must be risk weighted as exposures to institutions.
Exposures to institutions: Risk weight floor on exposures to unrated institutions
BIPRU 3.4.33
See Notes
Exposures to an unrated institution must not be assigned a risk weight lower than that applied to exposures to its central government.
[Note: BCD Annex VI Part 1 point 25]
Exposures to institutions: Credit assessment based method
BIPRU 3.4.34
See Notes
Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.35 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
Table: Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated ECAI is available
BIPRU 3.4.35
See Notes
Credit quality step | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight | 20% | 50% | 50% | 100% | 100% | 150% |
BIPRU 3.4.36
See Notes
Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions must be assigned a risk weight of 50%.
BIPRU 3.4.37
See Notes
Exposures to an institution with a residual maturity of three months or less for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.38 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
Table: Exposures to an institution with a residual maturity of three months or less for which a credit assessment by a nominated ECAI is available
BIPRU 3.4.38
See Notes
Credit quality step | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight | 20% | 20% | 20% | 50% | 50% | 150% |
BIPRU 3.4.39
See Notes
Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions having an original effective maturity of three months or less must be assigned a 20% risk weight
Exposures to institutions: Interaction with short-term credit assessments
BIPRU 3.4.40
See Notes
If there is no short-term credit assessment as set out in BIPRU 3.4.112 R, the general preferential treatment for short-term exposures as specified in BIPRU 3.4.37 R applies to all exposures to institutions of up to three months residual maturity.
[Note: BCD Annex VI Part 1 point 34]
BIPRU 3.4.41
See Notes
If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines the application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the short-term assessment and risk weighting specified in BIPRU 3.4.112 R must be used for that specific exposure only. Other short-term exposures must follow the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R.
BIPRU 3.4.42
See Notes
If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the general preferential treatment for short-term exposures must not be used and all unrated short-term claims must be assigned the same risk weight as that applied by the specific short-term assessment.
[Note: BCD Annex VI Part 1 point 36]
BIPRU 3.4.43
See Notes
Exposures to institutions: Short-term exposures in the national currency of the borrower
BIPRU 3.4.44
See Notes
A firm may assign to an exposure to an institution formed under the law of the United Kingdom of a residual maturity of 3 months or less denominated and funded in pounds sterling a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.5 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of the United Kingdom.
BIPRU 3.4.45
See Notes
- (1) Where a competent authority of another EEA State implements point 37 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to allow the treatment in that point, a firm may assign to the relevant national currency exposures the risk weight permitted by that CRD implementation measure.
- (2) When the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the EEA assigns to an exposure to an institution formed under the law of that third country of a residual maturity of 3 months or less denominated and funded in the national currency a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.6 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of that third country, a firm may risk weight such exposures in the same manner.
[Note: BCD Annex VI Part 1 point 37]
BIPRU 3.4.46
See Notes
No exposures of a residual maturity of 3 months or less denominated and funded in the national currency of the borrower may be assigned a risk weight less than 20%.
[Note: BCD Annex VI Part 1 point 38]
Exposures to institutions: Investments in regulatory capital instruments
BIPRU 3.4.47
See Notes
Investments in equity or regulatory capital instruments issued by institutions must be risk weighted at 100%, unless deducted from capital resources.
Exposures to institutions: Minimum reserves required by the ECB
BIPRU 3.4.48
See Notes
Where an exposure to an institution is in the form of minimum reserves required by the European Central Bank or by the central bank of an EEA State to be held by the firm, a firm may assign the risk weight that would be assigned to exposures to the central bank of the EEA State in question provided:
- (1) the reserves are held in accordance with Regulation (EC) No. 1745/2003 of the European Central Bank of 12 September 2003 or a subsequent replacement regulation or in accordance with national requirements in all material respects equivalent to that Regulation; and
- (2) in the event of the bankruptcy or insolvency of the institution where the reserves are held, the reserves will be fully repaid to the firm in a timely manner and will not be available to meet other liabilities of the institution.
[Note: BCD Annex VI Part 1 point 40]
Exposures to corporates: General
BIPRU 3.4.49
See Notes
Exposures to corporates: Treatment
BIPRU 3.4.50
See Notes
Exposures for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.51 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
Table: Exposures for which a credit assessment by a nominated ECAI is available
BIPRU 3.4.51
See Notes
Credit quality step | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight | 20% | 50% | 100% | 100% | 150% | 150% |
BIPRU 3.4.52
See Notes
Unrated exposures must be assigned a 100% risk weight or the risk weight of its central government, whichever is the higher.
Retail exposures
BIPRU 3.4.53
See Notes
Exposures that comply with the criteria listed in BIPRU 3.2.10 R must be assigned a risk weight of 75%. However a firm may treat such an exposure under BIPRU 3.2.24 R (100% risk weight).
Exposures secured by real estate property
BIPRU 3.4.54
See Notes
BIPRU 3.4.55
See Notes
Without prejudice to BIPRU 3.4.56 R to BIPRU 3.4.94 R, exposures fully secured by real estate property must be assigned a risk weight of 100%.
Exposures secured by mortgages on residential property
BIPRU 3.4.56
See Notes
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure fully and completely secured, to the satisfaction of the firm, by mortgages on residential property which is or shall be occupied or let by the owner or the beneficial owner in the case of personal investment companies must be assigned a risk weight of 35%.
BIPRU 3.4.56A
See Notes
- (1) A firm must not treat a lifetime mortgage as an exposure fully and completely secured on residential property for the purposes of BIPRU 3.4.56 R unless the amount of the exposure is calculated according to the following formula:
where:
- (a) P is the current outstanding balance on the lifetime mortgage;
- (b) i is the interest rate charged on the lifetime mortgage, which for the purposes of this calculation must not be lower than the discount rate referred to in (c);
- (c) d is the discount rate which is the risk-free rate as represented by the yield on 10-year UK government bonds; and
- (d) T is the projected number of years to maturity of the exposure.
- (2) Notwithstanding (1)(c), a firm may calculate an annual average discount rate provided there is no obvious bias in its calculation and it is consistent in its approach.
BIPRU 3.4.56B
See Notes
- (1) This paragraph provides guidance on BIPRU 3.4.56A R.
- (2) For the purposes of BIPRU 3.4.56A R (2), a firm may use the FTSE UK gilt 10-year yield index which the Council of Mortgage Lenders makes available to its members.
- (3) If a firm offers a variable interest rate on a lifetime mortgage, it should calculate an average interest rate in a way which is consistent with the calculation of the discount rate.
- (4) To determine the projected number of years to maturity of the exposure, a firm may use the standard mortality tables published by the Institute of Actuaries or the Faculty of Actuaries. For internal risk management purposes, the firm should use factual data or seek actuarial advice to determine how the information in these tables may be adjusted to take account of regional and other relevant variations.
BIPRU 3.4.57
See Notes
Exposures fully and completely secured, to the satisfaction of the firm, by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential property which is or shall be occupied or let by the owner must be assigned a risk weight of 35%.
[Note: BCD Annex VI Part 1 point 46]
BIPRU 3.4.58
See Notes
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure to a tenant under a property leasing transaction concerning residential property under which the firm is the lessor and the tenant has an option to purchase, must be assigned a risk weight of 35% provided that the firm is satisfied that the exposure of the firm is fully and completely secured by its ownership of the property.
BIPRU 3.4.59
See Notes
BIPRU 3.4.60
See Notes
- (1) In the exercise of its judgement for the purposes of BIPRU 3.4.56 R to BIPRU 3.4.58 R, a firm may be satisfied only if the conditions in (2) to (6) are met.
- (2) The value of the property does not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macroeconomic factors affect both the value of the property and the performance of the borrower.
- (3) The risk of the borrower does not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility does not materially depend on any cash flow generated by the underlying property serving as collateral.
- (4) The minimum requirements about:
- (a) legal certainty in BIPRU 3.4.64 R;
- (b) monitoring of property values in BIPRU 3.4.66 R;
- (c) documentation in BIPRU 3.4.72 R; and
- (d) insurance in BIPRU 3.4.73 R;
- are met.
- (5) The valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R are met.
- (6) The value of the property exceeds the exposures by a substantial margin as set out in BIPRU 3.4.81 R, BIPRU 3.4.83 R, BIPRU 3.4.84 R or BIPRU 3.4.85 R (as applicable).
[Note: BCD Annex VI Part 1 point 48]
BIPRU 3.4.61
See Notes
BIPRU 3.4.60 R (3) does not apply to exposures fully and completely secured by mortgages on residential property which is situated within the United Kingdom.
BIPRU 3.4.62
See Notes
BIPRU 3.4.63
See Notes
If a CRD implementation measure of another EEA State exercises the discretion in point 49 of Part 1 of Annex VI of the Banking Consolidation Directive to dispense with the condition corresponding to BIPRU 3.4.60 R (3) (The risk of the borrower should not materially depend upon the performance of the underlying property or project), a firm may apply a risk weight of 35% to such exposures fully and completely secured by mortgages on residential property situated in that EEA State.
BIPRU 3.4.64
See Notes
The requirements about legal certainty referred to in BIPRU 3.4.60 R (4)(a) are as follows:
- (1) the mortgage or charge must be enforceable in all relevant jurisdictions which are relevant at the time of conclusion of the credit agreement, and the mortgage or charge must be properly filed on a timely basis;
- (2) the arrangements must reflect a perfected lien (i.e. all legal requirements for establishing the pledge shall have been fulfilled); and
- (3) the protection agreement and the legal process underpinning it must enable the firm to realise the value of the protection within a reasonable timeframe.
[Note: BCD Annex VIII Part 2 point 8(a)]
BIPRU 3.4.65
See Notes
BIPRU 3.4.66
See Notes
- (1) The requirements about monitoring of property values referred to in BIPRU 3.4.60 R (4)(b) are as follows:
- (a) the value of the property must be monitored on a frequent basis and at a minimum once every three years for residential real estate;
- (b) more frequent monitoring must be carried out where the market is subject to significant changes in conditions;
- (c) statistical methods may be used to monitor the value of the property and to identify property that needs revaluation;
- (d) the property valuation must be reviewed by an independent valuer when information indicates that the value of the property may have declined materially relative to general market prices; and
- (e) for loans exceeding €3 million or 5% of the capital resources of the firm, the property valuation must be reviewed by an independent valuer at least every three years.
- (2) For the purposes of (1), 'independent valuer' means a person who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process.
[Note: BCD Annex VIII Part 2 point 8(b)]
BIPRU 3.4.67
See Notes
BIPRU 3.4.68
See Notes
BIPRU 3.4.69
See Notes
BIPRU 3.4.70
See Notes
BIPRU 3.4.71
See Notes
BIPRU 3.4.72
See Notes
The requirements about documentation referred to in BIPRU 3.4.60 R (4)(c) are that the types of residential real estate accepted by the firm and its lending policies in this regard must be clearly documented.
BIPRU 3.4.73
See Notes
The requirements about insurance referred to in BIPRU 3.4.60 R (4)(d) are that the firm must have procedures to monitor that the property taken as protection is adequately insured against damage.
[Note: BCD Annex VIII Part 2 point 8(d)]
BIPRU 3.4.74
See Notes
BIPRU 3.4.75
See Notes
BIPRU 3.4.76
See Notes
BIPRU 3.4.77
See Notes
The property must be valued by an independent valuer at or less than the market value. In those EEA States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions the property may instead be valued by an independent valuer at or less than the mortgage lending value.
[Note: BCD Annex VIII Part 3 point 62]
BIPRU 3.4.78
See Notes
Market value means the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value must be documented in a transparent and clear manner.
BIPRU 3.4.79
See Notes
Mortgage lending value means the value of the property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements must not be taken into account in the assessment of the mortgage lending value. The mortgage lending value must be documented in a transparent and clear manner.
BIPRU 3.4.80
See Notes
The value of the collateral must be the market value or mortgage lending value reduced as appropriate to reflect the results of the monitoring required under BIPRU 3.4.60 R (4)(b) and BIPRU 3.4.66 R and to take account of any prior claims on the property.
BIPRU 3.4.81
See Notes
BIPRU 3.4.82
See Notes
- (1) The application of BIPRU 3.4.81 R may be illustrated by an example. If a firm has a mortgage exposure of £100,000 secured on residential property in the United Kingdom that satisfies the criteria listed in BIPRU 3.4.56 R to BIPRU 3.4.80 R and the value of that property is £100,000, then £80,000 of that exposure may be treated as fully and completely secured and risk weighted at 35%. The remaining £20,000 may be risk weighted at 75% provided the exposure meets the criteria in BIPRU 3.2.10 R. The portion risk weighted at 75% should be treated as a retail exposure for the purposes of the aggregation calculations specified in BIPRU 3.2.10 R (3). A diagrammatic illustration of this example is in (2).
- (2)
- (3) The same approach applies to exposures described in BIPRU 3.4.58 R. On initiation a 35% risk weight should be applied to the first 80% of the principal/"purchase price" outstanding, with a 75% risk weight being applied to the remainder of the principal (assuming that the exposure meets the requirements in BIPRU 3.2 to be treated as a retail exposure).
BIPRU 3.4.83
See Notes
BIPRU 3.4.84
See Notes
BIPRU 3.4.85
See Notes
For the purposes of BIPRU 3.4.56 R or BIPRU 3.4.58 R, where the residential property in question is situated in the territory of a third-country competent authority that is not listed as equivalent for credit risk in BIPRU 8 Annex 3 R:
BIPRU 3.4.86
See Notes
BIPRU 3.4.87
See Notes
BIPRU 3.4.88
See Notes
Exposures secured by mortgages on commercial real estate
BIPRU 3.4.89
See Notes
Exposures or any part of an exposure secured by mortgages on offices or other commercial premises which cannot properly be considered to fall within any other standardised credit risk exposure class or to qualify for a lower risk weight under BIPRU 3 must be assigned a risk weight of 100%.
BIPRU 3.4.90
See Notes
Exposures fully and completely secured by shares in Finnish housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of offices or other commercial premises may be assigned a risk weight of 50%.
BIPRU 3.4.91
See Notes
If a CRD implementation measure in another EEA State implements the discretion in point 51 of Part 1 of Annex VI of the Banking Consolidation Directive, a firm may apply the same treatment as that CRD implementation measure to exposures falling within the scope of that CRD implementation measure which are fully and completely secured by mortgages on offices or other commercial premises situated in that EEA State.
BIPRU 3.4.92
See Notes
If a CRD implementation measure in another EEA State implements the discretion in point 53 of Part 1 of Annex VI of the Banking Consolidation Directive, a firm may apply the same treatment as that CRD implementation measure to exposures related to property leasing transactions concerning offices or other commercial premises situated in that EEA State and governed by statutory provisions whereby the lessor retains full ownership of the rented assets until the tenant exercises his option to purchase, as long as that exposure falls within the scope of that CRD implementation measure.
[Note: BCD Annex VI Part 1 points 53 and 57]
BIPRU 3.4.93
See Notes
In particular, if a firm applies BIPRU 3.4.91 R or BIPRU 3.4.92 R, it must comply with the corresponding CRD implementation measures in relation to points 54-56 of Part 1 of Annex VI of the Banking Consolidation Directive.
BIPRU 3.4.94
See Notes
- (1) If a CRD implementation measure in another EEA State implements the discretion in point 58 of Part 1 of Annex VI of the Banking Consolidation Directive to dispense with the condition in point 54(b) for exposures fully and completely secured by mortgages on commercial property situated in that EEA State, a firm may apply the same treatment as that CRD implementation measure to exposures fully and completely secured by mortgages on commercial property situated in that EEA State falling within the scope of that CRD implementation measure.
- (2) However a firm may not apply the treatment in (1) if the eligibility to use that treatment under the CRD implementation measure referred to in (1) ceases as contemplated under point 59 of Annex VI of the Banking Consolidation Directive (condition in point 54(b) must apply where conditions in point 58 are not satisfied).
[Note: BCD Annex VI Part 1 points 58, 59 and 60]
Past due items
BIPRU 3.4.95
See Notes
BIPRU 3.4.96
See Notes
Without prejudice to the provisions contained in BIPRU 3.4.97 R to BIPRU 3.4.101 R, the unsecured part of any item that is past due for more than 90 days (irrespective of the amount of that item or of the unsecured portion of that item) must be assigned a risk weight of:
[Note: BCD Annex VI Part 1 point 61]
BIPRU 3.4.97
See Notes
For the purpose of defining the secured portion of the past due item, eligible collateral and guarantees must be those eligible for credit risk mitigation purposes under BIPRU 5.
BIPRU 3.4.98
See Notes
BIPRU 3.4.99
See Notes
Exposures indicated in BIPRU 3.4.56 R to BIPRU 3.4.63 R (Exposures secured by mortgages on residential property) must be assigned a risk weight of 100% net of value adjustments if they are past due for more than 90 days. If value adjustments are no less than 20% of the exposure gross of value adjustments, the risk weight to be assigned to the remainder of the exposure is 50%.
BIPRU 3.4.100
See Notes
The application of BIPRU 3.4.96 R and BIPRU 3.4.99 R may be illustrated on the basis of a £110,000 loan on a property valued at £100,000, where £80,000 of the loan is secured and £30,000 of the exposure is unsecured and provisions of £20,000 are taken:
- (1) Option 1 (application of BIPRU 3.4.96 R):
- (a) provision of £20,000 taken on £80,000 secured exposure;
- (b) provision exceeds 20%, so the firm should risk weight the remaining £60,000 secured exposure at 50%;
- (c) the risk weight to be applied to the unsecured exposure of £30,000 is 150%;
- (d) the average risk weight to be assigned to the net exposure of £90,000 is 83%.
- (2) Option 2 (application of BIPRU 3.4.99 R):
- (a) provision of £20,000 taken on £30,000 unsecured exposure;
- (b) provision exceeds 20%, so the firm should risk weight the remaining £10,000 unsecured exposure at 100%;
- (c) the risk weight to be applied to the secured exposure of £80,000 is 100%;
- (d) the average risk weight to be assigned to the net exposure of £90,000 is 100%.
BIPRU 3.4.101
See Notes
Exposures indicated in BIPRU 3.4.89 R to BIPRU 3.4.94 R (Exposures secured by mortgages on commercial real estate) must be assigned a risk weight of 100% if they are past due for more than 90 days.
BIPRU 3.4.102
See Notes
Non past due items to be assigned a 150% risk weight under BIPRU 3.4 and for which value adjustments have been established may be assigned a risk weight of:
Items belonging to regulatory high-risk categories
BIPRU 3.4.103
See Notes
BIPRU 3.4.104
See Notes
Exposures listed in BIPRU 3 Annex 3 R must be assigned a risk weight of 150%.
[Note: BCD Annex VI Part 1 point 66]
BIPRU 3.4.105
See Notes
Exposures in the form of covered bonds
BIPRU 3.4.106
See Notes
BIPRU 3.4.107
See Notes
- (1) Covered bonds means covered bonds as defined in paragraph (1) of the definition in the glossary (Definition based on Article 22(4) of the UCITS Directive) and collateralised by any of the following eligible assets:
- (a) exposures to or guaranteed by central governments, central bank, public sector entities, regional governments and local authorities in the EEA;
- (b)
- (i) exposures to or guaranteed by non-EEA central governments, non-EEA central banks, multilateral development banks, international organisations that qualify for the credit quality step 1;
- (ii) exposures to or guaranteed by non-EEA public sector entities, non-EEA regional governments and non-EEA local authorities that are risk weighted as exposures to institutions or central governments and central banks according to BIPRU 3.4.23 R, BIPRU 3.4.24 R, BIPRU 3.4.10 R or BIPRU 3.4.16 G to BIPRU 3.4.17 R respectively and that qualify for the credit quality step 1; and
- (iii) exposures in the sense of this point (b) that qualify as a minimum for the credit quality step 2, provided that they do not exceed 20% of the nominal amount of outstanding covered bonds of issuing institutions;
- (c) exposures to institutions that qualify for the credit quality step 1 but so that:
- (i) the total exposure of this kind must not exceed 15% of the nominal amount of the outstanding covered bonds of the issuing credit institution;
- (ii) exposures caused by transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by real estate to the holders of covered bonds must not be comprised by the 15% limit; and
- (iii) exposures to institutions in the EEA with a maturity not exceeding 100 days are not comprised by the step 1 requirement but those institutions must as a minimum qualify for credit quality step 2;
- (d) loans secured:
- (i) by residential real estate or shares in Finnish residential housing companies as referred to in BIPRU 3.4.57 R up to the lesser of the principal amount of the liens that are combined with any prior liens and 80% of the value of the pledged properties; or
- (ii) by senior units issued by French Fonds Communs de Créances or by equivalent securitisation entities governed by the laws of an EEA State securitising residential real estate exposures provided that the special public supervision to protect bond holders as provided for in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council ensures that the assets underlying such units must, at any time while they are included in the cover pool, be at least 90% composed of residential mortgages that are combined with any prior liens up to the lesser of the principal amounts due under the units, the principal amounts of the liens, and 80% of the value of the pledged properties, that the units qualify for credit quality step 1 and that such units do not exceed 10% of the nominal amount of the outstanding issue; or
- (e)
- (i) loans secured by commercial real estate or shares in Finnish housing companies as referred to in BIPRU 3.4.57 R up to the lesser of the principal amount of the liens that are combined with any prior liens and 60% of the value of the pledged properties; or
- (ii) loans secured by senior units issued by French Fonds Communs de Créances or by equivalent securitisation entities governed by the laws of an EEA State securitising commercial real estate exposures provided that the special public supervision to protect bond holders as provided for in Article 52(4) of Directive 2009/65/EC of the European Parliament and of the Council ensures that the assets underlying such units must, at any time while they are included in the cover pool, be at least 90% composed of commercial mortgages that are combined with any prior liens up to the lesser of the principal amounts due under the units, the principal amounts of the liens, and 60% of the value of the pledged properties, that the units qualify for credit quality step 1 and that such units do not exceed 10% of the nominal amount of the outstanding issue; or
- (iii) a firm may recognise loans secured by commercial real estate as eligible where the loan to value ratio of 60% is exceeded up to a maximum level of 70% if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding on the covered bond by at least 10%, and the bondholders' claim meets the legal certainty requirements set out in BIPRU 3 and BIPRU 5; the bondholders' claim must take priority over all other claims on the collateral; or
- (f) loans secured by ships where only liens that are combined with any prior liens within 60% of the value of the pledged ship.
- (2) For the purposes of BIPRU 3.4.107 R (1)(d)(ii) and BIPRU 3.4.107 R (1)(e)(ii) exposures caused by transmission and management of payments of the obligors of, or liquidation proceeds in respect of, loans secured by pledged properties of the senior units or debt securities must not be comprised in calculating the 90% limit.
- (3) For the purposes of BIPRU 3.4.107 R to BIPRU 3.4.110 R "collateralised" includes situations where the assets described in subpoints (1)(a) to (1)(f) are exclusively dedicated in law to the protection of the bond-holders against losses.
- (4) [deleted]
- (4A) Until 31 December 2013, the 10% limit for senior units issued by French Fonds Communs de Créances or by equivalent securitisation entities as specified in (1)(d)(ii) and (1)(e)(ii) does not apply, provided that:
- (a) the securitised residential or commercial real estate exposures were originated by a member of the same consolidated group of which the issuer of the covered bonds is also a member or by an entity affiliated to the same central body to which the issuer of the covered bonds is also affiliated (that common group membership or affiliation to be determined at the time the senior units are made collateral for covered bonds); and
- (b) a member of the same consolidated group of which the issuer of the covered bonds is also a member or an entity affiliated to the same central body to which the issuer of the covered bonds is also affiliated retains the whole first loss tranche supporting those senior units.
- (5) Until 31 December 2010 the figure of 60% in (1)(f) can be replaced with a figure of 70%.
[Note: BCD Annex VI Part 1 point 68]
BIPRU 3.4.108
See Notes
A firm must for real estate collateralising covered bonds meet the minimum requirements set out in BIPRU 3.4.64 R to BIPRU 3.4.73 R and the valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R.
[Note: BCD Annex VI Part 1 point 69]
BIPRU 3.4.109
See Notes
Notwithstanding BIPRU 3.4.107 R to BIPRU 3.4.108 R, covered bonds meeting the definition of Article 22(4) of the UCITS Directive and issued before 31 December 2007 are also eligible for the preferential treatment until their maturity.
BIPRU 3.4.110
See Notes
Covered bonds must be assigned a risk weight on the basis of the risk weight assigned to senior unsecured exposures to the credit institution which issues them. The following correspondence between risk weights applies:
- (1) if the exposures to the institution are assigned a risk weight of 20%, the covered bond must be assigned a risk weight of 10%;
- (2) if the exposures to the institution are assigned a risk weight of 50%, the covered bond must be assigned a risk weight of 20%;
- (3) if the exposures to the institution are assigned a risk weight of 100%, the covered bond must be assigned a risk weight of 50%; and
- (4) if the exposures to the institution are assigned a risk weight of 150%, the covered bond must be assigned a risk weight of 100%.
Items representing securitisation positions
BIPRU 3.4.111
See Notes
Risk weighted exposure amounts for securitisation positions must be determined in accordance with BIPRU 9.
Exposures to institutions and corporates with a short-term credit assessment
BIPRU 3.4.112
See Notes
Exposures to institutions where BIPRU 3.4.34 R to BIPRU 3.4.39 R apply, and exposures to corporates for which a short-term credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.113 R in accordance with the mapping by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 73]
Table: Exposures to institutions where BIPRU 3.4.34 R to BIPRU 3.4.39 R apply, and exposures to corporates for which a short-term credit assessment by a nominated ECAI is available
BIPRU 3.4.113
See Notes
Credit quality step | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight | 20% | 50% | 100% | 150% | 150% | 150% |
Exposures in the form of collective investment undertakings (CIUs)
BIPRU 3.4.114
See Notes
BIPRU 3.4.115
See Notes
Without prejudice to BIPRU 3.4.116 R to BIPRU 3.4.125 R, exposures in CIUs must be assigned a risk weight of 100%.
BIPRU 3.4.116
See Notes
Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.117 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.
[Note: BCD Annex VI Part 1 point 75]
BIPRU 3.4.117
See Notes
This table belongs to BIPRU 3.4.116 R.
Credit quality step | 1 | 2 | 3 | 4 | 5 | 6 |
Risk weight | 20% | 50% | 100% | 100% | 150% | 150% |
BIPRU 3.4.118
See Notes
Where a firm considers that a position in a CIU is associated with particularly high risks it must assign that position a risk weight of 150%.
BIPRU 3.4.119
See Notes
BIPRU 3.4.120
See Notes
BIPRU 3.4.121
See Notes
Where BIPRU 3.4.116 R does not apply, a firm may determine the risk weight for a CIU as set out in BIPRU 3.4.123 R to BIPRU 3.4.125 R, if the following eligibility criteria are met:
- (1) one of the following conditions is satisfied:
- (a) the CIU is managed by a company which is subject to supervision in an EEA State; or
- (b) the following conditions are satisfied:
- (i) the CIU is managed by a company which is subject to supervision that is equivalent to that laid down in EU law; and
- (ii) cooperation between competent authorities is sufficiently ensured; and
- (2) the CIU's prospectus or equivalent document includes:
- (a) the categories of assets in which the CIU is authorised to invest; and
- (b) if investment limits apply, the relative limits and the methodologies to calculate them; and
- (3) the business of the CIU is reported on at least an annual basis to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period.
[Note: BCD Annex VI Part 1 point 77]
BIPRU 3.4.122
See Notes
If another EEA competent authority approves a third country CIU as eligible under a CRD implementation measure with respect to point 77(a) of Part 1 of Annex VI of the Banking Consolidation Directive then a firm may make use of this recognition.
BIPRU 3.4.123
See Notes
Where a firm is aware of the underlying exposures of a CIU, it may look through to those underlying exposures in order to calculate an average risk weight for the CIU in accordance with the standardised approach.
[Note: BCD Annex VI Part 1 point 79]
BIPRU 3.4.124
See Notes
Where a firm is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for the CIU in accordance with the standardised approach subject to the following rules: it will be assumed that the CIU first invests, to the maximum extent allowed under its mandate, in the standardised credit risk exposure classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment limit is reached.
[Note: BCD Annex VI Part 1 point 80]
BIPRU 3.4.125
See Notes
A firm may rely on a third party to calculate and report, in accordance with the methods set out in BIPRU 3.4.123 R to BIPRU 3.4.124 R, a risk weight for the CIU provided that the correctness of the calculation and report is adequately ensured.
[Note: BCD Annex VI Part 1 point 81]
Other items
BIPRU 3.4.126
See Notes
Treatment
BIPRU 3.4.127
See Notes
Tangible assets within the meaning of Article 4(10) of the Bank Accounts Directive must be assigned a risk weight of 100%.
BIPRU 3.4.128
See Notes
Prepayments and accrued income for which a firm is unable to determine the counterparty in accordance with the Bank Accounts Directive, must be assigned a risk weight of 100%.
[Note: BCD Annex VI Part 1 point 83]
BIPRU 3.4.129
See Notes
Cash items in the process of collection must be assigned a 20% risk weight. Cash in hand and equivalent cash items must be assigned a 0% risk weight.
[Note: BCD Annex VI Part 1 point 84]
BIPRU 3.4.130
See Notes
Holdings of equity and other participations except where deducted from capital resources must be assigned a risk weight of at least 100%.
[Note: BCD Annex VI Part 1 point 86]
BIPRU 3.4.131
See Notes
Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities must be assigned a 0% risk weight.
BIPRU 3.4.132
See Notes
In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight must be that assigned to the assets in question and not to the counterparties to the transactions.
BIPRU 3.4.133
See Notes
Where a firm provides credit protection for a number of exposures under terms that the nth default among the exposures triggers payment and that this credit event terminates the contract, and where the product has an external credit assessment from an eligible ECAI the risk weights prescribed in BIPRU 9 must be assigned. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket must be aggregated, excluding n-1 exposures, up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk weighted asset amount. The n-1 exposures to be excluded from the aggregation must be determined on the basis that they include those exposures each of which produces a lower risk weighted exposure amount than the risk weighted exposure amount of any of the exposures included in the aggregation.
[Note: BCD Annex VI Part 1 point 89]
BIPRU 3.4.134
See Notes
The exposure value for leases must be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. an option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in BIPRU 5.7.1 R (Eligibility), regarding the eligibility of protection providers as well as the minimum requirements for recognising other types of guarantees provided in BIPRU 5.7.6 R (Minimum requirements: General) to BIPRU 5.7.12 R (Additional requirements for guarantees) must also be included in the minimum lease payments. These exposures must be assigned to the relevant exposure class in accordance with BIPRU 3.2.9 R, BIPRU 3.2.10 R, BIPRU 3.2.11 R, BIPRU 3.2.12 R, BIPRU 3.2.13 R and BIPRU 3.2.14 G. When the exposure is a residual value of leased properties, the risk weighted exposure amounts must be calculated as follows:
1/t * 100% * exposure value;
where t is the greater of 1 and the nearest number of whole years of the lease term remaining.
[Note: BCD Annex VI Part 1, point 90]
BIPRU 3.5
Simplified method of calculating risk weights
- 01/01/2007
BIPRU 3.5.1
See Notes
BIPRU 3.5.2
See Notes
BIPRU 3.5.3
See Notes
BIPRU 3.5.4
See Notes
BIPRU 3.5.5
See Notes
This table belongs to BIPRU 3.5.4 G.
Exposure class | Exposure sub-class | Risk weights | Comments |
Central government | Exposures to United Kingdom government or Bank of England in sterling | 0% | |
Exposures to United Kingdom government or Bank of England in the currency of another EEA State | 0% | See Note 2. | |
Exposures to EEA State's central government or central bank in currency of that state | 0% | ||
Exposures to EEA State's central government or central bank in the currency of another EEA State | 0% | See Notes 2 and 3. | |
Exposures to central governments or central banks of certain countries outside the EEA in currency of that country | See next column | The risk weight is whatever it is under local law. See BIPRU 3.4.6 R for precise details. | |
Exposures to European Central Bank | 0% | ||
Other exposures | 100% | ||
Regional/local governments | Exposures to the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly in sterling | 0% | |
Exposures to the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly in the currency of another EEA State | 0% | See Note 2. | |
Exposures to EEA States' equivalent regional/local governments in currency of that state | 0% | See BIPRU 3.4.17 R for details of type of local/regional government covered. | |
Exposures to EEA States' equivalent regional/local governments in the currency of another EEA State | 0% | See BIPRU 3.4.17 R for details of type of local/regional government covered. See Notes 2 and 3. |
|
Exposures to local or regional governments of certain countries outside the EEA in currency of that country | 0% | See BIPRU 3.4.19 R for details of type of local/regional government covered. See Note 1. |
|
Exposures to United Kingdom or EEA States' local/regional government in currency of that state if the exposure has original effective maturity of 3 months or less | 20% | ||
Exposures to United Kingdom or EEA States' local/regional government in the currency of another EEA State if the exposure has original effective maturity of 3 months or less | 20% | See Note 2. See Note 3 for local/regional government of an EEA State other than the United Kingdom | |
Exposures to local or regional governments of countries outside the EEA in currency of that country if the exposure has original effective maturity of 3 months or less | 20% | See Note 1. | |
Other exposures | 100% | ||
PSE | Exposures to a PSE of the United Kingdom or of an EEA State if that PSE is guaranteed by its central government and if the exposure is be in currency of that PSE's state. | 0% | BIPRU 3.4.24 R describes the United Kingdom PSEs covered and BIPRU 3.4.25 R describes the EEA PSEs covered. |
Exposures to PSE of a country outside the EEA if that PSE is guaranteed by the country's central government and if the exposure is in currency of that country. | 0% | See BIPRU 3.4.26 R and Note 1. | |
Exposures to a PSE of the United Kingdom or of an EEA State in currency of that state if the exposure has original effective maturity of 3 months or less | 20% | ||
Exposures to a PSE of the United Kingdom or of an EEA State in the currency of another EEA State if the exposure has original effective maturity of 3 months or less | 20% | See Notes 2 and 3. | |
Exposures to PSE of a country outside the EEA in currency of that country if the exposure has original effective maturity of 3 months or less | 20% | See Note 1. | |
Other exposures | 100% | ||
Multilateral development banks | Exposures to multilateral development banks listed in paragraph (1) of the Glossary definition | 0% | Simplified approach does not apply. Normal rules apply. |
Other exposures | Various | Treated as an institution | |
EU, the International Monetary Fund and the Bank for International Settlements | 0% | Simplified approach does not apply. Normal rules apply. | |
Institutions | Exposures to United Kingdom institution in sterling with original effective maturity of three months or less | 20% | |
Exposures to United Kingdom institution in the currency of another EEA State with original effective maturity of three months or less | 20% | See Note 2. | |
Exposures to institution whose head office is in another EEA State in the currency of that state with original effective maturity of three months or less | 20% | ||
Exposures to institution whose head office is in another EEA State in the currency of another EEA State with original effective maturity of three months or less | 20% | See Notes 2 and 3. | |
Exposures to institution with a head office in a country outside the EEA in the currency of that country with original effective maturity of three months or less | 20% | See Note 1. | |
Exposures to United Kingdom institution in sterling with original effective maturity of over three months | 50% | ||
Exposures to United Kingdom institution in the currency of another EEA State with original effective maturity of over three months | 50% | See Note 2. | |
Exposures to an EEA institution with a head office in another EEA State in the currency of that state with original effective maturity of over three months | 50% | ||
Exposures to an EEA institution with a head office in another EEA State in the currency of another EEA State with original effective maturity of over three months | 50% | See Notes 2 and 3. | |
Exposures to institution with a head office in a country outside the EEA in the currency of that country with original effective maturity of over three months | 50% | See Note 1. | |
Other exposures | 100% | ||
Corporates | 100% | ||
Retail exposures | 75% | Simplified approach does not apply. Normal rules apply. | |
Mortgages on residential or commercial property | Various | Simplified approach does not apply. Normal rules apply. | |
Past due items | Various | Simplified approach does not apply. Normal rules apply. | |
High risk items | 150% | Simplified approach does not apply. Normal rules apply. | |
Covered bonds | Various | Risk weights are based on the risk weight of issuer as described in BIPRU 3.4.110 R. The risk weight of the issuer for this purpose should be calculated under the simplified approach. | |
Securitisation exposures | Generally 1250%. May look through to underlying exposures if IPRU 9 allows. | Use the BIPRU 9 rules for unrated exposures under the standardised approach | |
Short term exposures with rating | See BIPRU 3.4.112 R. Not applicable as uses ECAI ratings. | ||
CIUs | May look through to underlying under BIPRU 3.4.123 R | Various | Simplified approach does not apply. Normal rules apply. May use simplified approach to underlying if simplified approach applies to underlying. |
May use average risk weight under BIPRU 3.4.124 R | Various | Simplified approach does not apply. Normal rules apply. May use simplified approach to underlyings if simplified approach applies to underlying. | |
High risk under BIPRU 3.4.118 R | 150% | Simplified approach does not apply. Normal rules apply. | |
Others | 100% | ||
Other items under BIPRU 3.2.9 R (16) | Various | Simplified approach does not apply. Normal rules apply. | |
Note 1: The risk weight should not be lower than the risk weight that applies for national currency exposures of the central government of the third country in question under BIPRU 3.5. That means that this risk weight only applies if the third country is one of those to which BIPRU 3.4.6 R (Preferential risk weight for exposures of the central government of countries outside the EEA that apply equivalent prudential standards) applies. | |||
Note 2: This is a transitional measure. It lasts until 31 December 2012. | |||
Note 3: The risk weight should not be lower than the risk weight that applies for exposures of the central government of the EEA State in question in the currency of another EEA State under BIPRU 3.5. |
BIPRU 3.5.6
See Notes
BIPRU 3.5.7
See Notes
BIPRU 3.5.8
See Notes
BIPRU 3.6
Use of rating agencies' credit assessments for the determination of risk weights under the standardised approach to credit risk
- 01/01/2007
BIPRU 3.6.1
See Notes
The use of ECAI credit assessments for the calculation of a firm's risk weighted exposure amounts must be consistent and in accordance with BIPRU 3.6. Credit assessments must not be used selectively.
[Note: BCD Article 83(1)]
BIPRU 3.6.2
See Notes
Where the appropriate regulator's recognition of an ECAI is not limited to its solicited credit assessments, a firm may use an unsolicited credit assessment of an eligible ECAI for the calculation of a firm's risk weighted exposure amounts.
[Note: BCD Article 83(2)]
BIPRU 3.6.3
See Notes
Treatment
BIPRU 3.6.4
See Notes
A firm may nominate one or more eligible ECAIs to be used for the determination of risk weights to be assigned to asset and off-balance sheet items.
[Note: BCD Annex VI Part 3 point 1]
BIPRU 3.6.5
See Notes
A firm which decides to use the credit assessments produced by an eligible ECAI for a certain class of items must use those credit assessments consistently for all exposures belonging to that class.
[Note: BCD Annex VI Part 3 point 2]
BIPRU 3.6.6
See Notes
A firm which decides to use the credit assessments produced by an eligible ECAI must use them in a continuous and consistent way over time.
[Note: BCD Annex VI Part 3 point 3]
BIPRU 3.6.7
See Notes
BIPRU 3.6.8
See Notes
If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment must be used to determine the risk weight for that item.
[Note: BCD Annex VI Part 3 point 5]
BIPRU 3.6.9
See Notes
If two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight must be applied.
[Note: BCD Annex VI Part 3 point 6]
BIPRU 3.6.10
See Notes
If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights must be referred to. If the two lowest risk weights are different, the higher risk weight must be assigned. If the two lowest risk weights are the same, that risk weight must be assigned.
[Note: BCD Annex VI Part 3 point 7]
BIPRU 3.6.11
See Notes
- (1) If a firm has decided to make use of the credit assessments of export credit agencies, when risk weighting exposures to central governments or central banks, if two or more credit assessments are available to a firm from export credit agencies or if credit assessments are available to a firm from both nominated ECAIs and export credit agencies, the firm must adopt the approach in this rule.
- (2) If two credit assessments are available and correspond to different risk weights for a rated item, the higher risk weight must be applied.
- (3) If more than two credit assessments are available for a rated item, the assessments generating the two lowest risk weights must be referred to:
- (a) if the two lowest risk weights are the same, that risk weight must be applied; or
- (b) if the two lowest risk weights are different, the higher of the two must be applied.
- (4) If a firm does not for the purposes of BIPRU 3 make any use of the consensus risk scores referred to in BIPRU 3.4.7 R (1) it may treat those scores as not being available to it for the purpose of this rule. Likewise, if a firm does not for the purposes of BIPRU 3 make any use of the credit assessments of a particular export credit agency as referred to in BIPRU 3.4.7 R (2) it may treat those assessments as not being available to it for the purpose of this rule.
Issuer and issue credit assessment
BIPRU 3.6.12
See Notes
Where a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure belongs, this credit assessment must be used to determine the risk weight to be assigned to that item.
[Note: BCD Annex VI Part 3 point 8]
BIPRU 3.6.13
See Notes
Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment must be used if it produces a higher risk weight than would otherwise be the case or if it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer as relevant.
[Note: BCD Annex VI Part 3 point 9]
BIPRU 3.6.14
See Notes
BIPRU 3.6.12 R and BIPRU 3.6.13 R are not to prevent the application of BIPRU 3.4.107 R to BIPRU 3.4.110 R (Exposures in the form of covered bonds).
[Note: BCD Annex VI Part 3 point 10]
BIPRU 3.6.15
See Notes
[Note: BCD Annex VI Part 3 point 11]
Long-term and short-term credit assessments
BIPRU 3.6.16
See Notes
Short-term credit assessments may only be used for short-term asset and off-balance sheet items constituting exposures to institutions and corporates.
[Note: BCD Annex VI Part 3 point 12]
BIPRU 3.6.17
See Notes
Any short-term credit assessment may only apply to the item the short-term credit assessment refers to, and it must not be used to derive risk weights for any other item.
BIPRU 3.6.18
See Notes
Notwithstanding BIPRU 3.6.17 R, if a short-term rated facility is assigned a 150% risk weight, then all unrated unsecured exposures on that obligor whether short-term or long-term must also be assigned a 150% risk weight.
BIPRU 3.6.19
See Notes
Notwithstanding BIPRU 3.6.17 R, if a short-term rated facility is assigned a 50% risk weight, no unrated short-term exposure may be assigned a risk weight lower than 100%.
Domestic and foreign currency items
BIPRU 3.6.20
See Notes
A credit assessment that refers to an item denominated in the obligor's domestic currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.
BIPRU 3.6.21
See Notes
Notwithstanding BIPRU 3.6.20 R, when an exposure arises through a firm's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency item may be used for risk weighting purposes.
[Note: BCD Annex VI Part 3 point 17]
BIPRU 3.7
Classification of off-balance-sheet items
- 01/01/2007
BIPRU 3.7.1
See Notes
In accordance with BIPRU 3.2.1 R (2) and BIPRU 3.2.2 R, a firm must:
- (1) assign an off-balance sheet item listed in the table in BIPRU 3.7.2 R to the risk category indicated in column 1 of that table; and
- (2) determine the exposure value of that item as the percentage of its value for the appropriate risk category as set out in column 3 of the table in BIPRU 3.7.2 R.
Table: Classification of off-balance-sheet items
BIPRU 3.7.2
See Notes
[Note: BCD Annex II]
Category | Item | Percentage |
Full risk | Guarantees having the character of credit substitutes Credit derivatives Acceptances Endorsements on bills not bearing the name of another credit institution Transactions with recourse Irrevocable standby letters of credit having the character of credit substitutes Assets purchased under outright forward purchase agreements Forward deposits The unpaid portion of partly-paid shares and securities Asset sale and repurchase agreements as defined in Article 12(3) and (5) of the Bank Accounts Directive Other items also carrying full risk |
100% |
Medium risk | Documentary credits issued and confirmed (see also medium/low risk). Warranties and indemnities (including tender, performance, customs and tax bonds) and guarantees not having the character of credit substitutes. Irrevocable standby letters of credit not having the character of credit substitutes. Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an original maturity of more than one year. Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs). |
50% |
Medium/low risk | Documentary credits in which underlying shipment acts as collateral and other self-liquidating transactions. Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an original maturity of up to and including one year which may not be cancelled unconditionally at any time without notice or that do not effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness. |
20% |
Low risk | Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness. Retail credit lines may be considered as unconditionally cancellable if the terms permit the firm to cancel them to the full extent allowable under consumer protection and related legislation. | 0% |
BIPRU 3 Annex 1
Guidance on the standardised approach zero risk weighting for intra-group exposures
- 01/01/2007
See Notes
Flowchart - zero risk weighting for intra-group exposures
BIPRU 3 Annex 2
Regional governments and local authorities eligible for the treatment in BIPRU 3.4.15R
- 01/01/2007
See Notes
(1) | The Scottish Parliament |
(2) | National Assembly for Wales |
(3) | Northern Ireland Assembly |
BIPRU 3 Annex 3
High risk exposures
- 01/01/2007
See Notes
(1) | Exposures arising out of venture capital business (whether or not the firm itself carries on the venture capital business). |
(2) | Any exposure of the type referred to in BIPRU 3.4.118 R (High risk position in a CIU) that is illiquid and held with a view to long-term sale or realisation. |
BIPRU 3 Annex 4
Exposures to institutions: Interaction with short-term credit assessments in BIPRU 3.4.40R
- 01/01/2007
See Notes
Export chapter as
BIPRU 4
The IRB approach
BIPRU 4.1
The IRB approach: Application, purpose and overview
- 01/01/2007
Application
BIPRU 4.1.1
See Notes
Purpose
BIPRU 4.1.2
See Notes
BIPRU 4 implements the following provisions of the Banking Consolidation Directive:
- (1) Articles 84 - 89; and
- (2) Annex VII.
BIPRU 4.1.3
See Notes
BIPRU 4 also implements Annex VIII of the Banking Consolidation Directive so far as it applies to the IRB approach. In particular, it implements (in part):
- (1) from Part 1 of that Annex, points 12-16, 19-22, 26(g)(ii) and 27;
- (2) from Part 2 of that Annex, points 8-11; and
- (3) from Part 3 of that Annex, points 1, 11, 20, 23-24, 58(h), 61, 64-79 and 90-93.
BIPRU 4.1.4
See Notes
BIPRU 4.1.5
See Notes
Overview
BIPRU 4.1.6
See Notes
BIPRU 4.1.7
See Notes
BIPRU 4.1.8
See Notes
BIPRU 4.1.9
See Notes
BIPRU 4.1.10
See Notes
BIPRU 4.1.11
See Notes
IRB permissions: general
BIPRU 4.1.12
See Notes
BIPRU 4.1.13
See Notes
BIPRU 4.1.14
See Notes
- (1) The appropriate regulator will only grant an IRB permission if it is satisfied that the firm's systems for the management and rating of credit risk exposures are sound and implemented with integrity and, in particular, that they meet the standards in BIPRU 4.2.2 R in accordance with the minimum IRB standards.
- (2) Under BIPRU 4.2.11 R, a firm applying for an IRB permission is required to demonstrate that it has been using for the IRB exposure classes in question rating systems that were broadly in line with the minimum IRB standards for internal risk measurement and management purposes for at least three years prior to the date of its IRB permission.
- (3) Under BIPRU 4.2.13 R, a firm applying for the use of own estimates of LGDs and/or conversion factors should demonstrate that it has been estimating and employing own estimates of LGDs and/or conversion factors in a manner that was broadly consistent with the minimum IRB standards for use of own estimates for at least three years prior to the date of its IRB permission or of a variation of its IRB permission that, in either case, entitles the firm to use own estimates of LGDs and/or conversion factors.
Link to standard rules: Incorporation of the IRB output into the capital calculation
BIPRU 4.1.15
See Notes
BIPRU 4.1.16
See Notes
A firm must calculate its credit risk capital component as the sum of:
- (1) (for exposures to which the standardised approach is applied) the credit risk capital component as calculated under BIPRU 3.1.5 R; and
- (2) (for exposures to which the IRB approach is applied to which the standardised approach would otherwise apply in accordance with BIPRU 3.1.5 R (Credit risk capital component)), 8% of the total of the firm's risk weighted exposure amounts calculated in accordance with the IRB approach.
BIPRU 4.1.17
See Notes
BIPRU 4.1.18
See Notes
BIPRU 4.1.19
See Notes
BIPRU 4.1.20
See Notes
BIPRU 4.1.21
See Notes
A reference in the Handbook to a provision of the IRB approach, in the case of a firm:
- (1) excludes any provision of the IRB approach set out in the Handbook that is not applied to that firm by its IRB permission;
- (2) includes any additional provision contained in the firm's IRB permission; and
- (3) takes into account any other amendments made to the provisions in the Handbook relating to the IRB approach made by the firm's IRB permission.
BIPRU 4.1.22
See Notes
BIPRU 4.1.23
See Notes
If a provision of the Handbook relating to the IRB approach says that a firm may do something if its IRB permission allows it, a firm may do that thing unless its IRB permission expressly says that it may not do so except that:
- (1) BIPRU 4.2.18 R - BIPRU 4.2.19 R (Sequential implementation of IRB approach) and BIPRU 4.2.26 R (1)-BIPRU 4.2.26R (5) (Combined use of standardised approach with IRB approach) only apply if expressly permitted by a firm's IRB permission;
- (2) a firm may not use the advanced IRB approach for the sovereign, institution and corporate IRB exposure class except to the extent expressly permitted by the firm's IRB permission;
- (3) if a firm uses its own estimates of LGD and conversion factors it may only take into account unfunded credit protection to reduce LGD in the manner set out in its IRB permission;
- (4) if a firm uses its own estimates of LGD and conversion factors it may only recognise the effects of financial collateral under BIPRU 10.2.19 R (Firms using own estimates of LGD and conversion factors under the IRB approach) in the manner set out in its IRB permission;
- (5) a firm must deal with equity exposures in the manner set out in its IRB permission; and
- (6) (in the case of collateral that is only eligible for recognition under paragraph 21 of Part 1 of Annex VIII of the Banking Consolidation Directive (Other physical collateral)) a firm may not recognise as eligible collateral an item of a type referred to in BIPRU 4.10.16 R (Other physical collateral) unless that item is of a type specified as permitted in its IRB permission.
BIPRU 4.1.24
See Notes
An IRB permission will set out firm-specific material. This will generally include:
- (1) details about the firm's methodology for carrying out the IRB approach, including the models and rating systems that a firm should use;
- (2) reporting requirements; and
- (3) requirements about internal control structure.
Compliance
BIPRU 4.1.25
See Notes
If a firm ceases to comply with the requirements of the IRB approach, it must either present to the appropriate regulator a plan for a timely return to compliance or demonstrate that the effect of non-compliance is immaterial.
[Note: BCD Article 84(5)]
BIPRU 4.1.26
See Notes
BIPRU 4.1.27
See Notes
BIPRU 4.2
The IRB approach: High level material
- 01/01/2007
Application
BIPRU 4.2.1
See Notes
General approach to granting an IRB permission
BIPRU 4.2.2
See Notes
A firm's systems for the management and rating of credit risk exposures must be sound and implemented with integrity and, in particular, they must meet the following standards in accordance with the minimum IRB standards:
- (1) the firm's rating systems provide for a meaningful assessment of obligor and transaction characteristics, a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk;
- (2) internal ratings and default and loss estimates used in the calculation of capital requirements and associated systems and processes play an essential role in the risk management and decision-making process, and in the credit approval, internal capital allocation and corporate governance functions of the firm;
- (3) the firm has a credit risk control unit responsible for its rating systems that is appropriately independent and free from undue influence;
- (4) the firm collects and stores all relevant data to provide effective support to its credit risk measurement and management process; and
- (5) the firm documents its rating systems, the rationale for their design and validates its rating systems.
[Note: BCD Article 84(2) (part)]
BIPRU 4.2.3
See Notes
Where an EEA parent institution and its subsidiary undertakings or an EEA parent financial holding company and its subsidiary undertakings use the IRB approach on a unified basis, the question whether the minimum IRB standards are met is answered by considering the parent undertaking and its subsidiary undertakings together unless the firm's IRB permission specifies otherwise.
[Note: BCD Article 84(2) (part)]
Outsourcing
BIPRU 4.2.4
See Notes
- (1) This guidance sets out the basis on which a firm may rely upon a rating system or data provided by another member of its group.
- (2) A firm may rely upon a rating system or data provided by another member of its group if the following conditions are satisfied:
- (a) the firm only does so to the extent that it is appropriate, given the nature and scale of the firm's business and portfolios and the firm's position within the group;
- (b) the group is an EEA banking and investment group;
- (c) the integrity of the firm's systems and controls is not adversely affected;
- (d) the outsourcing of these functions meets the requirements of SYSC; and
- (e) (if the provision of the rating system or data is not carried out in the United Kingdom or in the jurisdiction of the competent authority that is the lead regulator of the group) the firm can demonstrate to the appropriate regulator that the ability of the appropriate regulator and that lead regulator to carry out their responsibilities under the Handbook, the Banking Consolidation Directive and the Capital Adequacy Directive are not adversely affected.
- (3) If a firm does use a rating system or data provided by another member of its group, the requirements in BIPRU 4 continue to apply to that firm in respect of that rating system and data. A firm cannot absolve itself of the responsibility for complying with those requirements by claiming that any breach is caused by the actions of a third party to which the firm has delegated tasks. The rating system and data provision are still those of the firm, even though personnel elsewhere in the firm's group are carrying out these functions on its behalf. So any references in BIPRU to what a firm, its personnel and its management should and should not do still apply.
- (4) If a firm does use a rating system or data provided by another group member, the firm's governing body should formally delegate those functions to the persons or bodies that are to carry them out.
- (5) Before delegating the provision of a rating system or data to another group member, the firm's governing body should have explicitly considered the arrangement and decided that it is appropriate and that it enables the firm to meet the conditions in (2).
Assessment and estimation
BIPRU 4.2.5
See Notes
- (1) This paragraph provides guidance on BIPRU 4.2.2 R and in particular BIPRU 4.2.2 R (1).
- (2) The information that a firm produces or uses for the purpose of the IRB approach should be reliable and take proper account of the different users of the information produced (customers, shareholders, regulators and other market participants).
- (3) A firm should establish quantified and documented targets and standards, against which it should test the accuracy of data used in its rating systems.
- (4) Tests under (3) might include:
- (a) report and accounts reconciliation, including completeness in relation to (b);
- (b) whether every exposure has a PD, LGD and, if applicable, conversion factor for reporting purposes;
- (c) whether the firm's risk control environment has key risk indicators for the purpose of monitoring and ensuring data accuracy;
- (d) whether the firm has an adequate business and information technology infrastructure with fully documented processes;
- (e) whether the firm has clear and documented standards on ownership of data (including inputs and manipulation) and timeliness of current data (daily, monthly, real time); and
- (f) whether the firm has a comprehensive quantitative audit programme.
- (5) The reconciliation referred to in 4(a) should be reasonably fit for purpose. In particular it should meet the standards in (6) and (7).
- (6) For data inputs, testing for accuracy of data, including the reconciliation referred to in 4(a), should be sufficiently detailed so that, together with other available evidence, it gives reasonable assurance that data input into the rating system is accurate, complete and appropriate. Input data fails the required standard if it gives rise to a serious risk of material misstatement in the capital requirement either immediately or subsequently.
- (7) For data outputs, the firm, as part of the reconciliation referred to in 4(a), should be able to identify and explain material differences between the outputs produced under accounting standards and those produced under the requirements of the IRB approach, including in relation to areas that address similar concepts in different ways (for example expected loss on the one hand and accounting provisions on the other).
- (8) A firm should have clear and documented standards and policies about the use of data in practice (including information technology standards) which should in particular cover the firm's approach to the following:
- (a) data access and security;
- (b) data integrity, including the accuracy, completeness, appropriateness and testing of data; and
- (c) data availability.
Further requirements concerning the use test
BIPRU 4.2.6
See Notes
BIPRU 4.2.7
See Notes
- (1) This paragraph provides guidance on BIPRU 4.2.2 R and in particular BIPRU 4.2.2 R (2).
- (2) The IRB approach as applicable to a firm should be an integral part of its business and risk management processes and procedures to the extent that credit risk is relevant to them. It should also have a substantial influence on its decision-making and actions.
- (a) particular regard should be had to the use of the IRB approach in:
- (i) credit approval;
- (ii) individual and portfolio limit setting;
- (iii) reporting of credit risk information; and
- (iv) provisioning;
- (b) other relevant aspects include:
- (i) assessment of economic capital;
- (ii) internal capital allocation so far as related to credit risk;
- (iii) risk appetite;
- (iv) strategy and acquisitions;
- (v) profitability and performance; and
- (vi) performance-related remuneration;
- (c) the carrying out of the firm's obligations under the overall Pillar 2 rule; and
- (d) matters relating to the firm's infrastructure, including information technology, skills and resources and organisational culture.
BIPRU 4.2.8
See Notes
BIPRU 4.2.9
See Notes
BIPRU 4.2.10
See Notes
Requirements concerning the experience requirement
BIPRU 4.2.11
See Notes
A firm must be able to demonstrate that it has been using for the IRB exposure classes in question rating systems that were broadly in line with the minimum IRB standards for internal risk measurement and management purposes for at least three years prior to the date of its IRB permission.
[Note: BCD Article 84(3)]
BIPRU 4.2.12
See Notes
In meeting the experience requirement under BIPRU 4.2.11 R, the appropriate regulator would expect a firm to be able to demonstrate that it has been:
- (1) operating an internal rating system with estimates of PD;
- (2) meeting the standards in BIPRU 4 for senior management knowledge and reporting; and
- (3) meeting the standards in BIPRU 4 relating to the use of rating systems in its business;
for the required minimum 3 year period.
BIPRU 4.2.13
See Notes
A firm that has applied for the use of own estimates of LGDs and/or conversion factors must be able to demonstrate to the appropriate regulator that it has been estimating and employing own estimates of LGDs and/or conversion factors in a manner that was broadly consistent with the minimum IRB standards for use of own estimates of those parameters for at least three years prior to the date of its IRB permission or of a variation of its IRB permission that, in either case, entitled the firm to use own estimates of LGDs and/or conversion factors.
BIPRU 4.2.14
See Notes
In meeting the experience requirement under BIPRU 4.2.13 R, the appropriate regulator would expect a firm to be able to demonstrate that it has been:
- (1) operating an internal rating system with estimates of LGD and with conversion factors; and
- (2) compliant with BIPRU 4.2.11 R as applied to the advanced IRB approach.
for the required minimum 3 year period.
BIPRU 4.2.15
See Notes
Implementation of the internal ratings based approach
BIPRU 4.2.16
See Notes
BIPRU 4.2.17
See Notes
Without prejudice to BIPRU 4.2.26 R, a firm and any parent undertaking and its subsidiary undertakings must implement the IRB approach for all exposures.
[Note: BCD Article 85(1) (part)]
BIPRU 4.2.18
See Notes
To the extent that a firm's IRB permission permits this, implementation may be carried out sequentially across the different IRB exposure classes within the same business unit, across different business units in the same group or for the use of own estimates of LGDs or conversion factors for the calculation of risk weights for the sovereign, institution and corporate IRB exposure class.
[Note: BCD Article 85(1) (part)]
BIPRU 4.2.19
See Notes
In the case of the retail exposures, implementation may (but only to the extent provided for in the firm's IRB permission) be carried out sequentially across the categories of exposures to which the different correlations in BIPRU 4.6.41 R-BIPRU 4.6.44 R correspond.
BIPRU 4.2.20
See Notes
- (1) Implementation of the IRB approach as referred to in BIPRU 4.2.18 R must be carried out within a reasonable period of time as set out in the IRB permission.
- (2) The implementation must be carried out subject to strict conditions determined by the appropriate regulator and set out in the IRB permission.
- (3) A firm must not use the flexibility under BIPRU 4.2.18 R selectively with the purpose of achieving reduced minimum capital requirements in respect of those IRB exposure classes or business units that are yet to be included in the IRB approach or in the use of own estimates of LGDs and conversion factors.
[Note: BCD Article 85(2)]
BIPRU 4.2.21
See Notes
- (1) A firm should achieve full roll-out of the IRB approach to all its exposures, subject to the exemptions outlined in BIPRU 4.2.26 R, within the period specified in its IRB permission. A firm should not retain a permanent mix of portfolios on the standardised approach and the IRB approach, on the foundation IRB approach and the advanced IRB approach or on a mixture of all approaches with the exception of portfolios covered by those exemptions.
- (2) This applies to a move:
- (a) from the standardised approach to the IRB approach;
- (b) from the foundation IRB approach to the advanced IRB approach; and
- (c) from the transitional rules and guidance for BIPRU to the IRB approach.
- (3) The period referred to in BIPRU 4.2.20 R (1) will generally be not more than three years of starting use of the IRB approach or the advanced IRB approach as applicable.
BIPRU 4.2.22
See Notes
A firm using the IRB approach for any IRB exposure class must at the same time use the IRB approach for the equity exposure class.
[Note: BCD Article 85(3)]
BIPRU 4.2.23
See Notes
Subject to BIPRU 4.2.17 R - BIPRU 4.2.20 R, BIPRU 4.2.22 R and BIPRU 4.2.26 R, a firm that has an IRB permission must not use the standardised approach for the calculation of risk weighted exposure amounts for the exposures to which the IRB approach applies under the IRB permission.
[Note: BCD Article 85(4)]
BIPRU 4.2.24
See Notes
Subject to BIPRU 4.2.17 R - BIPRU 4.2.22 R and BIPRU 4.2.26 R, a firm whose IRB permission provides for the use of the advanced IRB approach for the calculation of LGDs and conversion factors for the sovereign, institution and corporate IRB exposure class must not use the LGD values and conversion factors applicable to the foundation IRB approach for the exposures to which the advanced IRB approach applies under the IRB permission.
[Note: BCD Article 85(5)]
BIPRU 4.2.25
See Notes
Combined use of methodologies: Basic provisions
BIPRU 4.2.26
See Notes
- (1) To the extent that its IRB permission permits this, a firm permitted to use the IRB approach in the calculation of risk weighted exposure amounts and expected loss amounts for one or more IRB exposure classes may apply the standardised approach in accordance with this rule.
- (2) A firm may apply the standardised approach to the IRB exposure class referred to in BIPRU 4.3.2 R (1) (Sovereigns) where the number of material counterparties is limited and it would be unduly burdensome for the firm to implement a rating system for these counterparties. A firm may include in this treatment an exposure of the type described in BIPRU 3.4.18 R (Exposures to churches or religious communities) that would fall within BIPRU 3.4.15 R or BIPRU 3.4.17 R (Exposure to a regional government or local authority) if those provisions had not been excluded by BIPRU 3.4.18 R.
- (3) A firm may apply the standardised approach to the IRB exposure class referred to in BIPRU 4.3.2 R (2) (Institutions), where the number of material counterparties is limited and it would be unduly burdensome for the firm to implement a rating system for these counterparties.
- (4) A firm may apply the standardised approach to exposures in non-significant business units as well as IRB exposure classes that are immaterial in terms of size and perceived risk profile.
- (5) A firm may apply the standardised approach to exposures to the central governments of EEA States and their regional governments, local authorities and administrative bodies, provided that:
- (a) there is no difference in risk between the exposures to the central government and those other exposures because of specific public arrangements; and
- (b) exposures to the central government are assigned a 0% risk weight under the standardised approach.
- (6) A firm may apply the standardised approach to exposures of a firm to a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking provided that the counterparty is an institution, a financial holding company, a financial institution, an asset management company or an ancillary services undertaking subject to appropriate prudential requirements.
- (7) A firm may apply the standardised approach to equity exposures to entities whose credit obligations qualify for a 0% risk weight under the standardised approach (including those publicly sponsored entities where a zero risk weight can be applied).
- (8) A firm may apply the standardised approach to equity exposures incurred under legislative programmes to promote specified sectors of the economy that provide significant subsidies for the investment to the firm and involve some form of government oversight and restrictions on the equity investments. This exclusion is limited to an aggregate of 10% of capital resources.
- (9) A firm may apply the standardised approach to the exposures identified in BIPRU 3.4.48 R (Exposures in the form of minimum reserves required by the European Central Bank or by the central bank of an EEA State) meeting the conditions specified therein.
- (10) A firm may apply the standardised approach to state and state-reinsured guarantees pursuant to BIPRU 5.7.12 R (Conditions for state and state-reinsured guarantees).
[Note: BCD Article 89(1)]
Combined use of methodologies: Documentation
BIPRU 4.2.27
See Notes
Combined use of methodologies: Sovereign and institutional, exposures
BIPRU 4.2.28
See Notes
Combined use of methodologies: Meaning of non-significance and immateriality
BIPRU 4.2.29
See Notes
For the purposes of BIPRU 4.2.26 R (4), the equity exposure IRB exposure class of a firm must be considered material if its aggregate value, excluding equity exposures incurred under legislative programmes as referred to in BIPRU 4.2.26 R (8) but including exposures in a CIU treated as equity exposures in accordance with BIPRU 4.9.11 R to BIPRU 4.9.15 R, exceeds, on average over the preceding year, 10% of the firm's capital resources. If the number of those equity exposures is less than 10 individual holdings, that threshold is 5% of the firm's capital resources.
[Note: BCD Article 89(2)]
BIPRU 4.2.30
See Notes
- (1) This rule sets out what must be treated as being non-significant business or immaterial for the purposes of BIPRU 4.2.26 R (4), for exposures that do not fall within the equity exposure IRB exposure class.
- (2) A firm may elect permanently to exclude exposures from the IRB approach and apply the standardised approach. However a firm may only make use of this exemption to the extent that:
- (a) the consolidated credit risk requirement (adjusted under (6)) so far as it is attributable to the excluded exposures;
- would be no more than 15% of:
- (b) the consolidated credit risk requirement (adjusted under (6)) with respect to all exposures (including the ones dealt with under (a)).
- (3) Exposures excluded under BIPRU 4.2.29 R or BIPRU 4.2.26 R (2), BIPRU 4.2.26 R (3) and BIPRU 4.2.26 R (5)-BIPRU 4.2.26 R (7) must not be included in (a) or (b).
- (4) The calculation in (2)(a) is based on the standardised approach.
- (5) The calculation in (2)(b) is based on whichever of the standardised approach and the IRB approach would apply to the exposures referred to in (2)(b) at the time when the calculation is being made.
- (6) The consolidated credit risk requirement is adjusted for the purposes of this rule as follows:
- (a) the element based on the concentration risk capital component is excluded, with only the elements based on the credit risk capital component and the counterparty risk capital component being taken into account; and
- (b) the calculation is carried out with respect to the group of undertakings referred to in BIPRU 4.2.17 R.
- (7) If a group with respect to which the calculation in this rule is being carried out is not required to calculate the consolidated credit risk requirement, the calculations in this rule must be carried out as if it were.
BIPRU 4.2.31
See Notes
If a firm applies to use the advanced IRB approach for the sovereign, institution and corporate IRB exposure class, BIPRU 4.2.26 R (4) also applies with respect to exposures in that class. For these purposes, to the extent permitted in the firm's IRB permission, a firm may:
- (1) exclude some exposures from the IRB approach and apply the standardised approach to those exposures; and
- (2) exclude other exposures from the advanced IRB approach and apply the foundation IRB approach to those exposures.
BIPRU 4.2.32
See Notes
Where BIPRU 4.2.31 R applies:
- (1) the 15% limit in BIPRU 4.2.30 R (2) is a combined limit for excluded exposures remaining on the standardised approach and excluded exposures remaining on the foundation IRB approach; and
- (2) the calculation in BIPRU 4.2.30 R (2)(a) is carried out under whichever method of calculation would be applicable to the exposure in question.
Combined use of methodologies: Territorial aspects
BIPRU 4.2.33
See Notes
- (1) This guidance sets out at what level the tests in BIPRU 4.2.30 R- BIPRU 4.2.32 G will be applied in the case of a firm that is a member of a group that is part of a bigger group.
- (2) If an EEA banking and investment group for which the appropriate regulator is the lead regulator is part of a wider EEA banking and investment group for which the appropriate regulator is also lead regulator then BIPRU 4.2.30 R- BIPRU 4.2.32 G apply with respect to that wider group.
- (3) If an EEA banking and investment group for which the appropriate regulator is the lead regulator is part of a wider EEA banking and investment group for which another competent authority is lead regulator then BIPRU 4.2.26 R (4) applies with respect to that wider group but the requirements of that lead regulator will generally apply in place of BIPRU 4.2.30 R- BIPRU 4.2.32 G.
- (4) If an EEA banking and investment group for which the appropriate regulator is the lead regulator is part of a wider third-country banking and investment group that is subject to equivalent supervision by a regulatory authority outside the EEA, then BIPRU 4.2.26 R (4) applies with respect to both that wider group and the sub-group of which the appropriate regulator is lead regulator. However the requirements of that third country regulator apply in place of BIPRU 4.2.30 R- BIPRU 4.2.32 G. The question of whether supervision is equivalent is decided in accordance with GENPRU 3.2 (Third country groups).
- (5) If an EEA banking and investment group for which the appropriate regulator is the lead regulator is part of a wider third-country banking and investment group that is not subject to equivalent supervision by a regulatory authority outside the EEA, then BIPRU 4.2.30 R- BIPRU 4.2.32 G will apply. BIPRU 4.2.30 R- BIPRU 4.2.32 G will apply to the whole group if GENPRU 3.2.9 R (Supervision by analogy) applies. If GENPRU 3.2.4 G (Alternative measures) applies, BIPRU 4.2.30 R- BIPRU 4.2.32 G will apply to the EEA banking and investment group.
- (6) In the case of a group described in (2) or (3) in respect of which the Article 129 procedure applies then BIPRU 4.2.26 R (4) applies with respect to that wider group. The detailed requirements that apply will be decided in accordance with that procedure.
Combined use of methodologies: Intra-group exposures
BIPRU 4.2.34
See Notes
- (1) Generally, the appropriate regulator will consider excluding, through a firm's IRB permission, exposures falling into BIPRU 4.2.26 R (6) from the IRB approach. The degree to which this exclusion applies will be set out in the firm's IRB permission.
- (2) Exposures excluded under (1) will be eligible for a 0% risk weight under the standardised approach if they satisfy the conditions in BIPRU 3.2.25 R to BIPRU 3.2.27A R (Zero risk weight for certain intra-group exposures).
- (3) Exposures to or holdings in any non-financial undertakings in a firm's group are not eligible for permanent exemption from the IRB approach under BIPRU 4.2.26 R (6), as they are not subject to consolidated supervision. It is also the appropriate regulator's policy that exposures to or holdings in any insurance undertaking are ineligible. Such exposures should remain on the IRB approach unless excluded under another part of BIPRU 4.2.26 R.
- (4) If a firm uses the exemption in (1) it should have a policy that:
- (a) provides for the identification of connected counterparties excluded under (1);
- (b) identifies exposures that would be permanently exempted from the IRB approach under (1); and
- (c) identifies the connected counterparty exposures that are not permitted to be permanently exempted from the IRB approach under (1).
- (5) The policy in (4) should be applied consistently to all exposures excluded under (1).
Combined use of methodologies: Purchase of a new businesses
BIPRU 4.2.35
See Notes
- (1) This guidance deals with some possible effects of acquiring a major new business after the grant of an IRB permission.
- (2) A firm should if possible ensure that the exposures arising through the acquisition are dealt with in accordance with the firm's IRB permission.
- (3) If the acquisition is made during the currency of a roll out plan under BIPRU 4.2.18 R, a firm should ensure that the exposures arising through the acquisition are dealt with in accordance with that plan. For these purposes the existing and the acquired business should be considered together. The whole of the firm's business, including the newly acquired business, should be included in both the denominator and numerator of the fraction in BIPRU 4.2.30 R.
- (4) If a firm cannot comply with (2) the appropriate regulator will consider an application to vary the firm's IRB permission in order to deal with the acquisition. For example the appropriate regulator may agree to extend the time by which the roll out should be completed (see BIPRU 4.2.20 R). However any such variation should be consistent with the provisions of BIPRU 4.2 that would have applied if the acquisition had been included in the firm's original application for an IRB permission.
- (5) If the acquisition is made after a firm has completed its roll out under BIPRU 4.2.18 R the appropriate regulator will not in general agree to an application to treat an exposure:
- (a) under the standardised approach if it would otherwise be treated under the IRB approach under the firm's IRB permission; or
- (b) under the foundation IRB approach if it would otherwise be treated under the advanced IRB approach under the firm's IRB permission.
- (6) Any application to disapply the policy in (5) will be treated in accordance with the approach set out in BIPRU 4.2.25 G.
- (7) The appropriate regulator will also adopt the approach in (5) while a roll out plan is in progress if, in relation to an exposure of a particular type, the period for completion of the roll out for those exposures under that plan has ended.
BIPRU 4.3
The IRB approach: Provisions common to different exposure classes
- 01/01/2007
Application
BIPRU 4.3.1
See Notes
Exposure classes
BIPRU 4.3.2
See Notes
Each exposure must be assigned to one of the following exposure classes:
- (1) claims or contingent claims on central governments and central banks;
- (2) claims or contingent claims on institutions;
- (3) claims or contingent claims on corporates;
- (4) retail claims or contingent retail claims;
- (5) equity claims;
- (6) securitisation positions; and
- (7) non credit-obligation assets.
[Note: BCD Article 86(1)]
BIPRU 4.3.3
See Notes
The methodology used by a firm for assigning exposures to different IRB exposure classes must be appropriate and consistent over time.
[Note: BCD Article 86(9)]
Calculation of risk weighted exposure amounts
BIPRU 4.3.4
See Notes
The risk weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in (1) to (4) must, unless deducted from capital resources, be calculated in accordance with the following provisions:
- (1) for exposures in the sovereign, institution and corporate IRB exposure class, BIPRU 4.4.57 R to BIPRU 4.4.60 R, BIPRU 4.4.79 R, BIPRU 4.5.8 R to BIPRU 4.5.10 R (for specialised lending exposures), BIPRU 4.9.3 R and BIPRU 4.8.16 R to BIPRU 4.8.17 R (for purchased corporate exposure receivables);
- (2) for exposures in the retail exposure class, BIPRU 4.6.41 R to BIPRU 4.6.44 R, BIPRU 4.6.57 R and BIPRU 4.8.18 R to BIPRU 4.8.20 R (for purchased retail exposure receivables);
- (3) for exposures in the equity exposure class, BIPRU 4.7.5 R to BIPRU 4.7.6 R, BIPRU 4.7.9 R to BIPRU 4.7.11 R, BIPRU 4.7.14 R to BIPRU 4.7.16 R and BIPRU 4.7.24 R to BIPRU 4.7.25 R; and
- (4) for exposures in the non credit-obligation assets exposure class, BIPRU 4.9.6 R.
BIPRU 4.3.5
See Notes
The calculation of risk weighted exposure amounts for credit risk and dilution risk must be based on the relevant parameters associated with the exposure in question. These include probability of default (PD), loss given default (LGD), maturity (M) and the exposure value of the exposure. PD and LGD may be considered separately or jointly, in accordance with the provisions relating to PD and LGD in BIPRU 4.4, BIPRU 4.6, BIPRU 4.7 and BIPRU 4.8 at:
- (1) for exposures in the sovereign, institution and corporate IRB exposure class, BIPRU 4.4.34 R - BIPRU 4.4.35 R, BIPRU 4.4.42 R to BIPRU 4.4.43 R, BIPRU 4.4.63 R - BIPRU 4.4.66 R, BIPRU 4.4.80 R and, for PD and LGD for dilution risk of purchased corporate exposure receivables, BIPRU 4.8.23 Rand BIPRU 4.8.26 R;
- (2) for exposures in the retail exposure class, BIPRU 4.6.50 R - BIPRU 4.6.54 R, BIPRU 4.6.58 R, and, for PD and LGD for dilution risk of purchased retail exposure receivables, BIPRU 4.8.24 R and BIPRU 4.8.27 R; and
- (3) for exposures in the equity exposure class, BIPRU 4.7.18 R and BIPRU 4.7.20 R - BIPRU 4.7.21 R.
Calculation of expected loss amounts
BIPRU 4.3.6
See Notes
The expected loss amounts for exposures belonging to one of the IRB exposure classes referred to in (1) to (3) must be calculated in accordance with the methods set out in the following provisions:
- (1) for exposures in the sovereign, institution and corporate IRB exposure class, BIPRU 4.4.61 R to BIPRU 4.4.62 R and (for specialised lending exposures) BIPRU 4.5.13 R to BIPRU 4.5.15R;
- (2) for exposures in the retail exposure class, BIPRU 4.6.47 R to BIPRU 4.6.48 R;
- (3) for exposures in the equity exposure class, BIPRU 4.7.12 R, BIPRU 4.7.17 R and BIPRU 4.7.26 R; and
- (4) (for purchased receivables falling into one of the IRB exposure classes in (1) to (3)) BIPRU 4.8.30 R.
BIPRU 4.3.7
See Notes
The calculation of expected loss amounts in accordance with BIPRU 4.3.6 R must be based on the same input figures of PD, LGD and the exposure value for each exposure as being used for the calculation of risk weighted exposure amounts in accordance with BIPRU 4. For defaulted exposures, where a firm uses its own estimate of LGDs, EL must be the firm's best estimate of expected loss (ELBE), for the defaulted exposure in accordance with BIPRU 4.3.122 R.
[Note: BCD Article 88(2)]
Treatment of expected loss amounts
BIPRU 4.3.8
See Notes
The expected loss amounts calculated in accordance with BIPRU 4.3.6 R (1), BIPRU 4.3.6 R (2) and BIPRU 4.3.6 R (4) must be subtracted from the sum of value adjustments and provisions related to these exposures. Discounts on balance sheet exposures purchased when in default according to BIPRU 4.4.71 R must be treated in the same manner as value adjustments. Expected loss amounts for securitised exposures and value adjustments and provisions related to these exposures must not be included in this calculation.
[Note: BCD Annex VII Part 1 point 36]
Corporate governance
BIPRU 4.3.9
See Notes
All material aspects of the rating and estimation processes must be approved by the firm's governing body or a designated committee thereof and senior management. These parties must possess a general understanding of the firm's rating systems and detailed comprehension of its associated management reports.
[Note: BCD Annex VII Part 4 point 124]
BIPRU 4.3.10
See Notes
- (1) A firm's governing body or designated committee may choose to approve only material aspects of the firm's rating systems and material changes to the firm's rating systems.
- (2) Where a firm's governing body or designated committee chooses to approve only material aspects of the firm's rating systems and material changes to the firm's rating systems:
- (a) the firm's governing body or designated committee should define the firm's overall approach to material aspects of rating and estimation processes for all rating systems, including non-material rating systems and approve a policy statement defining that approach; and
- (b) the firm should define and document the process for approval of non-material aspects of the firm's rating systems.
BIPRU 4.3.11
See Notes
Senior management must provide notice to the governing body or a designated committee thereof of material changes or exceptions from established policies that will materially impact the operations of the firm's rating systems.
BIPRU 4.3.12
See Notes
Where the firm's rating systems are used on a unified basis for the parent undertaking and its subsidiary undertakings under BIPRU 4.2.3 R, and approval and reporting of the ratings systems are carried out at the group level, the governance requirements in BIPRU 4.3.9 R and BIPRU 4.3.11 R may be met if:
- (1) the subsidiary undertakings have delegated to the governing body or designated committee of the EEA parent institution or EEA parent financial holding company responsibility for approval of the firm's rating systems;
- (2) the governing body or designated committee of the EEA parent institution or EEA parent financial holding company approves either:
- (a) all aspects of the firm's rating systems, and material changes; or
- (b) all aspects of the firm's rating systems that are material in the context of the group, and material changes to those, and a policy statement defining the overall approach to material aspects of rating and estimation processes for all rating systems, including non-material rating systems.
BIPRU 4.3.13
See Notes
Senior management must have a good understanding of the rating system's designs and operations. Senior management must ensure on an ongoing basis that the rating systems are operating properly. Senior management must be regularly informed by the credit risk control units about the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.
[Note: BCD Annex VII Part 4 point 126]
BIPRU 4.3.14
See Notes
Internal ratings-based analysis of the firm's credit risk profile must be an essential part of the management reporting required under BIPRU 4.3.9 R, BIPRU 4.3.11 R and BIPRU 4.3.13 R. Reporting must include at least risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realised default rates and, to the extent that own estimates are used, of realised LGDs and realised conversion factors against expectations and stress-test results. Reporting frequencies must depend on the significance and type of information and the level of the recipient.
[Note: BCD Annex VII Part 4 point 127]
Credit risk control
BIPRU 4.3.15
See Notes
The credit risk control unit must be independent from the personnel and management functions responsible for originating or renewing exposures and report directly to senior management. The unit must be responsible for the design or selection, implementation, oversight and performance of the rating systems. It must regularly produce and analyse reports on the output of the rating systems.
[Note: BCD Annex VII Part 4 point 128]
BIPRU 4.3.16
See Notes
The areas of responsibility for the credit risk control unit(s) must include the following:
- (1) testing and monitoring grades and pools;
- (2) production and analysis of summary reports from the firm's rating systems;
- (3) implementing procedures to verify that grade and pool definitions are consistently applied across departments and geographic areas;
- (4) reviewing and documenting any changes to the rating process, including the reasons for the changes;
- (5) reviewing the rating criteria to evaluate if they remain predictive of risk (and changes to the rating process, criteria or individual rating parameters must be documented and retained);
- (6) active participation in the design or selection, implementation and validation of models used in the rating process;
- (7) oversight and supervision of models used in the rating process; and
- (8) ongoing review and alterations to models used in the rating process.
[Note: BCD Annex VII Part 4 point 129]
BIPRU 4.3.17
See Notes
Notwithstanding BIPRU 4.3.16 R, a firm using pooled data according to BIPRU 4.3.92 R - BIPRU 4.3.94 R (Overall requirements for estimation) may outsource the following tasks:
- (1) production of information relevant to testing and monitoring grades and pools;
- (2) production of summary reports from the firm's rating systems;
- (3) production of information relevant to review of the rating criteria to evaluate if they remain predictive of risk;
- (4) documentation of changes to the rating process, criteria or individual rating parameters; and
- (5) production of information relevant to ongoing review and alterations to models used in the rating process.
[Note: BCD Annex VII Part 4 point 130 (part)]
BIPRU 4.3.18
See Notes
A firm making use of BIPRU 4.3.17 R must ensure that the appropriate regulator has access to all relevant information from the third party that is necessary for examining compliance with the minimum IRB standards and the firm's IRB permission and that the appropriate regulator may perform on-site examinations to the same extent as within the firm.
[Note: BCD Annex VII Part 4 point 130 (part)]
Documentation of rating systems
BIPRU 4.3.19
See Notes
A firm must document the design and operational details of its rating systems. The documentation must evidence compliance with the minimum IRB standards and the firm's IRB permission, and address topics including portfolio differentiation, rating criteria, responsibilities of parties that rate obligors and exposures, frequency of assignment reviews, and management oversight of the rating process.
[Note: BCD Annex VII Part 4 point 31]
BIPRU 4.3.20
See Notes
BIPRU 4.3.21
See Notes
A firm must document the rationale for and analysis supporting its choice of rating criteria. A firm must document all major changes in the risk rating process, and such documentation must support identification of changes made to the risk rating process subsequent to the last review by the appropriate regulator. The organisation of rating assignment including the rating assignment process and the internal control structure must also be documented.
[Note: BCD Annex VII Part 4 point 32]
BIPRU 4.3.22
See Notes
BIPRU 4.3.23
See Notes
BIPRU 4.3.24
See Notes
Where a firm employs statistical models in the rating process, the firm must document its methodologies. This material must:
- (1) provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the assignment of estimates to grades, individual obligors, exposures, or pools, and the data source(s) used to estimate the model;
- (2) establish a rigorous statistical process (including out-of-time and out-of-sample performance tests) for validating the model; and
- (3) indicate any circumstances under which the model does not work effectively.
[Note: BCD Annex VII Part 4 point 34]
Rating systems
BIPRU 4.3.25
See Notes
[Note: BCD Annex VII Part 4 point 1]
BIPRU 4.3.26
See Notes
If a firm uses multiple rating systems, the rationale for assigning an obligor or a transaction to a rating system must be documented and applied in a manner that appropriately reflects the level of risk.
[Note: BCD Annex VII Part 4 point 2]
BIPRU 4.3.27
See Notes
Assignment criteria and processes must be periodically reviewed to determine whether they remain appropriate for the current portfolio and external conditions.
BIPRU 4.3.28
See Notes
Validation of internal estimates
BIPRU 4.3.29
See Notes
A firm must have robust systems in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk parameters (PD, LGD, conversion factors and EL). A firm must be able to demonstrate to the appropriate regulator that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.
[Note: BCD Annex VII Part 4 point 110]
BIPRU 4.3.30
See Notes
- (1) A firm must validate its rating systems. Its validation process must include, as a minimum, the elements set out in (2) - (8).
- (2) A firm must establish and define standards of objectivity, accuracy, stability and conservatism that it designs its ratings systems to meet. It must have processes that establish whether its rating systems meet those standards.
- (3) A firm must establish and define standards of accuracy of calibration (i.e. whether outcomes are consistent with estimate) and discriminative power (i.e. the ability to rank-order risk) that it designs its rating systems to meet. It must have processes that establish whether its rating systems meet those standards.
- (4) A firm must have polices and standards that specify the actions to be taken when a rating system fails to meet the standards of accuracy and discriminative power referred to in (2) and (3).
- (5) A firm's validation process must include a mix of developmental evidence, benchmarking and process verification. A firm's validation process must include policies on how this mixture varies between different rating systems.
- (6) A firm's validation process must include the use of both quantitative and qualitative techniques.
- (7) A firm's validation process must include policies on how validation procedures are expected to vary over time.
- (8) A firm's validation process must include independent input into and review of its rating systems.
- (9) The standards set under (2) and (3) must meet the minimum IRB standards.
- (10) For the purpose of (5):
- (a) developmental evidence means evidence that substantiates whether the logic and quality of a rating system (including the quantification process) adequately discriminates between different levels of, and delivers accurate estimates of PD, EL, LGD and conversion factors (as applicable); and
- (b) process verification means the process of establishing whether the methods used in a rating system to discriminate between different levels of risk and to quantify PD, EL, LGD and conversion factors are being used, monitored and updated in the way intended in the design of the rating system.
BIPRU 4.3.31
See Notes
BIPRU 4.3.32
See Notes
BIPRU 4.3.33
See Notes
A firm must regularly compare realised default rates with estimated PDs for each grade and where realised default rates are outside the expected range for that grade a firm must specifically analyse the reasons for the deviation. A firm using its own estimates of LGDs and/or conversion factors must also perform analogous analysis for own estimates of LGDs and conversion factors. Such comparisons must make use of historical data that cover as long a period as possible. A firm must document the methods and data used in such comparisons. This analysis and documentation must be updated at least annually.
[Note: BCD Annex VII Part 4 point 111]
BIPRU 4.3.34
See Notes
- (1) This paragraph sets out guidance on assessing the adequacy of a rating system's discriminative power (see BIPRU 4.3.30 R (3) on the meaning of discriminative power).
- (2) A firm should be able to explain the performance of its rating systems against its chosen measure (or measures) of discriminative power. In making this comparison a firm should rely primarily on actual historic default experience where this is available. In particular, a firm should be able to explain:
- (a) the extent of any potential inaccuracy in these measures, caused in particular by small sample size; and
- (b) the potential for divergence in the future, whether caused by changing economic conditions or other factors.
- (3) The assessment of discriminative power should include appropriate use of external benchmarks where available.
- (4) The appropriate regulator will, in assessing the firm's performance, take into consideration the sophistication of the measure of discrimination chosen.
- (5) In the case of a portfolio for which there is insufficient default experience to provide any confidence in statistical measures of discriminative power a firm need not carry out the procedure in (2) and may instead use other methods. For example, it may make use of comparison with an external measurement approach by analysing whether the firm's rating systems and the external approach rank common obligors in broadly similar ways. A firm should be able to explain the methodology it uses and the rationale for its use.
BIPRU 4.3.35
See Notes
A firm must also use other appropriate quantitative validation tools and comparisons with relevant external data sources. The analysis must be based on data that is appropriate to the portfolio, is updated regularly, and covers a relevant observation period. A firm's internal assessments of the performance of its rating systems must be based on as long a period as possible.
[Note: BCD Annex VII Part 4 point 112]
BIPRU 4.3.36
See Notes
The methods and data used for quantitative validation must be consistent through time. Changes in estimation and validation methods and data (both data sources and periods covered) must be documented.
[Note: BCD Annex VII Part 4 point 113
BIPRU 4.3.37
See Notes
A firm must have sound internal standards for situations where deviations in realised PDs, LGDs, conversion factors and, where EL is used, total losses, from expectations become significant enough to call the validity of the estimates into question. These standards must take account of business cycles and similar systematic variability in default and loss experience. Where realised values continue to be higher than expected values, a firm must revise estimates upward to reflect its default and loss experience.
[Note: BCD Annex VII Part 4 point 114]
Internal audit
BIPRU 4.3.38
See Notes
Internal audit or another comparable independent auditing unit must review at least annually the firm's rating systems and its operations, including the operations of the firm and the estimation of PDs, LGDs, ELs and conversion factors. Areas of review must include adherence to all applicable minimum requirements.
[Note: BCD Annex VII Part 4 point 131]
Stress tests used in assessment of capital adequacy
BIPRU 4.3.39
See Notes
A firm must have in place sound stress testing processes for use in the assessment of its capital adequacy. Stress testing must involve identifying possible events or future changes in economic conditions that could have unfavourable effects on the firm's credit exposures and assessment of the firm's ability to withstand such changes.
[Note: BCD Annex VII Part 4 point 40]
BIPRU 4.3.39A
See Notes
BIPRU 4.3.40
See Notes
- (1) A firm must regularly perform a credit risk stress test to assess the effect of certain specific conditions on its total capital requirements for credit risk. The test to be employed must be one chosen by the firm. The test to be employed must be meaningful and reasonably conservative. Stressed portfolios must contain the vast majority of a firm's total exposures covered by the IRB approach.
- (2) The stress test must be designed to assess the firm's ability to meet its capital requirements for credit risk under GENPRU 2.1 during all stages of the economic cycle and during an economic downturn scenario based on forward looking hypothetical events calibrated against the most adverse movements in individual risk drivers experienced over a long historical period.
- (3) In particular the stress test must address the impact (including by ratings migration) of changes in the credit quality of its credit risk counterparties including its protection providers. A firm using the treatment set out in BIPRU 4.4.79 R must in particular consider the impact of protection providers falling outside the eligibility criteria.
- (4) The stress test must be conducted on the basis of the firm's exposures (on- and off-balance sheet) as they stand at the time of the stress test.
- (5) The stress test must be carried out at least annually and also in the event of a significant change in the state of the economy.
- (6) A firm need not assume that the recession referred to in (2) will occur in the 12 months immediately following the stress test. Instead, the stress test must incorporate a plausible time horizon for the occurrence of the cyclical deterioration of the severity tested for. A firm need not assume that the downturn will occur for all portfolios in all jurisdictions simultaneously.
[Note: BCD Annex VII Part 4 points 41 and 42]
BIPRU 4.3.41
See Notes
BIPRU 4.3.42
See Notes
Rating systems: Assignment to grades or pools
BIPRU 4.3.43
See Notes
A firm must have specific definitions, processes and criteria for assigning exposures to grades or pools within a rating system.
[Note: BCD Annex VII Part 4 point 17 (part)]
BIPRU 4.3.44
See Notes
The grade or pool definitions and criteria must be sufficiently detailed to allow those charged with assigning ratings consistently to assign obligors or facilities posing similar risk to the same grade or pool. This consistency must exist across lines of business, departments and geographic locations within each rating system.
[Note: BCD Annex VII Part 4 point 17 (part)]
BIPRU 4.3.45
See Notes
BIPRU 4.3.46
See Notes
BIPRU 4.3.47
See Notes
The criteria referred to in BIPRU 4.3.43 R must also be consistent with the firm's internal lending standards and its policies for handling troubled obligors and facilities.
[Note: BCD Annex VII Part 4 point 17 (part)]
BIPRU 4.3.48
See Notes
A firm must take all relevant information into account in assigning obligors and facilities to grades or pools. Information must be current and must enable the firm to forecast the future performance of the exposure. The less information a firm has, the more conservative must be its assignments of exposures to obligor and facility grades or pools. If a firm uses an external rating as a primary factor determining an internal rating assignment, the firm must ensure that it considers other relevant information.
[Note: BCD Annex VII Part 4 point 18]
Rating systems: General governance
BIPRU 4.3.49
See Notes
- (1) This paragraph contains guidance on BIPRU 4.3.43 R and more general guidance about the governance of rating systems.
- (2) In determining the assignment referred to in BIPRU 4.3.43 R, a firm should have regard to the sensitivity of the rating to movements in fundamental risk drivers.
- (3) A firm should, for any rating system, be able to demonstrate that it acts appropriately or has an appropriate policy, as applicable, with respect to:
- (a) any deficiencies caused by its not being sensitive to movements in fundamental risk drivers or for any other reason;
- (b) periodic review and action in the light of such review;
- (c) provision of appropriate internal guidance to staff to ensure consistency in the use of the rating system, including the assignment of exposures or facilities to pools or grades;
- (d) dealing with potential weaknesses of the rating system;
- (e) identifying appropriate and inappropriate uses of the rating system and acting on that identification;
- (f) novel or narrow rating approaches; and
- (g) ensuring the appropriate level of stability over time of the rating system.
Rating systems: Overrides
BIPRU 4.3.50
See Notes
For grade and pool assignments a firm must document the situations in which human judgement may override the inputs or outputs of the assignment process and the personnel responsible for approving these overrides. A firm must document these overrides and the personnel responsible. A firm must analyse the performance of the exposures whose assignments have been overridden. This analysis must include assessment of the performance of exposures whose rating has been overridden by a particular person, accounting for all the responsible personnel.
[Note: BCD Annex VII Part 4 point 25]
Rating systems: Use of models
BIPRU 4.3.51
See Notes
- (1) This paragraph applies to the use of statistical models and/or other mechanical methods to assign exposures to obligor grades, obligor pools, facility grades or facility pools.
- (2) A firm must be able to demonstrate to the appropriate regulator that the model has good predictive power and that capital requirements are not distorted as a result of its use.
- (3) The input variables to the model must form a reasonable and effective basis for the resulting predictions. The model must not have material biases.
- (4) A firm must have in place a process for vetting data inputs into the model, which includes an assessment of the accuracy, completeness and appropriateness of the data.
- (5) A firm must be able to demonstrate to the appropriate regulator that the data used to build the model is representative of the population of the firm's actual obligors or exposures.
- (6) A firm must have a regular cycle of model validation that includes monitoring of model performance and stability, review of model specification and testing of model outputs against outcomes.
- (7) A firm must complement the statistical model by human judgement and human oversight to review model-based assignments and to ensure that the models are used appropriately. Review procedures must aim at finding and limiting errors associated with model weaknesses. Human judgements must take into account all relevant information not considered by the model. A firm must document how human judgement and model results are to be combined.
- (8) Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for exemption from documentation or any other of the requirements in BIPRU 4 or a firm's IRB permission for rating systems. A firm must be able to satisfy the appropriate regulator that all those requirements are satisfied if it uses such a model.
[Note: BCD Annex VII Part 4 points 30 and 35 (part)]
BIPRU 4.3.52
See Notes
- (1) This paragraph contains guidance on BIPRU 4.3.51 R (7).
- (2) BIPRU 4.3.51 R (7) does not require that each individual assignment of an exposure to a pool or grade should be the subject of an open-ended review by reference to factors not covered by the model if:
- (a) that is not necessary in order to meet the requirements of BIPRU 4 about the ability of the rating system to predict and to discriminate (as referred to in BIPRU 4.3.29 R to BIPRU 4.3.30 R (Validation of internal estimates)); and
- (b) the outputs of the model are not designed to be supplemented by such a review.
BIPRU 4.3.53
See Notes
- (1) This paragraph contains guidance on BIPRU 4.3.51 R for the use of external models.
- (2) BIPRU 4.3.51 R (2) - BIPRU 4.3.51 R (8) also apply to mechanical methods to assign exposures or obligors to facility grades or pools and to a combination of models and mechanical methods.
- (3) The standards which a firm applies to an external model should not be lower than those for internal models.
- (4) The appropriate regulator will not accredit any individual model or vendor. The burden is on a firm to satisfy itself that external models are fit for purpose and meet the relevant requirements of the IRB approach.
- (5) Notwithstanding that commercial confidentiality may limit the willingness of vendors of external models to disclose all details, a firm should ensure that it is able to obtain sufficiently detailed information to be able to satisfy the requirements of the IRB approach.
- (6) A firm should have a clear understanding of responsibilities for support and maintenance of external models. This should include how new developments will be brought in and what entitlement the firm has to receive and/or request specific enhancements. A firm should ensure that the requirements of BIPRU 4.3.51 R and other provisions of the IRB approach are complied with on an ongoing basis.
- (7) If a firm uses an external model it should have regard to the following:
- (a) the adequacy of the information it has about the population on which the model is built;
- (b) the comparability of the population referred to in (a) to the exposures with respect to which it is using that model;
- (c) what the drivers of the model are and their relevance to the exposures with respect to which it is using the model; and
- (d) how the firm satisfies itself that the standards required by the IRB approach for an internal model are met by the external model.
Rating systems: Data maintenance
BIPRU 4.3.54
See Notes
Rating systems: IT systems
BIPRU 4.3.55
See Notes
Definition of default: Main provisions
BIPRU 4.3.56
See Notes
A default must be considered to have occurred with regard to a particular obligor when either or both of the two following events has taken place:
- (1) the firm considers that the obligor is unlikely to pay its credit obligations to the firm, the parent undertaking or any of its subsidiary undertakings in full, without recourse by the firm to actions such as realising security (if held); and
- (2) the obligor is past due more than 90 days on any material credit obligation to the firm, the parent undertaking or any of its subsidiary undertakings.
[Note: BCD Annex VII Part 4 point 44 (part)]
BIPRU 4.3.57
See Notes
The following provisions also apply with respect to the definition of default:
- (1) for overdrafts, days past due commence once an obligor has breached an advised limit, has been advised a limit smaller than current outstandings, or has drawn credit without authorisation and the underlying amount is material;
- (2) an advised limit means a limit which has been brought to the knowledge of the obligor;
- (3) days past due for credit cards commence on the minimum payment due date;
- (4) in the case of retail exposures and exposures to public sector entities the number of days past due is as set out in BIPRU 4.4.22 R and BIPRU 4.6.20 R; and
- (5) in all cases for the purposes of the definition of default, a credit obligation or, for overdrafts, the underlying amount, is material if, when added to the other exposures of the obligor, the total exceeds the amount which the firm treats as a material default for its internal risk measurement and management purposes.
[Note: BCD Annex VII Part 4 point 44 (part)]
Definition of default: Materiality
BIPRU 4.3.58
See Notes
BIPRU 4.3.59
See Notes
Definition of default: Identification of obligor
BIPRU 4.3.60
See Notes
- (1) This paragraph contains guidance on the definition of default.
- (2) If:
- (a) a firm ordinarily assigns exposures in the sovereign, institution and corporate IRB exposure class to a member of a group substantially on the basis of membership of that group and a common group rating; and
- (b) the firm does so in the case of a particular group;
- (3) the firm should consider whether members of that group should be treated as a single obligor for the purpose of the definition of default.
- (4) The appropriate regulator would not expect a firm to treat an obligor as part of a single obligor under (2) if the firm rates its exposures on a stand alone basis or if its rating is notched. A rating is notched if it takes into account individual risk factors or otherwise reflects risk factors that are not applied on a common group basis.
- (5) Accordingly if a group has two members who are separately rated the default of one does not necessarily imply the default of the other.
Definition of default: Days past due
BIPRU 4.3.61
See Notes
- (1) This paragraph contains guidance on the meaning of days past due for the purposes of the definition of default.
- (2) If an amount is overdue by the relevant number of days past due because of administrative oversight on the part of the obligor or the firm, a firm with sufficient information may, retrospectively if necessary, treat that as not involving a default if:
- (a) that failure is not associated with any increase in the risk referred to in BIPRU 4.3.56 R (1); and
- (b) treating it as not being in default is consistent with the way that the firm treated the failure in its relationship with the obligor.
- (3) If a firm takes advantage of this provision it should have a policy about the circumstances in which it can apply the treatment in (2). That policy should be documented and consistently applied.
BIPRU 4.3.62
See Notes
Definition of default: Unlikeliness to pay
BIPRU 4.3.63
See Notes
- (1) Elements to be taken as indications of unlikeliness to pay must include the items set out in this rule.
- (2) The firm putting the credit obligation on non-accrued status must be taken as an indication of unlikeliness to pay.
- (3) The firm making a value adjustment resulting from a significant perceived decline in credit quality subsequent to the firm taking on the exposure must be taken as an indication of unlikeliness to pay.
- (4) The firm selling the credit obligation at a material credit-related economic loss must be taken as an indication of unlikeliness to pay.
- (5) The firm consenting to a distressed restructuring of the credit obligation must be taken as an indication of unlikeliness to pay where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees. This includes in the case of equity exposures assessed under a PD/LGD approach, distressed restructuring of the equity itself.
- (6) The firm having filed for the obligor's bankruptcy or a similar order in respect of an obligor's credit obligation to the firm, the parent undertaking or any of its subsidiary undertakings must be taken as an indication of unlikeliness to pay.
- (7) The obligor seeking or having been placed in bankruptcy or similar protection where this would avoid or delay repayment of a credit obligation to the firm, the parent undertaking or any of its subsidiary undertakings must be taken as an indication of unlikeliness to pay.
[Note: BCD Annex VII Part 4 point 45]
BIPRU 4.3.64
See Notes
A firm may use the amount overdue as an additional indication of unlikeliness to pay. If a firm uses this approach, the days past due element of the definition of default continues to apply, including the provisions relating to the fixed number of days past due referred to in BIPRU 4.3.57 R (4). A firm might make the use of a definition of default that takes into account the amount overdue consistent with the days past due element of the definition by setting the amount overdue at such a level that, taking into account:
it is not possible for any payment to be past due by a number of days exceeding the maximum amount specified in BIPRU for the purposes of the definition of default without there being a default under the part of the definition of default based on the amount overdue.
BIPRU 4.3.65
See Notes
BIPRU 4.3.66
See Notes
BIPRU 4.3.67
See Notes
- (1) The realisation or forfeiture of collateral may be taken as an indication of unlikeliness to pay for the purposes of the definition of default.
- (2) However, the realisation or forfeiture of collateral may not indicate unlikeliness to pay:
- (a) in the case of an exposure in a market (such as one that involves retail exposures involving margin lending) in which it is established practice for collateral to be sold if its value falls below a certain percentage of the exposure and the obligor does not restore the margin (but this exception does not apply if the value of the collateral has fallen below the amount outstanding); or
- (b) if the firm is able to demonstrate that for some other reason the realisation or forfeiture of collateral is not a meaningful indication of unlikeliness to pay.
BIPRU 4.3.68
See Notes
- (1) If an obligor approach is being taken with respect to retail exposures (that is, the application of the definition of default at an obligor level rather than at a facility level as set out in BIPRU 4.6.21 R,) a firm should ensure that the PD associated with unsecured exposures is not understated as a result of the presence of any collateralised exposures. A firm should be able to explain to the appropriate regulator, if asked, how it has ensured that its estimate of PD is appropriate for both secured and unsecured exposures covered by an obligor rating approach.
- (2) In the view of the appropriate regulator, firms typically find that the PD of a residential mortgage is lower than the PD of an unsecured loan to the same borrower.
BIPRU 4.3.69
See Notes
Risk quantification: Definition of default: Other provisions
BIPRU 4.3.70
See Notes
A firm must (if it uses external data that is not itself consistent with the definition of default) be able to demonstrate to the appropriate regulator that appropriate adjustments have been made that achieve broad equivalence with the definition of default.
[Note: BCD Annex VII Part 4 point 46]
BIPRU 4.3.71
See Notes
If a firm considers that a previously defaulted exposure is such that no trigger of default continues to apply, the firm must rate the obligor or facility as it would for a non-defaulted exposure. Should the definition of default subsequently be triggered, another default must be deemed to have occurred.
[Note: BCD Annex VII Part 4 point 47]
BIPRU 4.3.72
See Notes
Risk quantification: Overall requirements for estimation: General
BIPRU 4.3.73
See Notes
BIPRU 4.3.74 R to BIPRU 4.3.131 R apply to a firm's own estimates of risk parameters used in the IRB approach.
[Note: BCD Annex VII Part 4 point 43]
BIPRU 4.3.74
See Notes
A firm's own estimates of the risk parameters PD, LGD, conversion factor and EL must incorporate all relevant data, information and methods. The estimates must be derived using both historical experience and empirical evidence, and must not be based purely on judgemental considerations. The estimates must be plausible and intuitive and must be based on the material drivers of the respective risk parameters. The less data a firm has, the more conservative it must be in its estimation.
[Note: BCD Annex VII Part 4 point 49]
BIPRU 4.3.75
See Notes
- (1) This paragraph provides guidance on BIPRU 4.3.73 R.
- (2) Relevant data and information under BIPRU 4.3.73 R includes external data.
- (3) Where internal default and loss experience is scarce, a firm should consider using material relevant external information. When using external information such as industry averages when determining LGD or conversion factors, a firm should consider whether this data is appropriate to its own experience and whether adjustments are necessary.
BIPRU 4.3.76
See Notes
- (1) In calculating estimates of PD, LGD and conversion factors a firm must adjust the averages of historical experience referred to in the historical averages rules in order to ensure that those estimates are accurate estimates of the default rate, loss rate or conversion factor over the long-run.
- (2) The historical average rules means the requirements in BIPRU 4 relating to the calculation of PD, LGD and conversion factors using historical averages (and in particular BIPRU 4.4.24 R, BIPRU 4.4.30 R, BIPRU 4.8.7 R, BIPRU 4.8.8 R, BIPRU 4.6.24 R, BIPRU 4.6.27 R, BIPRU 4.3.99 R and BIPRU 4.3.125 R).
BIPRU 4.3.77
See Notes
BIPRU 4.3.78
See Notes
BIPRU 4.3.79
See Notes
BIPRU 4.3.80
See Notes
- (1) A firm must collect data on what it considers to be the main drivers of the risk parameters PD, LGD, conversion factor and EL for each group of obligors or facilities.
- (2) A firm must document its identification of the main drivers of risk parameters.
- (3) A firm must be able to demonstrate that its process of identification is reasonable and appropriate.
BIPRU 4.3.81
See Notes
BIPRU 4.3.82
See Notes
BIPRU 4.3.83
See Notes
A firm must be able to provide a breakdown of its loss experience in terms of default frequency, LGD, conversion factor, or loss where EL estimates are used, by the factors it sees as the drivers of the respective risk parameters. A firm must be able to demonstrate to the appropriate regulator that its estimates are representative of long-run experience.
[Note: BCD Annex VII Part 4 point 50]
BIPRU 4.3.84
See Notes
Any changes in lending practice or the process for pursuing recoveries over the observation periods referred to in BIPRU 4.4.31 R (Observation period for sovereigns, institutions and corporates for PDs), BIPRU 4.6.28 R (Observation period for retail exposures for PDs), BIPRU 4.4.54 R (Observation period for sovereigns, institutions and corporates for LGDs), BIPRU 4.6.33 R (Observation period for retail exposures for LGDs), BIPRU 4.4.55 R (Observation period for sovereigns, institutions and corporates for conversion factors) and BIPRU 4.6.38 R (Observation period for retail exposures for conversion factors) must be taken into account. A firm's estimates must reflect the implications of technical advances and new data and other information, as it becomes available. A firm must review its estimates when new information comes to light but at least on an annual basis.
[Note: BCD Annex VII Part 4 point 51]
BIPRU 4.3.85
See Notes
The population of exposures represented in the data used for estimation, the lending standards used when the data was generated and other relevant characteristics must be comparable with those of a firm's exposures and standards. A firm must also be able to demonstrate to the appropriate regulator that the economic or market conditions that underlie the data are relevant to current and foreseeable conditions. The number of exposures in the sample and the data period used for quantification must be sufficient to provide a firm with confidence in the accuracy and robustness of its estimates.
[Note: BCD Annex VII Part 4 point 52]
BIPRU 4.3.86
See Notes
BIPRU 4.3.87
See Notes
A firm should be able to demonstrate to the appropriate regulator:
- (1) how, with respect to each rating system, both assignment of ratings and estimates of PD, LGD and conversion factors are affected by:
- (a) movements in the economic cycle; and
- (b) other cyclical effects which are material to levels of default, loss or the amount of exposures at default for the exposures covered by the rating system; and
- (2) the level of conservatism inherent in its ratings, as provided for by BIPRU.
BIPRU 4.3.88
See Notes
BIPRU 4.3.89
See Notes
BIPRU 4.3.90
See Notes
If a firm uses different estimates for the calculation of risk weights and internal purposes it must be documented. The firm must be able to demonstrate to the appropriate regulator the reasonableness of such estimates.
[Note: BCD Annex VII Part 4 point 55]
BIPRU 4.3.91
See Notes
If a firm can demonstrate to the appropriate regulator that for data that has been collected prior to 31 December 2006, appropriate adjustments have been made to achieve broad equivalence with the definitions of default or loss, the appropriate regulator may in the IRB permission allow the firm some flexibility in the application of the required standards for data.
[Note: BCD Annex VII Part 4 point 56]
Risk quantification: Overall requirements for estimation: Pooled data
BIPRU 4.3.92
See Notes
If a firm uses data that is pooled across institutions it must be able to demonstrate to the appropriate regulator that:
- (1) the rating systems and criteria of other firms in the pool are similar to its own;
- (2) the pool is representative of the portfolio for which the pooled data is used; and
- (3) the pooled data is used consistently over time by the firm for its permanent estimates.
[Note: BCD Annex VII Part 4 point 57]
BIPRU 4.3.93
See Notes
BIPRU 4.3.94
See Notes
If a firm uses data that is pooled across institutions it remains responsible for the integrity of its rating systems. If a firm uses such data it must be able to demonstrate to the appropriate regulator that it has sufficient in-house understanding of its rating systems, including effective ability to monitor and audit the rating process.
[Note: BCD Annex VII Part 4 point 58]
Risk quantification: Overall requirements for estimation: Requirements specific to PD estimates
BIPRU 4.3.95
See Notes
- (1) If:
- (a) a firm's internal experience of exposures of a type covered by a model or other rating system is 20 defaults or fewer; and
- (b) in the firm's view, reliable estimates of PD cannot be derived from external sources of default data, including the use of market price related data, for all the exposures covered by the rating system;
- the firm must estimate PD for exposures covered by that rating system in accordance with this rule.
- (2) A firm must use a statistical technique to derive the distribution of defaults implied by the firm's experience, estimating PDs (the "statistical PD") from the upper bound of a confidence interval set by the firm in order to produce conservative estimates of PDs in accordance with BIPRU 4.3.88 R.
- (3) The techniques chosen for the purposes of (2) must take account, as a minimum, of the following modelling issues:
- (a) the number of defaults and number of obligor years in the sample;
- (b) the number of years from which the sample was drawn;
- (c) the interdependence between default events for individual obligors;
- (d) the interdependence between default rates for different years; and
- (e) the choice of the statistical estimators and the associated distributions and confidence intervals.
- (4) The firm must further adjust the statistical PD to the extent necessary to take account of the following:
- (a) any likely differences between the observed default rates over the period covered by the firm's default experience and the long-run PD for each grade in accordance with BIPRU 4.4.24 R and BIPRU 4.6.24 R; and
- (b) any other information that indicates (taking into account the robustness and cogency of that information) that the statistical PD is likely to be an inaccurate estimate of PD.
- (5) This rule is in addition to the other requirements in BIPRU about the calculation of PD.
- (6) When a firm calculates whether it has 20 defaults or fewer under the calculation in (1)(a), it must only take into account defaults that occurred during periods that are relevant to the validation under BIPRU 4 of the model or other rating system in question.
BIPRU 4.3.96
See Notes
BIPRU 4.3.97
See Notes
Risk quantification: Overall requirements for estimation: Requirements specific to own-LGD estimates
BIPRU 4.3.98
See Notes
BIPRU 4.3.99
See Notes
A firm must estimate LGDs by facility grade or pool on the basis of the average realised LGDs by facility grade or pool using all observed defaults within the data sources (default weighted average).
[Note: BCD Annex VII Part 4 point 73]
BIPRU 4.3.100
See Notes
BIPRU 4.3.101
See Notes
- (1) A firm's estimates of LGDs must take into account:
- (a) data in respect of relevant incomplete workouts; and
- (b) the possibility that the proportion of defaulted exposures which are cured (as referred to in BIPRU 4.3.71 R) or restructured (as referred to in BIPRU 4.3.63 R (5)) or the length of the period over which a firm makes recoveries under a defaulted exposure may be different from the firm's observed historic experience.
- (2) An incomplete workout as referred to in (1)(a) means a defaulted exposure included in the data set on which the firm's LGD estimates are based, but for which the recovery process is still in progress, with the result that the final realised losses in respect of that exposure are not yet certain.
BIPRU 4.3.102
See Notes
BIPRU 4.3.103
See Notes
A firm must use LGD estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver constant realised LGDs by grade or pool over time, a firm must make adjustments to its estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn.
[Note: BCD Annex VII Part 4 point 74]
BIPRU 4.3.104
See Notes
- (1) A firm must have a rigorous and well documented process for:
- (a) assessing the effects, if any, of economic downturn conditions on recovery rates; and
- (b) producing LGD estimates consistent with downturn conditions as referred to in BIPRU 4.3.103 R.
- (2) That process must include the following, which may be included in an integrated manner:
- (a) identification of appropriate downturn conditions for each IRB exposure class within each jurisdiction;
- (b) identification of adverse dependencies, if any, between default rates and recovery rates; and
- (c) incorporation of adverse dependencies, if identified, between default rates and recovery rates in the firm's estimates of LGD in a manner that meets the requirements in BIPRU 4.3.103 R relating to an economic downturn.
BIPRU 4.3.105
See Notes
BIPRU 4.3.106
See Notes
BIPRU 4.3.107
See Notes
BIPRU 4.3.108
See Notes
BIPRU 4.3.109
See Notes
BIPRU 4.3.110
See Notes
BIPRU 4.3.111
See Notes
BIPRU 4.3.112
See Notes
BIPRU 4.3.113
See Notes
BIPRU 4.3.114
See Notes
BIPRU 4.3.115
See Notes
BIPRU 4.3.116
See Notes
BIPRU 4.3.117
See Notes
BIPRU 4.3.118
See Notes
To the extent that LGD estimates take into account the existence of collateral, these estimates must not solely be based on the collateral's estimated market value. LGD estimates must take into account the effect of the potential inability of the firm expeditiously to gain control of its collateral and liquidate it.
[Note: BCD Annex VII Part 4 point 77]
BIPRU 4.3.119
See Notes
- (1) A firm may comply with BIPRU 4.3.118 R by reducing the amount of the collateral taken into account for the purposes of calculating LGD (applying a haircut to the collateral), basing that reduction on validated realisation experience and using conservatism to reflect the uncertainties.
- (2) If collateral is used to reduce the LGD, a firm should be able to demonstrate how the risk in BIPRU 4.3.118 R has been accounted for. To the extent that it is adequately accounted for in that way it need not be reflected again as part of the residual risk in relation to collateral under the overall Pillar 2 rule.
BIPRU 4.3.120
See Notes
To the extent that LGD estimates take into account the existence of collateral, a firm must establish internal requirements for collateral management, legal certainty and risk management that are generally consistent with those set out in BIPRU 5 (Credit risk mitigation) as modified by BIPRU 4.10.
[Note: BCD Annex VII Part 4 point 78]
BIPRU 4.3.121
See Notes
To the extent that a firm recognises collateral for determining the exposure value for counterparty credit risk according to the CCR standardised method or the CCR internal model method, any amount expected to be recovered from the collateral must not be taken into account in the LGD estimates.
[Note: BCD Annex VII Part 4 point 79]
BIPRU 4.3.122
See Notes
For the specific case of exposures already in default, a firm must use the sum of its best estimate of expected loss for each exposure given current economic circumstances and exposure status and the possibility of additional unexpected losses during the recovery period.
[Note: BCD Annex VII Part 4 point 80]
BIPRU 4.3.123
See Notes
Risk quantification: Overall requirements for estimation: Requirements specific to own-conversion factor estimates
BIPRU 4.3.124
See Notes
BIPRU 4.3.125
See Notes
A firm must estimate conversion factors by facility grade or pool on the basis of the average expected conversion factors by facility grade or pool using all observed defaults within the data sources (default weighted average).
[Note: BCD Annex VII Part 4 point 87]
BIPRU 4.3.126
See Notes
- (1) A firm using own estimates of conversion factors should take into account all facility types that may result in an exposure when an obligor defaults, including uncommitted facilities.
- (2) A firm should treat a facility as an exposure from the earliest date at which a customer is able to make drawings under it.
- (3) To the extent that a firm makes available multiple facilities, it should be able to demonstrate:
BIPRU 4.3.127
See Notes
A firm must use conversion factor estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver realised conversion factors at a constant level by grade or pool over time, a firm must make adjustments to its estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn.
[Note: BCD Annex VII Part 4 point 88]
BIPRU 4.3.128
See Notes
A firm's estimates of conversion factors must reflect the possibility of additional drawings by the obligor up to and after the time a default event is triggered. The conversion factor estimate must incorporate a larger margin of conservatism where a stronger positive correlation can reasonably be expected between the default frequency and the magnitude of conversion factor.
[Note: BCD Annex VII Part 4 point 89]
BIPRU 4.3.129
See Notes
[Note: BCD Annex VII Part 4 point 90]
BIPRU 4.3.130
See Notes
BIPRU 4.3.131
See Notes
If a firm uses different estimates of conversion factors for the calculation of risk weighted exposure amounts and internal purposes it must be documented. The firm must be able to demonstrate their reasonableness to the appropriate regulator.
[Note: BCD Annex VII Part 4 point 92]
Risk quantification: Overall requirements for estimation: Comparability
BIPRU 4.3.132
See Notes
- (1) This paragraph contains guidance about the interpretation of the requirements relating to comparability in BIPRU 4.3.85 R. It is also relevant to the requirement for representative data in BIPRU 4.3.51 R (5), to the references to comparability in the additional guidance in BIPRU 4.3.53 G (7)(b) and to the requirements for similarity in BIPRU 4.3.92 R.
- (2) In general, comparability should be based on analyses of the population of exposures represented in the data, the lending standards used when the data was generated (where relevant) and other relevant characteristics in relation to the corresponding properties of the firm's own portfolio. Other relevant characteristics could include the distribution of the obligors across industries, the size distribution of the exposures and similarity with respect to the geographic or demographic distribution of the exposures.
BIPRU 4.4
The IRB approach: Exposures to corporates, institutions and sovereigns
- 01/01/2007
Application
BIPRU 4.4.1
See Notes
- (1) This section applies with respect to the sovereign, institution and corporate IRB exposure class.
- (2) The sovereign, institution and corporate IRB exposure class includes specialised lending exposures.
- (3) Both BIPRU 4.4 and BIPRU 4.5 (Specialised lending exposures) apply to specialised lending exposures. A firm may calculate risk weighted exposure amounts for a specialised lending exposure either:
Definition
BIPRU 4.4.2
See Notes
The following exposures must be treated as exposures to central governments and central banks:
- (1) exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments under the standardised approach; and
- (2) exposures to multilateral development banks and international organisations which attract a risk weight of 0% under the standardised approach.
[Note: BCD Article 86(2)]
BIPRU 4.4.3
See Notes
The following exposures must be treated as exposures to institutions:
- (1) exposures to regional governments and local authorities which are not treated as exposures to central governments under the standardised approach;
- (2) exposures to public sector entities which are treated as exposures to institutions under the standardised approach;
- (3) exposures to multilateral development banks which do not attract a 0% risk weight under the standardised approach; and
- (4) without prejudice to BIPRU 13.3.13 R and BIPRU 13.8.7 R (Exposures to a central counterparty) exposures to recognised third country investment firms and exposures to recognised clearing houses and designated investment exchanges.
BIPRU 4.4.4
See Notes
Any credit obligation not assigned to the IRB exposure classes referred to in BIPRU 4.3.2 R (1) (Sovereigns), BIPRU 4.3.2 R (2) (Institutions) and BIPRU 4.3.2 R (4) - BIPRU 4.3.2 R (6) (Retail, equity and securitisations) must be assigned to the corporate exposure class.
[Note: BCD Article 86(7)]
Rating system: Structure of rating system
BIPRU 4.4.5
See Notes
BIPRU 4.4.6
See Notes
A rating system must take into account obligor and transaction risk characteristics.
[Note: BCD Annex VII Part 4 point 5]
BIPRU 4.4.7
See Notes
A rating system must have an obligor rating scale which reflects exclusively quantification of the risk of obligor default. The obligor rating scale must have a minimum of seven grades for non-defaulted obligors and one for defaulted obligors.
[Note: BCD Annex VII Part 4 point 6]
BIPRU 4.4.8
See Notes
An obligor grade means for the purpose of BIPRU 4 as it applies to the sovereign, institution and corporate IRB exposure class a risk category within a rating system's obligor rating scale, to which obligors are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. A firm must document both the relationship between obligor grades in terms of the level of default risk each grade implies and the criteria used to distinguish that level of default risk.
[Note: BCD Annex VII Part 4 point 7]
BIPRU 4.4.9
See Notes
A firm with portfolios concentrated in a particular market segment and range of default risk must have enough obligor grades within that range to avoid undue concentrations of obligors in a particular grade. Significant concentrations within a single grade must be supported by convincing empirical evidence that the obligor grade covers a reasonably narrow PD band and that the default risk posed by all obligors in the grade falls within that band.
[Note: BCD Annex VII Part 4 point 8]
Rating system: Assignment to grades or pools
BIPRU 4.4.10
See Notes
Rating system: Assignment of exposures
BIPRU 4.4.11
See Notes
Each obligor must be assigned to an obligor grade as part of the credit approval process.
[Note: BCD Annex VII Part 4 point 19]
BIPRU 4.4.12
See Notes
Each separate legal entity to which a firm is exposed must be separately rated. A firm must be able to demonstrate to the appropriate regulator that it has acceptable policies regarding the treatment of individual obligor clients and groups of connected clients.
[Note: BCD Annex VII Part 4 point 22]
BIPRU 4.4.13
See Notes
Separate exposures to the same obligor must be assigned to the same obligor grade, irrespective of any differences in the nature of each specific transaction. Exceptions, where separate exposures are allowed to result in multiple grades for the same obligor are:
- (1) country transfer risk, this being dependent on whether the exposures are denominated in local or foreign currency;
- (2) where the treatment of associated guarantees to an exposure may be reflected in an adjusted assignment to an obligor grade; and
- (3) where consumer protection, bank secrecy or other legislation prohibit the exchange of client data.
Rating system: Overrides
BIPRU 4.4.14
See Notes
Rating system: Integrity of assignment process
BIPRU 4.4.15
See Notes
Assignments and periodic reviews of assignments must be completed or approved by an independent party that does not directly benefit from decisions to extend the credit.
[Note: BCD Annex VII Part 4 point 26]
BIPRU 4.4.16
See Notes
BIPRU 4.4.17
See Notes
BIPRU 4.4.18
See Notes
A firm must have an effective process to obtain and update relevant information on obligor characteristics that affect PDs, and on transaction characteristics that affect LGDs and conversion factors.
[Note: BCD Annex VII Part 4 point 28]
Rating system: Use of models
BIPRU 4.4.19
See Notes
Rating system: Documentation of rating systems
BIPRU 4.4.20
See Notes
Rating system: Data maintenance
BIPRU 4.4.21
See Notes
In addition to complying with the material in BIPRU 4.3.54 R (Data maintenance) a firm must collect and store:
- (1) complete rating histories on obligors and recognised guarantors;
- (2) the dates the ratings were assigned;
- (3) the key data and methodology used to derive the rating;
- (4) the person responsible for the rating assignment;
- (5) the identity of obligors and exposures that defaulted;
- (6) the date and circumstances of such defaults;
- (7) data on the PDs and realised default rates associated with rating grades and ratings migration; and
- (8) (in the case of a firm not using the advanced IRB approach in the calculation of LGDs and/or conversion factors) data on comparisons of realised LGDs to the values as set out in BIPRU 4.4.34 R and BIPRU 4.8.25 R and realised conversion factors to the values as set out in BIPRU 4.4.37 R, BIPRU 4.4.45 R and BIPRU 4.6.44 R.
[Note: BCD Annex VII Part 4 point 37]
Risk quantification: Definition of default
BIPRU 4.4.22
See Notes
- (1) This rule, in accordance with BIPRU 4.3.57 R (4) (Definition of default), sets the exact number of days past due that a firm should abide by in the case of exposures to PSEs.
- (2) For counterparts that are PSEs situated within the United Kingdom the number of days past due is 180.
- (3) For counterparts that are PSEs situated in another EEA State the number of days past due is the lower of:
- (a) 180; and
- (b) the number of days past due fixed under the CRD implementation measure with respect to point 48 of Part 4 of Annex VII of the Banking Consolidation Directive for that EEA State for such exposures.
- (4) For counterparts that are PSEs in a state outside the EEA the number of days past due is the lower of:
- (a) 180; and
- (b) (if a number of days past due for such exposures has been fixed under any law of that state applicable to undertakings in the banking sector or the investment services sector that implements the IRB approach) that number.
[Note: BCD Annex VII Part 4 point 44 (part) and point 48 (part)]
Risk quantification: Overall requirements for estimation: Requirements specific to PD estimation
BIPRU 4.4.23
See Notes
BIPRU 4.4.24
See Notes
A firm must estimate PDs by obligor grade from long run averages of one-year default rates.
[Note: BCD Annex VII Part 4 point 59]
BIPRU 4.4.25
See Notes
BIPRU 4.4.26
See Notes
BIPRU 4.4.27
See Notes
To the extent that a firm uses data on internal default experience for the estimation of PDs it must be able to demonstrate in its analysis that the estimates are reflective of underwriting standards and of any differences in the rating system that generated the data and the current rating system. Where underwriting standards or rating systems have changed, a firm must add a greater margin of conservatism in its estimate of PD.
[Note: BCD Annex VII Part 4 point 63]
BIPRU 4.4.28
See Notes
To the extent that a firm associates or maps its internal grades to the scale used by an ECAI or similar organisations and then attributes the default rate observed for the external organisation's grades to the firm's grades, mappings must be based on a comparison of internal rating criteria to the criteria used by the external organisation and on a comparison of the internal and external ratings of any common obligors. Biases or inconsistencies in the mapping approach or underlying data must be avoided. The external organisation's criteria underlying the data used for quantification must be oriented to default risk only and not reflect transaction characteristics. The firm's analysis must include a comparison of the default definitions used, subject to the requirements in BIPRU 4.3.56 R to BIPRU 4.3.71 R and BIPRU 4.4.22 R (Definition of default). The firm must document the basis for the mapping.
[Note: BCD Annex VII Part 4 point 64]
BIPRU 4.4.29
See Notes
BIPRU 4.4.30
See Notes
To the extent that a firm uses statistical default prediction models it may estimate PDs as the simple average of default-probability estimates for individual obligors in a given grade. The firm's use of default probability models for this purpose must meet the standards specified in BIPRU 4.3.51 R.
[Note: BCD Annex VII Part 4 point 65]
BIPRU 4.4.31
See Notes
Irrespective of whether a firm is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation period spans a longer period for any source, and this data is relevant, this longer period must be used. A firm not permitted to use own estimates of LGDs or conversion factors may have, when it implements the IRB approach, relevant data covering a period of two years. The period to be covered must increase by one year each year until relevant data cover a period of five years.
[Note: BCD Annex VII Part 4 point 66 (part)]
IRB foundation approach: General
BIPRU 4.4.32
See Notes
BIPRU 4.4.33
See Notes
Under the foundation IRB approach a firm must apply the LGD values set out in BIPRU 4.4.34 R and BIPRU 4.8.25 R and the conversion factors set out in BIPRU 4.4.37 R.
[Note: BCD Article 87(8)]
IRB foundation approach: LGDs
BIPRU 4.4.34
See Notes
A firm must use the following LGD values:
- (1) senior exposures without eligible collateral, 45%;
- (2) subordinated exposures without eligible collateral, 75%;
- (3) a firm may recognise funded and unfunded credit protection in the LGD in accordance with BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10;
- (4) covered bonds may be assigned an LGD value of 11.25%; and
- (5) for certain senior corporate exposure purchased receivables, for certain subordinated corporate exposure purchased receivables and for dilution risk of corporate purchased receivables the provisions of BIPRU 4.8.25 R (LGDs for corporate receivables) apply.
[Note: BCD Annex VII Part 2 point 8 (part)]
Foundation IRB approach: Exposure value and conversion factors
BIPRU 4.4.36
See Notes
BIPRU 4.4.37
See Notes
- (1) The exposure value for the items set out in this rule must be calculated as the committed but undrawn amount multiplied by the applicable conversion factor set out in this rule.
- (2) For credit lines which are uncommitted, that are unconditionally cancellable at any time by the firm without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's credit worthiness, a conversion factor of 0 % applies. To apply a conversion factor of 0% a firm must actively monitor the financial condition of the obligor, and its internal control systems must enable it immediately to detect a deterioration in the credit quality of the obligor.
- (3) For short-term letters of credit arising from the movement of goods, a conversion factor of 20% applies for both the issuing and confirming firms.
- (4) For other credit lines, note issuance facilities (NIFs), and revolving underwriting facilities (RUFs), a conversion factor of 75% applies.
- (5) For undrawn purchase commitments for revolving purchased receivables falling under BIPRU 4.8.29 R, the conversion factor set out in that rule applies.
[Note: BCD Annex VII Part 3 point 9 (part)]
BIPRU 4.4.38
See Notes
Where a commitment refers to the extension of another commitment, the lower of the two conversion factors associated with the individual commitment must be used.
[Note: BCD Annex VII Part 3 point 10]
BIPRU 4.4.39
See Notes
For all off-balance sheet items other than mentioned in BIPRU 4.4.37 R, BIPRU 4.4.45 R, BIPRU 4.4.71 R - BIPRU 4.4.78 R, BIPRU 4.6.44 R, BIPRU 4.8.28 R and BIPRU 4.8.29 R, the exposure value must be the following percentage of its value:
- (1) 100% if it is a full risk item;
- (2) 50% if it is a medium risk item;
- (3) 20% if it is a medium/low risk item; and
- (4) 0% if it is a low risk item.
For the purposes of this rule the off-balance sheet items must be assigned to risk categories as indicated in BIPRU 3.7 (Classification of off-balance sheet items).
[Note: BCD Annex VII Part 3 point 11]
Advanced IRB approach: General
BIPRU 4.4.40
See Notes
BIPRU 4.4.41
See Notes
Under the advanced IRB approach a firm must use its own estimates of LGDs and conversion factors in accordance with BIPRU 4.
[Note: BCD Article 87(9)]
Advanced IRB approach: LGDs and PDs
BIPRU 4.4.42
See Notes
A firm using own LGD estimates under the advanced IRB approach may recognise unfunded credit protection by adjusting PDs subject to BIPRU 4.4.43 R.
[Note: BCD Annex VII Part 2 point 6]
BIPRU 4.4.43
See Notes
Notwithstanding BIPRU 4.4.34 R and BIPRU 4.8.25 R, if a firm's IRB permission permits it to use own LGD estimates under the advanced IRB approach for exposures to which BIPRU 4 applies and permits it to use the approach in this rule, unfunded credit protection may be recognised by adjusting PD and/or LGD estimates subject to the minimum IRB standards. A firm must not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor.
[Note: BCD Annex VII Part 2 point 10]
BIPRU 4.4.44
See Notes
Advanced IRB approach: Conversion factors
BIPRU 4.4.45
See Notes
If a firm uses its own estimates of conversion factors under the advanced IRB approach it must calculate the exposure value of off-balance sheet exposures calculated with the use of conversion factors by using its own estimates of conversion factors across different product types as mentioned in BIPRU 4.4.37 R and BIPRU 4.4.39 R (2) to BIPRU 4.4.39 R (4).
[Note: BCD Annex VII Part 3 point 9 (part)]
BIPRU 4.4.46
See Notes
Advanced IRB approach: Structure of the rating system
BIPRU 4.4.47
See Notes
BIPRU 4.4.48
See Notes
If a firm's IRB permission provides for it to use the advanced IRB approach for the calculation of LGDs, its rating system must incorporate a distinct facility rating scale which exclusively reflects LGD related transaction characteristics.
[Note: BCD Annex VII Part 4 point 9]
BIPRU 4.4.49
See Notes
A facility grade means for the purpose of the advanced IRB approach a risk category within a rating system's facility scale to which exposures are assigned on the basis of a specified and distinct set of rating criteria from which own estimates of LGDs are derived. The grade definition must include both a description of how exposures are assigned to the grade and of the criteria used to distinguish the level of risk across grades.
[Note: BCD Annex VII Part 4 point 10]
BIPRU 4.4.50
See Notes
Significant concentrations within a single facility grade must be supported by convincing empirical evidence that the facility grade covers a reasonably narrow LGD band, respectively, and that the risk posed by all exposures in the grade falls within that band.
[Note: BCD Annex VII Part 4 point 11]
Advanced IRB approach: Assignment of exposures
BIPRU 4.4.51
See Notes
For a firm permitted to use own estimates of LGDs or conversion factors under the advanced IRB approach, each exposure must be assigned to a facility grade as part of the credit approval process. This is in addition to the requirements in BIPRU 4.4.11 R - BIPRU 4.4.13 R.
[Note: BCD Annex VII Part 4 point 20]
BIPRU 4.4.52
See Notes
Advanced IRB approach: Data maintenance
BIPRU 4.4.53
See Notes
As well as complying with BIPRU 4.3.54 R and BIPRU 4.4.21 R (Data maintenance), a firm using own estimates of LGDs and/or conversion factors under the advanced IRB approach must collect and store:
- (1) complete histories of data on the facility ratings and LGD and conversion factor estimates associated with each rating scale;
- (2) the dates the ratings were assigned and the estimates were done;
- (3) the key data and methodology used to derive the facility ratings and LGD and conversion factor estimates;
- (4) the person who assigned the facility rating and the person who provided LGD and conversion factor estimates;
- (5) data on the estimated and realised LGDs and conversion factors associated with each defaulted exposure;
- (6) data on the LGD of the exposure before and after evaluation of the effects of a guarantee or credit derivative, for a firm that reflects the credit risk mitigating effects of guarantees or credit derivatives through LGD; and
- (7) data on the components of loss for each defaulted exposure.
[Note: BCD Annex VII Part 4 Point 38]
Advanced IRB approach: Requirements specific to own-LGD estimates
BIPRU 4.4.54
See Notes
In addition to the requirements in BIPRU 4.3.74 R - BIPRU 4.3.94 R (General requirements about risk quantification) and BIPRU 4.3.98 R - BIPRU 4.3.123 R (Requirements for risk quantification specific to own-LGD estimates), estimates of LGD must be based on data over a minimum of five years, increasing by one year each year after implementation until a minimum of seven years is reached, for at least one data source. If the available observation period spans a longer period for any source, and the data is relevant, this longer period must be used.
[Note: BCD Annex VII Part 4 point 82]
Advanced IRB approach: Requirements specific to own-conversion factor estimates
BIPRU 4.4.55
See Notes
In addition to the requirements in BIPRU 4.3.124 R - BIPRU 4.3.131 R (Requirements specific to own-conversion factor estimates), estimates of conversion factors must be based on data over a minimum of five years, increasing by one year each year after implementation until a minimum of seven years is reached, for at least one data source. If the available observation period spans a longer period for any source, and the data is relevant, this longer period must be used.
[Note: BCD Annex VII Part 4 point 93]
Calculations: General
BIPRU 4.4.56
See Notes
Calculations: Risk-weighted exposure amounts
BIPRU 4.4.57
See Notes
Subject to BIPRU 4.4.59 R to BIPRU 4.4.60 R, BIPRU 4.5.6 R, BIPRU 4.5.8 R - BIPRU 4.5.10 R (Risk weights for specialised lending), BIPRU 4.8.16 R, BIPRU 4.8.17 R (Risk weights for corporate exposure purchased receivables) and BIPRU 4.9.3 R (Securitisation: provision of credit protection), risk weighted exposure amounts must be calculated according to the formulae in the table in BIPRU 4.4.58 R and the adjustment formula in BIPRU 4.4.79 R (Double default).
[Note: BCD Annex VII Part 1 point 3]
BIPRU 4.4.58
See Notes
Table: Formulae for the calculation of risk weighted exposure amounts
This table belongs to BIPRU 4.4.57 R
Correlation (R) | 0.12 × (1 - EXP(-50*PD))/(1-EXP(-50)) + 0.24* | |
[1-(1-EXP(-50*PD))/(1-EXP(-50))] | ||
Maturity factor (b) | (0.11852-0.05478*1n(PD))2 | |
(LGD*N[(1-R)-0.5*G(PD)+(R/(1-R))0.5 *G(0.999)]-PD*LGD)* | ||
(1-1.5*b)-1*(1+(M-2.5)*b)*12.5*1.06 | ||
N(x) | denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that N(x) = z). | |
PD = 0 | For PD = 0, RW shall be: 0 | |
PD = 1 | For PD = 1: | |
(i) | for defaulted exposures where a firm applies the LGD values set out in BIPRU 4.4.32R and BIPRU 4.8.25R RW shall be: 0; | |
(ii) | for defaulted exposures where a firm uses its own estimates of LGDs, RW shall be: Max {0, 12.5 *(LGD-ELBE)}; | |
where ELBE must be the firm's best estimate of expected loss for the defaulted exposure according to BIPRU 4.3.122 R. |
[Note: BCD Annex VII Part 1 point 3]
BIPRU 4.4.59
See Notes
For exposures to companies where the total annual sales for the consolidated group of which the firm is a part is less than EUR 50 million a firm may use the following correlation formula for the calculation of risk weights for corporate exposures. In this formula S is expressed as total annual sales in millions of Euros with EUR 5 million < = S < = EUR 50 million. Reported sales of less than EUR 5 million must be treated as if they were equivalent to EUR 5 million. In accordance with BIPRU 4.8.21 R, for purchased receivables the total annual sales are the weighted average by individual exposures of the pool. The formula for the calculation of correlation (R) is:
0.12×(1-EXP(-50*PD))/(1-EXP(-50))+ 0.24*
[1-(1-EXP(-50*PD))/(1-EXP(-50))]
-0.04*(1-(S-5)/45)
[Note: BCD Annex VII Part 1 point 5 (part)]
BIPRU 4.4.60
See Notes
A firm must for the purpose of BIPRU 4.4.59 R substitute total assets of the consolidated group for total annual sales when total annual sales are not a meaningful indicator of firm size and total assets are a more meaningful indicator than total annual sales.
[Note: BCD Annex VII Part 1 point 5 (part)]
Calculations: Expected loss amounts
BIPRU 4.4.61
See Notes
Expected loss amounts must be calculated according to the formulae in the table in BIPRU 4.4.62 R.
[Note: BCD Annex VII Part 1 point 30 (part)]
BIPRU 4.4.62
See Notes
Table: Formulae for the calculation of expected loss amounts
This table belongs to BIPRU 4.4.61 R
Expected loss (EL) | equals PD×LGD |
Expected loss amount | equals EL×exposure value |
For defaulted exposures (PD = 1) where a firm uses its own estimates of LGDs, EL must be ELBE, the firm's best estimate of expected loss for the defaulted exposure according to BIPRU 4.3.122 R. | |
For exposures subject to the treatment set out in BIPRU 4.4.79 R (Double default) EL must be 0. |
[Note: BCD Annex VII Part 1 point 30 (part)]
Calculations: PD
BIPRU 4.4.63
See Notes
[Note: BCD Article 87(6) (part)]
BIPRU 4.4.64
See Notes
The PD of a corporate exposure or an exposure in the IRB exposure class referred to in BIPRU 4.3.2 R (2) (Institutions) must be at least 0.03%.
[Note: BCD Annex VII Part 2 point 2]
BIPRU 4.4.65
See Notes
BIPRU 4.4.66
See Notes
Subject to BIPRU 4.4.42 R (Advanced IRB approach: LGDs and PDs) a firm may recognise unfunded credit protection in the PD in accordance with the provisions of BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10. For dilution risk, however, a firm may also recognise unfunded credit protection providers which are specified in its IRB permission in addition to those indicated in the CRM eligibility conditions.
[Note: BCD Annex VII Part 2 point 5]
Calculations: Maturity
BIPRU 4.4.67
See Notes
- (1) A firm must calculate maturity (M) for each of the exposures referred to in this rule in accordance with this rule and subject to BIPRU 4.4.68 R to BIPRU 4.4.70 R. In all cases, M must be no greater than 5 years.
- (2) For an instrument subject to a cash flow schedule M must be calculated according to the following formula:
- (3) For derivatives subject to a master netting agreement M must be the weighted average remaining maturity of the exposure, where M must be at least 1 year. The notional amount of each exposure must be used for weighting the maturity.
- (4) For exposures arising from fully or nearly-fully collateralised financial derivative instruments transactions and fully or nearly-fully collateralised margin lending transactions which are subject to a master netting agreement M must be the weighted average remaining maturity of the transactions where M must be at least 10 days. For repurchase transactions or securities or commodities lending or borrowing transactions which are subject to a master netting agreement, M must be the weighted average remaining maturity of transactions, where M must be at least 5 days. The notional amount of each transaction must be used for weighting the maturity.
- (5) Where a firm uses the CCR internal model method to calculate the exposure values, M must be calculated for exposures to which a firm applies this method and for which the maturity of the longest-dated contract contained in the netting set is greater than one year according to the following formula:
dfk = the risk-free discount factor for future time period tk and the remaining symbols are defined in BIPRU 13.6.
- (6) Notwithstanding (7), a firm that uses a CCR internal model method model to calculate a one-sided credit valuation adjustment (CVA) may use the effective credit duration estimated by the model as M if permitted to do so by its CCR internal model method permission.
- (7) Subject to BIPRU 4.4.68 R, for netting sets in which all contracts have an original maturity of less than one year the formula in (2) must be applied.
- (8) If a firm is permitted under its IRB permission to use own PD estimates for corporate exposure purchased receivables, for drawn amounts M must equal the purchased receivables exposure weighted average maturity, where M must be at least 90 days. This same value of M must also be used for undrawn amounts under a committed purchase facility provided the facility contains effective covenants, early amortisation triggers, or other features that protect the purchasing firm against a significant deterioration in the quality of the future receivables it is required to purchase over the facility's term. Absent such effective protections, M for undrawn amounts must be calculated as the sum of the longest-dated potential receivable under the purchase agreement and the remaining maturity of the purchase facility, where M must be at least 90 days.
- (9) For any other instrument than mentioned in this rule or when a firm is not in a position to calculate M as set out in (2), M must be the maximum remaining time (in years) that the obligor is permitted to take fully to discharge its contractual obligations, where M must be at least 1 year.
- (10) Notwithstanding (2) and (9), M must be at least one-day for:
- (a) import letters of credit (including standby letters of credit issued for similar purposes) and acceptances under them;
- (b) export letters of credit confirmation and negotiation;
- (c) pre-shipment and post-shipment acceptances and financing;
- (d) export and import loans collateralised by underlying goods, up to a maximum maturity of 180 days; and
- (e) performance guarantees, bid bonds and other guarantees (including standby letters of credit issued for similar purposes) relating to the export and import of goods and services;
[Note: BCD Annex VII Part 2 point 13 (part)]
BIPRU 4.4.68
See Notes
Notwithstanding BIPRU 4.4.67 R (2) - (4) and (8)-(9), M must be at least one-day for:
- (1) fully or nearly-fully collateralised financial derivative instruments;
- (2) fully or nearly-fully collateralised margin lending transactions; and
- (3) repurchase transactions, securities or commodities lending or borrowing transactions,
provided the documentation requires daily remargining and daily revaluation and includes provisions that allow for the prompt liquidation or setoff of collateral in the event of default or failure to re-margin.
[Note: BCD Annex VII Part 2 point 14 (part)]
BIPRU 4.4.69
See Notes
The last paragraph of paragraph 14 of Part 2 of Annex VII of the Banking Consolidation Directive says: "In addition, for other short-term exposures specified by the competent authorities which are not part of the credit institution's ongoing financing of the obligor, M shall be at least one-day. A careful review of the particular circumstances shall be made in each case." BIPRU 4.4.67R (10) is currently the only instance where the appropriate regulator has specified any such short-term exposures.
[Note: BCD Annex VII Part 2 point 14 (part)]
BIPRU 4.4.70
See Notes
Maturity mismatches must be treated as specified in BIPRU 4.10 and BIPRU 5 (Credit risk mitigation).
[Note: BCD Annex VII Part 2 point 16]
Calculations: Exposure value
BIPRU 4.4.71
See Notes
Unless provided otherwise in BIPRU 4 the exposure value of on-balance sheet exposures must be measured gross of value adjustments. This also applies to assets purchased at a price different than the amount owed. For purchased assets, the difference between the amount owed and the net value recorded on the balance-sheet of the firm is denoted discount if the amount owed is larger, and premium if it is smaller.
[Note: BCD Annex VII Part 3 point 1]
BIPRU 4.4.72
See Notes
BIPRU 4.4.73
See Notes
Where a firm uses master netting agreements in relation to repurchase transactions or securities or commodities lending or borrowing transactions the exposure value must be calculated in accordance with BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10, and BIPRU 13.8.
[Note: BCD Annex VII Part 3 point 2]
BIPRU 4.4.74
See Notes
For on-balance sheet netting of loans and deposits a firm must apply for the calculation of the exposure value the methods set out in BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10.
[Note: BCD Annex VII Part 3 point 3]
BIPRU 4.4.75
See Notes
The exposure value for leases must be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in BIPRU 5.7.1 R (Eligibility), as modified by BIPRU 4.10.38 R and BIPRU 4.10.39 R (Unfunded credit protection: Eligibility of providers) regarding the eligibility of protection providers as well as the minimum requirements for recognising other types of guarantees provided in BIPRU 5.7.6 R (Minimum requirements: General) to BIPRU 5.7.12 R (Additional requirements for guarantees) should also be included in the minimum lease payments.
[Note: BCD Annex VII Part 3 point 4]
BIPRU 4.4.76
See Notes
Where an exposure takes the form of securities or commodities sold, posted or lent under repurchase transactions or securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, the exposure value must be the value of the securities or commodities determined in accordance with GENPRU 1.3 (Valuation). Where the financial collateral comprehensive method is used, the exposure value must be increased by the volatility adjustment appropriate to such securities or commodities as set out in BIPRU 4.10 and BIPRU 5 (Credit risk mitigation). The exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlements transactions and margin lending transactions must be determined in accordance with BIPRU 13.
[Note: BCD Annex VII Part 3 point 7]
BIPRU 4.4.77
See Notes
Notwithstanding BIPRU 4.4.76 R, the exposure value of credit risk exposures outstanding, as determined by the firm, with a central counterparty must be determined in accordance with BIPRU 13.3.3 R and BIPRU 13.8.8 R (Exposure to central counterparty), provided that the central counterparty's CCR exposures with all participants in its arrangements are fully collateralised on a daily basis.
[Note: BCD Annex VII Part 3 point 8]
BIPRU 4.4.78
See Notes
In the case of any financial derivative instrument, the exposure value must be determined by the methods set out in BIPRU 13.
[Note: BCD Annex VII Part 3 point 5]
Double default
BIPRU 4.4.79
See Notes
The risk weighted exposure amount for each exposure which meets the requirements set out in BIPRU 5.7.2 R and BIPRU 4.4.83 R (Double default) may be adjusted according to the following formula:
- (1) Risk weighted exposure amount = RW *exposure value * (0.15 + 160*PDpp)]
- (2) PDpp = PD of the protection provider
- (3) RW must be calculated using the relevant risk weight formula set out in BIPRU 4.4.57 R for the exposure, the PD of the obligor and the LGD of a comparable direct exposure to the protection provider. The maturity factor (b) must be calculated using the lower of the PD of the protection provider and the PD of the obligor.
[Note: BCD Annex VII Part 1 point 4]
BIPRU 4.4.80
See Notes
Notwithstanding BIPRU 4.4.34 R and BIPRU 4.4.43 R, for the purposes of BIPRU 4.4.79 R, the LGD of a comparable direct exposure to the protection provider shall either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor, depending upon whether in the event both the guarantor and the obligor default during the life of the hedged transaction available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or obligor, respectively
[Note: BCD Annex VII Part 2 point 11]
BIPRU 4.4.81
See Notes
For the purposes of BIPRU 4.4.79 R, M must be the effective maturity of the credit protection but at least 1 year.
[Note: BCD Annex VII Part 2 point 13 (part)]
BIPRU 4.4.82
See Notes
BIPRU 4.4.83
See Notes
An institution, an insurance undertaking (including an insurance undertaking that carries out reinsurance) or an export credit agency which fulfils the following conditions may be recognised as an eligible provider of unfunded credit protection which qualifies for the treatment set out in BIPRU 4.4.79 R:
- (1) the protection provider has sufficient expertise in providing unfunded credit protection;
- (2) the protection provider is regulated in a manner equivalent to the rules laid down in the Banking Consolidation Directive or had, at the time the credit protection was provided, a credit assessment by an eligible ECAI which is associated with credit quality step 3 or above under the rules for the risk weighting of exposures to corporates under the standardised approach;
- (3) the protection provider had, at the time the credit protection was provided, or for any period of time thereafter, an internal rating with a PD equivalent to or lower than that associated with credit quality step 2 or above under the rules for the risk weighting of exposures to corporates under the standardised approach;
- (4) the protection provider has an internal rating with a PD equivalent to or lower than that associated with credit quality step 3 or above under the rules for the risk weighting of exposures to corporates under the standardised approach;
For the purpose of this rule, credit protection provided by an export credit agency must not benefit from any explicit central government counter-guarantee.
[Note: BCD Annex VIII Part 1 point 29]
BIPRU 4.4.84
See Notes
BIPRU 4.4.85
See Notes
To be eligible for the treatment set out in BIPRU 4.4.79 R, credit protection deriving from a guarantee or credit derivative must meet the following conditions:
- (1) the underlying obligation must be to:
- (a) a corporate exposure, excluding an exposure to an insurance undertaking (including an insurance undertaking that carries out reinsurance); or
- (b) an exposure to a regional government, local authority or public sector entity which is not treated as an exposure to a central government or a central bank according to BIPRU 4.4.2 R; or
- (c) an exposure to retail SME, classified as a retail exposure according to BIPRU 4.6.2 R;
- (2) the underlying obligors must not be members of the same group as the protection provider;
- (3) the exposure must be hedged by one of the following instruments:
- (a) single name unfunded credit derivatives or single name guarantees;
- (b) first to default basket products, with these the treatment must be applied to the asset within the basket with the lowest risk weighted exposure amount;
- (c) nth to default basket products, with these the protection obtained is only eligible for consideration under this framework if eligible (n-1)th default protection has also been obtained or where (n-1) of the assets within the basket has/have already defaulted and where this is the case the treatment must be applied to the asset within the basket with the lowest risk weighted exposure amount;
- (4) the credit protection must meet the requirements set out in BIPRU 5.7.6 R - BIPRU 5.7.8 R (Minimum requirements: Operational requirements), BIPRU 5.7.11 R (Additional requirements for guarantees) and BIPRU 5.7.13 R - BIPRU 5.7.14 R (Additional requirements for credit derivatives);
- (5) the risk weight that is associated with the exposure prior to the application of the treatment in BIPRU 4.4.79 R does not already factor in any aspect of the credit protection;
- (6) a firm must have the right and expectation to receive payment from the protection provider without having to take legal action in order to pursue the counterparty for payment;
- (7) the purchased credit protection must absorb all credit losses incurred on the hedged portion of an exposure that arise due to the occurrence of credit events outlined in the contract;
- (8) if the payout structure provides for physical settlement, then there must be legal certainty with respect to the deliverability of a loan, bond or contingent liability and if a firm intends to deliver an obligation other than the underlying exposure, it must ensure that the deliverable obligation is sufficiently liquid so that the firm would have the ability to purchase it for delivery in accordance with the contract;
- (9) the terms and conditions of credit protection arrangements must be legally confirmed in writing by both the protection provider and the firm;
- (10) a firm must have a process in place to detect excessive correlation between the creditworthiness of a protection provider and the obligor of the underlying exposure due to their performance being dependent on common factors beyond the systematic risk factor;
- (11) in the case of protection against dilution risk, the seller of purchased receivables must not be a member of the same group as the protection provider; and
- (12) with reference to (6), to the extent possible, a firm must take steps to satisfy itself that the protection provider is willing to pay promptly should a credit event occur.
[Note: BCD Annex VIII Part 2 point 22]
BIPRU 4.5
The IRB approach: Specialised lending exposures
- 01/01/2007
Application
BIPRU 4.5.1
See Notes
BIPRU 4.5.2
See Notes
Definition of specialised lending
BIPRU 4.5.3
See Notes
Within the corporate exposure IRB exposure class, a firm must separately identify as specialised lending exposures, exposures which possess the following characteristics:
- (1) the exposure is to an entity which was created specifically to finance and/or operate physical assets;
- (2) the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate; and
- (3) the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise.
[Note: BCD Article 86(6)]
Treatment of specialised lending
BIPRU 4.5.4
See Notes
Structure of rating system
BIPRU 4.5.5
See Notes
A firm using the methods set out in BIPRU 4.5.8 R (Slotting) for assigning risk weights for specialised lending exposures is exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for these exposures. Notwithstanding BIPRU 4.4.7 R (Seven grades for exposures to sovereigns, institutions and corporates), a firm must have for these exposures four grades for non-defaulted obligors and one grade for defaulted obligors.
[Note: BCD Annex VII Part 4 point 12 and point 21]
Assignment of exposures
BIPRU 4.5.6
See Notes
- (1) A firm using the methods set out in BIPRU 4.5.8 R (Slotting) for assigning risk weights for specialised lending exposures must assign each of these exposures to a grade in accordance with BIPRU 4 Annex 1 R, taking into account the following factors:
- (a) financial strength;
- (b) political and legal environment;
- (c) transaction and/or asset characteristics;
- (d) strength of the sponsor and developer including any public private partnership income stream; and
- (e) security package.
- (2) A firm must slot exposures into the five columns in the tables in BIPRU 4.5.9 R and BIPRU 4.5.13 R as follows:
- (a) a firm must slot an exposure categorised as strong under Annex X into column 1;
- (b) a firm must slot an exposure categorised as good under the Annex X into column 2;
- (c) a firm must slot an exposure categorised as satisfactory under Annex X into column 3;
- (d) a firm must slot an exposure categorised as weak under Annex X into column 4;
- (e) in accordance with BIPRU 4.5.5 R a firm must slot an exposure in default into column 5.
[Note: BCD Annex VII Part 1 point 6 (part)]
Calculation of risk-weighted exposure amounts
BIPRU 4.5.7
See Notes
Notwithstanding BIPRU 4.3.5 R (Use of relevant parameters for calculating risk weighted exposure amounts), the calculation of risk weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance with BIPRU 4.5.8 R.
[Note: BCD Article 87(5)]
BIPRU 4.5.8
See Notes
For specialised lending exposures in respect of which a firm cannot demonstrate that its PD estimates meet the minimum IRB standards it must assign risk weights to these exposures according to the table in BIPRU 4.5.9 R.
[Note: BCD Annex VII Part 1 point 6 (part)]
BIPRU 4.5.9
See Notes
Table: Risk weights for specialised lending
This table belongs to BIPRU 4.5.8 R
Remaining maturity | Category 1 (Strong) | Category 2 (Good) | Category 3 (Satisfactory) | Category 4 (Weak) | Category 5 |
Less than 2.5 years | 50% | 70% | 115% | 250% | 0% |
Equal or more than 2.5 years | 70% | 90% | 115% | 250% | 0% |
The coverage of each of the categories is set out in BIPRU 4.5.6 R |
[Note: BCD Annex VII Part 1 point 6 (part)]
BIPRU 4.5.10
See Notes
A firm may generally assign preferential risk weights of 50% to exposures in category 1, and a 70% risk weight to exposures in category 2 if:
- (1) its IRB permission allows this; and
- (2) the firm's underwriting characteristics and other risk characteristics are substantially strong for the relevant category.
[Note: BCD Annex VII Part 1 point 6 (part)]
BIPRU 4.5.11
See Notes
- (1) If a firm applies for an IRB permission or for a variation of an IRB permission that permits the treatment in BIPRU 4.5.10 R it should demonstrate that its standards exceed those of the slotting criteria provided for in BIPRU 4.5 and result in ratings that are stronger than the benchmarks referred to in (3).
- (2) If a firm has an IRB permission that permits the treatment in BIPRU 4.5.10 R it should continue to be able to demonstrate the matters in (1) to the appropriate regulator if asked.
- (3) Although a firm should map its internal ratings to the supervisory categories set out in the table in BIPRU 4.5.9 R using the slotting criteria provided in BIPRU 4.5.6 R, each supervisory category broadly corresponds to a range of external credit assessments of BBB- or better, BB+ or BB, BB- or B+ and B to C- (or their equivalents). The fifth category covers default.
Calculation of expected loss amounts
BIPRU 4.5.12
See Notes
The EL values for specialised lending exposures where a firm uses the methods set out in BIPRU 4.5.8 R for assigning risk weights must be assigned according to the table in BIPRU 4.5.13 R.
[Note: BCD Annex VII Part 1 point 31 (part)]
BIPRU 4.5.13
See Notes
Table: Expected loss values for specialised lending
This table belongs to BIPRU 4.5.12 R
Remaining maturity | Category 1 (Strong) | Category 2 (Good) | Category 3 (Satisfactory) | Category 4 (Weak) | Category 5 |
Less than 2.5 years | 0% | 0.4% | 2.8% | 8% | 50% |
Equal or more than 2.5 years | 0.4% | 0.8% | 2.8% | 8% | 50% |
The coverage of each of the categories is set out in BIPRU 4.5.6 R |
[Note: BCD Annex VII Part 1 point 31 (part)]
BIPRU 4.5.14
See Notes
Where a firm's IRB permission authorises it generally to assign preferential risk weights as outlined in BIPRU 4.5.10 R of 50% to exposures in category 1, and 70% to exposures in category 2, the EL value for exposures in category 1 must be 0%, and for exposures in category 2 must be 0.4%.
[Note: BCD Annex VII Part 1 point 31 (part)]
BIPRU 4.6
The IRB approach: Retail exposures
- 01/01/2007
Application
BIPRU 4.6.1
See Notes
Definition of retail exposures
BIPRU 4.6.2
See Notes
To be eligible to be treated as a retail exposure, exposures must meet the following criteria:
- (1) they must be either to an individual person or persons, or to a small or medium sized entity, provided in the latter case that the total amount owed to the firm and parent undertaking and its subsidiary undertakings, including any past due exposure, by the obligor client or group of connected clients, but excluding claims or contingent claims secured on residential real estate collateral, must not, to the knowledge of the firm, which must have taken reasonable steps to confirm the situation, exceed EUR 1 million;
- (2) they are treated by the firm in its risk management consistently over time and in a similar manner;
- (3) they are not managed just as individually as exposures in the corporate exposure IRB exposure class; and
- (4) they each represent one of a significant number of similarly managed exposures.
[Note: BCD Article 86(4) (part)]
BIPRU 4.6.3
See Notes
The present value of retail minimum lease payments is eligible to be treated as a retail exposure.
[Note: BCD Article 86(4) (part)]
BIPRU 4.6.4
See Notes
- (1) This paragraph sets out guidance on BIPRU 4.6.2 R so far as it relates to the boundary between retail exposures and corporate exposures.
- (2) In deciding what steps are reasonable for the purposes of BIPRU 4.6.2 R (1), a firm may take into account complexity and cost, as well as the materiality of the impact upon its capital calculation. A firm should be able to demonstrate to the appropriate regulator that it has complied with the obligation to take reasonable steps under BIPRU 4.6.2 R (1) in the way it takes these factors into account.
- (3) If a firm has exposures to an owner of a retail SME in his personal capacity and exposures to the retail SME the firm should aggregate the two types of exposure for the purpose of BIPRU 4.6.2 R (1), although it should not include claims secured on residential real estate collateral. In deciding what steps are reasonable for the purposes of BIPRU 4.6.2 R (1) in aggregating these two types of exposure, a firm may take into account the materiality of those personal exposures. A firm should be able to demonstrate to the appropriate regulator that it has complied with the obligation to take reasonable steps under BIPRU 4.6.2 R (1) when taking into account materiality in this way.
- (4) The definition of group of connected clients is set out in the glossary. Paragraph (2) of that definition is "two or more persons ... who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties". Say that a firm has exposures to A and B. When deciding whether A and B come within paragraph (2) of the definition two conditions should be satisfied. Firstly the connections between A and B should mean that if A experiences financial problems, B should be likely to encounter repayment difficulties. Secondly, the connections between A and B should mean that if B experiences financial problems, A should be likely to encounter repayment difficulties
- (5) A firm should have its own documented policy on the types of exposures that, in accordance with BIPRU 4.6, qualify as retail SME exposures. The appropriate regulator would not expect that a definition based on the EUR 1m exposure limit would be adequate on its own.
- (6) The purpose of the definition of retail exposure is to separate a non-granular retail and small and medium sized business portfolio from other business so that a separate capital calculation may be applied to that portfolio that takes into account its non-granularity. Where retail exposures are assigned to pools it is the statistical characteristics of these pools which are used to derive the IRB approach estimates. Therefore pools should be reasonably homogenous and subject to consistent risk management practices.
- (7) A firm should have sufficient controls to ensure that any inadvertent assignment of non-eligible exposures to the retail exposure IRB exposure class is sufficiently immaterial that it does not result in any significant distortion of the overall statistical characteristics of the sub-sets of that IRB exposure class which arise when the exposures are assigned to grades or pools. Cost considerations do not justify inclusion of non-eligible exposures if the effect would be material. Sample testing could be one method of demonstrating that the impact would be immaterial. BIPRU 4.1.25 R applies to exposures treated in accordance with this sub-paragraph (7).
- (8) If an exposure to a small or medium sized business crosses the retail exposure size boundary it should be treated as a corporate, unless, in accordance with BIPRU 4.1.25 R, the excess is immaterial because of its size or because it is temporary.
- (9) BIPRU 4.6.2 R does not require that exposures to retail SMEs should never be individually managed. In deciding whether the frequency and extent of individual management does or does not make exposures ineligible for the retail exposure IRB exposure class, a firm should consider whether that individual management is:
- (a) sufficiently insignificant not to disrupt the homogeneity of the pool;
- (b) consistent with the management of other exposures in the same retail exposure pool; and
- (c) significantly different in extent from the individual management that occurs for corporate exposures, looked at as a whole.
- (10) Where an exposure is denominated in other currencies, a firm may calculate the Euro equivalent for the purposes of BIPRU 4.6.2 R (1) using any appropriate set of exchange rates provided its choice has no obvious bias and that the firm is consistent in its approach to choosing rates.
- (11) A firm may monitor compliance with the €1m threshold in BIPRU 4.6.2 R (1) on the basis of approved limits provided that it has internal control procedures that are sufficient to ensure that amounts owed cannot diverge from those approved limits to such an extent as to give rise to a breach of the €1m threshold or, if the firm is relying on provisions relating to reasonable steps in BIPRU 4.6.2 R (1), any material breach of that threshold.
Rating system: Structure of rating system
BIPRU 4.6.5
See Notes
Rating system: Assignment to grades or pools
BIPRU 4.6.6
See Notes
Rating systems must reflect both obligor and transaction risk, and must capture all relevant obligor and transaction characteristics.
[Note: BCD Annex VII Part 4 point 13]
BIPRU 4.6.7
See Notes
The level of risk differentiation must ensure that the number of exposures in a given grade or pool is sufficient to allow for meaningful quantification and validation of the loss characteristics at the grade or pool level. The distribution of exposures and obligors across grades or pools must be such as to avoid excessive concentrations.
[Note: BCD Annex VII Part 4 point 14]
BIPRU 4.6.8
See Notes
- (1) This paragraph contains guidance on the level of differentiation referred to in BIPRU 4.6.7 R.
- (2) It is important that a firm achieves adequate segmentation to deliver robust estimates of LGD and conversion factors, as well as PD. Whether the focus should be more on exposure size or collateral type is a question of fact for the particular circumstances in which the assignment of exposures to grades or pools occurs. Typically the appropriate regulator would expect both to be important.
- (3) A firm may allocate retail exposures to pools based on direct estimates of PD, LGD and conversion factors as well as using an approach under which the firm segments first and attributes PD, LGD and conversion factors afterwards. However the result should in either case be that the pools are sufficiently homogenous.
- (4) The number and size of pools should be determined in relation to the objective of establishing homogeneous risk. Pools should be of sufficient size to permit the production of robust risk estimates but should not be so large as to obscure variations in quality.
BIPRU 4.6.9
See Notes
A firm must be able to demonstrate to the appropriate regulator that the process of assigning exposures to grades or pools provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at grade or pool level.
[Note: BCD Annex VII Part 4 point 15 (part)]
BIPRU 4.6.10
See Notes
BIPRU 4.6.11
See Notes
- (1) A firm must consider the following risk drivers when assigning exposures to grades or pools:
- (a) obligor risk characteristics;
- (b) transaction risk characteristics, including product or collateral types or both; and
- (c) delinquency.
- (2) In the case of (1)(b) a firm must explicitly address cases where several exposures benefit from the same collateral.
- (3) However:
- (a) a firm need not consider delinquency if this is compatible with its IRB permission; and
- (b) (in the case of a firm with an IRB permission that permits the firm not to consider delinquency) it should be able to demonstrate to the appropriate regulator that delinquency is not a material risk driver for the exposures treated in this way.
[Note: BCD Annex VII Part 4 Point 16]
Rating system: Assignment of exposures
BIPRU 4.6.12
See Notes
Rating system: Overrides
BIPRU 4.6.13
See Notes
Rating system: Integrity of assignment process
BIPRU 4.6.14
See Notes
A firm must at least annually update obligor and facility assignments or review the loss characteristics and delinquency status of each identified risk pool whichever is applicable. A firm must also at least annually review in a representative sample the status of individual exposures within each pool as a means of ensuring that exposures continue to be assigned to the correct pool.
[Note: BCD Annex VII Part 4 point 29]
BIPRU 4.6.15
See Notes
Rating system: Use of models
BIPRU 4.6.16
See Notes
Rating system: Documentation
BIPRU 4.6.17
See Notes
Rating system: Data maintenance
BIPRU 4.6.18
See Notes
In addition to complying with BIPRU 4.3.54 R (Data maintenance) a firm must collect and store:
- (1) data used in the process of allocating exposures to grades or pools;
- (2) data on the estimated PDs, LGDs and conversion factors associated with grades or pools of exposures;
- (3) the identity of obligors and exposures that defaulted;
- (4) for defaulted exposures, data on the grades or pools to which the exposure was assigned over the year prior to default and the realised outcomes on LGD and conversion factor; and
- (5) data on loss rates for qualifying revolving retail exposures.
[Note: BCD Annex VII Part 4 point 39]
Risk quantification: Definition of default
BIPRU 4.6.19
See Notes
BIPRU 4.6.20
See Notes
- (1) This rule, in accordance with BIPRU 4.3.57 R (4) (Definition of default), sets the exact number of days past due that a firm must abide by in the case of retail exposures.
- (2) For retail exposures to counterparts situated within the United Kingdom the number of days past due is 180 days with the exception of retail SME exposures. For these exposures the number is 90 days.
- (3) For retail exposures to counterparts situated in another EEA State the number of days past due is the lower of:
- (a) 180; and
- (b) the number of days past due fixed under the CRD implementation measure in that EEA State with respect to paragraph 48 of Part 4 of Annex VII of the Banking Consolidation Directive for such exposures.
- (4) For retail exposures to counterparts in a state outside the EEA the number of days past due is the lower of:
- (a) 180; and
- (b) (if a number of days past due for such exposures has been fixed under any national law of that state applicable to undertakings in the banking sector or the investment services sector that implements the IRB approach) that number.
[Note: BCD Annex VII Part 4 point 44 (part) and point 48 (part)]
BIPRU 4.6.21
See Notes
BIPRU 4.6.22
See Notes
Risk quantification: Overall requirements for estimation
BIPRU 4.6.23
See Notes
Risk quantification: Requirements specific to PD estimation
BIPRU 4.6.24
See Notes
BIPRU 4.6.25
See Notes
Notwithstanding BIPRU 4.6.24 R, PD estimates may also be derived from realised losses and appropriate estimates of LGDs.
[Note: BCD Annex VII Part 4 point 68]
BIPRU 4.6.26
See Notes
A firm must regard internal data for assigning exposures to grades or pools as the primary source of information for estimating loss characteristics. A firm may use external data (including pooled data) or statistical models for quantification provided a strong link can be demonstrated between:
[Note: BCD Annex VII Part 4 point 69]
BIPRU 4.6.27
See Notes
If a firm derives long run average estimates of PD and LGD for retail exposures from an estimate of total losses, and an appropriate estimate of PD or LGD, the process for estimating total losses must meet the minimum IRB standards for estimation of PD and LGD, and the outcome must be consistent with the concept of LGD as set out in BIPRU 4.3.99 R (Default weighted average).
[Note: BCD Annex VII Part 4 point 70]
BIPRU 4.6.28
See Notes
Irrespective of whether a firm is using external, internal, pooled data sources or a combination of the three, for its estimation of loss characteristics, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation spans a longer period for any source, and these data are relevant, this longer period must be used. However:
- (1) a firm need not give equal importance to historic data if this is compatible with its IRB permission; and
- (2) (in the case of a firm with an IRB permission that permits this treatment of historic data) the firm must be able to convince the appropriate regulator that more recent data is a better predictor of loss rates.
[Note: BCD Annex VII Part 4 point 71 (part)]
BIPRU 4.6.29
See Notes
A firm may have, when implementing the IRB approach, relevant data covering a period of two years. The period to be covered must increase by one year each year until relevant data covers a period of five years.
[Note: BCD Annex VII Part 4 point 71 (part)]
BIPRU 4.6.30
See Notes
Risk quantification: Requirements specific to own-LGD estimation
BIPRU 4.6.31
See Notes
Notwithstanding BIPRU 4.3.99 R (Default weighted average), LGD estimates may be derived from realised losses and appropriate estimates of PDs.
[Note: BCD Annex VII Part 4 point 83]
BIPRU 4.6.32
See Notes
Notwithstanding BIPRU 4.3.128 R (Additional drawings), a firm may reflect future drawings either in its conversion factor or in its LGD estimates.
[Note: BCD Annex VII Part 4 point 84]
BIPRU 4.6.33
See Notes
Estimates of LGD must be based on data over a minimum of five years. Notwithstanding BIPRU 4.3.99 R (Default weighted average):
- (1) a firm need not give equal importance to historic data if this is permitted by its IRB permission; and
- (2) (in the case of a firm with an IRB permission that permits this treatment of historic data) the firm must be able to convince the appropriate regulator that more recent data is a better predictor of loss rates.
[Note: BCD Annex VII Part 4 point 86 (part)]
BIPRU 4.6.34
See Notes
A firm may have, when it implements the IRB approach, relevant data covering a period of two years. The period to be covered must increase by one year each year until relevant data covers a period of five years.
[Note: BCD Annex VII Part 4 point 86 (part)]
BIPRU 4.6.35
See Notes
BIPRU 4.6.36
See Notes
Risk quantification: Requirements specific to own-conversion factor estimates
BIPRU 4.6.37
See Notes
Notwithstanding BIPRU 4.3.128 R (Additional drawings), a firm may reflect future drawings either in its conversion factors or in its LGD estimates.
[Note: BCD Annex VII Part 4 point 94]
BIPRU 4.6.38
See Notes
Estimates of conversion factors must be based on data over a minimum of five years. Notwithstanding BIPRU 4.3.125 R:
- (1) a firm need not give equal importance to historic data if this is permitted by its IRB permission; and
- (2) (in the case of a firm with an IRB permission that permits this treatment of historic data) the firm must be able to convince the appropriate regulator if asked that more recent data is a better predictor of loss rates.
[Note: BCD Annex VII Part 4 point 95 (part)]
BIPRU 4.6.39
See Notes
A firm may have, when it implements the IRB approach, relevant data covering a period of two years. The period to be covered must increase by one year each year until relevant data cover a period of five years.
[Note: BCD Annex VII Part 4 point 95 (part)]
BIPRU 4.6.40
See Notes
Calculation of risk weighted exposure amounts for retail exposures: General
BIPRU 4.6.41
See Notes
Subject to BIPRU 4.6.43 R and BIPRU 4.6.44 R, the risk weighted exposure amounts for retail exposures must be calculated according to the formulae in the table in BIPRU 4.6.42 R.
[Note: BCD Annex VII Part 1 point 10 1st sentence]
BIPRU 4.6.42
See Notes
Table: Risk weighted exposure amounts for retail exposures
This table belongs to BIPRU 4.6.41 R
Correlation (R) | 0.03 × (1 - EXP(-35*PD))/(1-EXP(-35)) + 0.16* |
[1-(1-EXP(-35*PD))/(1-EXP(-35))] | |
Risk weight (RW) | (LGD*N[(1-R)-0.5*G(PD)+(R/(1-R))0.5 *G(0.999)]-PD*LGD)* 12.5*1.06 |
N(x) | denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). |
G(z) | denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that N(x) = z). |
PD = 1 | For PD = 1 (defaulted exposure), RW must be: Max {0, 12.5 *(LGD- ELBE)} where ELBE must be the firm's best estimate of expected loss for the defaulted exposure according to BIPRU 4.3.122 R. |
Risk weighted exposure amount | equals RW*exposure value |
[Note: BCD Annex VII Part 1 point 10 (part)]
Calculation of risk weighted exposure amounts for retail exposures: Retail mortgages
BIPRU 4.6.43
See Notes
For retail exposures secured by real estate collateral a correlation (R) of 0.15 must replace the correlation formula in the table in BIPRU 4.6.42 R.
[Note: BCD Annex VII Part 1 point 12]
Calculation of risk weighted exposure amounts for retail exposures: Qualifying revolving retail exposures
BIPRU 4.6.44
See Notes
- (1) For qualifying revolving retail exposures a correlation (R) of 0.04 must replace the correlation formula in the table in BIPRU 4.6.42 R.
- (2) Retail exposures qualify as qualifying revolving retail exposures if they meet the following conditions:
- (a) the IRB permission of the firm in question does not disapply this paragraph;
- (b) the exposures are to individuals;
- (c) the exposures are revolving, unsecured, and, to the extent they are not drawn, immediately and unconditionally cancellable by the firm;
- (d) the maximum exposure to a single individual in the sub-portfolio is EUR 100,000 or less;
- (e) the firm is able to demonstrate to the appropriate regulator that the use of the correlation formula in this paragraph is limited to portfolios that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially within the low PD bands; and
- (f) the firm is able to demonstrate to the appropriate regulator that treatment as a qualifying revolving retail exposure is consistent with the underlying risk characteristics of the sub-portfolio.
- (3) In the context of this rule revolving exposures are defined as those where customers' outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the firm in question. Undrawn commitments may be considered as unconditionally cancellable if the terms permit the firm to cancel them to the full extent allowable under consumer protection and related legislation.
[Note: BCD Annex VII Part 1 point 13 (part) and Part 3 point 9(a) (part)]
BIPRU 4.6.45
See Notes
BIPRU 4.6.46
See Notes
Calculation of expected loss amounts
BIPRU 4.6.47
See Notes
Expected loss amounts must be calculated according to the formulae in the table in BIPRU 4.6.48 R.
[Note: BCD Annex VII Part 1 point 30 (part)]
BIPRU 4.6.48
See Notes
Table: Formulae for the calculation of expected loss amounts
This table belongs to BIPRU 4.6.47 R
Expected loss (EL) | equals PD×LGD |
Expected loss amount | equals EL×exposure value |
For defaulted exposures (PD = 1) where a firm uses its own estimates of LGDs, EL must be ELBE, the firm's best estimate of expected loss for the defaulted exposure according to BIPRU 4.3.122 R. For exposures subject to the treatment set out in BIPRU 4.4.79 R (Double default) EL must be 0. |
[Note: BCD Annex VII Part 1 point 30 (part)]
Calculation of PDs
BIPRU 4.6.49
See Notes
A firm must provide its own estimates of PDs in accordance with its IRB permission and the minimum IRB standards.
[Note: BCD Article 87(6) (part)]
BIPRU 4.6.50
See Notes
BIPRU 4.6.51
See Notes
BIPRU 4.6.52
See Notes
Unfunded credit protection may be recognised by adjusting PDs subject to BIPRU 4.6.54 R. For dilution risk, where a firm does not use its own estimates of LGDs, this must be subject to compliance with BIPRU 5 (Credit risk mitigation) modified by BIPRU 4.10 and, for this purpose, a firm may recognise unfunded credit protection providers other than those indicated in the CRM eligibility conditions provided the firm is able to demonstrate that the unfunded protection provider giving the undertaking is sufficiently reliable and that the protection agreement is legally effective in accordance with BIPRU 5.2.7 R (Unfunded credit protection).
[Note: BCD Annex VII Part 2 point 20]
Calculation of LGDs
BIPRU 4.6.53
See Notes
A firm must provide its own estimates of LGDs in accordance with its IRB permission and the minimum IRB standards.
[Note: BCD Article 87(7) (part)]
BIPRU 4.6.54
See Notes
Unfunded credit protection may be recognised as eligible by adjusting PD or LGD estimates subject to the minimum IRB standards as specified in BIPRU 4.10.43 R - BIPRU 4.10.48 R and in accordance with the IRB permission either in support of an individual exposure or a pool of exposures. A firm must not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor.
[Note: BCD Annex VII Part 2 point 22]
Calculation of exposure values and own conversion factors
BIPRU 4.6.55
See Notes
BIPRU 4.6.56
See Notes
A firm must provide its own estimates of conversion factors in accordance with its IRB permission and the minimum IRB standards.
[Note: BCD Article 87(7) (part)]
Double default
BIPRU 4.6.57
See Notes
The risk weighted exposure amount for each exposure to retail SME as defined in BIPRU 4.6.2 R which meets the requirements set out in BIPRU 4.4.83 R and BIPRU 4.4.85 R may be calculated according to BIPRU 4.4.79 R (Double default).
[Note: BCD Annex VII Part 1 point 11]
BIPRU 4.6.58
See Notes
Notwithstanding BIPRU 4.6.54 R for the purposes of BIPRU 4.4.80 R the LGD of a comparable direct exposure to the protection provider must either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor, depending upon whether in the event both the guarantor and obligor default during the life of the hedged transaction available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or obligor, respectively.
[Note: BCD Annex VII Part 2 point 23]
BIPRU 4.7
The IRB approach: Equity exposures
- 01/01/2007
Application
BIPRU 4.7.1
See Notes
Definition of equity exposures
BIPRU 4.7.2
See Notes
Calculation of risk-weighted exposure amounts
BIPRU 4.7.3
See Notes
Notwithstanding BIPRU 4.3.5 R (Relevant parameters), the calculation of risk weighted exposure amounts for credit risk for all exposures belonging to the equity exposure IRB exposure class must be calculated in accordance with one of the following ways:
- (1) the simple risk weight approach (see BIPRU 4.7.8 R;
- (2) the PD/LGD approach (see BIPRU 4.7.13 R); and
- (3) the internal models approach (see BIPRU 4.7.23 R);
in accordance with BIPRU 4.7 and subject to the firm's IRB permission.
[Note: BCD Article 87(4) (part)]
BIPRU 4.7.4
See Notes
Even if a firm's IRB permission would otherwise permit the use of the internal models approach as referred to in BIPRU 4.7.3 R (3), it may only use that approach if it meets the minimum requirements in BIPRU 4.7.27 R - BIPRU 4.7.35 R.
[Note: BCD Article 87(4) (part)]
BIPRU 4.7.5
See Notes
A firm may employ different approaches to different portfolios where the firm itself uses different approaches internally. A firm must, if it uses different approaches in accordance with the previous sentence, be able to demonstrate to the appropriate regulator that the choice is made consistently and is not determined by regulatory arbitrage considerations.
[Note: BCD Annex VII Part 1 point 17]
BIPRU 4.7.6
See Notes
Notwithstanding BIPRU 4.7.5 R a firm may, if its IRB permission permits it to do so, attribute the risk weighted exposure amounts for equity exposures to ancillary services undertakings according to the treatment of non credit-obligation assets.
[Note: BCD Annex VII Part 1 point 18]
Exposure value
BIPRU 4.7.7
See Notes
The exposure value must be the value presented in the financial statements. Admissible equity exposure measures are the following:
- (1) for investments held at fair value with changes in value flowing directly through income and into capital resources, the exposure value is the fair value presented in the balance sheet;
- (2) for investments held at fair value with changes in value not flowing through income but into a tax-adjusted separate component of equity, the exposure value is the fair value presented in the balance sheet; and
- (3) for investments held at cost or at the lower of cost or market value, the exposure value is the cost or market value presented in the balance sheet.
[Note: BCD Annex VII Part 3 point 12]
The calculation of risk-weighted exposure amounts for equity exposures: The simple risk weight approach: Introduction
BIPRU 4.7.8
See Notes
The calculation of risk-weighted exposure amounts for equity exposures: The simple risk weight approach: Risk weighted exposure amounts
BIPRU 4.7.9
See Notes
The risk weighted exposure amounts must be calculated according to the following formula:
risk-weighted exposure amounts = RW * exposure value;
where:
- (1) risk weight (RW) = 190% for private equity exposures in sufficiently diversified portfolios;
- (2) risk weight (RW) = 290% for exchange traded equity exposures; and
- (3) risk weight (RW) = 370% for all other equity exposures.
[Note: BCD Annex VII Part 1 point 19]
BIPRU 4.7.10
See Notes
Short cash positions and derivative instruments held in the non-trading book are permitted to offset long positions in the same individual stocks provided that these instruments have been explicitly designated as hedges of specific equity exposures and that they provide a hedge for at least another year. Other short positions must be treated as if they are long positions with the relevant risk weight assigned to the absolute value of each position. In the context of maturity mismatched positions, the method is that for corporate exposures as set out in BIPRU 4.4.70 R.
[Note: BCD Annex VII Part 1 point 20]
BIPRU 4.7.11
See Notes
A firm may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10.
[Note: BCD Annex VII Part 1 point 21]
The calculation of risk-weighted exposure amounts for equity exposures: The simple risk weight approach: Expected loss
BIPRU 4.7.12
See Notes
The expected loss amounts for equity exposures must be calculated according to the following formula:
- (1) expected loss amount = EL × exposure value; and
- (2) the EL values must be the following:
- (a) expected loss (EL) = 0.8% for private equity exposures in sufficiently diversified portfolios;
- (b) expected loss (EL) = 0.8% for exchange traded equity exposures; and
- (c) expected loss (EL) = 2.4% for all other equity exposures.
[Note: BCD Annex VII Part 1 point 32]
The calculation of risk-weighted exposure amounts for equity exposures: The PD/LGD approach: Introduction
BIPRU 4.7.13
See Notes
The calculation of risk-weighted exposure amounts for equity exposures: The PD/LGD approach: Risk weighted exposure amounts
BIPRU 4.7.14
See Notes
The risk weighted exposure amounts must be calculated according to the formulas in BIPRU 4.4.58 R (Risk weighted exposure amounts for sovereigns, institutions and corporates). If a firm does not have sufficient information to use the definition of default a scaling factor of 1.5 must be assigned to the risk weights.
[Note: BCD Annex VII Part 1 point 22]
BIPRU 4.7.15
See Notes
At the individual exposure level the sum of the expected loss amount multiplied by 12.5 and the risk weighted exposure amount must not exceed the exposure value multiplied by 12.5.
[Note: BCD Annex VII Part 1 point 23]
BIPRU 4.7.16
See Notes
A firm may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in BIPRU 5 (Credit risk mitigation) as modified by BIPRU 4.10. This must be subject to an LGD of 90% on the exposure to the provider of the hedge. For private equity exposures in sufficiently diversified portfolios an LGD of 65% may be used.
[Note: BCD Annex VII Part 1 point 24]
The calculation of risk-weighted exposure amounts for equity exposures: The PD/LGD approach: Calculation of expected loss amounts
BIPRU 4.7.17
See Notes
The expected loss amounts for equity exposures must be calculated according to the following formulae:
- (1) expected loss (EL) = PD × LGD; and
- (2) expected loss amount = EL × exposure value.
[Note: BCD Annex VII Part 1 point 33]
The calculation of risk-weighted exposure amounts for equity exposures: The PD/LGD approach: PDs
BIPRU 4.7.18
See Notes
PDs must be determined according to the methods for corporate exposures. The following minimum PDs must be applied:
- (1) 0.09% for exchange traded equity exposures where the investment is part of a long-term customer relationship;
- (2) 0.09% for non-exchange traded equity exposures where the returns on the investment are based on regular and periodic cash flows not derived from capital gains;
- (3) 0.40% for exchange traded equity exposures including other short positions as set out in BIPRU 4.7.10 R; and
- (4) 1.25% for all other equity exposures including other short positions as set out in BIPRU 4.7.10 R.
[Note: BCD Annex VII Part 2 point 24]
BIPRU 4.7.19
See Notes
BIPRU 4.4.29 G (five year observation period) applies to the PD/LGD approach.
[Note: BCD Annex VII Part 4 point 66 (part)]
The calculation of risk-weighted exposure amounts for equity exposures: The PD/LGD approach: LGDs
BIPRU 4.7.20
See Notes
Private equity exposures in sufficiently diversified portfolios may be assigned an LGD of 65%.
[Note: BCD Annex VII Part 2 point 25]
BIPRU 4.7.21
See Notes
The calculation of risk-weighted exposure amounts for equity exposures: The PD/LGD approach: Maturity
BIPRU 4.7.22
See Notes
The calculation of risk-weighted exposure amounts for equity exposures: The internal models approach: Introduction
BIPRU 4.7.23
See Notes
The calculation of risk-weighted exposure amounts for equity exposures: The internal models approach: Risk weighted exposure amounts
BIPRU 4.7.24
See Notes
The risk weighted exposure amount is the potential loss on the firm's equity exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, multiplied by 12.5. The risk weighted exposure amounts at the equity exposure portfolio level must not be less than the total of the sums of the minimum risk weighted exposure amounts required under the PD/LGD approach and the corresponding expected loss amounts multiplied by 12.5 and calculated on the basis of the PD values set out in BIPRU 4.7.18 R (1) and the corresponding LGD values set out in BIPRU 4.7.20 R and BIPRU 4.7.21 R.
[Note: BCD Annex VII Part 1 point 25]
BIPRU 4.7.25
See Notes
A firm may recognise unfunded credit protection obtained on an equity position.
[Note: BCD Annex VII Part 1 point 26]
The calculation of risk weighted exposure amounts for equity exposures: The internal models approach: Expected loss amounts
BIPRU 4.7.26
See Notes
The expected loss amounts for equity exposures under the internal models approach must be 0%.
[Note: BCD Annex VII Part 1 point 34]
The calculation of risk weighted exposure amounts for equity exposures: The internal models approach: Capital requirements and risk quantification
BIPRU 4.7.27
See Notes
- (1) A firm must meet the standards set out in (2) to (9) for the purpose of calculating capital requirements.
- (2) The estimate of potential loss must be robust to adverse market movements relevant to the long-term risk profile of the firm's specific holdings. The data used to represent return distributions must reflect the longest sample period for which data is available and be meaningful in representing the risk profile of the firm's specific equity exposures. The data used must be sufficient to provide conservative, statistically reliable and robust loss estimates that are not based purely on subjective or judgmental considerations. A firm must be able to demonstrate to the appropriate regulator that the shock employed provides a conservative estimate of potential losses over a relevant long-term market or business cycle.
- (3) A firm must combine empirical analysis of available data with adjustments based on a variety of factors in order to attain model outputs that achieve appropriate realism and conservatism. In constructing Value at Risk (VaR) models estimating potential quarterly losses, a firm may use quarterly data or convert shorter horizon period data to a quarterly equivalent using an analytically appropriate method supported by empirical evidence and through a well-developed and documented thought process and analysis. Such an approach must be applied conservatively and consistently over time. Where only limited relevant data is available a firm must add appropriate margins of conservatism.
- (4) The models used must be able to capture adequately all of the material risks embodied in equity returns including both the general market risk and specific risk exposure of the firm's equity exposure portfolio. The internal models must adequately explain historical price variation, capture both the magnitude and changes in the composition of potential concentrations, and be robust to adverse market environments. The population of risk exposures represented in the data used for estimation must be closely matched to or at least comparable with those of the firm's equity exposures.
- (5) The internal model must be appropriate for the risk profile and complexity of a firm's equity exposure portfolio. Where a firm has material holdings with values that are highly non-linear in nature the internal models must be designed to capture appropriately the risks associated with such instruments.
- (6) Mapping of individual positions to proxies, market indices, and risk factors must be plausible, intuitive, and conceptually sound.
- (7) A firm must be able to demonstrate to the appropriate regulator through empirical analyses the appropriateness of risk factors, including their ability to cover both general market risk and specific risk.
- (8) The estimates of the return volatility of equity exposures must incorporate relevant and available data, information, and methods. Independently reviewed internal data or data from external sources (including pooled data) must be used.
- (9) A rigorous and comprehensive stress-testing programme must be in place.
[Note: BCD Annex VII Part 4 point 115]
The calculation of risk-weighted exposure amounts for equity exposures: The internal models approach: Risk management and controls
BIPRU 4.7.28
See Notes
- (1) With regard to the development and use of internal models for capital requirement purposes, a firm must establish policies, procedures, and controls to ensure the integrity of the model and modelling process. These policies, procedures, and controls must include the ones set out in the rest of this paragraph.
- (2) There must be full integration of the internal model into the overall management information systems of the firm and in the management of the non-trading book equity exposure portfolio. In particular they must be used in:
- (a) measuring and assessing equity exposure portfolio performance (including the risk adjusted performance);
- (b) allocating economic capital to equity exposures; and
- (c) evaluating overall capital adequacy and the investment management process.
- (3) A firm must have established management systems, procedures, and control functions for ensuring the periodic and independent review of all elements of the internal modelling process, including approval of model revisions, vetting of model inputs, and review of model results, such as direct verification of risk computations. These reviews must assess the accuracy, completeness, and appropriateness of model inputs and results and focus on both finding and limiting potential errors associated with known weaknesses and identifying unknown model weaknesses. Such reviews may be conducted by an internal independent unit, or by an independent external third party.
- (4) There must be adequate systems and procedures for monitoring investment limits and the risk exposures of equity exposures.
- (5) The units responsible for the design and application of the model must be functionally independent from the units responsible for managing individual investments.
- (6) Parties responsible for any aspect of the modelling process must be adequately qualified. Management must allocate sufficient skilled and competent resources to the modelling function.
[Note: BCD Annex VII Part 4 point 116]
The calculation of risk-weighted exposure amounts for equity exposures: The internal models approach: Validation and documentation
BIPRU 4.7.29
See Notes
BIPRU 4.7.30
See Notes
BIPRU 4.7.31
See Notes
The methods and data used for quantitative validation must be consistent through time. Changes in estimation and validation methods and data (both data sources and periods covered) must be documented.
[Note: BCD Annex VII Part 4 point 119]
BIPRU 4.7.32
See Notes
A firm must regularly compare actual equity exposure returns (computed using realised and unrealised gains and losses) with modelled estimates. Such comparisons must make use of historical data that cover as long a period as possible. A firm must document the methods and data used in such comparisons. This analysis and documentation must be updated at least annually.
[Note: BCD Annex VII Part 4 point 120]
BIPRU 4.7.33
See Notes
A firm must make use of other quantitative validation tools and comparisons with external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. A firm's internal assessments of the performance of its models must be based on as long a period as possible.
[Note: BCD Annex VII Part 4 point 121]
BIPRU 4.7.34
See Notes
A firm must have sound internal standards for situations where comparison of actual equity exposure returns with the models' estimates calls the validity of the estimates or of the models as such into question. These standards must take account of business cycles and similar systematic variability in equity exposure returns. All adjustments made to internal models in response to model reviews must be documented and consistent with the firm's model review standards.
[Note: BCD Annex VII Part 4 point 122]
BIPRU 4.7.35
See Notes
The internal model and the modelling process must be documented, including the responsibilities of parties involved in the modelling, and the model approval and model review processes.
[Note: BCD Annex VII Part 4 point 123]
BIPRU 4.8
The IRB approach: Purchased receivables
- 01/01/2007
Application
BIPRU 4.8.1
See Notes
BIPRU 4.8.2
See Notes
Purchased receivables do not form an IRB exposure class on their own. For any purchased receivable, the provisions of the sections of BIPRU 4 that deal with the IRB exposure class to which it belongs also apply, as modified by this section.
[Note: BCD Annex VII Part 4 point 15 (part)]
Structure of rating systems
BIPRU 4.8.3
See Notes
Risk quantification: Overall requirements for estimation: General
BIPRU 4.8.4
See Notes
BIPRU 4.8.5
See Notes
The estimates for determining the risk parameters PD, LGD, conversion factor and EL must reflect all relevant information available to the purchasing firm regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing firm, or by external sources. The purchasing firm must evaluate any data relied upon which is provided by the seller.
[Note: BCD Annex VII Part 4 point 53]
Risk quantification: Overall requirements for estimation: Requirements specific to PD estimation
BIPRU 4.8.6
See Notes
With respect to BIPRU 4.6.26 R (Internal and external data for PD estimation: retail exposures) a firm may use external and internal reference data for PD estimation. A firm must use all relevant data sources as points of comparison.
[Note: BCD Annex VII Part 4 point 69 (part)]
BIPRU 4.8.7
See Notes
For corporate exposure purchased receivables a firm may estimate ELs by obligor grade from long run averages of one-year realised default rates.
[Note: BCD Annex VII Part 4 point 60]
BIPRU 4.8.8
See Notes
If a firm derives long run average estimates of PDs and LGDs for corporate exposure purchased receivables from an estimate of EL, and an appropriate estimate of PD or LGD, the process for estimating total losses must meet the overall standards for estimation of PD and LGD set out in the minimum IRB standards, and the outcome must be consistent with the concept of LGD as set out in BIPRU 4.3.99 R.
[Note: BCD Annex VII Part 4 point 61]
Risk quantification: Overall requirements for estimation: Requirements specific to own-LGD estimates
BIPRU 4.8.9
See Notes
A firm may use external and internal reference data for its LGD estimates in the case of retail exposures that are purchased receivables.
[Note: BCD Annex VII Part 4 point 85]
Risk quantification: Overall requirements for estimation: Minimum requirements for purchased receivables: General
BIPRU 4.8.10
See Notes
Risk quantification: Overall requirements for estimation: Minimum requirements for purchased receivables: Legal certainty
BIPRU 4.8.11
See Notes
The structure of the facility must ensure that under all foreseeable circumstances a firm has effective ownership and control of all cash remittances from the receivables. When the obligor makes payments directly to a seller or servicer a firm must verify regularly that payments are forwarded completely and within the contractually agreed terms. Servicer means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis. A firm must have procedures to ensure that ownership over the receivables and cash receipts is protected against bankruptcy stays or legal challenges that could materially delay the lender's ability to liquidate or assign the receivables or retain control over cash receipts.
[Note: BCD Annex VII Part 4 point 105]
Risk quantification: Overall requirements for estimation: Minimum requirements for purchased receivables: Effectiveness of monitoring systems
BIPRU 4.8.12
See Notes
- (1) A firm must monitor both the quality of the purchased receivables and the financial condition of the seller and servicer. In particular a firm must comply with the remaining provisions of this rule.
- (2) A firm must assess the correlation among the quality of the purchased receivables and the financial condition of both the seller and servicer, and have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including the assignment of an internal risk rating for each seller and servicer.
- (3) A firm must have clear and effective policies and procedures for determining seller and servicer eligibility. A firm or its agent must conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports from the seller or servicer, detect fraud or operational weaknesses, and verify the quality of the seller's credit policies and servicer's collection policies and procedures. The findings of these reviews must be documented.
- (4) A firm must assess the characteristics of the purchased receivables pools including:
- (a) over-advances;
- (b) history of the seller's arrears, bad debts, and bad debt allowances;
- (c) payment terms; and
- (d) potential contra accounts.
- (4) A firm must have effective policies and procedures for monitoring on an aggregate basis single-obligor concentrations both within and across purchased receivables pools.
- (5) A firm must ensure that it receives from the servicer timely and sufficiently detailed reports of receivables ageings and dilutions to ensure compliance with the firm's eligibility criteria and advancing policies governing purchased receivables, and provide an effective means with which to monitor and confirm the seller's terms of sale and dilution.
[Note: BCD Annex VII Part 4 point 106]
Risk quantification: Overall requirements for estimation: Minimum requirements for purchased receivables: Effectiveness of work-out systems
BIPRU 4.8.13
See Notes
A firm must have systems and procedures for detecting deteriorations in the seller's financial condition and purchased receivables quality at an early stage, and for addressing emerging problems proactively. In particular a firm must have clear and effective policies, procedures, and information systems to monitor covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem purchased receivables.
[Note: BCD Annex VII Part 4 point 107]
Risk quantification: Overall requirements for estimation: Minimum requirements for purchased receivables: Effectiveness of systems for controlling collateral, credit availability and cash
BIPRU 4.8.14
See Notes
A firm must have clear and effective policies and procedures governing the control of purchased receivables, credit, and cash. In particular, written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and the way cash receipts are to be handled. These elements must take appropriate account of all relevant and material factors, including the seller's and servicer's financial condition, risk concentrations, and trends in the quality of the purchased receivables and the seller's customer base, and internal systems must ensure that funds are advanced only against specified supporting collateral and documentation.
[Note: BCD Annex VII Part 4 point 108]
Risk quantification: Overall requirements for estimation: Minimum requirements for purchased receivables: Compliance with the firm's internal policies and procedures
BIPRU 4.8.15
See Notes
A firm must have an effective internal process for assessing compliance with all internal policies and procedures. The process must include regular audits of all critical phases of the firm's receivables purchase programme, verification of the separation of duties between, firstly, the assessment of the seller and servicer and the assessment of the obligor and, secondly, between the assessment of the seller and servicer and the field audit of the seller and servicer and evaluations of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting automation systems.
[Note: BCD Annex VII Part 4 point 109]
Calculation of risk-weighted asset amounts: Eligibility for different treatments: Corporate exposures
BIPRU 4.8.16
See Notes
For its corporate exposure purchased receivables a firm must comply with the minimum requirements set out in BIPRU 4.8.11 R - BIPRU 4.8.15 R. For corporate exposure purchased receivables that comply in addition with the conditions set out in BIPRU 4.8.18 R, and where it would be unduly burdensome for a firm to use the risk quantification standards for corporate exposures as set out in the minimum IRB standards for these receivables, the risk quantification standards for retail exposures as set out in the minimum IRB standards may be used.
[Note: BCD Annex VII Part 1 point 7]
BIPRU 4.8.17
See Notes
For corporate exposure purchased receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection for default losses, dilution losses, or both, may be treated as first-loss positions under the provisions in BIPRU 9 (Securitisation) about the IRB approach.
[Note: BCD Annex VII Part 1 point 8]
Calculation of risk weighted asset amounts: Eligibility for different treatments: Retail exposures
BIPRU 4.8.18
See Notes
To be eligible for the retail exposure treatment purchased receivables must comply with the minimum requirements set out in BIPRU 4.8.11 R - BIPRU 4.8.15 R and the following conditions:
- (1) the firm has purchased the receivables from unrelated, third party sellers, and its exposure to the obligor of the receivable does not include any exposures that are directly or indirectly originated by the firm itself;
- (2) the purchased receivables must be generated on an arm's-length basis between the seller and the obligor (and as such, intercompany accounts receivables and receivables subject to contra-accounts between firms that buy and sell to each other are ineligible);
- (3) the purchasing firm has a claim on all proceeds from the purchased receivables or a pro-rata interest in the proceeds; and
- (4) the portfolio of purchased receivables is sufficiently diversified.
[Note: BCD Annex VII Part 1 point 14]
BIPRU 4.8.19
See Notes
With respect to retail exposures, for purchased receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection for default losses, dilution losses, or both, may be treated as first-loss positions under the provisions in BIPRU 9 (Securitisation) about the IRB approach.
[Note: BCD Annex VII Part 1 point 15]
BIPRU 4.8.20
See Notes
For hybrid pools of purchased retail exposure receivables where the purchasing firm cannot separate exposures secured by real estate collateral and qualifying revolving retail exposures from other retail exposures, the retail risk weight function producing the highest capital requirements for those exposures must apply.
[Note: BCD Annex VII Part 1 point 16]
Calculation of risk weighted asset amounts for dilution risk
BIPRU 4.8.21
See Notes
The risk weights for dilution risk for purchased receivables (both corporate exposures and retail exposures) must be calculated according to this rule. The risk weights must be calculated according to the formula in BIPRU 4.4.58 R. However, for the purposes of that formula, the total annual sales referred to in BIPRU 4.4.59 R are the weighted average by individual exposures of the pool. The input parameters PD and LGD and the exposure value must be determined under the applicable provisions of BIPRU 4 as modified by this section. M (maturity) must be 1 year. However:
- (1) a firm need not recognise dilution risk if its IRB permission permits this; and
- (2) (in the case of a firm with an IRB permission that permits the treatment of dilution risk in (1)) the firm must be able to convince the appropriate regulator that dilution risk is immaterial.
[Note: BCD Article 87(2) (part) and Annex VII Part 1 point 28]
Calculation of risk weighted exposure amounts: PDs
BIPRU 4.8.22
See Notes
For purchased corporate exposure receivables in respect of which a firm cannot demonstrate that its PD estimates meet the minimum IRB standards, the PDs for these exposures must be determined according to the following methods:
- (1) for senior claims on purchased corporate exposure receivables PD must be the firm's estimate of EL divided by LGD for these receivables;
- (2) for subordinated claims on purchased corporate exposure receivables PD must be the firm's estimate of EL; and
- (3) if a firm is under its IRB permission using the advanced IRB approach for LGD estimates for corporate exposures and it can decompose its EL estimates for purchased corporate exposure receivables into PDs and LGDs in a reliable manner, the LGD estimate may be used.
[Note: BCD Annex VII Part 2 point 3]
BIPRU 4.8.23
See Notes
In the case of corporate exposures, for dilution risk of purchased receivables PD must be set equal to EL estimate for dilution risk. If a firm is under its IRB permission using the advanced IRB approach for LGD estimates for corporate exposures and it can decompose its EL estimates for dilution risk of purchased corporate exposure receivables into PDs and LGDs in a reliable manner, the PD estimate may be used. A firm may recognise unfunded credit protection in the PD in accordance with the provisions of BIPRU 9 and BIPRU 5 as modified by BIPRU 4.10. A firm may recognise those unfunded credit protection providers set out in its IRB permission in addition to those indicated in the CRM eligibility conditions. Where a firm's IRB permission allows it to use its own LGD estimates for dilution risk of purchased corporate receivables, the firm may recognise unfunded credit protection by adjusting PDs subject to the provisions of BIPRU 4.4.43 R.
[Note: BCD Annex VII Part 2 point 7]
BIPRU 4.8.24
See Notes
In the case of retail exposures, for dilution risk of purchased receivables PD must be set equal to EL estimates for dilution risk. If a firm can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the PD estimate may be used.
[Note: BCD Annex VII Part 2 point 19]
Calculation of risk weighted asset amounts: LGDs: Corporate exposures
BIPRU 4.8.25
See Notes
The following LGD values apply for purchased corporate exposure receivables:
- (1) for senior purchased corporate exposure receivables exposures where a firm cannot demonstrate that its PD estimates meet the minimum IRB standards, the value is 45%;
- (2) for subordinated purchased corporate exposure receivables exposures where a firm cannot demonstrate that its PD estimates meet the minimum IRB standards, the value is 100%; and
- (3) for dilution risk of purchased corporate exposure receivables, the value is 75%.
[Note: BCD Annex VII Part 2 point 8(e) to (g)]
BIPRU 4.8.26
See Notes
Notwithstanding BIPRU 4.4.34 R and BIPRU 4.8.25 R, for dilution risk and default risk if a firm is under its IRB permission using the advanced IRB approach for LGD estimates for corporate exposures and it can decompose its EL estimates for purchased corporate exposure receivables into PDs and LGDs in a reliable manner, the LGD estimate for purchased corporate exposure receivables may be used.
[Note: BCD Annex VII Part 2 point 9]
Calculation of risk weighted asset amounts: LGDs: Retail exposures
BIPRU 4.8.27
See Notes
For dilution risk of purchased retail exposure receivables an LGD value of 75% must be used. If a firm can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the LGD estimate may be used.
[Note: BCD Annex VII Part 2 point 21]
Calculation of risk weighted asset amounts: Exposure value
BIPRU 4.8.28
See Notes
The exposure value for the calculation of risk weighted exposure amounts of purchased receivables must be the outstanding amount minus the capital requirements for dilution risk prior to credit risk mitigation.
BIPRU 4.8.29
See Notes
- (1) The exposure value for the items in (2) must be calculated as the committed but undrawn amount multiplied by a conversion factor.
- (2) For undrawn purchase commitments for revolving purchased receivables that are unconditionally cancellable or that effectively provide for automatic cancellation at any time by the firm without prior notice, a conversion factor of 0% applies. To apply a conversion factor of 0%, a firm must actively monitor the financial condition of the obligor, and its internal control systems must enable it immediately to detect a deterioration in the credit quality of the obligor.
[Note: BCD Annex VII Part 3 point 9 (c)]
Calculation of expected loss amounts
BIPRU 4.8.30
See Notes
The expected loss amounts for dilution risk of purchased receivables must be calculated according to the following formula:
[Note: BCD Article 88(5) and Annex VII Part 1 point 35]
BIPRU 4.9
The IRB approach: Securitisation, non-credit obligations assets and CIUs
- 01/01/2007
Application
BIPRU 4.9.1
See Notes
Securitisation exposures
BIPRU 4.9.2
See Notes
The following must be calculated in accordance with BIPRU 9 (Securitisation):
- (1) risk-weighted exposure amounts for securitised exposures and for exposures belonging to the IRB exposure class referred to in BIPRU 4.3.2 R (6) (securitisation positions); and
- (2) the expected loss amounts for securitised exposures.
[Note: BCD Article 87(10) and Article 88(3)]
Provision of credit protection
BIPRU 4.9.3
See Notes
Where a firm provides credit protection for a number of exposures under terms that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, if the product has an external credit assessment from an eligible ECAI the risk weights set out in BIPRU 9 must be applied. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket must be aggregated, excluding n-1 exposures where the sum of the expected loss amount multiplied by 12.5 and the risk weighted exposure amount must not exceed the nominal amount of the protection provided by the credit derivative multiplied by 12.5. The n-1 exposures to be excluded from the aggregation must be determined on the basis that they must include those exposures each of which produces a lower risk weighted exposure amount than the risk weighted exposure amount of any of the exposures included in the aggregation.
[Note: BCD Annex VII Part 1 point 9]
Non credit obligation assets: Introduction
BIPRU 4.9.4
See Notes
Non credit obligation assets: Inclusion of residual value of leases
BIPRU 4.9.5
See Notes
The non credit obligation asset IRB exposure class includes the residual value of leased properties, if not included in the lease exposure as defined in BIPRU 4.4.75 R.
[Note: BCD Article 86(8)]
Non credit obligation assets: Risk weighted exposure amount
BIPRU 4.9.6
See Notes
The risk weighted exposure amounts must be calculated according to the formula:
Risk-weighted exposure amount = 100% * exposure value except for when the exposure is a residual value of leased properties in which case it must be calculated as follows:
1/t * 100% * exposure value; where t is the greater of 1 and the nearest number of whole years of the lease remaining.
[Note: BCD Annex VII Part 1 point 27]
BIPRU 4.9.7
See Notes
BIPRU 4.9.8
See Notes
Where a firm has full recourse in respect of purchased receivables for default risk and for dilution risk, to the seller of the purchased receivables, BIPRU 4.8.21 R and BIPRU 4.8.30 R need not be applied. The exposure may instead be treated as a collateralised exposure.
[Note: BCD Article 87(2) (part)]
Non credit obligation assets: Exposure value
BIPRU 4.9.9
See Notes
The exposure value of non credit-obligation assets must be the value presented in the financial statements.
[Note: BCD Annex VII Part 3 point 13]
Non credit obligation assets: Expected loss amounts
BIPRU 4.9.10
See Notes
For non credit-obligation assets the expected loss amount must be zero.
[Note: BCD Article 88(4)]
Collective investment undertakings
BIPRU 4.9.11
See Notes
- (1) Where exposures in the form of a CIU meet the criteria set out in BIPRU 3.4.121 R to BIPRU 3.4.122 R (Conditions for look through treatment under the standardised approach) and the firm is aware of all of the underlying exposures of the CIU, the firm must look through to those underlying exposures in order to calculate risk weighted exposure amounts and expected loss amounts in accordance with the methods set out in BIPRU 4. BIPRU 4.9.12 R applies to the part of the underlying exposures of the CIU of which the firm is not aware or could not reasonably be aware. In particular, BIPRU 4.9.12 R must apply where it would be unduly burdensome for the firm to look through the underlying exposures in order to calculate risk weighted exposure amounts and expected loss amounts in accordance with methods set out in this rule.
- (2) Where (1) applies but a firm does not meet the conditions for using the methods set out in BIPRU 4 for all or part of the underlying exposures of the CIU, risk weighted exposure amounts and expected loss amounts must be calculated in accordance with the following approaches.
- (3) For equity exposures the approach set out in BIPRU 4.7.9 R - BIPRU 4.7.12 R (Simple risk weights) must be used. If, for those purposes, the firm is unable to differentiate between private equity, exchange-traded and other equity exposures, it must treat the exposures concerned as other equity exposures.
- (4) For all other underlying exposures, the standardised approach must be used, subject to the following modifications:
- (a) [deleted]
- (b) [deleted]
- (c) for exposures subject to a specific risk weight for unrated exposures or subject to the credit quality step yielding the highest risk weight for a given exposure class, the risk weight must be multiplied by a factor of two, but cannot be higher than 1250%; and
- (d) for all other exposures, the risk weight must be multiplied by a factor of 1.1 and subject to a minimum of 5%.
[Note: BCD Article 87(11)]
BIPRU 4.9.12
See Notes
- (1) Where exposures in the form of a CIU do not meet the criteria set out in BIPRU 3.4.121 R to BIPRU 3.4.122 R (Conditions for look through treatment under the standardised approach) or the firm is not aware of all of the underlying exposures of the CIU, a firm must look through to the underlying exposures and calculate risk weighted exposure amounts and expected loss amounts in accordance with the approach set out in BIPRU 4.7.9 R - BIPRU 4.7.12 R (Simple risk weights). If, for those purposes, the firm is unable to differentiate between private equity, exchange-traded and other equity exposures, it must treat the exposures concerned as other equity exposures. For these purposes, non-equity exposures must be assigned to one of the classes (private equity, exchange traded equity or other equity) set out in BIPRU 4.7.9 R (Simple risk weight approach) and unknown exposures must be assigned to the other equity class.
- (2) Alternatively to the method described in (1), a firm may calculate itself or rely on a third party to calculate and report the average risk weighted exposure amounts based on the CIU's underlying exposures and calculated in accordance with the approaches in BIPRU 4.9.11R (3) to BIPRU 4.9.11R (4), provided that the correctness of the calculation and the report is adequately ensured.
- (3) [deleted]
- (4) [deleted]
- (a) [deleted]
- (b) [deleted]
[Note: BCD Article 87(12)]
BIPRU 4.9.13
See Notes
BIPRU 4.9.14
See Notes
BIPRU 4.9.15
See Notes
The expected loss amounts for exposures referred to in BIPRU 4.9.11 R - BIPRU 4.9.12 R must be calculated in accordance with the methods set out in BIPRU 4.4.61 R (Calculation of expected loss for sovereigns, institutions and corporates), BIPRU 4.5.12 R - BIPRU 4.5.14 R (Calculation of expected loss for specialised lending), BIPRU 4.6.47 R - BIPRU 4.6.48 R (Calculation of expected loss for retail exposures), BIPRU 4.7.12 R, BIPRU 4.7.17 R and BIPRU 4.7.26 R (Calculation of expected loss for equity exposures) and BIPRU 4.8.30 R (Dilution risk of purchased receivables).
[Note: BCD Article 88(6)]
BIPRU 4.10
The IRB approach: Credit risk mitigation
- 01/01/2007
Application
BIPRU 4.10.1
See Notes
Purpose
BIPRU 4.10.2
See Notes
General
BIPRU 4.10.3
See Notes
A firm using the IRB approach, but not using its own estimates of LGD and conversion factors, may recognise credit risk mitigation in accordance with BIPRU 5 as modified by BIPRU 4.10 in the calculation of risk weighted exposure amounts for the purposes of the calculation of the credit risk capital component or as relevant expected loss amounts for the purposes of the calculation in GENPRU 2.2.191 R to GENPRU 2.2.193 R or GENPRU 2.2.236 R.
[Note: BCD Article 91 (as it applies to the IRB approach)]
BIPRU 4.10.4
See Notes
- (1) Where the requirements of BIPRU 5.2.2 R - BIPRU 5.2.8 R are met the calculation of risk weighted exposure amounts, and, as relevant, expected loss amounts, may be modified in accordance with BIPRU 5 as modified by BIPRU 4.10.
- (2) No exposure in respect of which credit risk mitigation is obtained must produce a higher risk weighted exposure amount or expected loss amount than an otherwise identical exposure in respect of which there is no credit risk mitigation.
- (3) Where the risk weighted exposure amount already takes account of credit protection under the IRB approach the calculation of the credit protection must not be further recognised under BIPRU 5 or BIPRU 4.10.
- (4) Subject to BIPRU 5.2.8 R (Maturity mismatches), BIPRU 5.2.9 R (Combinations of credit risk mitigation in the standardised approach) and BIPRU 5.7.27 R to BIPRU 5.7.28 R (Basket credit risk mitigation techniques), where the CRM eligibility conditions and the CRM minimum requirements are satisfied, the calculation of risk weighted exposure amounts and expected loss amounts under the IRB approach may be modified in accordance with the provisions of BIPRU 5 and BIPRU 4.10 that deal with calculating the effects of credit risk mitigation.
[Note: BCD Article 93 and Annex VIII Part 3 point 1(as they apply to the IRB approach)]
Eligibility of funded credit protection: General
BIPRU 4.10.5
See Notes
In addition to the collateral set out in BIPRU 5.3.1 R to BIPRU 5.3.2 R, BIPRU 5.4.1 R to BIPRU 5.4.8 R and BIPRU 5.6.1 R (Eligibility of funded credit protection) the provisions of BIPRU 4.10.6 R - BIPRU 4.10.12 R (Eligibility of real estate collateral), BIPRU 4.10.14 R (Eligibility: receivables), BIPRU 4.10.16 R (Eligibility: other physical collateral), and BIPRU 4.10.19 R (Eligibility: leasing), apply where a firm calculates risk weighted exposure amounts and expected loss amounts under the IRB approach.
[Note: BCD Annex VIII Part 1 point 12]
Real estate collateral: Types of eligible collateral: General
BIPRU 4.10.6
See Notes
- (1) Residential real estate property which is or will be occupied or let by the owner or the beneficial owner in the case of personal investment companies and commercial real estate property, that is offices and other commercial premises, may be recognised as eligible collateral where the conditions set out in the remaining provisions of this paragraph are met.
- (2) The value of the property must not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macro-economic factors affect both the value of the property and the performance of the borrower.
- (3) The risk of the borrower must not materially depend upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility must not materially depend on any cash flow generated by the underlying property serving as collateral.
[Note: BCD Annex VIII Part 1 point 13]
BIPRU 4.10.7
See Notes
The condition in BIPRU 4.10.6 R (3) does not apply to exposures secured by residential real estate property situated within the United Kingdom.
[Note: BCD Annex VIII Part 1 point 16 (part)]
BIPRU 4.10.8
See Notes
- (1) Under paragraph 16 of Part 1 of Annex VIII of the Banking Consolidation Directive, a competent authority may only disapply the condition in BIPRU 4.10.6 R (3) if the competent authority has evidence that the relevant market is well-developed and long-established with loss-rates which are sufficiently low to justify such action.
- (2) If the evidence were to change so that the action was no longer justified the appropriate regulator would expect to revoke BIPRU 4.10.7 R.
BIPRU 4.10.9
See Notes
- (1) The condition in BIPRU 4.10.6 R (3) does not apply for exposures secured by residential real estate property situated within the territory of another EEA State.
- (2) However (1) only applies if and to the extent that the CRD implementation measures for that EEA State in relation to the IRB approach implement the option set out in paragraph 16 of Part 1 of Annex VIII of the Banking Consolidation Directive (waiver for residential real estate property) with respect to residential real estate property situated within that EEA State. Therefore (1) does not apply if the eligibility to use this treatment under those measures ceases as contemplated under paragraph 18 of Part 1 of Annex VIII of the Banking Consolidation Directive (suspension of alternative treatment).
[Note: BCD Annex VIII Part 1 point 16 (part)]
BIPRU 4.10.10
See Notes
- (1) The condition in BIPRU 4.10.6 R (3) does not apply for commercial real estate property situated within the territory of another EEA State.
- (2) However (1) only applies if and to the extent that the CRD implementation measures for that EEA State in relation to the IRB approach implement the option set out in paragraph 17 of Part 1 of Annex VIII of the Banking Consolidation Directive (waiver for commercial real estate property) with respect to commercial real estate property situated within that EEA State. Therefore (1) does not apply if the eligibility to use this treatment under those measures ceases as contemplated under paragraph 18 of Part 1 of Annex VIII of the Banking Consolidation Directive (suspension of alternative treatment).
[Note: BCD Annex VIII Part 1 point 19]
Real estate collateral: Types of eligible collateral: Finnish housing legislation
BIPRU 4.10.11
See Notes
A firm may also recognise as eligible collateral shares in Finnish residential housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation in respect of residential property which is or will be occupied or let by the owner, as residential real estate collateral, provided that the conditions in BIPRU 4.10.6 R are met.
[Note: BCD Annex VIII Part 1 point 14]
BIPRU 4.10.12
See Notes
A firm may also recognise as eligible collateral shares in Finnish housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation as commercial real estate collateral, provided that the conditions in BIPRU 4.10.6 R are met.
[Note: BCD Annex VIII Part 1 point 15]
Real estate collateral: Minimum requirements for recognition
BIPRU 4.10.13
See Notes
For the recognition of real estate collateral: the minimum requirements in BIPRU 3.4.64 R - BIPRU 3.4.73 R must be met with the following adjustments:
- (1) those provisions apply to all real estate collateral eligible under BIPRU 4.10; and
- (2) the minimum frequency of valuation as referred to in BIPRU 3.4.66 R is once every year for commercial real estate.
[Note: BCD Annex VIII Part 2 point 8 (as it applies to the IRB approach)]
Receivables: Types of eligible collateral
BIPRU 4.10.14
See Notes
Amounts receivable linked to a commercial transaction or transactions with an original maturity of less than or equal to one year may be recognised as eligible collateral. Eligible receivables do not include those associated with securitisations, sub-participations or credit derivatives or amounts owed by affiliated parties.
[Note: BCD Annex VIII Part 1 point 20]
Receivables: Minimum requirements for recognition
BIPRU 4.10.15
See Notes
- (1) For the recognition of receivables as collateral the requirements in this paragraph must be met.
- (2) The legal mechanism by which the collateral is provided must be robust and effective and ensure that the lender has clear rights over the proceeds.
- (3) A firm must take all steps necessary to fulfil local requirements in respect of the enforceability of security interests. There must be a framework which allows the lender to have a first priority claim over the collateral subject to any claims of preferential creditors provided for in applicable insolvency law.
- (4) A firm must have conducted sufficient legal review confirming the enforceability of the collateral arrangements in all relevant jurisdictions.
- (5) The collateral arrangements must be properly documented, with a clear and robust procedure for the timely collection of collateral. A firm's procedures must ensure that any legal conditions required for declaring the default of the borrower and timely collection of collateral are observed. In the event of the obligor's financial distress or default, a firm must have legal authority to sell or assign the receivables to other parties without consent of the receivables obligors.
- (6) A firm must have a sound process for determining the credit risk associated with the receivables. Such a process must include, among other things, analyses of the obligor's business and industry and the types of customers with whom the obligor does business. Where a firm relies on the obligor to ascertain the credit risk of the customers, the firm must review the obligor's credit practices to ascertain their soundness and credibility.
- (7) The margin between the amount of the exposure and the value of the receivables must reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual obligor, and potential concentration risk within the firm's total exposures beyond that controlled by the firm's general methodology. A firm must maintain a continuous monitoring process appropriate to the receivables. Additionally, compliance with loan covenants, Environmental restrictions, and other legal requirements must be reviewed on a regular basis.
- (8) The receivables pledged by an obligor must be diversified and not be unduly correlated with the obligor. Where there is material positive correlation, the attendant risks must be taken into account in the setting of margins for the collateral pool as a whole.
- (9) Receivables from affiliates of the obligor (including subsidiary undertakings and employees) must not be recognised as risk mitigants.
- (10) A firm must have a documented process for collecting receivable payments in distressed situations. The requisite facilities for collection must be in place, even when the firm normally looks to the obligor for collections.
[Note: BCD Annex VIII Part 2 point 9]
Other physical collateral: Types of eligible collateral
BIPRU 4.10.16
See Notes
A firm may recognise as eligible collateral a physical item of a type other than those types indicated in BIPRU 4.10.6 R - BIPRU 4.10.12 R (Eligibility of real estate collateral) if its IRB permission provides that the firm may treat collateral of that type as eligible and if the firm is able to demonstrate the following:
- (1) the existence of liquid markets for disposal of the collateral in an expeditious and economically efficient manner;
- (2) the existence of well-established, publicly available market prices for the collateral; and
- (3) there is no evidence that the net prices it receives when collateral is realised deviates significantly from the market prices referred to in (b).
[Note: BCD Annex VIII Part 1 point 21]
BIPRU 4.10.17
See Notes
Other physical collateral: Minimum requirements for recognition
BIPRU 4.10.18
See Notes
- (1) If a type of other physical collateral referred to in BIPRU 4.10.16 R is potentially eligible under a firm's IRB permission a firm must only recognise it as eligible if the minimum requirements in (2) to (10) are met.
- (2) The collateral arrangement must be legally effective and enforceable in all relevant jurisdictions and must enable the firm to realise the value of the property within a reasonable timeframe.
- (3) With the sole exception of permissible prior claims referred to in BIPRU 4.10.15 R (3), only first liens on, or charges over, collateral must be permissible. As such, the firm must have priority over all other lenders to the realised proceeds of the collateral.
- (4) The value of the property must be monitored on a frequent basis and at a minimum once every year. More frequent monitoring must be carried out where the market is subject to significant changes in conditions.
- (5) The loan agreement (or other agreement documenting the exposure) must include detailed descriptions of the collateral plus detailed specifications of the manner and frequency of revaluation.
- (6) The types of physical collateral accepted by the firm and policies and practices in respect of the appropriate amount of each type of collateral relative to the exposure amount must be clearly documented in internal credit policies and procedures available for examination.
- (7) The firm's credit policies with regard to the transaction structure must address appropriate collateral requirements relative to the exposure amount, the ability to liquidate the collateral readily, the ability to establish objectively a price or market value, the frequency with which the value can readily be obtained (including a professional appraisal or valuation), and the volatility or a proxy of the volatility of the value of the collateral.
- (8) Both initial valuation and revaluation must take fully into account any deterioration or obsolescence of the collateral. Particular attention must be paid in valuation and revaluation to the effects of the passage of time on fashion- or date-sensitive collateral.
- (9) The firm must have the right to inspect the property physically. It must have policies and procedures addressing its exercise of the right to physical inspection.
- (10) The firm must have procedures to monitor that the property taken as protection is adequately insured against damage.
[Note: BCD Annex VIII Part 2 point 10]
Leasing: Types of eligible transactions and conditions of eligibility
BIPRU 4.10.19
See Notes
- (1) Where the requirements set out in this paragraph are met, exposures arising from transactions whereby a firm leases property to a third party must be treated the same as loans collateralised by the type of property leased.
- (2) For the exposures arising from leasing transactions to be treated as collateralised by the type of property leased, the following conditions must be met:
- (a) the conditions set out or referred to in BIPRU 4.10.13 R or BIPRU 4.10.18 R as appropriate for the recognition as collateral of the type of property leased are met;
- (b) there is robust risk management on the part of the lessor with respect to the use to which the leased asset is put, its age, and planned duration of its use, including appropriate monitoring of the value of the security;
- (c) there is in place a robust legal framework establishing the lessor's legal ownership of the asset and its ability to exercise its rights as owner in a timely fashion; and
- (d) where this has not already been ascertained in calculating the LGD level, the difference between value of the unamortised amount and the market value of the security must not be so large as to overstate the credit risk mitigation attributed to the leased assets.
[Note: BCD Annex VIII Part 1 point 22 and Part 2 point 11]
Calculating risk-weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Introduction
BIPRU 4.10.20
See Notes
Calculating risk weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Valuation: Receivables
BIPRU 4.10.21
See Notes
The value of receivables for the purpose of calculating the effect of credit risk mitigation must be the amount receivable.
[Note: BCD Annex VIII Part 3 point 66]
Calculating risk weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Valuation: Other physical collateral
BIPRU 4.10.22
See Notes
Physical collateral recognised as eligible as described in BIPRU 4.10.16 R must be valued for the purpose of calculating the effect of credit risk mitigation at its market value. Market value is the estimated amount for which the property would exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction.
[Note: BCD Annex VIII Part 3 point 67]
Calculating risk weighted exposure amounts and expected loss amounts: General treatment
BIPRU 4.10.23
See Notes
BIPRU 4.10.24
See Notes
LGD* (the effective loss given default) calculated as set out in BIPRU 4.10.25 R - BIPRU 4.10.28 R must be taken as the LGD.
[Note: BCD Annex VIII Part 3 point 68]
BIPRU 4.10.25
See Notes
Where the ratio of the value of the collateral (C) to the exposure value (E) is below a threshold level of C* (the required minimum collateralisation level for the exposure) as laid down in BIPRU 4.10.28 R, LGD* must be the LGD laid down in the other sections of BIPRU 4 for uncollateralised exposures to the counterparty. For this purpose, the exposure value of items listed in BIPRU 4.4.37 R to BIPRU 4.4.39 R and BIPRU 4.8.29 R must be calculated using a conversion factor or percentage of 100% rather than the conversion factors or percentages indicated in those rules.
[Note: BCD Annex VIII Part 3 point 69]
BIPRU 4.10.26
See Notes
Where the ratio of the value of the collateral to the exposure value exceeds a second, higher threshold level of C** (i.e. the required level of collateralisation to receive full LGD recognition) as laid down in BIPRU 4.10.28 R, LGD* must be that prescribed in that table.
[Note: BCD Annex VIII Part 3 point 70]
BIPRU 4.10.27
See Notes
Where the required level of collateralisation C** is not achieved in respect of the exposure as a whole, the exposure must be considered to be two exposures - that part in respect of which the required level of collateralisation C** is achieved and the remainder.
[Note: BCD Annex VIII Part 3 point 71]
BIPRU 4.10.28
See Notes
Table: Minimum LGD for secured portion of exposures
This table belongs to BIPRU 4.10.24 R - BIPRU 4.10.27 R
LGD* for senior claims or contingent claims | LGD* for subordinated claims or contingent claims | Required minimum collateralisation level of the exposure (C*) | Required minimum collateralisation level of the exposure (C**) | |
Receivables | 35% | 65% | 0% | 125% |
Residential real estate/commercial real estate | 35% | 65% | 30% | 140% |
Other collateral | 40% | 70% | 30% | 140% |
[Note: BCD Annex VIII Part 3 point 72 (part)]
Calculating risk weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Alternative treatment for real estate collateral
BIPRU 4.10.29
See Notes
- (1) A firm may apply the treatment in paragraph 74 of Part 3 of Annex VIII of the Banking Consolidation Directive (50% risk weight for exposures secured by real estate) in respect of exposures collateralised by:
- (a) residential real estate property; or
- (b) commercial real estate property;
- located in the territory of another EEA State.
- (2) However (1)(a) or (1)(b) only applies if the CRD implementing measures for that EEA State with respect to the IRB approach have implemented the option set out in the provision of the Banking Consolidation Directive referred to in (1) with respect to the relevant category of real estate property situated within that EEA State.
- (3) The use of the treatment in (1) with respect to property in another EEA State must be subject to the same conditions as apply under the relevant CRD implementation measures for that EEA State.
[Note: BCD Annex VIII Part 3 point 75]
Calculating risk weighted exposure amounts and expected loss amounts: Mixed pools of collateral
BIPRU 4.10.30
See Notes
- (1) Where:
- (a) risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach; and
- (b) an exposure is collateralised by both financial collateral and other eligible collateral;
- LGD* to be taken as the LGD for the purposes of the IRB approach must be calculated in accordance with this rule.
- (2) A firm must subdivide the volatility-adjusted value of the exposure (i.e. the value after the application of the volatility adjustment as set out in BIPRU 5.4.28 R (Volatility adjustments under the financial collateral comprehensive method) into parts each covered by only one type of collateral. That is, the firm must divide the exposure into the part covered by eligible financial collateral, the part covered by receivables, the parts covered by commercial real estate property collateral and/or residential real estate property collateral, the part covered by other eligible collateral, and the unsecured part, as relevant.
- (3) LGD* for each part of exposure must be calculated separately in accordance with the relevant provisions of BIPRU 5 (Credit risk mitigation) and BIPRU 4.10.
[Note: BCD Annex VIII Part 3 points 76 to 78]
Calculating risk weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Other modifications of the rules on credit risk mitigation: Financial collateral simple method
BIPRU 4.10.31
See Notes
The financial collateral simple method must not be used under the IRB approach.
[Note: BCD Annex VIII Part 3 point 24 (part)]
Calculating risk weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Other modifications of the rules on credit risk mitigation: Master netting agreements
BIPRU 4.10.32
See Notes
- (1) This rule sets out how the calculations under BIPRU 5.6.11 R (Using the supervisory volatility adjustments or the own estimates volatility adjustments approaches to master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions) must be modified under the IRB approach.
- (2) Where risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach, E is the exposure value for each separate exposure under the agreement referred to in the provisions listed in (1) that would apply in the absence of the credit protection.
[Note: BCD Annex VIII Part 3 point 11 (as it applies to the IRB approach)]
BIPRU 4.10.33
See Notes
- (1) This rule sets out how the calculations under BIPRU 5.6.24 R (Using the internal models approach to master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions) must be modified under the IRB approach.
- (2) Where risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach E is the exposure value for each separate exposure under the agreement referred to in the provisions listed in (1) that would apply in the absence of the credit protection.
[Note: BCD Annex VIII Part 3 point 20 (as it applies to the IRB approach)]
BIPRU 4.10.34
See Notes
- (1) This rule sets out how the calculations under BIPRU 5.6.29 R (Calculating risk-weighted exposure amounts and expected loss amounts for master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions) must be modified under the IRB approach.
- (2) E* must be taken as the exposure value of the exposure to the counterparty arising from the transactions subject to the master netting agreement referred to in the provisions listed in (1) for the purposes of BIPRU 4.
[Note: BCD Annex VIII Part 3 point 23 (as it applies to the IRB approach)]
Calculating risk weighted exposure amounts and expected loss amounts for funded credit risk mitigation: Other modifications of the rules on credit risk mitigation: Financial collateral comprehensive method
BIPRU 4.10.35
See Notes
- (1) This rule sets out how the calculations under BIPRU 5.4.28 R (Calculating adjusted values under the financial collateral comprehensive method) must be modified under the IRB approach.
- (2) E as referred to in the provisions listed in (1) is the exposure value as would be determined under the IRB approach if the exposure was not collateralised. For this purpose, where a firm calculates risk weighted exposure amounts under the IRB approach, the exposure value of the items listed in BIPRU 4.4.37 R to BIPRU 4.4.39 R, BIPRU 4.4.45 R, BIPRU 4.6.44 R (3) and BIPRU 4.8.29 R must be calculated using a conversion factor of 100% rather than the conversion factors or percentages indicated in those provisions.
BIPRU 4.10.36
See Notes
- (1) This rule sets out the calculation of risk weighted exposure amounts and expected loss amounts under the financial collateral comprehensive method for a firm using the IRB approach.
- (2) LGD* (the effective loss given default) calculated as set out in this paragraph must be taken as the LGD for the purposes of BIPRU 4.
- (3) LGD* = LGD x (E*/E) where:
- (a) LGD is the loss given default that would apply to the exposure under the IRB approach if the exposure was not collateralised;
- (b) E is the exposure value as calculated under BIPRU 4; and
- (c) E* is as calculated under BIPRU 5.4.28 R (3) (Calculation of adjusted values under the financial collateral comprehensive method).
[Note: BCD Annex VIII Part 3 point 61]
BIPRU 4.10.37
See Notes
- (1) In the case of a firm using the IRB approach to calculate risk weighted exposure amounts and expected loss amounts, the persons in (2) are added to the list in BIPRU 5.4.64 R (Definition of core market participant).
- (2) The persons referred to in (1) are other financial companies (including insurance companies) exposures to which do not have a credit assessment by an eligible ECAI and are internally rated as having a probability of default equivalent to that associated with the credit assessments of ECAIs that are associated with credit quality step 2 or above under the rules for the risk weighting of exposures under the standardised approach to credit risk.
[Note: BCD Annex VIII Part 3 point 58(h) (as it applies to the IRB approach)]
Unfunded credit protection: Eligibility of providers
BIPRU 4.10.38
See Notes
- (1) In the case of a firm using the IRB approach in calculating risk weighted exposure amounts and expected loss amounts, the persons in (2) are added to the list in BIPRU 5.7.1 R (List of eligible providers of unfunded credit protection).
- (2) The persons referred to in (1) are other corporate entities, including parent undertakings, subsidiary undertakings and affiliate corporate entities of the firm, that do not have a credit assessment by an eligible ECAI and are internally rated as having a probability of default equivalent to that associated with the credit assessments of ECAIs that are associated with credit quality step 2 or above under the rules for the risk weighting of exposures under the standardised approach to credit risk.
[Note: BCD Annex VIII Part 1 point 26(g)(ii)]
BIPRU 4.10.39
See Notes
Where risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach, to be eligible a guarantor must be internally rated by a firm in accordance with the provisions of the minimum IRB standards.
[Note: BCD Annex VIII Part 1 point 27]
Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives: Introduction
BIPRU 4.10.40
See Notes
BIPRU 4.10.41 R to BIPRU 4.10.48 R set out the minimum requirements:
- (1) assessing the effect of guarantees and credit derivatives for:
- (a) exposures in the sovereign, institution and corporate IRB exposure class where the advanced IRB approach is being used to calculate LGDs; and
- (b) retail exposures; and
- (2) additionally, in the case of retail exposure guarantees, to the assignment of exposures to grades or pools, and the estimation of PD.
[Note: BCD Annex VII Part 4 point 97]
BIPRU 4.10.41
See Notes
The requirements in BIPRU 4.10.40 R (2) and BIPRU 4.10.42 R - BIPRU 4.10.48 R do not apply to guarantees provided by institutions, central governments, central banks and other corporate entities which meet the requirements in BIPRU 5.7.1 R (7) if the firm has received approval under BIPRU 4.2 to apply the standardised approach for exposures to such entities. In this case the requirements of BIPRU 5 (credit risk mitigation) apply.
[Note: BCD Annex VII Part 4 point 96]
Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives: Eligible guarantors and guarantees
BIPRU 4.10.42
See Notes
A firm must have clearly specified criteria for the types of guarantors it recognises for the calculation of risk weighted exposure amounts.
[Note: Annex VII Part 4 point 98]
BIPRU 4.10.43
See Notes
For recognised guarantors the same requirements as for obligors as set out in BIPRU 4.3.43 R - BIPRU 4.3.48 R (Assignment to grades and pools), BIPRU 4.4.11 R - BIPRU 4.4.18 R and BIPRU 4.4.51 R (Assignment of exposures and rating systems), BIPRU 4.5.6 R (Assignment of exposures) and BIPRU 4.6.11 R and BIPRU 4.6.14 R (Assignment of exposures and rating systems) apply.
[Note: BCD Annex VII Part 4 point 99]
BIPRU 4.10.44
See Notes
The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the obligation is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. Guarantees prescribing conditions under which the guarantor may not be obliged to perform (conditional guarantees) may be recognised if the IRB permission permits this. A firm must (in the case of a firm with an IRB permission that permits conditional guarantees) be able to demonstrate to the appropriate regulator that the assignment criteria adequately address any potential reduction in the risk mitigation effect.
[Note: BCD Annex VII Part 4 point 100]
Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives: Adjustment criteria
BIPRU 4.10.45
See Notes
A firm must have clearly specified criteria for adjusting grades, pools or LGD estimates, and in the case of retail exposures and eligible purchased receivables, the process of allocating exposures to grades or pools, to reflect the impact of guarantees for the calculation of risk weighted exposure amounts. These criteria must comply with the minimum requirements referred to in BIPRU 4.10.43 R.
[Note: BCD Annex VII Part 4 point 101]
BIPRU 4.10.46
See Notes
The criteria in BIPRU 4.10.45 R must be plausible and intuitive. They must address the guarantor's ability and willingness to perform under the guarantee, the likely timing of any payments from the guarantor, the degree to which the guarantor's ability to perform under the guarantee is correlated with the obligor's ability to repay, and the extent to which residual risk to the obligor remains.
[Note: BCD Annex VII Part 4 point 102]
Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives: Credit derivatives
BIPRU 4.10.47
See Notes
The minimum requirements for guarantees set out in BIPRU 4.10 also apply for single name credit derivatives. In relation to a mismatch between the underlying obligation and the reference obligation of the credit derivative or the obligation used for determining whether a credit event has occurred the requirements set out under BIPRU 5.7.14 R (Mismatches and credit derivatives) apply. For retail exposures and eligible purchased receivables, this paragraph applies to the process of allocating exposures to grades or pools.
[Note: BCD Annex VII Part 4 point 103]
BIPRU 4.10.48
See Notes
The criteria applied by BIPRU 4.10.47 R must address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. A firm must consider the extent to which other forms of residual risk remain.
[Note: BCD Annex VII Part 4 point 104]
Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives: Calculating risk weighted exposure amounts and expected loss amounts
BIPRU 4.10.49
See Notes
- (1) This rule relates to the calculation of risk-weighted exposure amounts and expected loss amounts in the case of unfunded credit protection.
- (2) BIPRU 5.7.21 R (Tranching) applies for the purpose in (1).
- (3) The provisions in (4) replace those in BIPRU 5.7.22 R to BIPRU 5.7.25 R (Calculating risk weighted exposure amounts under the standardised approach in the case of unfunded credit protection).
- (4) For the covered portion of the exposure value E (based on the adjusted value of the credit protection GA), the PD for the purposes of BIPRU 4 may be the PD of the protection provider, or a PD between that of the borrower and that of the guarantor if a full substitution is deemed not to be warranted. In the case of subordinated exposures and non-subordinated unfunded protection, the LGD to be applied for the purposes of BIPRU 4 may be that associated with senior claims.
- (5) For any uncovered portion of the exposure value E the PD must be that of the borrower and the LGD must be that of the underlying exposure.
- (6) GA is the value of G* as calculated under BIPRU 5.7.17 R (Valuation of unfunded credit protection) further adjusted for any maturity mismatch as laid down in BIPRU 4.10.51 R (Maturity mismatches).
- (7) E is the exposure value as related to the following rules: BIPRU 4.4.38 R, BIPRU 4.4.39 R, BIPRU 4.4.71 R to BIPRU 4.4.78 R, BIPRU 4.7.7 R, BIPRU 4.8.28 R, BIPRU 4.8.29 R and BIPRU 4.9.9 R. For this purpose, the exposure value of the items referred to in BIPRU 4.4.37 R to BIPRU 4.4.39 R and BIPRU 4.8.29 R must be calculated using a conversion factor or percentage of 100% rather than the conversion factors or percentages indicated in those rules.
[Note: BCD Annex VIII Part 3 points 90 to 92]
Maturity mismatches
BIPRU 4.10.50
See Notes
In addition to BIPRU 5.8.2 R, where there is a maturity mismatch the credit protection must not be recognised where the exposure is a short term exposure specified in the firm's IRB permission as being subject to a one-day floor rather than a one-year floor in respect of the maturity value (M) under BIPRU 4.4.68 R.
[Note: BCD Annex VIII Part 4 point 2(b)]
BIPRU 4.10.51
See Notes
GA as calculated under BIPRU 5.8.11 R is then taken as the value of the protection for the purposes of calculating the effects of unfunded credit protection under the IRB approach.
[Note: BCD Annex VIII Part 4 point 8 (part)]
BIPRU 4 Annex 1
Supervisory Slotting Criteria for Specialised Lending
- 01/01/2007
See Notes
This table belongs to BIPRU 4.5.6 R and must be used in accordance with that rule only for project finance exposures.
Table 1 - Supervisory Rating Grades for Project Finance Exposures | ||||
Strong | Good | Satisfactory | Weak | |
Financial strength | ||||
Market conditions | Few competing suppliers or substantial and durable advantage in location, cost, or technology. Demand is strong and growing | Few competing suppliers or better than average location, cost, or technology but this situation may not last. Demand is strong and stable | Project has no advantage in location, cost, or technology. Demand is adequate and stable | Project has worse than average location, cost, or technology. Demand is weak and declining |
Financial ratios (e.g. debt service coverage ratio (DSCR), loan life coverage ratio (LLCR), project life coverage ratio (PLCR), and debt-to-equity ratio) | Strong financial ratios considering the level of project risk; very robust economic assumptions | Strong to acceptable financial ratios considering the level of project risk; robust project economic assumptions | Standard financial ratios considering the level of project risk | Aggressive financial ratios considering the level of project risk |
Stress analysis | The project can meet its financial obligations under sustained, severely stressed economic or sectoral conditions | The project can meet its financial obligations under normal stressed economic or sectoral conditions. The project is only likely to default under severe economic conditions | The project is vulnerable to stresses that are not uncommon through an economic cycle, and may default in a normal downturn | The project is likely to default unless conditions improve soon |
Financial structure | ||||
Duration of the credit compared to the duration of the project | Useful life of the project significantly exceeds tenor of the loan | Useful life of the project exceeds tenor of the loan | Useful life of the project exceeds tenor of the loan | Useful life of the project may not exceed tenor of the loan |
Amortisation schedule | Amortising debt | Amortising debt | Amortising debt repayments with limited bullet payment | Bullet repayment or amortising debt repayments with high bullet repayment |
Political and legal environment | ||||
Political risk, including transfer risk, considering project type and mitigants | Very low exposure; strong mitigation instruments, if needed | Low exposure; satisfactory mitigation instruments, if needed | Moderate exposure; fair mitigation instruments | High exposure; no or weak mitigation instruments |
Force majeure risk (war, civil unrest, etc) | Low exposure | Acceptable exposure | Standard protection | Significant risks, not fully mitigated |
Government support and project's importance for the country over the long term | Project of strategic importance for the country (preferably export-oriented). Strong support from Government | Project considered important for the country. Good level of support from Government | Project may not be strategic but brings unquestionable benefits for the country. Support from Government may not be explicit | Project not key to the country. No or weak support from Government |
Stability of legal and regulatory environment (risk of change in law) | Favourable and stable regulatory environment over the long term | Favourable and stable regulatory environment over the medium term | Regulatory changes can be predicted with a fair level of certainty | Current or future regulatory issues may affect the project |
Acquisition of all necessary supports and approvals for such relief from local content laws | Strong | Satisfactory | Fair | Weak |
Enforceability of contracts, collateral and security | Contracts, collateral and security are enforceable | Contracts, collateral and security are enforceable | Contracts, collateral and security are considered enforceable even if certain non-key issues may exist | There are unresolved key issues in respect if actual enforcement of contracts, collateral and security |
Transaction characteristics | ||||
Design and technology risk | Fully proven technology and design | Fully proven technology and design | Proven technology and design - start-up issues are mitigated by a strong completion package | Unproven technology and design; technology issues exist and/or complex design |
Construction risk | ||||
Permitting and siting | All permits have been obtained | Some permits are still outstanding but their receipt is considered very likely | Some permits are still outstanding but the permitting process is well defined and they are considered routine | Key permits still need to be obtained and are not considered routine. Significant conditions may be attached |
Type of construction contract | Fixed-price date-certain turnkey construction EPC (engineering and procurement contract) | Fixed-price date-certain turnkey construction EPC | Fixed-price date-certain turnkey construction contract with one or several contractors | No or partial fixed-price turnkey contract and/or interfacing issues with multiple contractors |
Completion guarantees | Substantial liquidated damages supported by financial substance and/or strong completion guarantee from sponsors with excellent financial standing | Significant liquidated damages supported by financial substance and/or completion guarantee from sponsors with good financial standing | Adequate liquidated damages supported by financial substance and/or completion guarantee from sponsors with good financial standing | Inadequate liquidated damages or not supported by financial substance or weak completion guarantees |
Track record and financial strength of contractor in constructing similar projects. | Strong | Good | Satisfactory | Weak |
Operating risk | ||||
Scope and nature of operations and maintenance (O & M) contracts | Strong long-term O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts | Long-term O&M contract, and/or O&M reserve accounts | Limited O&M contract or O&M reserve account | No O&M contract: risk of high operational cost overruns beyond mitigants |
Operator's expertise, track record, and financial strength | Very strong, or committed technical assistance of the sponsors | Strong | Acceptable | Limited/weak, or local operator dependent on local authorities |
Off-take risk | ||||
(a) If there is a take-or-pay or fixed-price off-take contract: | Excellent creditworthiness of off-taker; strong termination clauses; tenor of contract comfortably exceeds the maturity of the debt | Good creditworthiness of off-taker; strong termination clauses; tenor of contract exceeds the maturity of the debt | Acceptable financial standing of off-taker; normal termination clauses; tenor of contract generally matches the maturity of the debt | Weak off-taker; weak termination clauses; tenor of contract does not exceed the maturity of the debt |
(b) If there is no take-or-pay or fixed-price off-take contract: | Project produces essential services or a commodity sold widely on a world market; output can readily be absorbed at projected prices even at lower than historic market growth rates | Project produces essential services or a commodity sold widely on a regional market that will absorb it at projected prices at historical growth rates | Commodity is sold on a limited market that may absorb it only at lower than projected prices | Project output is demanded by only one or a few buyers or is not generally sold on an organised market |
Supply risk | ||||
Price, volume and transportation risk of feed-stocks; supplier's track record and financial strength | Long-term supply contract with supplier of excellent financial standing | Long-term supply contract with supplier of good financial standing | Long-term supply contract with supplier of good financial standing - a degree of price risk may remain | Short-term supply contract or long-term supply contract with financially weak supplier - a degree of price risk definitely remains |
Reserve risks (e.g. natural resource development) | Independently audited, proven and developed reserves well in excess of requirements over lifetime of the project | Independently audited, proven and developed reserves in excess of requirements over lifetime of the project | Proven reserves can supply the project adequately through the maturity of the debt | Project relies to some extent on potential and undeveloped reserves |
Strength of Sponsor | ||||
Sponsor's track record, financial strength, and country/sector experience | Strong sponsor with excellent track record and high financial standing | Good sponsor with satisfactory track record and good financial standing | Adequate sponsor with adequate track record and good financial standing | Weak sponsor with no or questionable track record and/or financial weaknesses |
Sponsor support, as evidenced by equity, ownership clause and incentive to inject additional cash if necessary | Strong. Project is highly strategic for the sponsor (core business - long-term strategy) | Good. Project is strategic for the sponsor (core business - long-term strategy) | Acceptable. Project is considered important for the sponsor (core business) | Limited. Project is not key to sponsor's long-term strategy or core business |
Security Package | ||||
Assignment of contracts and accounts | Fully comprehensive | Comprehensive | Acceptable | Weak |
Pledge of assets, taking into account quality, value and liquidity of assets | First perfected security interest in all project assets, contracts, permits and accounts necessary to run the project | Perfected security interest in all project assets, contracts, permits and accounts necessary to run the project | Acceptable security interest in all project assets, contracts, permits and accounts necessary to run the project | Little security or collateral for lenders; weak negative pledge clause |
Lender's control over cash flow (e.g. cash sweeps, independent escrow accounts) | Strong | Satisfactory | Fair | Weak |
Strength of the covenant package (mandatory prepayments, payment deferrals, payment cascade, dividend restrictions...) | Covenant package is strong for this type of project Project may issue no additional debt | Covenant package is satisfactory for this type of project Project may issue extremely limited additional debt | Covenant package is fair for this type of project Project may issue limited additional debt | Covenant package is Insufficient for this type of project Project may issue unlimited additional debt |
Reserve funds (debt service, O&M, renewal and replacement, unforeseen events, etc) | Longer than average coverage period, all reserve funds fully funded in cash or letters of credit from highly rated bank | Average coverage period, all reserve funds fully funded | Average coverage period, all reserve funds fully funded | Shorter than average coverage period, reserve funds funded from operating cash flows |
Table 2 - Supervisory Rating Grades for Income-Producing Real Estate Exposures | ||||
Strong | Good | Satisfactory | Weak | |
Financial strength | ||||
Market conditions | The supply and demand for the project's type and location are currently in equilibrium. The number of competitive properties coming to market is equal or lower than forecasted demand | The supply and demand for the project's type and location are currently in equilibrium. The number of competitive properties coming to market is roughly equal to forecasted demand | Market conditions are roughly in equilibrium. Competitive properties are coming on the market and others are in the planning stages. The project's design and capabilities may not be state of the art compared to new projects | Market conditions are weak. It is uncertain when conditions will improve and return to equilibrium. The project is losing tenants at lease expiration. New lease terms are less favourable compared to those expiring |
Financial ratios and advance rate | The property's debt service coverage ratio (DSCR) is considered strong (DSCR is not relevant for the construction phase) and its loan to value ratio (LTV) is considered low given its property type. Where a secondary market exists, the transaction is underwritten to market standards | The DSCR (not relevant for development real estate) and LTV are satisfactory. Where a secondary market exists, the transaction is underwritten to market standards | The property's DSCR has deteriorated and its value has fallen, increasing its LTV | The property's DSCR has deteriorated significantly and its LTV is well above underwriting standards for new loans |
Stress analysis | The property's resources, contingencies and liability structure allow it to meet its financial obligations during a period of severe financial stress (e.g. interest rates, economic growth) | The property can meet its financial obligations under a sustained period of financial stress (e.g. interest rates, economic growth). The property is likely to default only under severe economic conditions | During an economic downturn, the property would suffer a decline in revenue that would limit its ability to fund capital expenditures and significantly increase the risk of default | The property's financial condition is strained and is likely to default unless conditions improve in the near term |
Cash-flow predictability | ||||
(a) For complete and stabilised property | The property's leases are long-term with creditworthy tenants and their maturity dates are scattered. The property has a track record of tenant retention upon lease expiration. Its vacancy rate is low. Expenses (maintenance, insurance, security, and property taxes) are predictable | Most of the property's leases are long-term, with tenants that range in creditworthiness. The property experiences a normal level of tenant turnover upon lease expiration. Its vacancy rate is low. Expenses are predictable | Most of the property's leases are medium rather than long-term with tenants that range in creditworthiness. The property experiences a moderate level of tenant turnover upon lease expiration. Its vacancy rate is moderate. Expenses are relatively predictable but vary in relation to revenue | The property's leases are of various terms with tenants that range in creditworthiness. The property experiences a very high level of tenant turnover upon lease expiration. Its vacancy rate is high. Significant expenses are incurred preparing space for new tenants |
(b) For complete but not stabilised property | Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future | Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future | Most leasing activity is within projections; however, stabilisation will not occur for some time | Market rents do not meet expectations. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue |
(c) For construction phase | The property is entirely pre-leased through the tenor of the loan or pre-sold to an investment grade tenant or buyer, or the bank has a binding commitment for take-out financing from an investment grade lender | The property is entirely pre-leased or pre-sold to a creditworthy tenant or buyer, or the bank has a binding commitment for permanent financing from a creditworthy lender | Leasing activity is within projections but the building may not be pre-leased and there may not exist a take-out financing. The bank may be the permanent lender | The property is deteriorating due to cost overruns, market deterioration, tenant cancellations or other factors. There may be a dispute with the party providing the permanent financing |
Asset characteristics | ||||
Location | Property is located in highly desirable location that is convenient to services that tenants desire | Property is located in desirable location that is convenient to services that tenants desire | The property location lacks a competitive advantage | The property's location, configuration, design and maintenance have contributed to the property's difficulties |
Design and condition | Property is favoured due to its design, configuration, and maintenance, and is highly competitive with new properties | Property is appropriate in terms of its design, configuration and maintenance. The property's design and capabilities are competitive with new properties | Property is adequate in terms of its configuration, design and maintenance | Weaknesses exist in the property's configuration, design or maintenance |
Property is under construction | Construction budget is conservative and technical hazards are limited. Contractors are highly qualified | Construction budget is conservative and technical hazards are limited. Contractors are highly qualified | Construction budget is adequate and contractors are ordinarily qualified | Project is over budget or unrealistic given its technical hazards. Contractors may be under qualified |
Strength of Sponsor/Developer | ||||
Financial capacity and willingness to support the property | The sponsor/developer made a substantial cash contribution to the construction or purchase of the property. The sponsor/developer has substantial resources and limited direct and contingent liabilities. The sponsor/developer's properties are diversified geographically and by property type | The sponsor/developer made a material cash contribution to the construction or purchase of the property. The sponsor/developer's financial condition allows it to support the property in the event of a cash flow shortfall. The sponsor/developer's properties are located in several geographic regions | The sponsor/developer's contribution may be immaterial or non-cash. The sponsor/developer is average to below average in financial resources | The sponsor/developer lacks capacity or willingness to support the property |
Reputation and track record with similar properties | Experienced management and high sponsors' quality. Strong reputation and lengthy and successful record with similar properties | Appropriate management and sponsors' quality. The sponsor or management has a successful record with similar properties | Moderate management and sponsors' quality. Management or sponsor track record does not raise serious concerns | Ineffective management and substandard sponsors' quality. Management and sponsor difficulties have contributed to difficulties in managing properties in the past |
Relationships with relevant real estate actors | Strong relationships with leading actors such as leasing agents | Proven relationships with leading actors such as leasing agents | Adequate relationships with leasing agents and other parties providing important real estate services | Poor relationships with leasing agents and/or other parties providing important real estate services |
Security Package | ||||
Nature of lien | Perfected first lien (Note 1) | Perfected first lien (Note 1) | Perfected first lien (Note 1) | Ability of lender to foreclose is constrained |
Assignment of rents (for projects leased to long-term tenants) | The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to remit rents directly to the lender, such as a current rent roll and copies of the project's leases | The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project's leases | The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project's leases | The lender has not obtained an assignment of the leases or has not maintained the information necessary to readily provide notice to the building's tenants |
Quality of the insurance coverage | Appropriate | Appropriate | Appropriate | Substandard |
Note 1: Lenders in some markets extensively use loan structures that include junior liens. Junior liens may be indicative of this level of risk if the total LTV inclusive of all senior positions does not exceed a typical first loan LTV. |
Table 3 - Supervisory Rating Grades for Object Finance Exposures | ||||
Strong | Good | Satisfactory | Weak | |
Financial strength | ||||
Market conditions | Demand is strong and growing, strong entry barriers, low sensitivity to changes in technology and economic outlook | Demand is strong and stable. Some entry barriers, some sensitivity to changes in technology and economic outlook | Demand is adequate and stable, limited entry barriers, significant sensitivity to changes in technology and economic outlook | Demand is weak and declining, vulnerable to changes in technology and economic outlook, highly uncertain environment |
Financial ratios (debt service coverage ratio and loan-to-value ratio) | Strong financial ratios considering the type of asset. Very robust economic assumptions | Strong / acceptable financial ratios considering the type of asset. Robust project economic assumptions | Standard financial ratios for the asset type | Aggressive financial ratios considering the type of asset |
Stress analysis | Stable long-term revenues, capable of withstanding severely stressed conditions through an economic cycle | Satisfactory short-term revenues. Loan can withstand some financial adversity. Default is only likely under severe economic conditions | Uncertain short-term revenues. Cash flows are vulnerable to stresses that are not uncommon through an economic cycle. The loan may default in a normal downturn | Revenues subject to strong uncertainties; even in normal economic conditions the asset may default, unless conditions improve |
Market liquidity | Market is structured on a worldwide basis; assets are highly liquid | Market is worldwide or regional; assets are relatively liquid | Market is regional with limited prospects in the short term, implying lower liquidity | Local market and/or poor visibility. Low or no liquidity, particularly on niche markets |
Political and legal environment | ||||
Political risk, including transfer risk | Very low; strong mitigation instruments, if needed | Low; satisfactory mitigation instruments, if needed | Moderate; fair mitigation instruments | High; no or weak mitigation instruments |
Legal and regulatory risks | Jurisdiction is favourable to repossession and enforcement of contracts | Jurisdiction is favourable to repossession and enforcement of contracts | Jurisdiction is generally favourable to repossession and enforcement of contracts, even if repossession might be long and/or difficult | Poor or unstable legal and regulatory environment. Jurisdiction may make repossession and enforcement of contracts lengthy or impossible |
Transaction characteristics | ||||
Financing term compared to the economic life of the asset | Full payout profile/minimum balloon. No grace period | Balloon more significant, but still at satisfactory levels | Important balloon with potentially grace periods | Repayment in fine or high balloon |
Operating risk | ||||
Permits / licensing | All permits have been obtained; asset meets current and foreseeable safety regulations | All permits obtained or in the process of being obtained; asset meets current and foreseeable safety regulations | Most permits obtained or in process of being obtained, outstanding ones considered routine, asset meets current safety regulations | Problems in obtaining all required permits, part of the planned configuration and/or planned operations might need to be revised |
Scope and nature of O & M contracts | Strong long-term O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts (if needed) | Long-term O&M contract, and/or O&M reserve accounts (if needed) | Limited O&M contract or O&M reserve account (if needed) | No O&M contract: risk of high operational cost overruns beyond mitigants |
Operator's financial strength, track record in managing the asset type and capability to re-market asset when it comes off-lease | Excellent track record and strong re-marketing capability | Satisfactory track record and re-marketing capability | Weak or short track record and uncertain re-marketing capability | No or unknown track record and inability to re-market the asset |
Asset characteristics | ||||
Configuration, size, design and maintenance (i.e. age, size for a plane) compared to other assets on the same market | Strong advantage in design and maintenance. Configuration is standard such that the object meets a liquid market | Above average design and maintenance. Standard configuration, maybe with very limited exceptions - such that the object meets a liquid market | Average design and maintenance. Configuration is somewhat specific, and thus might cause a narrower market for the object | Below average design and maintenance. Asset is near the end of its economic life. Configuration is very specific; the market for the object is very narrow |
Resale value | Current resale value is well above debt value | Resale value is moderately above debt value | Resale value is slightly above debt value | Resale value is below debt value |
Sensitivity of the asset value and liquidity to economic cycles | Asset value and liquidity are relatively insensitive to economic cycles | Asset value and liquidity are sensitive to economic cycles | Asset value and liquidity are quite sensitive to economic cycles | Asset value and liquidity are highly sensitive to economic cycles |
Strength of sponsor | ||||
Operator's financial strength, track record in managing the asset type and capability to re-market asset when it comes off-lease | Excellent track record and strong re-marketing capability | Satisfactory track record and re-marketing capability | Weak or short track record and uncertain re-marketing capability | No or unknown track record and inability to re-market the asset |
Sponsors' track record and financial strength | Sponsors with excellent track record and high financial standing | Sponsors with good track record and good financial standing | Sponsors with adequate track record and good financial standing | Sponsors with no or questionable track record and/or financial weaknesses |
Security Package | ||||
Asset control | Legal documentation provides the lender effective control (e.g. a first perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it | Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it | Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it | The contract provides little security to the lender and leaves room to some risk of losing control on the asset |
Rights and means at the lender's disposal to monitor the location and condition of the asset | The lender is able to monitor the location and condition of the asset, at any time and place (regular reports, possibility to lead inspections) | The lender is able to monitor the location and condition of the asset, almost at any time and place | The lender is able to monitor the location and condition of the asset, almost at any time and place | The lender is able to monitor the location and condition of the asset are limited |
Insurance against damages | Strong insurance coverage including collateral damages with top quality insurance companies | Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies | Fair insurance coverage (not including collateral damages) with acceptable quality insurance companies | Weak insurance coverage (not including collateral damages) or with weak quality insurance companies |
Table 4 - Supervisory Rating Grades for Commodities Finance Exposures | ||||
Strong | Good | Satisfactory | Weak | |
Financial strength | ||||
Degree of over-collateralisation of trade | Strong | Good | Satisfactory | Weak |
Political and legal Environment | ||||
Country risk | No country risk | Limited exposure to country risk (in particular, offshore location of reserves in an emerging country) | Exposure to country risk (in particular, offshore location of reserves in an emerging country) | Strong exposure to country risk (in particular, inland reserves in an emerging country) |
Mitigation of country risks | Very strong mitigation: | Strong mitigation: | Acceptable mitigation: | Only partial mitigation: |
Strong offshore Mechanisms | Offshore mechanisms | Offshore mechanisms | No offshore mechanisms | |
Strategic commodity | Strategic commodity | Less strategic commodity | Non-strategic commodity | |
1st class buyer | Strong buyer | Acceptable buyer | Weak buyer | |
Asset characteristics | ||||
Liquidity and susceptibility to damage | Commodity is quoted and can be hedged through futures or OTC instruments. Commodity is not susceptible to damage | Commodity is quoted and can be hedged through OTC instruments. Commodity is not susceptible to damage | Commodity is not quoted but is liquid. There is uncertainty about the possibility of hedging. Commodity is not susceptible to damage | Commodity is not quoted. Liquidity is limited given the size and depth of the market. No appropriate hedging instruments. Commodity is susceptible to damage |
Strength of sponsor | ||||
Financial strength of trader | Very strong, relative to trading philosophy and risks | Strong | Adequate | Weak |
Track record, including ability to manage the logistic process | Extensive experience with the type of transaction in question. Strong record of operating success and cost efficiency | Sufficient experience with the type of transaction in question. Above average record of operating success and cost efficiency | Limited experience with the type of transaction in question. Average record of operating success and cost efficiency | Limited or uncertain track record in general. Volatile costs and profits |
Trading controls and hedging policies | Strong standards for counterparty selection, hedging, and monitoring | Adequate standards for counterparty selection, hedging, and monitoring | Past deals have experienced no or minor problems | Trader has experienced significant losses on past deals |
Quality of financial disclosure | Excellent | Good | Satisfactory | Financial disclosure contains some uncertainties or is insufficient |
Security package | ||||
Asset control | First perfected security interest provides the lender legal control of the assets at any time if needed | First perfected security interest provides the lender legal control of the assets at any time if needed | At some point in the process, there is a rupture in the control of the assets by the lender. The rupture is mitigated by knowledge of the trade process or a third party undertaking as the case may be | Contract leaves room for some risk of losing control over the assets. Recovery could be jeopardised |
Insurance against damages | Strong insurance coverage including collateral damages with top quality insurance companies | Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies | Fair insurance coverage (not including collateral damages) with acceptable quality insurance companies | Weak insurance coverage (not including collateral damages) or with weak quality insurance companies |
BIPRU 5
Credit risk mitigation
BIPRU 5.1
Application and purpose
- 01/01/2007
Application
BIPRU 5.1.1
See Notes
Purpose
BIPRU 5.1.2
See Notes
BIPRU 5.1.3
See Notes
BIPRU 5.1.4
See Notes
BIPRU 5.1.5
See Notes
BIPRU 5.2
The central principles of credit risk mitigation
- 01/01/2007
BIPRU 5.2.1
See Notes
A firm using the standardised approach may recognise credit risk mitigation in accordance with BIPRU 5 in the calculation of risk weighted exposure amounts for the purposes of the calculation of the credit risk capital component.
[Note: BCD Article 91]
BIPRU 5.2.2
See Notes
The technique used to provide the credit protection together with the actions and steps taken and procedures and policies implemented by a lending firm must be such as to result in credit protection arrangements which are legally effective and enforceable in all relevant jurisdictions.
[Note: BCD Article 92(1)]
BIPRU 5.2.3
See Notes
- (1) A firm must not recognise credit protection as eligible until it has conducted sufficient legal review confirming that the credit protection arrangements are legally effective and enforceable in all relevant jurisdictions in accordance with BIPRU 5.2.2 R.
- (2) A firm must re-conduct legal reviews as necessary to ensure continuing enforceability and effectiveness.
BIPRU 5.2.4
See Notes
A lending firm must take all appropriate steps to ensure the effectiveness of the credit protection arrangement and to address related risks.
[Note: BCD Article 92(2)]
Funded credit protection
BIPRU 5.2.5
See Notes
In the case of funded credit protection:
- (1) to be eligible for recognition the assets relied upon must be sufficiently liquid and their value over time sufficiently stable to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk weighted exposure amounts and to the degree of recognition allowed; eligibility is limited to the assets set out in the CRM eligibility conditions; and
- (2) the lending firm must have the right to liquidate or retain, in a timely manner, the assets from which the protection derives in the event of the default, insolvency or bankruptcy of the obligor - or other credit event set out in the transaction documentation - and, where applicable, of the custodian holding the collateral; the degree of correlation between the value of the assets relied upon for protection and the credit quality of the obligor must not be undue.
[Note: BCD Article 92(3) and (4)]
Treatment of credit linked notes
BIPRU 5.2.6
See Notes
Unfunded credit protection
BIPRU 5.2.7
See Notes
In the case of unfunded credit protection:
- (1) to be eligible for recognition the party giving the undertaking must be sufficiently reliable, and the protection agreement legally effective and enforceable in the relevant jurisdictions, to provide appropriate certainty as to the credit protection achieved having regard to the approach used to calculate risk weighted exposure amounts and to the degree of recognition allowed; and
- (2) eligibility is limited to the protection providers and types of protection agreement set out in the CRM eligibility conditions.
[Note: BCD Article 92(5)]
Minimum requirements
BIPRU 5.2.8
See Notes
The minimum requirements set out in BIPRU 5 must be complied with.
[Note: BCD Article 92(6)]
BIPRU 5.2.9
See Notes
A firm must be able to satisfy the appropriate regulator that it has adequate risk management processes to control the risks to which the firm may be exposed as a result of carrying out credit risk mitigation. Those processes must include appropriate stress tests and scenario analyses relating to those risks, including residual risk and the risks relating to the intrinsic value of the credit risk mitigation.
[Note: BCD Annex VIII Part 2 point 1]
BIPRU 5.2.10
See Notes
Notwithstanding the presence of credit risk mitigation taken into account for the purposes of calculating risk weighted exposure amounts and as relevant expected loss amounts, a firm must continue to undertake full credit risk assessment of the underlying exposure and must be in a position to demonstrate to the appropriate regulator the fulfilment of this requirement. In the case of repurchase transactions and/or securities or commodities lending or borrowing transactions the underlying exposure must, for the purposes of this rule only, be deemed to be the net amount of the exposure.
[Note: BCD Annex VIII Part 2 point 2]
Calculating the effects of the credit risk mitigation
BIPRU 5.2.11
See Notes
Where the requirements of BIPRU 5.2.2 R to BIPRU 5.2.8 R are met the calculation of risk weighted exposure amounts, may be modified in accordance with BIPRU 5.
[Note: BCD Article 93(1)]
BIPRU 5.2.12
See Notes
No exposure in respect of which credit risk mitigation is obtained may produce a higher risk weighted exposure amount than an otherwise identical exposure in respect of which there is no credit risk mitigation.
[Note: BCD Article 93(2)]
BIPRU 5.2.13
See Notes
Where the risk weighted exposure amount already takes account of credit protection under the standardised approach the calculation of the credit protection must not be further recognised under BIPRU 5.
[Note: BCD Article 93(3)]
BIPRU 5.2.14
See Notes
Subject to BIPRU 5.8, BIPRU 5.9 and BIPRU 5.7.27 R to BIPRU 5.7.28 R, where the CRM eligibility conditions and the CRM minimum requirements are satisfied, the calculation of risk weighted exposure amounts under the standardised approach may be modified in accordance with the provisions of BIPRU 5.
[Note: BCD Annex VIII Part 3 point 1]
BIPRU 5.2.15
See Notes
Cash, securities or commodities purchased, borrowed or received under a repurchase transaction or securities or commodities lending or borrowing transaction must be treated as collateral.
[Note: BCD Annex VIII Part 3 point 2]
BIPRU 5.3
On balance sheet netting
- 01/01/2007
Eligibility
BIPRU 5.3.1
See Notes
BIPRU 5.3.2
See Notes
Without prejudice to BIPRU 5.6.1 R, eligibility is limited to reciprocal cash balances between a firm and a counterparty. Only loans and deposits of the lending firm may be subject to a modification of risk weighted exposure amounts and, as relevant, expected loss amounts as a result of an on-balance sheet netting agreement.
[Note: BCD Annex VIII Part 1 point 4]
Minimum requirements
BIPRU 5.3.3
See Notes
For on-balance sheet netting agreements - other than master netting agreements covering repurchase transactions, securities or commodities lending or borrowing transactions and/or other capital market-driven transactions - to be recognised for the purposes of BIPRU 5 the following conditions must be satisfied:
- (1) they must be legally effective and enforceable in all relevant jurisdictions, including in the event of the insolvency or bankruptcy of a counterparty;
- (2) the firm must be able to determine at any time those assets and liabilities that are subject to the on-balance sheet netting agreement;
- (3) the firm must monitor and control the risks associated with the termination of the credit protection; and
- (4) the firm must monitor and control the relevant exposures on a net basis.
[Note: BCD Annex VIII Part 2 point 3]
Calculating the effects of credit risk mitigation
BIPRU 5.3.4
See Notes
Loans and deposits with a lending firm subject to on-balance sheet netting are to be treated as cash collateral.
[Note: BCD Annex VIII Part 3 point 4]
BIPRU 5.4
Financial collateral
- 01/01/2007
Eligibility
BIPRU 5.4.1
See Notes
- (1) Where the credit risk mitigation used relies on the right of a firm to liquidate or retain assets, eligibility depends upon whether risk weighted exposure amounts, and, as relevant, expected loss amounts, are calculated under the standardised approach or the IRB approach.
- (2) Eligibility further depends upon whether the financial collateral simple method is used or the financial collateral comprehensive method.
- (3) In relation to repurchase transactions and securities or commodities lending or borrowing transactions, eligibility also depends upon whether the transaction is booked in the non-trading book or the trading book.
[Note: BCD Annex VIII Part 1 point 6]
BIPRU 5.4.2
See Notes
The following financial items may be recognised as eligible collateral under all approaches and methods:
- (1) cash on deposit with, or cash assimilated instruments held by, the lending firm;
- (2) debt securities issued by central governments or central banks which securities have a credit assessment by an eligible ECAI or export credit agency recognised as eligible for the purposes of the standardised approach, which is associated with credit quality step 4 or above under the rules for the risk weighting of exposures to central governments and central banks under the standardised approach;
- (3) debt securities issued by institutions which securities have a credit assessment by an eligible ECAI associated with credit quality step 3 or above under the rules for the risk weighting of exposures to a credit institution under the standardised approach;
- (4) debt securities issued by other entities which securities have a credit assessment by an eligible ECAI associated with credit quality step 3 or above under the rules for the risk weighting of exposures to corporates under the standardised approach;
- (5) debt securities with a short-term credit assessment by an eligible ECAI associated with credit quality step 3 or above under the rules for the risk weighting of short term exposures under the standardised approach;
- (6) equities or convertible bonds that are included in a main index; and
- (7) gold.
[Note: BCD Annex VIII Part 1 point 7 (part)]
BIPRU 5.4.3
See Notes
For the purposes of BIPRU 5.4.2 R (2), 'debt securities issued by central governments or central banks' include -
- (1) debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central government in whose jurisdiction they are established under the standardised approach;
- (2) debt securities issued by public sector entities which are treated as exposures to central governments in accordance with BIPRU 3.4.24 R;
- (3) debt securities issued by multilateral development banks to which a 0% risk weight is assigned under the standardised approach; and
- (4) debt securities issued by international organisations which are assigned a 0% risk weight under the standardised approach.
[Note: BCD Annex VIII Part 1 point 7 (part)]
BIPRU 5.4.4
See Notes
For the purposes of BIPRU 5.4.2 R (3), 'debt securities issued by institutions' include:
- (1) debt securities issued by regional governments or local authorities other than those exposures to which are treated as exposures to the central government in whose jurisdiction they are established under the standardised approach;
- (2) debt securities issued by public sector entities, exposures to which are treated as exposures to a credit institution under the standardised approach;
- (3) debt securities issued by multilateral development banks other than those to which a 0% risk weight is assigned under the standardised approach.
[Note: BCD Annex VIII Part 1 point 7 (part)]
BIPRU 5.4.5
See Notes
Debt securities issued by institutions which securities do not have a credit assessment by an eligible ECAI may be recognised as eligible collateral if they fulfil the following criteria:
- (1) they are listed on a recognised investment exchange or a designated investment exchange;
- (2) they qualify as senior debt;
- (3) all other rated issues by the issuing institution of the same seniority have a credit assessment by an eligible ECAI associated with credit quality step 3 or above under the rules for the risk weight of exposures to institutions or short term exposures under the standardised approach;
- (4) the lending firm has no information to suggest that the issue would justify a credit assessment below that indicated in (3); and
- (5) the firm can demonstrate to the appropriate regulator that the market liquidity of the instrument is sufficient for these purposes.
[Note: BCD Annex VIII Part 1 point 8]
BIPRU 5.4.6
See Notes
- (1) Units in CIUs may be recognised as eligible collateral if the following conditions are satisfied:
- (a) they have a daily public price quote;
- (b) the CIU is limited to investing in instruments that are eligible for recognition under BIPRU 5.4.2 R to BIPRU 5.4.5 R; and
- (c) if the CIU is not limited to investing in instruments that are eligible for recognition under BIPRU 5.4.2 R to BIPRU 5.4.5 R, units may be recognised with the value of the eligible assets as collateral under the assumption that the CIU has invested to the maximum extent allowed under its mandate in non-eligible assets. In cases where non-eligible assets can have a negative value due to liabilities or contingent liabilities resulting from ownership, the firm must calculate the total value of the non-eligible assets and must reduce the value of the eligible assets by that of the non-eligible assets in case the latter is negative in total.
- (2) The use (or potential use) by a CIU of derivative instruments to hedge permitted investments shall not prevent units in that CIU from being eligible.
[Note: BCD Annex VIII Part 1 point 9]
BIPRU 5.4.7
See Notes
In relation to BIPRU 5.4.2 R (2) to (5):
- (1) where a security has two credit assessments by eligible ECAIs, the less favourable assessment must be deemed to apply;
- (2) in cases where a security has more than two credit assessments by eligible ECAIs:
- (a) the two most favourable assessments must be deemed to apply; or
- (b) if the two most favourable credit assessments are different, the less favourable of the two must be deemed to apply.
[Note: BCD Annex VIII Part 1 point 10]
BIPRU 5.4.8
See Notes
- (1) In addition to the collateral set out in BIPRU 5.4.2 R to BIPRU 5.4.7 R, where a firm uses the financial collateral comprehensive method, the following financial items may be recognised as eligible collateral:
- (a) equities or convertible bonds not included in a main index but traded on a recognised investment exchange or a designated investment exchange;
- (b) units in CIUs if the following conditions are met:
- (i) they have a daily public price quote; and
- (ii) the CIU is limited to investing in instruments that are eligible for recognition under BIPRU 5.4.2 R to BIPRU 5.4.5 R and the items mentioned in (a); and
- (c) if the CIU is not limited to investing in instruments that are eligible for recognition under BIPRU 5.4.2 R to BIPRU 5.4.5 R and the items mentioned in (a) of this rule, units may be recognised with the value of the eligible assets as collateral under the assumption that the CIU has invested to the maximum extent allowed under its mandate in non-eligible assets. In cases where non-eligible assets can have a negative value due to liabilities or contingent liabilities resulting from ownership, the firm must calculate the total value of the non-eligible assets and must reduce the value of the eligible assets by that of the non-eligible assets, in case the latter is negative in total.
- (2) The use (or potential use) by a CIU of derivative instruments to hedge permitted investments shall not prevent units in that CIU from being eligible.
[Note: BCD Annex VIII Part 1 point 11]
Minimum requirements
BIPRU 5.4.9
See Notes
For the recognition of financial collateral and gold, the following conditions must be met:
- (1) the low correlation conditions in BIPRU 5.4.10 R;
- (2) the legal certainty conditions in BIPRU 5.4.11 R; and
- (3) the operational requirements in BIPRU 5.4.12 R.
[Note: BCD Annex VIII Part 2 point 6]
BIPRU 5.4.10
See Notes
The low correlation conditions referred to in BIPRU 5.4.9 R (1) are as follows:
- (1)
- (a) the credit quality of the obligor and the value of the collateral must not have a material positive correlation; and
- (b) securities issued by the obligor, or any related group entity are not eligible.
- (2) notwithstanding (1)(b), the obligor's own issues of covered bonds falling within the terms of BIPRU 3.4.107 R to BIPRU 3.4.109 R may be recognised as collateral for repurchase transactions, provided that (1)(a) is complied with.
[Note: BCD Annex VIII Part 2 point 6(a)]
BIPRU 5.4.11
See Notes
The legal certainty conditions referred to in BIPRU 5.4.9 R (2) are as follows:
- (1) a firm must fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under the law applicable to its interest in the collateral;
- (2) in accordance with the general principle in BIPRU 5.2.2 R, a firm must have conducted sufficient legal review confirming the enforceability of the collateral arrangements in all relevant jurisdictions; and
- (3) a firm must re-conduct such review as necessary to ensure continuing enforceability.
[Note: BCD Annex VIII Part 2 point 6(b)]
BIPRU 5.4.12
See Notes
The operational requirements referred to in BIPRU 5.4.9 R (3) are as follows:
- (1) the collateral arrangements must be properly documented, with a clear and robust procedure for the timely liquidation of collateral;
- (2) a firm must employ robust procedures and processes to control risks arising from the use of collateral - including risks of failed or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration risk arising from the use of collateral and the interaction with the firm's overall risk profile;
- (3) a firm must have documented policies and practices concerning the types and amounts of collateral accepted;
- (4) a firm must calculate the market value of the collateral, and revalue it accordingly, with a minimum frequency of once every six months and whenever the firm has reason to believe that there has occurred a significant decrease in its market value; and
- (5) where the collateral is held by a third party, a firm must take reasonable steps to ensure that the third party segregates the collateral from its own assets.
[Note: BCD Annex VIII Part 2 point 6(c)]
BIPRU 5.4.13
See Notes
In addition to the requirements set out in BIPRU 5.4.9 R, for the recognition of financial collateral under the financial collateral simple method the residual maturity of the protection must be at least as long as the residual maturity of the exposure.
[Note: BCD Annex VIII Part 2 point 7]
The financial collateral simple method: General
BIPRU 5.4.14
See Notes
BIPRU 5.4.15
See Notes
The financial collateral simple method is available only where risk weighted exposure amounts are calculated under the standardised approach to credit risk.
[Note: BCD Annex VIII Part 3 point 24 (part)]
BIPRU 5.4.16
See Notes
A firm must not use both the financial collateral simple method and the financial collateral comprehensive method, unless such use is for the purposes of BIPRU 4.2.17 R to BIPRU 4.2.19 R and BIPRU 4.2.26 R, and such use is provided for by the firm's IRB permission. A firm must demonstrate to the appropriate regulator that this exceptional application of both methods is not used selectively with the purpose of achieving reduced minimum capital requirements and does not lead to regulatory arbitrage.
[Note: BCD Annex VIII Part 3 point 24 (part)]
The financial collateral simple method: Valuation
BIPRU 5.4.17
See Notes
Under the financial collateral simple method, recognised financial collateral is assigned a value equal to its market value as determined in accordance with BIPRU 5.4.12 R.
[Note: BCD Annex VIII Part 3 point 25]
The financial collateral simple method: Calculating risk-weighted exposure amounts
BIPRU 5.4.18
See Notes
The risk weight that would be assigned under the standardised approach to credit risk if the lending firm had a direct exposure to the collateral instrument must be assigned to those portions of exposure values collateralised by the market value of recognised collateral. For this purpose, the exposure value of an off-balance sheet item listed in BIPRU 3.7.2 R must be 100% of its value rather than the exposure value indicated in BIPRU 3.2.1 R. The risk weight of the collateralised portion must be a minimum of 20% except as specified in BIPRU 5.4.19 R to BIPRU 5.4.21 R. The remainder of the exposure value receives the risk weight that would be applied to an unsecured exposure to the counterparty under the standardised approach.
[Note: BCD Annex VIII Part 3 point 26]
The financial collateral simple method: Repurchase transactions and securities lending or borrowing transactions
BIPRU 5.4.19
See Notes
A risk weight of 0% must be assigned to the collateralised portion of the exposure arising from transactions which fulfil the criteria enumerated in BIPRU 5.4.62 R or BIPRU 5.4.65 R. If the counterparty to the transaction is not a core market participant a risk weight of 10% must be assigned.
[Note: BCD Annex VIII Part 3 point 27]
The financial collateral simple method: financial derivative instruments subject to daily mark-to-market
BIPRU 5.4.20
See Notes
A risk weight of 0% must, to the extent of the collateralisation, be assigned to the exposure values determined under BIPRU 13 for financial derivative instruments and subject to daily marking-to-market, collateralised by cash or cash assimilated instruments where there is no currency mismatch. A risk weight of 10% must be assigned to the extent of the collateralisation to the exposure values of such transactions collateralised by debt securities issued by central governments or central banks which are assigned a 0% risk weight under the standardised approach.
[Note: BCD Annex VIII Part 3 point 28 (part)]
BIPRU 5.4.21
See Notes
A 0% risk weight may be assigned where the exposure and the collateral are denominated in the same currency, and either:
- (1) the collateral is cash on deposit or a cash assimilated instrument; or
- (2) the collateral is in the form of debt securities issued by central governments or central banks eligible for a 0% risk weight under the standardised approach, and its market value has been discounted by 20%.
[Note: BCD Annex VIII Part 3 point 29]
BIPRU 5.4.22
See Notes
For the purposes of BIPRU 5.4.20 R and BIPRU 5.4.21 R 'debt securities issued by central governments or central banks' must include:
- (1) debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central government in whose jurisdiction they are established under the standardised approach;
- (2) debt securities issued by multilateral development banks to which a 0% risk weight is assigned under or by virtue of the standardised approach; and
- (3) debt securities issued by international organisations which are assigned a 0% risk weight under the standardised approach.
[Note: BCD Annex VIII Part 3 point 28 (part)]
The financial collateral comprehensive method: General
BIPRU 5.4.23
See Notes
BIPRU 5.4.24
See Notes
In valuing financial collateral for the purposes of the financial collateral comprehensive method, volatility adjustments must be applied to the market value of collateral, as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R, in order to take account of price volatility.
[Note: BCD Annex VIII Part 3 point 30]
BIPRU 5.4.25
See Notes
Subject to the treatment for currency mismatches in the case of financial derivative instrument set out in BIPRU 5.4.26 R, where collateral is denominated in a currency that differs from that in which the underlying exposure is denominated, an adjustment reflecting currency volatility must be added to the volatility adjustment appropriate to the collateral as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R.
[Note: BCD Annex VIII Part 3 point 31]
BIPRU 5.4.26
See Notes
In the case of financial derivative instrument covered by netting agreements recognised under BIPRU 13, a volatility adjustment reflecting currency volatility must be applied when there is a mismatch between the collateral currency and the settlement currency. Even in the case where multiple currencies are involved in the transactions covered by the netting agreement, only a single volatility adjustment may be applied.
[Note: BCD Annex VIII Part 3 point 32]
BIPRU 5.4.27
See Notes
In the case of a firm using the financial collateral comprehensive method, where an exposure takes the form of securities or commodities sold, posted or lent under a repurchase transaction or under a securities or commodities lending or borrowing transaction, and margin lending transactions the exposure value must be increased by the volatility adjustment appropriate to such securities or commodities as prescribed in BIPRU 5.4.30 R to BIPRU 5.4.65 R.
[Note: BCD Article 78(1), third sentence]
The financial collateral comprehensive method: Calculating adjusted values
BIPRU 5.4.28
See Notes
- (1) The volatility-adjusted value of the collateral to be taken into account is calculated as follows in the case of all transactions except those transactions subject to recognised master netting agreements to which the provisions set out in BIPRU 5.6.5 R to BIPRU 5.6.29 R are to be applied:
- CVA = C x (1-HC-HFX)
- (2) The volatility-adjusted value of the exposure to be taken into account is calculated as follows:
- EVA = E x (1+HE), and in the case of financial derivative instruments EVA = E.
- (3) The fully adjusted value of the exposure, taking into account both volatility and the risk-mitigating effects of collateral is calculated as follows:
- E * = max {0, [EVA - CVAM]}
- Where:
- (a) E is the exposure value as would be determined under the standardised approach if the exposure was not collateralised.
- (b) EVA is the volatility-adjusted exposure amount.
- (c) CVA is the volatility-adjusted value of the collateral.
- (d) CVAM is CVA further adjusted for any maturity mismatch in accordance with the provisions of BIPRU 5.8.
- (e) HE is the volatility adjustment appropriate to the exposure (E), as calculated under BIPRU 5.4.30 R to BIPRU 5.4.65 R.
- (f) HC is the volatility adjustment appropriate for the collateral, as calculated under BIPRU 5.4.30 R to BIPRU 5.4.65 R.
- (g) HFX is the volatility adjustment appropriate for currency mismatch, as calculated under BIPRU 5.4.30 R to BIPRU 5.4.65 R.
- (h) E * is the fully adjusted exposure value taking into account volatility and the risk-mitigating effects of the collateral.
- (4) For the purpose of (3)(a), for a firm calculating risk weighted exposure amounts under the standardised approach the exposure value of an off-balance sheet items listed in BIPRU 3.7 must be 100% of its value rather than the exposure value indicated in BIPRU 3.2.1 R and BIPRU 3.7.2 R.
[Note: BCD Annex VIII Part 3 point 33]
The financial collateral comprehensive method: Calculation of volatility adjustments to be applied: General
BIPRU 5.4.29
See Notes
BIPRU 5.4.30
See Notes
Volatility adjustments may be calculated in two ways: the supervisory volatility adjustments approach and the own estimates of volatility adjustments approach.
[Note: BCD Annex VIII Part 3 point 34]
BIPRU 5.4.31
See Notes
A firm may choose to use the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach independently of the choice it has made between the standardised approach and the IRB approach for the calculation of risk weighted exposure amounts. However, if a firm seeks to use the own estimates of volatility adjustments approach, it must do so for the full range of instrument types, excluding immaterial portfolios where it may use the supervisory volatility adjustments approach.
[Note: BCD Annex VIII Part 3 point 35 (part)]
BIPRU 5.4.32
See Notes
Where the collateral consists of a number of recognised items, the volatility adjustment must be
(H = Σi αi Hi)
where:
- (1) ai is the proportion of an item to the collateral as a whole; and
- (2) Hi is the volatility adjustment applicable to that item.
[Note: BCD Annex VIII Part 3 point 35 (part)]
The financial collateral comprehensive method: Supervisory volatility adjustments approach
BIPRU 5.4.33
See Notes
BIPRU 5.4.34
See Notes
The volatility adjustments to be applied under the supervisory volatility adjustments approach (assuming daily revaluation) are those set out in the tables in BIPRU 5.4.35 R - BIPRU 5.4.38 R.
[Note: BCD Annex VIII Part 3 point 36]
Table: Volatility adjustments for debt securities described in BIPRU 5.4.2R(2) and (3) - (4)
BIPRU 5.4.35
See Notes
Credit quality step with which the credit assessment of the debt security is associated | Residual Maturity | Volatility adjustments for debt securities issued by entities described in BIPRU 5.4.2 R (2) | Volatility adjustments for debt securities issued by entities described in BIPRU 5.4.2 R (3) and (4) | ||||
20 day liquidation period (%) | 10 day liquidation period (%) | 5 day liquidation period (%) | 20 day liquidation period (%) | 10 day liquidation period (%) | 5 day liquidation period (%) | ||
1 | ≤ 1 year | 0.707 | 0.5 | 0.354 | 1.414 | 1 | 0.707 |
> 1 ≤ 5 years | 2.828 | 2 | 1.414 | 5.657 | 4 | 2.828 | |
> 5 years | 5.657 | 4 | 2.828 | 11.314 | 8 | 5.657 | |
2-3 | ≤ 1 year | 1.414 | 1 | 0.707 | 2.828 | 2 | 1.414 |
> 1 ≤ 5 years | 4.243 | 3 | 2.121 | 8.485 | 6 | 4.243 | |
> 5 years | 8.485 | 6 | 4.243 | 16.971 | 12 | 8.485 | |
4 | ≤ 1 year | 21.213 | 15 | 10.607 | N/A | N/A | N/A |
> 1 ≤ 5 years | 21.213 | 15 | 10.607 | N/A | N/A | N/A | |
> 5 years | 21.213 | 15 | 10.607 | N/A | N/A | N/A |
Table: Volatility adjustments for debt securities described in BIPRU 5.4.2R(5)
BIPRU 5.4.36
See Notes
Credit quality step with which the credit assessment of a short term debt security is associated | Volatility adjustments for debt securities issued by entities described in BIPRU 5.4.2 R (2) with short-term credit assessments | Volatility adjustments for debt securities issued by entities described in BIPRU 5.4.2 R (3) and (4) with short-term credit assessments | ||||
20 day liquidation period (%) | 10 day liquidation period (%) | 5 day liquidation period (%) | 20 day liquidation period (%) | 10 day liquidation period (%) | 5 day liquidation period (%) | |
1 | 0.707 | 0.5 | 0.354 | 1.414 | 1 | 0.707 |
2-3 | 1.414 | 1 | 0.707 | 2.828 | 2 | 1.414 |
Table: Volatility adjustments for other collateral or exposure types
BIPRU 5.4.37
See Notes
Other collateral or exposure types | |||
20 day liquidation period (%) | 10 day liquidation period (%) | 5 day liquidation period (%) | |
Main index equities, main index convertible bonds | 21.213 | 15 | 10.607 |
Other equities or convertible bonds listed on a recognised investment exchange or designated investment exchange | 35.355 | 25 | 17.678 |
Cash | 0 | 0 | 0 |
Gold | 21.213 | 15 | 10.607 |
Table: Volatility adjustments for currency mismatch
BIPRU 5.4.38
See Notes
Volatility adjustment for currency mismatch | ||
20 day liquidation period (%) | 10 day liquidation period (%) | 5 day liquidation period (%) |
11.314 | 8 | 5.657 |
BIPRU 5.4.39
See Notes
- (1) For secured lending transactions the liquidation period is 20 business days.
- (2) For repurchase transactions (except insofar as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities) and securities lending or borrowing transactions the liquidation period is 5 business days.
- (3) For other capital market-driven transactions, the liquidation period is 10 business days.
[Note: BCD Annex VIII Part 3 point 37]
BIPRU 5.4.40
See Notes
In the tables in BIPRU 5.4.35 R - BIPRU 5.4.38 R and in BIPRU 5.4.41 R to BIPRU 5.4.43 R, the credit quality step with which a credit assessment of the debt security is associated is the credit quality step with which the external credit assessment is associated under the standardised approach. For the purposes of this rule, BIPRU 5.4.7 R also applies.
[Note: BCD Annex VIII Part 3 point 38]
BIPRU 5.4.41
See Notes
For non-eligible securities or for commodities lent or sold under repurchase transactions or securities or commodities lending or borrowing transactions, the volatility adjustment is the same as for non-main index equities listed on a recognised investment exchange or a designated investment exchange.
[Note: BCD Annex VIII Part 3 point 39]
BIPRU 5.4.42
See Notes
For eligible units in CIUs the volatility adjustment is the weighted average volatility adjustments that would apply, having regard to the liquidation period of the transaction as specified in BIPRU 5.4.39 R, to the assets in which the fund has invested. If the assets in which the fund has invested are not known to the firm, the volatility adjustment is the highest volatility adjustment that would apply to any of the assets in which the fund has the right to invest.
[Note: BCD Annex VIII Part 3 point 40]
BIPRU 5.4.43
See Notes
For unrated debt securities issued by institutions and satisfying the eligibility criteria in BIPRU 5.4.5 R the volatility adjustments are the same as for securities issued by institutions or corporates with an external credit assessment associated with credit quality steps 2 or 3.
[Note: BCD Annex VIII Part 3 point 41]
The financial collateral comprehensive method: Own estimates of volatility adjustments approach: General
BIPRU 5.4.44
See Notes
BIPRU 5.4.45
See Notes
A firm complying with the requirements set out in BIPRU 5.4.50 R to BIPRU 5.4.60 R may use the own estimates of volatility adjustments approach for calculating the volatility adjustments to be applied to collateral and exposures.
[Note: BCD Annex VIII Part 3 point 42]
BIPRU 5.4.46
See Notes
When debt securities have a credit assessment from an eligible ECAI equivalent to investment grade or better, a firm may calculate a volatility estimate for each category of security.
[Note: BCD Annex VIII Part 3 point 43]
BIPRU 5.4.47
See Notes
In determining relevant categories, a firm must take into account the type of issuer of the security the external credit assessment of the securities, their residual maturity, and their modified duration. Volatility estimates must be representative of the securities included in the category by the firm.
[Note: BCD Annex VIII Part 3 point 44]
BIPRU 5.4.48
See Notes
For debt securities having a credit assessment from an eligible ECAI equivalent to below investment grade and for other eligible collateral the volatility adjustments must be calculated for each individual item.
[Note: BCD Annex VIII Part 3 point 45]
BIPRU 5.4.49
See Notes
A firm using the own estimates of volatility adjustments approach must estimate volatility of the collateral or foreign exchange mismatch without taking into account any correlations between the unsecured exposure, collateral and/or exchange rates.
[Note: BCD Annex VIII Part 3 point 46]
The financial collateral comprehensive method: Own estimates of volatility adjustments approach: Quantitative Criteria
BIPRU 5.4.50
See Notes
In calculating the volatility adjustments, a 99th percentile one-tailed confidence interval must be used.
[Note: BCD Annex VIII Part 3 point 47]
BIPRU 5.4.51
See Notes
The liquidation period is 20 business days for secured lending transactions; 5 business days for repurchase transactions except insofar as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities and securities lending or borrowing transactions; and 10 business days for other capital market-driven transactions.
[Note: BCD Annex VIII Part 3 point 48]
BIPRU 5.4.52
See Notes
A firm may use volatility adjustment numbers calculated according to shorter or longer liquidation periods, scaled up or down to the liquidation period set out in BIPRU 5.4.51 R for the type of transaction in question, using the square root of time formula:
(HM = HN )√TM/TN)
where:
- (1) TM is the relevant liquidation period;
- (2) HM is the volatility adjustment under TM ; and
- (3) HN is the volatility adjustment based on the liquidation period TN.
[Note: BCD Annex VIII Part 3 point 49]
BIPRU 5.4.53
See Notes
A firm must take into account the illiquidity of lower-quality assets. The liquidation period must be adjusted upwards in cases where there is doubt concerning the liquidity of the collateral. A firm must also identify where historical data may understate potential volatility, e.g. a pegged currency. Such cases must be dealt with by means of stress scenario assessments.
[Note: BCD Annex VIII Part 3 point 50]
BIPRU 5.4.54
See Notes
The historical observation period (sample period) for calculating volatility adjustments must be a minimum length of one year. For a firm that uses a weighting scheme or other methods for the historical observation period, the effective observation period must be at least one year (that is, the weighted average time lag of the individual observations must not be less than 6 months).
[Note: BCD Annex VIII Part 3 point 51]
BIPRU 5.4.55
See Notes
BIPRU 5.4.56
See Notes
The financial collateral comprehensive method: Own estimates of volatility adjustments approach: Qualitative Criteria
BIPRU 5.4.57
See Notes
BIPRU 5.4.58
See Notes
If the liquidation period used by a firm in its day-to-day risk management process is longer than that set out in BIPRU 5.4 for the type of transaction in question, the firm's volatility adjustments must be scaled up in accordance with the square root of time formula set out in BIPRU 5.4.52 R.
[Note: BCD Annex VIII Part 3 point 54]
BIPRU 5.4.59
See Notes
A firm must have established procedures for monitoring and ensuring compliance with a documented set of policies and controls for the operation of its system for the estimation of volatility adjustments and for the integration of such estimations into its risk management process.
[Note: BCD Annex VIII Part 3 point 55]
BIPRU 5.4.60
See Notes
An independent review of a firm's system for the estimation of volatility adjustments must be carried out regularly in the firm's own internal auditing process. A review of the overall system for the estimation of volatility adjustments and for integration of those adjustments into the firm's risk management process must take place at least once a year and must specifically address, at a minimum:
- (1) the integration of estimated volatility adjustments into daily risk management;
- (2) the validation of any significant change in the process for the estimation of volatility adjustments;
- (3) the verification of the consistency, timeliness and reliability of data sources used to run the system for the estimation of volatility adjustments, including the independence of such data sources; and
- (4) the accuracy and appropriateness of the volatility assumptions.
[Note: BCD Annex VIII Part 3 point 56]
The financial collateral comprehensive method: Scaling up of volatility adjustments
BIPRU 5.4.61
See Notes
The volatility adjustments set out in BIPRU 5.4.34 R to BIPRU 5.4.43 R are the volatility adjustments to be applied where there is daily revaluation. Similarly, where a firm uses its own estimates of the volatility adjustments in accordance with BIPRU 5.4.45 R to BIPRU 5.4.60 R, these must be calculated in the first instance on the basis of daily revaluation. If the frequency of revaluation is less than daily, larger volatility adjustments must be applied. These must be calculated by scaling up the daily revaluation volatility adjustments, using the following 'square root of time' formula:
(H = HM√(NR + (TM - 1))/(TM)))
where:
- (1) H is the volatility adjustment to be applied;
- (2) HM is the volatility adjustment where there is daily revaluation;
- (3) NR is the actual number of business days between revaluations; and
- (4) TM is the liquidation period for the type of transaction in question.
[Note: BCD Annex VIII Part 3 point 57]
The financial collateral comprehensive method: Conditions for applying a 0% volatility adjustment
BIPRU 5.4.62
See Notes
In relation to repurchase transaction and securities lending or borrowing transactions, where a firm uses the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach and where the conditions set out in (1) - (8) are satisfied, a firm may, instead of applying the volatility adjustments calculated under BIPRU 5.4.30 R to BIPRU 5.4.61 R, apply a 0% volatility adjustment:
- (1) both the exposure and the collateral are cash or debt securities issued by central governments or central banks within the meaning of BIPRU 5.4.2 R (2) and eligible for a 0% risk weight under the standardised approach;
- (2) both the exposure and the collateral are denominated in the same currency;
- (3) either the maturity of the transaction is no more than one day or both the exposure and the collateral are subject to daily marking-to-market or daily remargining;
- (4) it is considered that the time between the last marking-to-market before a failure to remargin by the counterparty and the liquidation of the collateral is no more than four business days;
- (5) the transaction is settled across a settlement system proven for that type of transaction;
- (6) the documentation covering the agreement is standard market documentation for repurchase transactions or securities lending or borrowing transactions in the securities concerned;
- (7) the transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable; and
- (8) the counterparty is a core market participant.
[Note: BCD Annex VIII Part 3 point 58 (part)]
BIPRU 5.4.63
See Notes
The option in BIPRU 5.4.62 R is not available in respect of a firm using the master netting agreement internal models approach.
[Note: BCD Annex VIII Part 3 point 58 (part)]
BIPRU 5.4.64
See Notes
Core market participant means the following entities:
- (1) the entities mentioned in BIPRU 5.4.2 R (2) exposures to which are assigned a 0% risk weight under the standardised approach to credit risk;
- (2) institutions;
- (3) other financial companies (including insurance companies) exposures which are assigned a 20% risk weight under the standardised approach;
- (4) regulated CIUs that are subject to capital or leverage requirements;
- (5) regulated pension funds; and
- (6) a recognised clearing house or designated clearing house.
[Note: BCD Annex VIII Part 3 point 58 (part)]
BIPRU 5.4.65
See Notes
If under the CRD implementation measure for a particular EEA State with respect to point 58 of Part 3 of Annex VIII of the Banking Consolidation Directive (Conditions for applying the 0% volatility adjustment) the treatment set out in that point is permitted to be applied in the case of repurchase transactions or securities lending or borrowing transactions in securities issued by the domestic government of that EEA State, then a firm may adopt the same approach to the same transactions.
[Note: BCD Annex VIII Part 3 point 59]
Financial collateral comprehensive method: Calculating risk-weighted exposure amounts
BIPRU 5.4.66
See Notes
Under the standardised approach E* as calculated under BIPRU 5.4.28 R must be taken as the exposure value for the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 R. In the case of off-balance sheet items listed in BIPRU 3.7, E* must be taken as the value to which the percentages indicated in BIPRU 3.2.1 R and BIPRU 3.7.2 R must be applied to arrive at the exposure value.
[Note: BCD Annex VIII Part 3 point 60]
BIPRU 5.5
Other funded credit risk mitigation
- 01/01/2007
Deposits with third parties: Eligibility
BIPRU 5.5.1
See Notes
Cash on deposit with, or cash assimilated instruments held by, a third party institution in a non-custodial arrangement and pledged to a lending firm may be recognised as eligible credit protection.
[Note: BCD Annex VIII Part 1 point 23]
Deposits with third parties: Minimum requirements
BIPRU 5.5.2
See Notes
To be eligible for the treatment set out at BIPRU 5.5.3 R, the protection referred to in BIPRU 5.5.1 R must satisfy the following conditions:
- (1) the borrower's claim against the third party institution is openly pledged or assigned to the lending firm and such pledge or assignment is legally effective and enforceable in all relevant jurisdictions;
- (2) the third party institution is notified of the pledge or assignment;
- (3) as a result of the notification, the third party institution is able to make payments solely to the lending firm or to other parties with the lending firm's consent; and
- (4) the pledge or assignment is unconditional and irrevocable.
[Note: BCD Annex VIII Part 2 point 12]
Deposits with third parties: Calculating the effects of the credit risk mitigation
BIPRU 5.5.3
See Notes
Where the conditions set out in BIPRU 5.5.2 R are satisfied, credit protection falling within the terms of BIPRU 5.5.1 R may be treated as a guarantee by the third party institution.
[Note: BCD Annex VIII Part 3 point 79]
Life insurance policies: Eligibility
BIPRU 5.5.4
See Notes
Life insurance policies pledged to a lending firm may be recognised as eligible credit protection.
[Note: BCD Annex VIII Part 1 point 24]
Life insurance policies: Minimum requirements
BIPRU 5.5.5
See Notes
For life insurance policies pledged to a lending firm to be recognised the following conditions must be met:
- (1) the party providing the life insurance must be subject to Directive 2002/83/EC and Directive 2001/17/EC of the European Parliament and of the Council, or is subject to supervision by a competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the Community;
- (2) the life insurance policy is openly pledged or assigned to the lending firm;
- (3) the party providing the life insurance is notified of the pledge or assignment and as a result may not pay amounts payable under the contract without the consent of the lending firm;
- (4) the surrender value is declared by the company providing the life insurance and is non-reducible;
- (4A) the surrender value must be paid in a timely manner upon request;
- (4B) the surrender value must not be requested without the consent of the lending firm;
- (5) the lending firm must have the right to cancel the policy and receive the surrender value in a timely way in the event of the default of the borrower;
- (6) the lending firm is informed of any non-payments under the policy by the policyholder;
- (7) the credit protection must be provided for the maturity of the loan. Where this is not possible because the insurance relationship ends before the loan relationship expires, the lending firm must ensure that the amount deriving from the insurance contract serves the lending firm as security until the end of the duration of the credit agreement; and
- (8) the pledge or assignment must be legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.
[Note: BCD Annex VIII Part 2 point 13 (part)]
BIPRU 5.5.6
See Notes
Where it is not possible for a firm to meet the condition set out in BIPRU 5.5.5 R (7), because the insurance relationship ends before the loan relationship expires, the firm must ensure that the amount deriving from the insurance contract serves the firm as security until the end of the duration of the credit agreement.
[Note: BCD Annex VIII Part 2 point 13 (part)]
Life insurance policies: Calculating the effects of the credit risk mitigation
BIPRU 5.5.7
See Notes
- (1) Where the conditions set out in BIPRU 5.5.5 R are satisfied, the portion of the exposure collateralised by the current surrender value of credit protection falling within the terms of BIPRU 5.5.4 R must be either:
- (a) subject to the risk weights specified in (3) where the exposure is subject to the standardised approach to credit risk; or
- (b) assigned an LGD of 40% where the exposure is subject to the IRB approach but not subject to the firm's own estimates of LGD.
- (2) In case of a currency mismatch, the current surrender value must be reduced according to BIPRU 5.7.17 R and BIPRU 5.7.18R, the value of the credit protection being the current surrender value of the life insurance policy.
- (3) For the purpose of (1)(a), the following risk weights must be assigned on the basis of the risk weight assigned to a senior unsecured exposure to the company providing the life insurance:
- (a) a risk weight of 20%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 20%;
- (b) a risk weight of 35%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 50%;
- (c) a risk weight of 70%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 100%; and
- (d) a risk weight of 150%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 150%.
[Note: BCD Annex VIII Part 3 point 80]
Instruments purchased on request: Eligibility
BIPRU 5.5.8
See Notes
Instruments issued by third party institutions which will be repurchased by that institution on request may be recognised as eligible credit protection.
[Note: BCD Annex VIII Part 1 point 25]
Instruments purchased on request: Calculating the effects of the credit risk mitigation
BIPRU 5.5.9
See Notes
Instruments eligible under BIPRU 5.5.8 R may be treated as a guarantee by the issuing institution.
[Note: BCD Annex VIII Part 3 point 81]
BIPRU 5.5.10
See Notes
For the purposes of BIPRU 5.5.9 R, the value of the credit protection recognised is the following:
- (1) where the instrument will be repurchased at its face value, the value of the protection is that amount; or
- (2) where the instrument will be repurchased at market price, the value of the protection is the value of the instrument valued in the same way as the debt securities specified in BIPRU 5.4.5 R.
[Note: BCD Annex VIII Part 3 point 82]
Credit linked notes
BIPRU 5.5.11
See Notes
Investments in credit linked notes issued by a lending firm may be treated as cash collateral.
[Note: BCD Annex VIII Part 3 point 3]
BIPRU 5.6
Master netting agreements
- 01/01/2007
Eligibility
BIPRU 5.6.1
See Notes
- (1) For a firm adopting the financial collateral comprehensive method, the effects of bilateral netting contracts covering repurchase transactions, securities or commodities lending or borrowing transactions, and/or other capital market-driven transactions with a counterparty may be recognised.
- (2) Without prejudice to BIPRU 14 to be recognised the collateral taken and securities or commodities borrowed within such agreements must comply with the eligibility requirements for collateral set out at BIPRU 5.4.2 R to BIPRU 5.4.8 R.
[Note: BCD Annex VIII Part 1 point 5]
Minimum requirements
BIPRU 5.6.2
See Notes
For master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions to be recognised for the purposes of BIPRU 5, they must:
- (1) be legally effective and enforceable in all relevant jurisdictions, including in the event of the bankruptcy or insolvency of the counterparty;
- (2) give the non-defaulting party the right to terminate and close-out in a timely manner all transactions under the agreement upon the event of default, including in the event of the bankruptcy or insolvency of the counterparty; and
- (3) provide for the netting of gains and losses on transactions closed out under a master agreement so that a single net amount is owed by one party to the other.
[Note: BCD Annex VIII Part 2 point 4]
BIPRU 5.6.3
See Notes
In addition the minimum requirements for the recognition of financial collateral under the financial collateral comprehensive method set out in BIPRU 5.4.9 R must be fulfilled.
[Note: BCD Annex VIII Part 2 point 5]
Calculation of the fully adjusted exposure value: the supervisory volatility adjustments approach and the own estimates of volatility adjustments approach
BIPRU 5.6.4
See Notes
BIPRU 5.6.5
See Notes
In calculating the 'fully adjusted exposure value' (E*) for the exposures subject to an eligible master netting agreement covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, a firm must calculate the volatility adjustments to be applied in the manner set out in BIPRU 5.6.6 R to BIPRU 5.6.11 R either using the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R for the financial collateral comprehensive method. For the use of the own estimates of volatility adjustments approach the same conditions and requirements apply as under the financial collateral comprehensive method.
[Note: BCD Annex VIII Part 3 point 5]
BIPRU 5.6.6
See Notes
A firm must calculate the net position in each type of security or commodity by subtracting from the total value of the securities or commodities of that type lent, sold or provided under the master netting agreement, the total value of securities or commodities of that type borrowed, purchased or received under the agreement.
BIPRU 5.6.7
See Notes
For the purposes of BIPRU 5.6.6 R, type of security means securities which are issued by the same entity, have the same issue date, the same maturity and are subject to the same terms and conditions and are subject to the same liquidation periods as indicated in BIPRU 5.4.30 R to BIPRU 5.4.65 R.
[Note: BCD Annex VIII Part 3 point 7]
BIPRU 5.6.8
See Notes
A firm must calculate the net position in each currency other than the settlement currency of the master netting agreement by subtracting from the total value of securities denominated in that currency lent, sold or provided under the master netting agreement added to the amount of cash in that currency lent or transferred under the agreement, the total value of securities denominated in that currency borrowed, purchased or received under the agreement added to the amount of cash in that currency borrowed or received under the agreement.
[Note: BCD Annex VIII Part 3 point 8]
BIPRU 5.6.9
See Notes
A firm must apply the volatility adjustment appropriate to a given type of security or cash position to the absolute value of the positive or negative net position in the securities of that type.
[Note: BCD Annex VIII Part 3 point 9]
BIPRU 5.6.10
See Notes
BIPRU 5.6.11
See Notes
E * must be calculated according to the following formula:
E * = max {0, [(Σ(E) -Σ (C)) + Σ (|net position in each security| x Hsec) + (Σ|Efx| x Hfx)]}
where:
- (1) (where risk weighted exposure amounts are calculated under the standardised approach) E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection;
- (2) C is the value of the securities or commodities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure;
- (3) Σ(E) is the sum of all Es under the agreement;
- (4) Σ(C) is the sum of all Cs under the agreement;
- (5) Efx is the net position (positive or negative) in a given currency other than the settlement currency of the agreement as calculated under BIPRU 5.6.8 R;
- (6) Hsec is the volatility adjustment appropriate to a particular type of security;
- (7) Hfx is the foreign exchange volatility adjustment; and
- (8) E * is the fully adjusted exposure value.
[Note: BCD Annex VIII Part 3 point 11]
Calculation of the fully adjusted exposure value: the master netting agreement internal models approach
BIPRU 5.6.12
See Notes
BIPRU 5.6.13
See Notes
BIPRU 5.6.14
See Notes
BIPRU 5.6.15
See Notes
A firm which has been granted a VaR model waiver will still need to make an application to the appropriate regulator for a master netting agreement internal models approach permission. However, the application should generally be straightforward as a firm which is able to satisfy the requirements for a VaR model waiver should usually also be able to satisfy the requirements for a master netting agreement internal models approach permission.
[Note: BCD Annex VIII Part 3 point 14]
BIPRU 5.6.16
See Notes
The master netting agreement internal models approach is an alternative to using the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach in calculating volatility adjustments for the purpose of calculating the 'fully adjusted exposure value' (E*) resulting from the application of an eligible master netting agreement covering repurchase transactions, securities or commodities lending or borrowing transactions and/or other capital market-driven transactions other than derivative transactions. The master netting agreement internal models approach takes into account correlation effects between security positions subject to a master netting agreement as well as the liquidity of the instruments concerned. The internal model used for the master netting agreement internal models approach must provide estimates of the potential change in value of the unsecured exposure amount (ΣE -ΣC).
[Note: BCD Annex VIII Part 3 point 12 (part)]
BIPRU 5.6.17
See Notes
A firm may also use the internal model used for the master netting agreement internal models approach for margin lending transactions if the transactions are covered under the firm's master netting agreement internal models approach permission and the transactions are covered by a bilateral master netting agreement that meets the requirements set out in BIPRU 13.7.
[Note: BCD Annex VIII Part 3 point 12 (part)]
BIPRU 5.6.18
See Notes
A firm may use the master netting agreement internal models approach independently of the choice it has made between the standardised approach and the IRB approach for the calculation of risk weighted exposure amounts. However, if a firm uses the master netting agreement internal models approach, it must do so for all counterparties and securities, excluding immaterial portfolios where it may use the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R.
[Note: BCD Annex VIII Part 3 point 13]
BIPRU 5.6.19
See Notes
- (1) A firm must be able to satisfy the appropriate regulator that the firm's risk management system for managing the risks arising on the transactions covered by the master netting agreement is conceptually sound and implemented with integrity and that, in particular, the minimum qualitative standards in (2) - (11) are met.
- (2) The internal risk-measurement model used for calculation of potential price volatility for the transactions is closely integrated into the daily risk-management process of the firm and serves as the basis for reporting risk exposures to senior management of the firm.
- (3) The firm has a risk control unit that is independent from business trading units and reports directly to senior management. The unit must be responsible for designing and implementing the firm's risk-management system. It must produce and analyse daily reports on the output of the risk-measurement model and on the appropriate measures to be taken in terms of position limits.
- (4) The daily reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce reductions of positions taken and of overall risk exposure.
- (5) The firm has sufficient staff skilled in the use of sophisticated models in the risk control unit.
- (6) The firm has established procedures for monitoring and ensuring compliance with a documented set of internal policies and controls concerning the overall operation of the risk-measurement system.
- (7) The firm's models have a proven track record of reasonable accuracy in measuring risks demonstrated through the back-testing of its output using at least one year of data.
- (8) The firm frequently conducts a rigorous programme of stress testing and the results of these tests are reviewed by senior management and reflected in the policies and limits it sets.
- (9) The firm must conduct, as part of its regular internal auditing process, an independent review of its risk-measurement system. This review must include both the activities of the business trading units and of the independent risk-control unit.
- (10) At least once a year, the firm must conduct a review of its risk management system.
- (11) The internal model used for the master netting agreement internal models approach must meet the requirements set out in BIPRU 13.6.65 R to BIPRU 13.6.67 R.
[Note: BCD Annex VIII Part 3 point 16]
BIPRU 5.6.19A
See Notes
BIPRU 5.6.20
See Notes
The calculation of the potential change in value must be subject to the following minimum standards:
- (1) at least daily calculation of the potential change in value;
- (2) a 99th percentile, one-tailed confidence interval;
- (3) a 5-day equivalent liquidation period, except in the case of transactions other than securities repurchase transaction or securities lending or borrowing transactions where a 10-day equivalent liquidation period should be used;
- (4) an effective historical observation period of at least one year except where a shorter observation period is justified by a significant upsurge in price volatility; and
- (5) three-monthly data set updates.
[Note: BCD Annex VIII Part 3 point 17]
BIPRU 5.6.21
See Notes
The internal risk-measurement model must capture a sufficient number of risk factors in order to capture all material price risks.
[Note: BCD Annex VIII Part 3 point 18]
BIPRU 5.6.22
See Notes
A firm may use empirical correlations within risk categories and across risk categories provided that it is able to satisfy the appropriate regulator that the firm's system for measuring correlations is sound and implemented with integrity.
[Note: BCD Annex VIII Part 3 point 19]
BIPRU 5.6.23
See Notes
BIPRU 5.6.24
See Notes
The fully adjusted exposure value (E*) for a firm using the master netting agreement internal models approach must be calculated according to the following formula:
E * = max {0, [(ΣE -ΣC) + (VaR output of the internal models)]}
where
- (1) (where risk weighted exposure amounts are calculated under the standardised approach) E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection;
- (2) C is the value of the securities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure;
- (3) Σ (E) is the sum of all Es under the agreement; and
- (4) Σ (C) is the sum of all Cs under the agreement.
[Note: BCD Annex VIII Part 3 point 20]
BIPRU 5.6.25
See Notes
In calculating risk weighted exposure amounts using the master netting agreement internal models approach, a firm must use the previous business day's model output.
[Note: BCD Annex VIII Part 3 point 21]
BIPRU 5.6.26
See Notes
BIPRU 5.6.27
See Notes
BIPRU 5.6.28
See Notes
Calculation of risk weighted exposure amounts under the standardised approach
BIPRU 5.6.29
See Notes
- (1) A firm must under the standardised approach calculate risk weighted exposure amounts for repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions covered by master netting agreements under this rule.
- (2) E * as calculated under BIPRU 5.6.5 R to BIPRU 5.6.25 R must be taken as the exposure value of the exposure to the counterparty arising from the transactions subject to the master netting agreement for the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 R.
[Note: BCD Annex VIII Part 3 point 22]
BIPRU 5.7
Unfunded credit protection
- 01/01/2007
Eligibility
BIPRU 5.7.1
See Notes
The following parties may be recognised as eligible providers of unfunded credit protection:
- (1) central governments and central banks;
- (2) regional governments or local authorities;
- (3) multilateral development banks;
- (4) international organisations exposures which are assigned a 0% risk weight under the standardised approach;
- (5) public sector entities, claims on which are treated as claims on institutions or central governments under the standardised approach;
- (6) institutions;
- (7) other corporate entities, including parent undertakings, subsidiary undertakings and affiliate corporate entities of the firm, that have a credit assessment by an eligible ECAI associated with credit quality step 2 or above under the rules for the risk weighting of exposures to corporates under the standardised approach.
[Note: BCD Annex VIII Part 1 point 26]
Types of credit derivatives
BIPRU 5.7.2
See Notes
The following types of credit derivatives, and instruments that may be composed of such credit derivatives or that are economically effectively similar, may be recognised as eligible;
- (1) credit default swaps;
- (2) total return swaps; and
- (3) credit linked notes to the extent of their cash funding.
[Note: BCD Annex VIII Part 1 point 30]
BIPRU 5.7.3
See Notes
Where a firm buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection must not be recognised as eligible.
[Note: BCD Annex VIII Part 1 point 31]
Internal hedges
BIPRU 5.7.4
See Notes
When a firm conducts an internal hedge using a credit derivative - i.e. hedges the credit risk of an exposure in the non-trading book with a credit derivative booked in the trading book - in order for the protection to be recognised as eligible for the purposes of BIPRU 4.10 or BIPRU 5 the credit risk transferred to the trading book must be transferred out to a third party or parties. In such circumstances, subject to the compliance of such transfer with the requirements for the recognition of credit risk mitigation set out in BIPRU 4.10 or BIPRU 5, the rules for the calculation of risk weighted exposure amounts and expected loss amounts where unfunded credit protection is acquired set out in BIPRU 4.10 or BIPRU 5 must be applied.
[Note: BCD Annex VIII Part 1 point 32]
Minimum requirements: General
BIPRU 5.7.5
See Notes
BIPRU 5.7.6
See Notes
Subject to BIPRU 5.7.9 R, for the credit protection deriving from a guarantee or credit derivative to be recognised the following conditions must be met:
- (1) the credit protection must be direct;
- (2) the extent of the credit protection must be clearly defined and incontrovertible;
- (3) the credit protection contract must not contain any clause, the fulfilment of which is outside the direct control of the lender, that:
- (a) would allow the protection provider unilaterally to cancel the protection;
- (b) would increase the effective cost of protection as a result of deteriorating credit quality of the protected exposure;
- (c) could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original obligor fails to make any payments due; or
- (d) could allow the maturity of the credit protection to be reduced by the protection provider; and
- (4) it must be legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.
[Note: BCD Annex VIII Part 2 point 14]
BIPRU 5.7.7
See Notes
Minimum requirements: Operational requirements
BIPRU 5.7.8
See Notes
A firm must be able to satisfy the appropriate regulator that it has systems in place to manage potential concentration of risk arising from the firm's use of guarantees and credit derivatives. The firm must be able to demonstrate how its strategy in respect of its use of credit derivatives and guarantees interacts with its management of its overall risk profile.
[Note: BCD Annex VIII Part 2 point 15]
Minimum requirements: Sovereign and other public sector counter-guarantees
BIPRU 5.7.9
See Notes
Where an exposure is protected by a guarantee which is counter-guaranteed by a central government or central bank, a regional government or local authority or a public sector entity claims on which are treated as claims on the central government in whose jurisdiction they are established under the standardised approach, a multilateral development bank or an international organisation, to which a 0% risk weight is assigned under or by virtue of the standardised approach, or a public sector entity, claims on which are treated as claims on credit institutions under the standardised approach, the exposure may be treated as protected by a guarantee provided by the entity in question provided the following conditions are satisfied:
- (1) the counter-guarantee covers all credit risk elements of the claim;
- (2) both the original guarantee and the counter-guarantee meet the requirements for guarantees set out in BIPRU 5.7.6 R, BIPRU 5.7.8 R and BIPRU 5.7.11 R, except that the counter-guarantee need not be direct; and
- (3) the firm is able to satisfy the appropriate regulator that the cover is robust and that nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.
[Note: BCD Annex VIII Part 2 point 16]
BIPRU 5.7.10
See Notes
The treatment of BIPRU 5.7.9 R applies, also, to an exposure which is not counter-guaranteed by an entity listed in that rule if the exposure's counter-guarantee is in its turn directly guaranteed by one of the listed entities and the conditions listed in BIPRU 5.7.9 R are satisfied.
[Note: BCD Annex VIII Part 2 point 17]
Additional requirements for guarantees
BIPRU 5.7.11
See Notes
For a guarantee to be recognised the following conditions must also be met:
- (1) on the qualifying default of and/or non-payment by the counterparty, the lending firm must have the right to pursue, in a timely manner, the guarantor for any monies due under the claim in respect of which the protection is provided;
- (2) payment by the guarantor must not be subject to the lending firm first having to pursue the obligor;
- (3) in the case of unfunded credit protection covering residential mortgage loans, the requirements in BIPRU 5.7.6 R (3)(c) and in this rule have only to be satisfied within 24 months;
- (4) the guarantee must be an explicitly documented obligation assumed by the guarantor;
- (5) subject to (6), the guarantee must cover all types of payments the obligor is expected to make in respect of the claim; and
- (6) where certain types of payment are excluded from the guarantee, the recognised value of the guarantee must be adjusted to reflect the limited coverage.
[Note: BCD Annex VIII Part 2 point 18]
BIPRU 5.7.12
See Notes
In the case of guarantees provided in the context of mutual guarantee schemes recognised for these purposes by another EEA competent authority under a CRD implementation measure with respect to point 19 of Part 2 of Annex VIII of the Banking Consolidation Directive or provided by or counter-guaranteed by entities referred to in BIPRU 5.7.9 R, the requirements in BIPRU 5.7.11 R (1) - (3) will be satisfied where either of the following conditions are met:
[Note: BCD Annex VIII Part 2 point 19]
Additional requirements for credit derivatives
BIPRU 5.7.13
See Notes
For a credit derivative to be met the following conditions must also be met.
- (1) Subject to (2), the credit events specified under the credit derivative must at a minimum include:
- (a) the failure to pay the amounts due under the terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with or shorter than the grace period in the underlying obligation);
- (b) the bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
- (c) the restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. value adjustment or other similar debit to the profit and loss account).
- (2) Where the credit events specified under the credit derivative do not include restructuring of the underlying obligation as described in (1)(c), the credit protection may nonetheless be recognised subject to a reduction in the recognised value as specified in BIPRU 5.7.16 R.
- (3) In the case of credit derivatives allowing for cash settlement a robust valuation process must be in place in order to estimate loss reliably. There must be a clearly specified period for obtaining post-credit-event valuations of the underlying obligation.
- (4) If the protection purchaser's right and ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld.
- (5) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the protection provider. The protection buyer must have the right/ability to inform the protection provider of the occurrence of a credit event.
[Note: BCD Annex VIII Part 2 point 20]
BIPRU 5.7.14
See Notes
A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for the purposes of determining cash settlement value or the deliverable obligation) or between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible only if the following conditions are met:
- (1) the reference obligation or the obligation used for purposes of determining whether a credit event has occurred, as the case may be, ranks pari passu with or is junior to the underlying obligation; and
- (2) the underlying obligation and the reference obligation or the obligation used for purposes of determining whether a credit event has occurred, as the case may be, share the same obligor (i.e., the same legal entity) and there are in place legally enforceable cross-default or cross-acceleration clauses.
[Note: BCD Annex VIII Part 2 point 21]
Unfunded credit protection: Valuation
BIPRU 5.7.15
See Notes
BIPRU 5.7.16
See Notes
- (1) The value of unfunded credit protection (G) is the amount that the protection provider has undertaken to pay in the event of the default or non-payment of the borrower or on the occurrence of other specified credit events.
- (2) In the case of credit derivatives which do not include as a credit event restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that result in a credit loss event (e.g. value adjustment, the making of a value adjustment or other similar debit to the profit and loss account):
- (a) where the amount that the protection provider has undertaken to pay is not higher than the exposure value, the value of the credit protection calculated under (1) must be reduced by 40%; or
- (b) where the amount that the protection provider has undertaken to pay is higher than the exposure value, the value of the credit protection must be no higher than 60% of the exposure value.
[Note: BCD Annex VIII Part 3 point 83]
BIPRU 5.7.17
See Notes
Where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated (a currency mismatch) the value of the credit protection must be reduced by the application of a volatility adjustment HFX as follows:
G* = G x (1-HFX)
where:
- (1) G is the nominal amount of the credit protection;
- (2) G* is G adjusted for any foreign currency risk; and
- (3) Hfx is the volatility adjustment for any currency mismatch between the credit protection and the underlying obligation.
[Note: BCD Annex VIII Part 3 point 84 (part)]
BIPRU 5.7.18
See Notes
Where there is no currency mismatch:
G* = G
[Note: BCD Annex VIII Part 3 point 84 (part)]
BIPRU 5.7.19
See Notes
The volatility adjustments to be applied for any currency mismatch may be calculated based on the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R.
[Note: BCD Annex VIII Part 3 point 85]
Calculating risk weighted exposure amounts and expected loss amounts
BIPRU 5.7.20
See Notes
Calculating risk weighted exposure amounts: Partial protection - tranching
BIPRU 5.7.21
See Notes
Where a firm transfers a part of the risk of a loan in one or more tranches, BIPRU 9 applies. Materiality thresholds on payments below which no payment shall be made in the event of loss are considered to be equivalent to retained first loss positions and to give rise to a tranched transfer of risk.
[Note: BCD Annex VIII Part 3 point 86]
Calculating risk-weighted exposure amounts : The standardised approach
BIPRU 5.7.22
See Notes
Calculating risk weighted exposure amounts: standardised approach: Full protection
BIPRU 5.7.23
See Notes
For the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 R, g shall be the risk weight to be assigned to an exposure, the exposure value (E) of which is fully protected by unfunded credit protection (GA), where:
- (1) g is the risk weight of exposures to the protection provider as specified under the standardised approach;
- (2) GA is the value of G* as calculated under BIPRU 5.7.17 R further adjusted for any maturity mismatch as laid down in BIPRU 5.8; and
- (3) E is the exposure value according to BIPRU 3.2.1 R to BIPRU 3.2.3 R and BIPRU 13; for this purpose the exposure value of an off-balance sheet item listed in BIPRU 3.7.2 R shall be 100% of its value rather than the exposure value indicated in BIPRU 3.2.1 R.
[Note: BCD Annex VIII Part 3 point 87]
Calculating risk weighted exposure amounts: Standardised approach: Partial protection - equal seniority
BIPRU 5.7.24
See Notes
Where the protected amount is less than the exposure value and the protected and unprotected portions are of equal seniority - i.e. the firm and the protection provider share losses on a pro-rata basis, proportional regulatory capital relief is afforded. For the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 R risk weighted exposure amounts must be calculated in accordance with the following formula:
(E-GA) x r + GA x g
where:
- (1) E is the exposure value; according to BIPRU 3.2.1 R to BIPRU 3.2.3 R and BIPRU 13; for this purpose, the exposure value of an off-balance sheet item listed in BIPRU 3.7.2 R shall be 100% of its value rather than the exposure value indicated in BIPRU 3.2.1 R;
- (2) GA is the value of G* as calculated under BIPRU 5.7.17 R further adjusted for any maturity mismatch as laid down in BIPRU 5.8;
- (3) r is the risk weight of exposures to the obligor as specified under the standardised approach; and
- (4) g is the risk weight of exposures to the protection provider as specified under the standardised approach.
[Note: BCD Annex VIII Part 3 point 88]
Calculating risk weighted exposure amounts: standardised approach: Sovereign guarantees
BIPRU 5.7.25
See Notes
A firm may apply the treatment provided for in BIPRU 3.4.5 R to BIPRU 3.4.7 R to exposures or parts of exposures guaranteed by the central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure is funded in that currency.
[Note: BCD Annex VIII Part 3 point 89]
Calculating risk-weighted exposure amounts and expected loss amounts: Basket CRM techniques
BIPRU 5.7.26
See Notes
First-to-default credit derivatives
BIPRU 5.7.27
See Notes
Where a firm obtains credit protection for a number of exposures under terms that the first default among the exposures will trigger payment and that this credit event will terminate the contract, the firm may modify the calculation of the risk weighted exposure amount and, as relevant, the expected loss amount of the exposure which would in the absence of the credit protection produce the lowest risk weighted exposure amount under the standardised approach or the IRB approach as appropriate in accordance with BIPRU 4.10 or BIPRU 5, but only if the exposure value is less than or equal to the value of the credit protection.
[Note: BCD Annex VIII Part 6 point 1]
Nth-to-default credit derivatives
BIPRU 5.7.28
See Notes
Where the nth default among the exposures triggers payment under the credit protection provided by a credit derivative, a firm purchasing the protection may only recognise the protection for the calculation of risk weighted exposure amounts and, as relevant, expected loss amounts if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such cases the methodology must follow that set out in BIPRU 5.7.27 R for first-to-default derivatives appropriately modified for nth-to-default products.
[Note: BCD Annex VIII Part 6 point 2]
BIPRU 5.8
Maturity mismatches
- 01/01/2007
BIPRU 5.8.1
See Notes
For the purposes of calculating risk weighted exposure amounts, a maturity mismatch occurs when the residual maturity of the credit protection is less than that of the protected exposure. Protection of less than three months residual maturity, the maturity of which is less than the maturity of the underlying exposure, must not be recognised.
[Note: BCD Annex VIII Part 4 point 1]
BIPRU 5.8.2
See Notes
Where there is a maturity mismatch the credit protection must not be recognised where the original maturity of the protection is less than 1 year.
[Note: BCD Annex VIII Part 4 point 2 (part)]
Definition of maturity
BIPRU 5.8.3
See Notes
Subject to a maximum of 5 years, the effective maturity of the underlying is the longest possible remaining time before the obligor is scheduled to fulfil its obligations. Subject to BIPRU 5.8.4 R, the maturity of the credit protection is the time to the earliest date at which the protection may terminate or be terminated.
[Note: BCD Annex VIII Part 4 point 3]
BIPRU 5.8.4
See Notes
Where there is an option to terminate the protection which is at the discretion of the protection seller, the maturity of the protection must be taken to be the time to the earliest date at which that option may be exercised. Where there is an option to terminate the protection which is at the discretion of the protection buyer and the terms of the arrangement at origination of the protection contain a positive incentive for the firm to call the transaction before contractual maturity, the maturity of the protection must be taken to be the time to the earliest date at which that option may be exercised; otherwise such an option may be considered not to affect the maturity of the protection.
[Note: BCD Annex VIII Part 4 point 4]
BIPRU 5.8.5
See Notes
Where a credit derivative is not prevented from terminating prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay the maturity of the protection must be reduced by the amount of the grace period.
[Note: BCD Annex VIII Part 4 point 5]
Valuation of protection: Transactions subject to funded credit protection - financial collateral simple method
BIPRU 5.8.6
See Notes
BIPRU 5.8.7
See Notes
Valuation of protection: Transactions subject to funded credit protection - financial collateral comprehensive method
BIPRU 5.8.8
See Notes
BIPRU 5.8.9
See Notes
- (1) The maturity of the credit protection and that of the exposure must be reflected in the adjusted value of the collateral according to the following formula:
- CVAM = CVA x (t-t*)/(T-t*)
- where:
- (a) CVA is the volatility adjusted value of the collateral as specified in BIPRU 5.4.28 R or the amount of the exposure, whichever is the lowest;
- (b) t is the number of years remaining to the maturity date of the credit protection calculated in accordance with BIPRU 5.8.3 R to BIPRU 5.8.5 R, or the value of T, whichever is the lower;
- (c) T is the number of years remaining to the maturity date of the exposure calculated in accordance with BIPRU 5.8.3 R to BIPRU 5.8.5 R, or 5 years, whichever is the lower; and
- (d) t* is 0.25.
- (2) CVAM must be taken as CVA further adjusted for maturity mismatch to be included in the formula for the calculation of the fully adjusted value of the exposure (E*) set out at BIPRU 5.4.28 R.
[Note: BCD Annex VIII Part 4 point 7]
Valuation of protection: Transactions subject to unfunded credit protection
BIPRU 5.8.10
See Notes
BIPRU 5.8.11
See Notes
- (1) The maturity of the credit protection and that of the exposure must be reflected in the adjusted value of the credit protection according to the following formula:
- GA = G* x (t-t*)/(T-t*)
- where:
- (a) G* is the amount of the protection adjusted for any currency mismatch;
- (b) GA is G* adjusted for any maturity mismatch;
- (c) t is the number of years remaining to the maturity date of the credit protection calculated in accordance with BIPRU 5.8.3 R to BIPRU 5.8.5 R, or the value of T, whichever is the lower;
- (d) T is the number of years remaining to the maturity date of the exposure calculated in accordance with BIPRU 5.8.3 R to BIPRU 5.8.5 R, or 5 years, whichever is the lower; and
- (e) t* is 0.25.
- (2) GA is then taken as the value of the protection for the purposes of BIPRU 5.7.16 R to BIPRU 5.7.25 R.
[Note: BCD Annex VIII Part 4 point 8]
BIPRU 5.9
Combinations of credit risk mitigation in the standardised approach
- 01/01/2007
BIPRU 5.9.1
See Notes
In the case where a firm calculating risk weighted exposure amounts under the standardised approach has more than one form of credit risk mitigation covering a single exposure (e.g. a firm has both collateral and a guarantee partially covering an exposure), the firm must subdivide the exposure into parts covered by each type of credit risk mitigation tool (e.g. a part covered by collateral and a portion covered by guarantee) and the risk weighted exposure amount for each portion must be calculated separately in accordance with the provisions of the standardised approach and BIPRU 5.
[Note: BCD Annex VIII Part 5 point 1]
BIPRU 5.9.2
See Notes
When credit protection provided by a single protection provider has differing maturities, a similar approach to that described in BIPRU 5.9.1 R must be applied.
[Note: BCD Annex VIII Part 5 point 2]
BIPRU 6
Operational risk
BIPRU 6.1
Operational risk: Application and purpose
- 01/01/2007
Application
BIPRU 6.1.1
See Notes
BIPRU 6 applies to a BIPRU firm except for:
- (1) a BIPRU limited licence firm; and
- (2) a BIPRU limited activity firm.
BIPRU 6.1.2
See Notes
Purpose
BIPRU 6.1.3
See Notes
The purpose of BIPRU 6 is:
- (1) to detail the requirement to hold capital to cover operational risk losses and have appropriate systems and controls in place to manage operational risk; and
- (2) to explain how to calculate the operational risk capital requirement, or ORCR.
BIPRU 6.1.4
See Notes
BIPRU 6 implements:
- (1) Articles 102 to 104;
- (2) Article 105, in part; and
- (3) Annex X;
of the Banking Consolidation Directive.
BIPRU 6.2
Operational risk: Methodologies and systems
- 01/01/2007
The definition of ORCR
BIPRU 6.2.1
See Notes
The operational risk capital requirement (ORCR) for a firm is an amount calculated in accordance with:
- (1) the basic indicator approach (see BIPRU 6.3); or
- (2) the standardised approach (see BIPRU 6.4).
[Note: BCD Article 102(1)]
BIPRU 6.2.2
See Notes
BIPRU 6.2.3
See Notes
BIPRU 6.2.4
See Notes
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.1 R in order to use its own advanced measurement approach for the calculation of its ORCR (see BIPRU 6.5). If the waiver is granted, the ORCR will be an amount determined in accordance with such waiver.
[Note: BCD Article 105(1)]
Restrictions on changing the approach used for calculating ORCR
BIPRU 6.2.5
See Notes
A firm that calculates its ORCR using the standardised approach must not change to calculating its ORCR using the basic indicator approach.
[Note: BCD Article 102(2) (part)]
BIPRU 6.2.6
See Notes
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.5 R where it can demonstrate good cause for changing to the basic indicator approach.
[Note: BCD Article 102(2) (part)]
BIPRU 6.2.7
See Notes
A firm that calculates its ORCR using an advanced measurement approach must not change to calculating its ORCR using the standardised approach or the basic indicator approach.
[Note: BCD Article 102(3) (part)]
BIPRU 6.2.8
See Notes
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.7 R where it can demonstrate good cause for changing to the standardised approach or the basic indicator approach as the case may be.
[Note: BCD Article 102(3) (part)]
Combination of different methodologies
BIPRU 6.2.9
See Notes
Without prejudice to any other conditions that may be imposed by a firm's AMA permission, where a firm's AMA permission allows it to use an advanced measurement approach in combination with either the basic indicator approach or the standardised approach, the firm must comply with the following conditions:
- (1) all operational risks of the firm are captured;
- (2) the firm must be able to satisfy the appropriate regulator with respect to the methodology used to cover different activities, geographical locations or other relevant divisions determined on an internal basis; and
- (3) BIPRU 6.4.1 R and BIPRU 6.5.6 R must be complied with for the part of activities covered by the standardised approach and advanced measurement approaches respectively.
[Note: BCD Article 102(4) and Annex X, Part 4 point 1]
BIPRU 6.2.10
See Notes
Where a firm's AMA permission allows it to use an advanced measurement approach in combination with either the basic indicator approach or the standardised approach, the appropriate regulator may impose additional conditions on a case by case basis as follows:
- (1) on the date of implementation of an advanced measurement approach, a significant part of the firm's operational risks are captured by the advanced measurement approach; and
- (2) the firm is obliged to roll out the advanced measurement approach to a material part of its operations within a time schedule set out in its AMA permission.
[Note: BCD Annex X, Part 4 point 2]
BIPRU 6.2.11
See Notes
A firm applying for an AMA permission to use a combination of different approaches must be able to show that:
- (1) at the date of implementation of the advanced measurement approach, approximately 50% (or more) of the firm's operational risk is captured under the AMA; and
- (2) the firm has committed to roll out the advanced measurement approach for around 85% (or more) of its operational risk, subject to the remaining percentage not being concentrated in a single operation, within a timescale set out in the AMA permission.
BIPRU 6.2.12
See Notes
For the determination of its ORCR, a firm must not use any of the following combinations of methodologies:
- (1) the basic indicator approach with the standardised approach;
- (2) the basic indicator approach with the alternative standardised approach; or
- (3) the standardised approach with the alternative standardised approach for the same business line.
BIPRU 6.2.13
See Notes
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.12 R (1) and BIPRU 6.2.12 R (2) in exceptional circumstances, such as the recent acquisition of new business, which require a transition period for the roll out of the standardised approach (or the alternative standardised approach). In this event, a firm will need to make a commitment to roll out the standardised approach (or the alternative standardised approach) within a time schedule agreed with the appropriate regulator.
[Note: BCD Annex X, Part 4 points 3 and 4]
BIPRU 6.3
Operational risk: Basic indicator approach
- 01/01/2007
ORCR
BIPRU 6.3.1
See Notes
The ORCR under the basic indicator approach is equal to 15% of the relevant indicator defined in this section.
[Note: BCD Article 103 and Annex X, Part 1 point 1]
Relevant indicator: General
BIPRU 6.3.2
See Notes
- (1) The relevant indicator is the three-year average of the sum of:
- (2) The three-year average must be calculated on the basis of the last three yearly observations at the end of the financial year. When audited figures are not available, business estimates may be used.
- (3) If for any given observation, the sum of a firm's net interest income and net non-interest income is negative or equal to zero, this figure must be excluded from both the numerator and denominator when calculating the three year average. The relevant indicator must be calculated as the sum of the positive figures divided by the number of positive figures.
[Note: BCD Annex X, Part 1 points 2 to 4]
Relevant indicator: An example calculation
BIPRU 6.3.3
See Notes
If a firm has:
- (1) two positive yearly relevant indicators of £20 each; and
- (2) the final yearly observation shows a negative figure of £5; then
the relevant indicator is calculated as £20, being £40 (sum of positive figures) divided by 2 (number of positive figures).
Relevant indicator: Insufficient income data
BIPRU 6.3.4
See Notes
Relevant indicator: Application of accounting categories
BIPRU 6.3.5
See Notes
- (1) This rule applies to a firm that is subject to the Bank Accounts Directive.
- (2) Based on accounting categories for the profit and loss account of credit institutions under Article 27 of the Bank Accounts Directive, the relevant indicator in BIPRU 6.3.2 R must be expressed as the sum of the elements listed in the table in BIPRU 6.3.6 R.
- (3) Each element in the table in BIPRU 6.3.6 R must be included in the sum with its positive or negative sign.
[Note: BCD Annex X, Part 1 point 5]
BIPRU 6.3.6
See Notes
1 | Interest receivable and similar income |
2 | Interest payable and similar charges |
3 | Income from shares and other variable/fixed-yield securities. |
4 | Commissions/fees receivable |
5 | Commission/fees payable |
6 | Net profit or net loss on financial operations |
7 | Other operating income |
BIPRU 6.3.7
See Notes
BIPRU 6.3.8
See Notes
BIPRU 6.3.9
See Notes
- (1) If a firm considers that, due to exceptional circumstances, using a three year average to calculate the relevant indicator would lead to a major overestimation of its ORCR, the firm may apply for a waiver from BIPRU 6.3.2 R.
- (2) Exceptional circumstances might include stopping or selling a major business line.
Qualifications
BIPRU 6.3.10
See Notes
- (1) The relevant indicator for the basic indicator approach must be calculated before the deduction of any provisions and operating expenses.
- (2) Operating expenses must include fees paid for outsourcing services rendered by third parties which are not a parent undertaking or subsidiary undertaking of the firm or a subsidiary undertaking of a parent undertaking which is also the parent undertaking of the firm. Expenditure on the outsourcing of services rendered by third parties may reduce the relevant indicator if the expenditure is incurred by an undertaking subject to supervision under, or equivalent to, the Banking Consolidation Directive.
[Note: BCD Annex X, Part 1 point 7]
BIPRU 6.3.11
See Notes
BIPRU 6.3.12
See Notes
The following elements must not be used in the calculation of the relevant indicator:
- (1) realised profits/losses from the sale of non-trading book items;
- (2) income from extraordinary or irregular items; and
- (3) income derived from insurance.
[Note: BCD Annex X, Part 1 point 8 (part)]
BIPRU 6.3.13
See Notes
When revaluation of trading items is part of the profit and loss statement, revaluation may be included in the calculation of the relevant indicator.
[Note: BCD Annex X, Part 1 point 8 (part)]
BIPRU 6.3.14
See Notes
When Article 36(2) of the Bank Accounts Directive is applied, revaluation booked in the profit and loss account must be included in the calculation of the relevant indicator.
[Note: BCD Annex X, Part 1 point 8 (part)]
BIPRU 6.3.15
See Notes
When a firm is subject to an accounting framework different from the one established by the Bank Accounts Directive, it must calculate the relevant income indicator on the basis of internal data that best reflect the definition in this section.
[Note: BCD Annex X, Part 1 points 6 and 9]
General risk management standards
BIPRU 6.3.16
See Notes
- (1) In common with all BIPRU firms, a firm calculating its ORCR using the basic indicator approach is required to meet the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R.
- (2) In meeting those general risk management standards, a firm that undertakes market-related activities should be able to demonstrate to the appropriate regulator that it has considered the Committee of European Banking Supervisors' Guidelines on the management of operational risk in market-related activities, published in October 2010. These can be found at http://www.eba.europa.eu/documents/Publications/Standards---Guidelines/2010/Management-of-op-risk/CEBS-2010-216-(Guidelines-on-the-management-of-op-.aspx
BIPRU 6.4
Operational risk: Standardised approach
- 01/01/2007
Eligibility
BIPRU 6.4.1
See Notes
- (1) To be eligible for the standardised approach, a firm must meet the qualifying criteria set out in this rule, in addition to the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R .
- (2) A firm must have a well-documented assessment and management system for operational risk with clear responsibilities for the system assigned within the firm. The system must identify the firm's exposures to operational risk and track relevant operational risk data, including material loss data.
- (3) A firm's operational risk assessment and management system must be subject to regular independent review.
- (4) A firm's operational risk assessment system must be closely integrated into the firm's risk management processes. Its output must be an integral part of the process of monitoring and controlling the firm's operational risk profile.
- (5) A firm must implement a system of management reporting that provides operational risk reports to relevant functions within the firm. A firm must have procedures in place for taking appropriate action in response to the information contained in such reports.
[Note: BCD Article 104(6) and Annex X, Part 2 point 12 (part)]
BIPRU 6.4.1A
See Notes
BIPRU 6.4.2
See Notes
A firm must comply with the criteria in BIPRU 6.4.1 R having regard to the size and scale of its activities and to the principle of proportionality.
[Note: BCD Annex X, Part 2 point 12 (part)]
Business lines
BIPRU 6.4.3
See Notes
Under the standardised approach, a firm must divide its activities into a number of business lines as set out in this section.
[Note: BCD Article 104(1)]
BIPRU 6.4.4
See Notes
BIPRU 6.4.5
See Notes
For each business line, a firm must calculate a capital requirement for operational risk as a certain percentage of a relevant indicator, in accordance with the rules in this section.
[Note: BCD Article 104(2)]
ORCR calculated using the standardised approach
BIPRU 6.4.6
See Notes
The ORCR under the standardised approach is calculated as the three-year average of the yearly summations of the capital requirements across the business lines referred to in BIPRU 6.4.15 R.
[Note: BCD Annex X, Part 2 point 1 (part)]
BIPRU 6.4.7
See Notes
In any given year, negative capital requirements (resulting from negative gross income) in any business line may offset positive capital requirements in other business lines without limit. However, where the aggregate of the capital requirements across all business lines within a given year is negative, the input to the numerator for that year must be zero.
[Note: BCD Annex X, Part 2 point 1 (part)]
BIPRU 6.4.8
See Notes
- (1) If a firm considers that, due to exceptional circumstances, using a three year average to calculate the relevant indicator would lead to a major overestimation of its ORCR, the firm may apply for a waiver from BIPRU 6.4.5 R.
- (2) Exceptional circumstances might include stopping or selling a major business line.
Relevant indicator
BIPRU 6.4.9
See Notes
The three year average in BIPRU 6.4.6 R must be calculated on the basis of the last three twelve monthly observations at the end of the financial year. When audited figures are not available, business estimates may be used.
[Note: BCD Annex X, Part 2 point 2]
Principles for business line mapping
BIPRU 6.4.10
See Notes
A firm must develop and document specific policies and criteria for mapping the relevant indicator for current business lines and activities into the framework for the standardised approach. The criteria must be reviewed and adjusted for new or changing business activities and risks as appropriate.
[Note: BCD Annex X, Part 2 point 4 (part)]
BIPRU 6.4.11
See Notes
- (1) The principles for business line mapping that a firm must meet are set out in this rule.
- (2) All activities must be mapped into the business lines in a mutually exclusive and jointly exhaustive manner.
- (3) Any activity which cannot be readily mapped into the business line framework, but which represents an ancillary function to an activity included in the framework, must be allocated to the business line it supports. If more than one business line is supported through the ancillary activity, an objective mapping criterion must be used (e.g., proportional allocation of the indicators).
- (4) If an activity cannot be mapped into a particular business line then the business line yielding the highest charge for the firm must be used. The same business line equally applies to any associated ancillary activity.
- (5) A firm may use internal pricing methods to allocate the relevant indicator between business lines.
- (6) The mapping of activities into business lines for operational risk capital purposes must be consistent with the definitions of business lines used by the firm for credit and market risks.
- (7) Senior management must be responsible for the mapping policy.
- (8) The mapping process to business lines must be subject to independent review.
[Note: BCD Annex X, Part 2 point 4 (part)]
BIPRU 6.4.12
See Notes
A firm that is mapping activities to a business line should take into account:
- (1) the activities listed in respect of each business line in the table in BIPRU 6.4.15 R; and
- (2) the organisation of the firm's business in respect of that business line.
BIPRU 6.4.13
See Notes
BIPRU 6.4.14
See Notes
For the purposes of BIPRU 6.4.11 R (5), costs generated in one business line which are imputable to a different business line may be reallocated to the business line to which they pertain, for instance by using a treatment based on internal transfer costs between two business lines.
[Note: BCD Annex X, Part 2 point 4 (part)]
BIPRU 6.4.15
See Notes
This table belongs to BIPRU 6.4.3 R
Business line | List of activities | Percentage |
Corporate finance |
•Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
•Services related to underwriting
•Investment advice
•Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to the mergers and the purchase of undertakings
•Investment research and financial analysis and other forms of general recommendation relating to transactions in financial instruments
|
18% |
Trading and sales |
•Dealing on own account
•Money broking
•Reception and transmission of orders in relation to one or more financial instruments
•Execution of orders on behalf of clients
•Placing of financial instruments on a best efforts basis
•Operation of multilateral trading facilities
|
18% |
Retail brokerage (Activities with individual physical persons or with a retail SME as defined under the standardised approach to credit risk) |
•Reception and transmission of orders in relation to one or more financial instruments
•Execution of orders of behalf of clients
•Placing of financial instruments without a firm commitment basis
|
12% |
Commercial banking |
•Acceptance of deposits and other repayable funds
•Lending
•Financial leasing
•Guarantees and commitments
|
15% |
Retail banking (Activities with an individual physical persons or with a retail SME as defined under the standardised approach to credit risk) |
•Acceptance of deposits and other repayable funds
•Lending
•Financial leasing
•Guarantees and commitments
|
12% |
Payment and settlement |
•Money transmission services
•Issuing and administering means of payment
|
18% |
Agency services |
•Safekeeping and administration of financial instruments for the account of clients including custodianship and related services such as cash/collateral management
|
15% |
Asset management |
•Portfolio management
•UCITS management and other forms of asset management
|
12% |
The alternative standardised approach
BIPRU 6.4.16
See Notes
Under the alternative standardised approach, a firm using the standardised approach may use alternative indicators for retail banking and commercial banking business lines if it complies with BIPRU 6.4.17 R to BIPRU 6.4.21 R.
[Note: BCD Annex X, Part 2 point 3]
Eligibility for the alternative standardised approach
BIPRU 6.4.17
See Notes
To be eligible to use the alternative standardised approach, a firm must meet the following conditions, in addition to the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R :
- (1) the firm must meet the eligibility criteria for the standardised approach in BIPRU 6.4.1 R;
- (2) the firm must be overwhelmingly active in retail and/or commercial banking activities, which must account for at least 90% of its income; and
- (3) the firm must be able to demonstrate that a significant proportion of its retail and/or commercial banking activities comprise loans associated with a high probability of default, and that the alternative standardised approach provides an improved basis for assessing the operational risk.
[Note: BCD Article 104(3) and Annex X, Part 2 points 5 and 8 to 11]
BIPRU 6.4.18
See Notes
ORCR calculated using the alternative standardised approach
BIPRU 6.4.19
See Notes
- (1) The relevant indicators under the alternative standardised approach are the same as for the standardised approach except for the two following business lines:
- (a) retail banking; and
- (b) commercial banking.
- (2) For retail banking and commercial banking, the ORCR must be calculated as a normalised income indicator equal to the three-year average of the total nominal amount of loans and advances multiplied:
- (a) by 0.035, and then
- (b) by the appropriate business line percentage set out in BIPRU 6.4.15 R.
[Note: BCD Annex X, Part 2 point 6]
BIPRU 6.4.20
See Notes
For the retail and/or commercial banking business lines, the loans and advances must consist of the total drawn amounts in the corresponding credit portfolios.
[Note: BCD Annex X, Part 2 point 7 (part)]
BIPRU 6.4.21
See Notes
For the commercial banking business line, the securities held in the non-trading book must also be included.
[Note: BCD Annex X, Part 2 point 7 (part)]
BIPRU 6.5
Operational risk: Advanced measurement approaches
- 01/01/2008
Application
BIPRU 6.5.1
See Notes
AMA permissions: general
BIPRU 6.5.2
See Notes
BIPRU 6.5.3
See Notes
BIPRU 6.5.4
See Notes
Minimum standards
BIPRU 6.5.5
See Notes
A firm must be able to satisfy the appropriate regulator that it meets:
- (1) the general risk management standards in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R;
- (2) the qualitative standards set out in this section; and
- (3) the quantitative standards set out in this section.
[Note: BCD Article 105(2) and Annex X Part 3 point 1]
BIPRU 6.5.5A
See Notes
BIPRU 6.5.5B
See Notes
Qualitative standards
BIPRU 6.5.6
See Notes
- (1) This rule sets out the qualitative standards that a firm's operational risk measurement system must meet.
- (2) A firm's internal operational risk measurement system must be closely integrated into its day-to-day risk management processes.
- (3) A firm must have an independent risk management function for operational risk.
- (4) There must be regular reporting of operational risk exposures and loss experience. The firm must have procedures for taking appropriate corrective action.
- (5) A firm's risk management system must be well documented. The firm must have a routine in place for ensuring compliance and policies for the treatment of non-compliance.
- (6) A firm's operational risk management processes and measurement systems must be subject to regular reviews performed by internal and/or external auditors.
- (7) A firm must ensure that in respect of its operational risk measurement system:
- (a) its internal validation processes are operating in a satisfactory manner; and
- (b) the data flows and processes associated with the risk measurement system are transparent and accessible.
[Note: BCD Annex X Part 3 points 2 to 7]
BIPRU 6.5.7
See Notes
For the purposes of BIPRU 6.5.6 R (2), a firm should be able to show that:
- (1) its operational risk measurement systems and processes provide benefits to the firm and are not limited to determining regulatory capital;
- (2) the operational risk measurement system and framework forms part of the systems and controls it has in place; and
- (3) the operational risk measurement system and framework are capable of adapting to the changes in the business of the firm and evolving as the firm gains experience of risk management techniques.
BIPRU 6.5.8
See Notes
BIPRU 6.5.9
See Notes
For the purposes of BIPRU 6.5.6 R (4), a firm should ensure that:
- (1) its governing body or designated committee (where one is used) possesses a general understanding of the firm's AMA; and
- (2) its senior management possesses a good understanding of the firm's AMA and its operation.
BIPRU 6.5.10
See Notes
- (1) A firm's governing body or designated committee may choose to approve only material aspects of the firm's AMA and material changes to the firm's AMA.
- (2) Where a firm's governing body or designated committee chooses to approve only material aspects of the firm's AMA and material changes to the firm's AMA:
- (a) the firm's governing body or designated committee should define the firm's overall approach to the AMA and approve a policy statement defining that approach; and
- (b) the firm should define and document the process for approval of non-material aspects of the firm's AMA.
BIPRU 6.5.11
See Notes
For the purposes of BIPRU 6.5.6 R (7), a firm should develop and adopt an internal validation methodology of its operational risk measurement system and management processes that:
- (1) is proportionate and appropriate to the business of the firm;
- (2) takes into account changing market and operating conditions of the firm;
- (3) encompasses both quantitative and qualitative methods of the firm's operational risk measurement system;
- (4) is periodically assessed by the firm;
- (5) is subject to regular independent review to ensure effective implementation; and
- (6) is clearly documented.
Quantitative standards: process
BIPRU 6.5.12
See Notes
- (1) This rule sets out the quantitative standards that a firm's operational risk measurement system must meet with respect to process.
- (2) A firm must calculate its capital requirement as comprising both expected loss and unexpected loss, unless the firm can demonstrate that expected loss is adequately captured in its internal business practices.
- (3) The operational risk measure of a firm must capture potentially severe tail events, achieving a soundness standard comparable to a 99.9% confidence interval over a one year period.
- (4) The operational risk measurement system of a firm must have certain key elements to meet the soundness standard set out in (2) and (3). These elements must include the use of internal data, external data, scenario analysis and factors reflecting the business environment and internal control systems as set out in BIPRU 6.5.21 R to BIPRU 6.5.25 R.
- (5) A firm must have a well documented approach for weighting the use of the four elements in (4) in its overall risk measurement system.
- (6) A firm's risk measurement system must capture the major drivers of risk affecting the shape of the tail of the loss estimates.
- (7) A firm must only recognise correlations in operational risk losses across individual operational risk estimates to the extent they are set out in its AMA permission. The firm must validate its correlation assumptions using appropriate quantitative and qualitative techniques.
- (8) A firm's risk measurement system must be internally consistent and must avoid the multiple counting of qualitative assessments or risk mitigants recognised in other areas of the capital adequacy framework.
[Note: BCD Annex X Part 3 points 8 to 10, 11 (part) and 12]
BIPRU 6.5.13
See Notes
For the purposes of BIPRU 6.5.12 R (7), the firm must be able to show that its system for measuring correlations is sound, implemented with integrity, and takes into account the uncertainty surrounding any such correlation estimates, particularly in periods of stress.
[Note: BCD Annex X Part 3 point 11 (part)]
BIPRU 6.5.14
See Notes
A firm should be able to satisfy the appropriate regulator that it has considered the following with respect to its operational risk measurement systems:
- (1) whether the choice of distributions used provides both a good fit with the data and an ability adequately to account for rare events;
- (2) whether the estimated parameters and capital numbers used for the simulated inclusion or exclusion of unusually large losses are sufficiently robust;
- (3) the co-dependency, or independency, of assumptions governing the relationships between risk types and between business lines;
- (4) the number of simulations or iterations required during model execution to provide reasonably stable capital results;
- (5) the emergence of different data types, such as the combination of internal and external loss data, based on different degrees of credibility; and
- (6) the methodologies used for the purposes of achieving a soundness standard comparable to a 99.9% confidence interval.
BIPRU 6.5.15
See Notes
For the purposes of BIPRU 6.5.12 R (2), a firm should be able to show that its operational risk measurement systems that capture expected loss are:
- (1) clearly documented;
- (2) sound, implemented with integrity and consistently applied, and take into account uncertainty surrounding expected loss;
- (3) subject to regular reviews by the firm of the reasonableness of the expected loss estimates and comparisons with subsequent outcomes; and
- (4) based on justifiable assumptions for capturing and reviewing the reasonableness of the expected loss estimates.
BIPRU 6.5.16
See Notes
BIPRU 6.5.17
See Notes
Where a firm is using a combination of budgeting and pricing for the purposes of the operational risk measurement system for capturing expected loss, a firm should be able to show that:
- (1) the process is transparent, can be repeated and provides support to the firm's management of its business;
- (2) to a reasonable degree of certainty, budgeted resources for the relevant year cover budgeted expected losses;
- (3) its forecasting takes into account both historic performance and drivers which may affect future trends; and
- (4) the forecasting in (3) is monitored on a periodic basis and adjusted as appropriate.
BIPRU 6.5.18
See Notes
For the purposes of BIPRU 6.5.12 R (3), a firm should be able to show that in respect of its operational risk measurement system:
- (1) the methodology for obtaining a soundness standard comparable to a 99.9% confidence level is practical and appropriate;
- (2) it has assessed its overall model outputs as sufficiently robust; and
- (3) it reviews its methodology on an ongoing basis.
BIPRU 6.5.19
See Notes
For the purpose of developing and reviewing its methodology for obtaining a soundness standard comparable to a 99.9% confidence level, a firm should consider whether any of the following are appropriate:
- (1) stress testing;
- (2) sensitivity analysis;
- (3) scenario analysis;
- (4) back testing; and
- (5) boot-strapping techniques.
BIPRU 6.5.20
See Notes
Quantitative standards: internal data
BIPRU 6.5.21
See Notes
- (1) This rule sets out the quantitative standards that a firm's operational risk measurement system must meet with respect to internal data.
- (2) A firm's internally generated operational risk measures must be based on a minimum historical observation period of five years. When a firm first moves to the advanced measurement approach, a three year historical observation period may be used.
- (3) A firm must be able to map its historical internal loss data into the business lines defined in BIPRU 6.4.15 R and into the event type categories defined in BIPRU 6.5.25 R, and must be able to provide this data to the appropriate regulator upon request. Loss events which affect the entire firm may be allocated to an additional business line 'corporate items' due to exceptional circumstances. The firm must have documented, objective criteria for allocating losses to the specified business lines and event types. A firm's operational risk losses that are related to credit risk and have historically been included in the internal credit risk databases must be recorded in the operational risk databases and be separately identified. Such losses will not be subject to the ORCR, as long as they continue to be treated as credit risk for the purposes of calculating the capital resources requirement. Operational risk losses that are related to market risks must be included in the scope of the capital requirement for operational risk.
- (4) A firm's internal loss data must be comprehensive in that it captures all material activities and exposures from all appropriate sub-systems and geographic locations. A firm must be able to demonstrate that any excluded activities or exposures, both individually and in combination, would not have a material impact on the overall risk estimates. A firm must define appropriate minimum loss thresholds for internal loss data collection.
- (5) Aside from information on gross loss amounts, a firm must collect information about the date of the event, any recoveries of gross loss amounts, as well as some descriptive information about the drivers or causes of the loss event.
- (6) A firm must have specific criteria for assigning loss data arising from an event in a centralised function or an activity that spans more than one business line, as well as from related events over time.
- (7) A firm must have documented procedures for assessing the ongoing relevance of historical loss data, including those situations in which judgement overrides, scaling or other adjustments may be used, to what extent they may be used and who is authorised to make such decisions.
[Note: BCD Annex X Part 3 points 13 to 18]
Quantitative standards: external data
BIPRU 6.5.22
See Notes
- (1) This rule sets out the quantitative standards that a firm's operational risk measurement system must meet with respect to external data.
- (2) A firm's operational risk measurement system must use relevant external data, especially when there is reason to believe that the firm is exposed to infrequent, yet potentially severe, losses. A firm must have a systematic process for determining the situations for which external data should be used and the methodologies used to incorporate the data in its measurement system. The conditions and practices for external data use should be regularly reviewed, documented and subject to periodic independent review.
[Note: BCD Annex X Part 3 point 19]
Quantitative standards: scenario analysis
BIPRU 6.5.23
See Notes
- (1) This rule sets out the quantitative standards that a firm's operational risk measurement system must meet with respect to scenario analysis.
- (2) A firm must use scenario analysis of expert opinion in conjunction with external data to evaluate its exposure to high severity events. Over time, such assessments must be validated and re-assessed through comparison to actual loss experience to ensure their reasonableness.
[Note: BCD Annex X Part 3 point 20]
Quantitative standards: business environment and internal control factors
BIPRU 6.5.24
See Notes
- (1) This rule sets out the quantitative standards that a firm's operational risk measurement system must meet with respect to business environment and internal control factors.
- (2) A firm's firm-wide risk assessment methodology must capture key business environment and internal control factors that can change its operational risk profile.
- (3) A firm must be able to justify the choice of each factor as a meaningful driver of risk, based on experience and involving the expert judgment of the affected business areas.
- (4) The sensitivity of risk estimates to changes in the factors and the relative weighting of the various factors must be well reasoned. In addition to capturing changes in risk due to improvements in risk controls, the framework must also capture potential increases in risk due to greater complexity of activities or increased business volume.
- (5) A firm must document this framework and make it subject to independent review within the firm and make it available for review by supervisors.
- (6) Over time, a firm must validate and re-assess the process and the outcomes through comparison to actual internal loss experience and relevant external data.
[Note: BCD Annex X Part 3 points 21 to 24]
Table: Loss event type classification
BIPRU 6.5.25
See Notes
This table belongs to BIPRU 6.5.21 R (3).
Event-Type Category | Definition |
Internal fraud | Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/ discrimination events, which involves at least one internal party |
External fraud | Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party |
Employee Practices and Workplace Safety | Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity/discrimination events |
Clients, Products & Business Practices | Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product |
Damage to Physical Assets | Losses arising from loss or damage to physical assets from natural disaster or other events |
Business disruption and system failures | Losses arising from disruption of business or system failures |
Execution, Delivery & Process Management | Losses from failed transaction processing or process management, from relations with trade counterparties and vendors |
[Note: BCD Annex X Part 5 Table 3]
Impact of insurance and risk transfer mechanisms
BIPRU 6.5.26
See Notes
- (1) A firm may recognise the impact of insurance for the purposes of its operational risk measurement system subject to the conditions set out in this rule and BIPRU 6.5.27 R.
- (2) The provider must be authorised to provide insurance or re-insurance.
- (3) The provider must have a minimum claims paying ability rating by an eligible ECAI associated with credit quality step 3 or above under the rules for the risk weighting of exposures to firms under the standardised approach to credit risk.
[Note: BCD Annex X Part 3 points 25 to 26]
BIPRU 6.5.27
See Notes
- (1) A firm must ensure that its insurance and its insurance framework meet the conditions in this rule.
- (2) The insurance policy must have an initial term of no less than one year. For policies with a residual term of less than one year the firm must make appropriate haircuts to reflect the declining residual term of the policy, up to a full 100% haircut for policies with a residual term of 90 days or less.
- (3) The insurance policy must have a minimum notice period for cancellation of the contract of 90 days.
- (4) The insurance policy must contain no exclusions or limitations based upon supervisory actions or, in the case of a failed firm, that preclude the firm, its receiver or liquidator from recovering for damages suffered or expenses incurred by the firm, except in respect of events occurring after the initiation of receivership or liquidation proceedings in respect of the firm. The insurance policy may exclude coverage for any fine, penalty or punitive damages resulting from actions by a competent authority or third country competent authority.
- (5) The risk mitigation calculations must reflect the insurance coverage in a manner that is transparent in its relationship to, and consistent with, the actual likelihood and impact of loss used in the overall determination of the ORCR.
- (6) The insurance must be provided by a third party entity. In the case of insurance through captives and affiliates, the exposure must be laid off to an independent third party entity, for example through reinsurance that meets the eligibility criteria.
- (7) The framework for recognising insurance must be well reasoned and documented.
- (8) The methodology for recognising insurance must capture the following elements through discounts or haircuts in the amount of insurance recognition:
- (a) the residual term of a policy, where less than one year, as noted in (2);
- (b) a policy's cancellation terms, where less than one year;
- (c) mismatches in coverage of insurance policies; and
- (d) the uncertainty of payment.
- (9) The capital alleviation arising from the recognition of insurances and other risk transfer mechanisms must not exceed 20% of the capital requirement before the recognition of risk mitigation techniques.
[Note: BCD Annex X Part 3 points 27 to 29]
BIPRU 6.5.28
See Notes
BIPRU 6.5.29
See Notes
BIPRU 6.5.30
See Notes
A firm may recognise a risk transfer mechanism other than insurance to the extent that a noticeable risk mitigating effect is achieved and the risk transfer mechanism is included in the firm's AMA permission.
[Note: BCD Annex X Part 3 point 25]
BIPRU 6.5.30A
See Notes
Use of an advanced measurement approach on a groupwide basis
BIPRU 6.5.31
See Notes
Where an EEA parent institution and its subsidiary undertakings or an EEA parent financial holding company and its subsidiary undertakings use an advanced measurement approach on a unified basis for the parent undertaking and its subsidiary undertakings, the qualifying criteria set out in BIPRU 6.5 may be met by the parent undertaking and its subsidiary undertakings considered together where permitted by the AMA permission.
[Note: BCD Article 105(4)]
BIPRU 6.5.32
See Notes
Where the AMA is used on a unified basis for the parent undertaking and its subsidiary undertakings, and approval and reporting of the AMA are carried out at the group level, the qualifying criteria in BIPRU 6.5 may be met if:
- (1) the subsidiary undertakings have delegated to the governing body or designated committee of the EEA parent institution or EEA parent financial holding company responsibility for approval of the AMA;
- (2) the governing body or designated committee of the EEA parent institution or EEA parent financial holding company approves either:
BIPRU 7
Market risk
BIPRU 7.1
Application, purpose, general provisions and non-standard transactions
- 01/01/2007
Application
BIPRU 7.1.1
See Notes
Purpose
BIPRU 7.1.2
See Notes
General provisions: Obligation to calculate PRR
BIPRU 7.1.3
See Notes
A firm must calculate a PRR in respect of:
- (1) all its trading book positions;
- (2) all positions falling within BIPRU 7.5.3 R (Scope of the foreign exchange PRR calculation), whether or not in the trading book; and
- (3) all positions in commodities (including physical commodities) whether or not in the trading book;
even if no treatment is provided for that position in the other sections of this chapter.
BIPRU 7.1.4
See Notes
A firm must calculate a PRR for any position falling into BIPRU 7.1.3 R using:
General provisions: Non-trading book items
BIPRU 7.1.5
See Notes
General provisions: Frequency of calculation
BIPRU 7.1.6
See Notes
BIPRU 7.1.7
See Notes
Purpose of rules for non-standard transactions and instruments for which no PRR treatment has been specified
BIPRU 7.1.8
See Notes
Instruments for which no PRR treatment has been specified
BIPRU 7.1.9
See Notes
BIPRU 7.1.10
See Notes
BIPRU 7.1.11
See Notes
BIPRU 7.1.12
See Notes
BIPRU 7.1.13
See Notes
Instruments in non-standard form
BIPRU 7.1.14
See Notes
- (1) If a firm has a position:
- (a) in a PRR item in non-standard form; or
- (b) that is part of a non-standard arrangement; or
- (c) that, taken together with other positions (whether or not they are subject to PRR charges under BIPRU 7), gives rise to a non-standard market risk;
- the firm must notify the appropriate regulator of that fact and of details about the position, PRR item, arrangements and type of risk concerned.
- (2) Except as (1) provides to the contrary, (1) applies to a position that is subject to a PRR under BIPRU 7.1.3R.
- (3) The question of what is non-standard for the purposes of (1) must be judged by reference to the standards:
BIPRU 7.1.15
See Notes
Meaning of appropriate percentage for non-standard transactions
BIPRU 7.1.16
See Notes
- (1) In BIPRU 7.1.13R and, to the extent that that rule applies BIPRU 7.1.13R, BIPRU 7.1.15R, an "appropriate percentage" is:
- (a) 100%; or
- (b) a percentage which takes account of the characteristics of the position concerned and of discussions with the appropriate regulator or a predecessor regulator under the Banking Act 1987 or the Financial Services Act 1986.
- (2) Compliance with (1) may be relied on as tending to establish compliance with BIPRU 7.1.13R or, insofar as it incorporates the requirements relating to an appropriate percentage, BIPRU 7.1.15R.
- (3) Contravention of (1) may be relied on as tending to establish contravention with BIPRU 7.1.13 R or, insofar as it incorporates the requirements relating to an appropriate percentage, BIPRU 7.1.15 R.
Stress testing and scenario analyses of trading book positions
BIPRU 7.1.17
See Notes
BIPRU 7.1.17A
See Notes
BIPRU 7.1.18
See Notes
BIPRU 7.1.19
See Notes
This paragraph gives guidance in relation to the stress testing programme that a firm must carry out in relation to its trading book positions.
- (1) The frequency of the stress testing of trading book positions should be determined by the nature of the positions.
- (2) The stress testing should include shocks which reflect the nature of the portfolio and the time it could take to hedge out or manage risks under severe market conditions.
- (3) The firm should have procedures in place to assess and respond to the results of the stress testing programme. In particular, stress testing should be used to evaluate the firm's capacity to absorb losses or to identify steps to be taken by the firm to reduce risk.
- (4) As part of its stress testing programme, the firm should consider how prudent valuation principles (see GENPRU 1.3) will be met in a stressed scenario.
BIPRU 7.1.20
See Notes
BIPRU 7.2
Interest rate PRR
- 01/01/2007
General rule
BIPRU 7.2.1
See Notes
- (1) A firm must calculate its interest rate PRR under BIPRU 7.2 by:
- (a) identifying which positions must be included within the interest rate PRR calculation;
- (b) deriving the net position in each debt security in accordance with BIPRU 7.2.36R-BIPRU 7.2.41R;
- (c) including these net positions in the interest rate PRR calculation for general market risk and the interest rate PRR calculation for specific risk; and
- (d) summing all PRRs calculated for general market risk and specific risk.
- (2) A firm must calculate its interest rate PRR by adding the amount calculated under (1) to the amount calculated under the basic interest rate PRR calculation under BIPRU 7.3.45R.
- (3) All net positions, irrespective of their signs, must be converted on a daily basis into the firm's base currency at the prevailing spot exchange rate before their aggregation.
- (4) Net positions must be classified according to the currency in which they are denominated. A firm must calculate the capital requirement for general market risk and specific risk in each individual currency separately.
BIPRU 7.2.2
See Notes
Scope of the interest rate PRR calculation
BIPRU 7.2.3
See Notes
A firm's interest rate PRR calculation must:
- (1) include all trading book positions in debt securities, preference shares and convertibles, except:
- (a) positions in convertibles which have been included in the firm's equity PRR calculation;
- (b) positions fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude them; or
- (c) positions hedging an option which is being treated under BIPRU 7.6.26R (Table: Appropriate treatment for equities, debt securities or currencies hedging options);
- (2) include notional positions arising from trading book positions in the instruments listed in the table in BIPRU 7.2.4R; and
- (3) (if the firm is the transferor of debt securities or guaranteed rights relating to title to debt securities in a repurchase agreement or the lender of debt securities in a debt securities lending agreement) include such debt securities if those debt securities meet the criteria for inclusion in the trading book.
BIPRU 7.2.4
See Notes
This table belongs to BIPRU 7.2.3R(2)
Instrument | See |
Futures, forwards or synthetic futures on debt securities | BIPRU 7.2.13 R |
Futures, forwards or synthetic futures on debt indices or baskets | BIPRU 7.2.14R |
Interest rate futures or forward rate agreements (FRAs) | BIPRU 7.2.18 R |
Interest rate swaps or foreign currency swaps | BIPRU 7.2.21R |
Deferred start interest rate swaps or foreign currency swaps | BIPRU 7.2.24R |
The interest rate leg of an equity swap (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives)) | BIPRU 7.2.27R |
The cash leg of a repurchase agreement or a reverse repurchase agreement | BIPRU 7.2.30R |
Cash borrowings or deposits | BIPRU 7.2.31 R |
Options on a debt security, a basket of debt securities, a debt security index, an interest rate or an interest rate future or swap (including an option on a future on a debt security) (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR)) | BIPRU 7.2.32R |
Dual currency bonds | BIPRU 7.2.33R |
Foreign currency futures or forwards | BIPRU 7.2.34R |
Gold futures or forwards | BIPRU 7.2.34R |
Forwards, futures or options (except cliquets) on an equity, basket of equities or equity index (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3) | BIPRU 7.2.34R |
Credit derivatives | BIPRU 7.11 |
A warrant must be treated in the same way as an option |
BIPRU 7.2.5
See Notes
BIPRU 7.2.6
See Notes
BIPRU 7.2.7
See Notes
Firms are reminded that the table in BIPRU 7.6.5R (Table: Appropriate PRR calculation for an option or warrant) divides options and warrants on interest rates, debt securities and interest rate futures and swaps into:
BIPRU 7.2.8
See Notes
BIPRU 7.2.9
See Notes
Derivation of notional positions: General approach
BIPRU 7.2.10
See Notes
BIPRU 7.2.11 R - BIPRU 7.2.35R convert the instruments listed in the table in BIPRU 7.2.4R into notional positions in:
- (1) the underlying debt security, where the instrument depends on the price (or yield) of a specific debt security; or
- (2) notional debt securities to capture the pure interest rate risk arising from future payments and receipts of cash (including notional payments and receipts) which, because they are designed to represent pure general market risk (and not specific risk), are called zero-specific-risk securities; or
- (3) both (1) and (2).
BIPRU 7.2.11
See Notes
- (1) For the purposes of calculating interest rate PRR, unless specified otherwise, a firm must derive the value of notional positions as follows:
- (a) notional positions in actual debt securities must be valued as the nominal amount underlying the contract at the current market price of the debt security; and
- (b) positions in zero-specific-risk securities must be valued using one of the two methods in (2).
- (2) A firm must use one of the following two methods for all positions arising under (1)(b) and must use the same method for all positions denominated in the same currency:
- (a) the present value approach, under which the zero-specific-risk security is assigned a value equal to the present value of all the future cash flows that it represents; or
- (b) the alternative approach, under which the zero-specific-risk security is assigned a value equal to:
- (i) the market value of the underlying notional equity position in the case of an equity derivative;
- (ii) the notional principal amount in the case of an interest rate or foreign currency swap; or
- (iii) the notional amount of the future cash flow that it represents in the case of any other CRD financial instrument.
BIPRU 7.2.12
See Notes
Derivation of notional positions: Futures, forwards or synthetic futures on a debt security
BIPRU 7.2.13
See Notes
Futures, forwards or synthetic futures on a single debt security must be treated as follows:
- (1) a purchased future, synthetic future or forward is treated as:
- (a) a notional long position in the underlying debt security (or the cheapest to deliver (taking into account the conversion factor) where the contract can be satisfied by delivery of one from a range of securities); and
- (b) a notional short position in a zero coupon zero-specific-risk security with a maturity equal to the expiry date of the future or forward; and
- (2) a sold future, synthetic future or forward is treated as:
- (a) a notional short position in the underlying security (or the cheapest to deliver (taking into account the conversion factor) where the contract can be satisfied by delivery of one from a range of securities); and
- (b) a notional long position in a zero coupon zero-specific-risk security with a maturity equal to the expiry date of the future, synthetic future or forward.
Derivation of notional positions: Futures, forwards or synthetic futures on a basket or index of debt securities
BIPRU 7.2.14
See Notes
Futures, forwards or synthetic futures on a basket or index of debt securities must be converted into forwards on single debt securities as follows (and then the resulting positions must be treated under BIPRU 7.2.13R):
- (1) futures, synthetic futures or forwards on a single currency basket or index of debt securities must be treated as either:
- (a) a series of forwards, one for each of the constituent debt securities in the basket or index, of an amount which is a proportionate part of the total underlying the contract according to the weighting of the relevant debt security in the basket; or
- (b) a single forward on a notional debt security; and
- (2) futures, synthetic futures or forwards on multiple currency baskets or indices of debt securities must be treated as either:
- (a) a series of forwards (using the method described in (1)(a)); or
- (b) a series of forwards, each one on a notional debt security to represent one of the currencies in the basket or index, of an amount which is a proportionate part of the total underlying the contract according to the weighting of the relevant currency in the basket.
BIPRU 7.2.15
See Notes
BIPRU 7.2.16
See Notes
BIPRU 7.2.17
See Notes
Derivation of notional positions: Interest rate futures and forward rate agreements (FRAs)
BIPRU 7.2.18
See Notes
BIPRU 7.2.19
See Notes
This table belongs to BIPRU 7.2.18R
A short position in a zero coupon zero-specific-risk security | A long position in a zero coupon zero-specific-risk security | |
Where the firm buys an interest rate future or sells an FRA | Maturity equals the expiry date of the future (or settlement date of the FRA) | Maturity equals the expiry date of the future (or settlement date of the FRA) plus the maturity of the notional borrowing/deposit |
Where the firm sells an interest rate future or buys an FRA | Maturity equals the expiry date of the future (or settlement date of the FRA) plus the maturity of the notional borrowing/deposit | Maturity equals the expiry date of the future (or settlement date of the FRA) |
BIPRU 7.2.20
See Notes
- (1) The following example illustrates BIPRU 7.2.18R and BIPRU 7.2.19R in conjunction with BIPRU 7.2.11R (the last rule determines the value of notional positions). A firm sells £1mn notional of a 3v6 FRA at 6%. This results in:
- (a) a short position in a zero-specific-risk security with a zero coupon, three month maturity, and a nominal amount of £1million; and
- (b) a long position in a zero-specific-risk security with a zero coupon, six month maturity, and nominal amount of £1,015,000 (i.e. notional plus interest at 6% over 90 days).
- (2) If a firm were to apply the approach in BIPRU 7.2.11R(2)(a) the two nominal amounts would have to be present valued.
Derivation of notional positions: Interest rate swaps or foreign currency swaps
BIPRU 7.2.21
See Notes
BIPRU 7.2.22
See Notes
This table belongs to BIPRU 7.2.21R
Paying leg (which must be treated as a short position in a zero-specific-risk security) | Receiving leg (which must be treated as a long position in a zero-specific-risk security) | |
Receiving fixed and paying floating | Coupon equals the floating rate and maturity equals the reset date | Coupon equals the fixed rate of the swap and maturity equals the maturity of the swap |
Paying fixed and receiving floating | Coupon equals the fixed rate of the swap and maturity equals the maturity of the swap | Coupon equals the floating rate and maturity equals the reset date |
Paying floating and receiving floating | Coupon equals the floating rate and maturity equals the reset date | Coupon equals the floating rate and maturity equals the reset date |
BIPRU 7.2.23
See Notes
Derivation of notional positions: Deferred start interest rate swaps or foreign currency swaps
BIPRU 7.2.24
See Notes
BIPRU 7.2.25
See Notes
This table belongs to BIPRU 7.2.24R
Paying leg (which must be treated as a short position in a zero-specific-risk security with a coupon equal to the fixed rate of the swap) | Receiving leg (which must be treated as a long position in a zero-specific-risk security with a coupon equal to the fixed rate of the swap) | |
Receiving fixed and paying floating | maturity equals the start date of the swap | maturity equals the maturity of the swap |
Paying fixed and receiving floating | maturity equals the maturity of the swap | maturity equals the start date of the swap |
BIPRU 7.2.26
See Notes
Derivation of notional positions: Swaps where only one leg is an interest rate leg (e.g. equity swaps)
BIPRU 7.2.27
See Notes
A firm must treat a swap with only one interest rate leg as a notional position in a zero-specific-risk security:
BIPRU 7.2.28
See Notes
Derivation of notional positions: Cash legs of repurchase agreements and reverse repurchase agreements
BIPRU 7.2.29
See Notes
BIPRU 7.2.30
See Notes
The forward cash leg of a repurchase agreement or reverse repurchase agreement must be treated as a notional position in a zero-specific-risk security which:
- (1) is a short notional position in the case of a repurchase agreement; and a long notional position in the case of a reverse repurchase agreement;
- (2) has a value equal to the market value of the cash leg;
- (3) has a maturity equal to that of the repurchase agreement or reverse repurchase agreement; and
- (4) has a coupon equal to:
- (a) zero, if the next interest payment date coincides with the maturity date; or
- (b) the interest rate on the contract, if any interest is due to be paid before the maturity date.
Derivation of notional positions: Cash borrowings and deposits
BIPRU 7.2.31
See Notes
A cash borrowing or deposit must be treated as a notional position in a zero coupon zero-specific-risk security which:
- (1) is a short position in the case of a borrowing and a long position in the case of a deposit;
- (2) has a value equal to the market value of the borrowing or deposit;
- (3) has a maturity equal to that of the borrowing or deposit, or the next date the interest rate is reset (if earlier); and
- (4) has a coupon equal to:
- (a) zero, if the next interest payment date coincides with the maturity date; or
- (b) the interest rate on the borrowing or deposit, if any interest is due to be paid before the maturity date.
Derivation of notional positions: Options and warrants
BIPRU 7.2.32
See Notes
- (1) Where included in the PRR calculation in BIPRU 7.2 (see the table in BIPRU 7.2.4R), options and warrants must be treated in accordance with this rule.
- (2) An option or warrant on a debt security, a basket of debt securities or a debt security index must be treated as a position in that debt security, basket or index.
- (3) An option on an interest rate must be treated as a position in a zero coupon zero-specific-risk security with a maturity equal to the sum of the time to expiry of the option and the length of the period for which the interest rate is fixed.
- (4) An option on a future - where the future is based on an interest rate or debt security - must be treated as:
- (a) a long position in that future for purchased call options and written put options; and
- (b) a short position in that future for purchased put options and written call options.
- (5) An option on a swap must be treated as a deferred starting swap.
Derivation of notional positions: Bonds where the coupons and principal are paid in different currencies
BIPRU 7.2.33
See Notes
Where a debt security pays coupons in one currency, but will be redeemed in a different currency, it must be treated as:
- (1) a debt security denominated in the coupon's currency; and
- (2) a foreign currency forward to capture the fact that the debt security's principal will be repaid in a different currency from that in which it pays coupons, specifically:
Derivation of notional positions: Interest rate risk on other futures, forwards and options
BIPRU 7.2.34
See Notes
Other futures, forwards, options and swaps treated under BIPRU 7.2 must be treated as positions in zero-specific-risk securities, each of which:
- (1) has a zero coupon;
- (2) has a maturity equal to that of the relevant contract; and
- (3) is long or short according to the table in BIPRU 7.2.35R.
BIPRU 7.2.35
See Notes
This table belongs to BIPRU 7.2.34R.
Instrument | Notional positions | ||
foreign currency forward or future | a long position denominated in the currency purchased | and | a short position denominated in the currency sold |
Gold forward or future | a long position if the forward or future involves an actual (or notional) sale of gold | or | a short position if the forward or future involves an actual (or notional) purchase of gold |
Equity forward or future, or option (unless the interest rate PRR is calculated under the basic interest rate PRR calculation in BIPRU 7.3) | A long position if the contract involves an actual (or notional) sale of the underlying equity | or | A short position if the contract involves an actual (or notional) purchase of the underlying equity |
Deriving the net position in each debt security: General
BIPRU 7.2.36
See Notes
Deriving the net position in each debt security: Netting positions in the same debt security
BIPRU 7.2.37
See Notes
- (1) A firm must not net positions (including notional positions) unless those positions are in the same debt security. This rule sets out the circumstances in which debt securities may be treated as the same for these purposes.
- (2) Subject to (3) long and short positions are in the same debt security, and a debt security is the same as another if and only if:
- (a) they enjoy the same rights in all respects; and
- (b) are fungible with each other.
- (3) Long and short positions in different tranches of the same debt security may be treated as being in the same debt security for the purpose of (1) where:
- (a) the tranches enjoy the same rights in all respects; and
- (b) the tranches become fungible within 180 days and thereafter the debt security of one tranche can be delivered in settlement of the other tranche.
Deriving the net position in each debt security: Netting the cheapest to deliver security with other deliverable securities
BIPRU 7.2.38
See Notes
BIPRU 7.2.39
See Notes
Deriving the net position in each debt security: Netting zero-specific-risk securities with different maturities
BIPRU 7.2.40
See Notes
A firm may net a notional long position in a zero-specific-risk security against a notional short position in a zero-specific-risk security if:
- (1) they are denominated in the same currency;
- (2) their coupons do not differ by more than 15 basis points; and
- (3) they mature:
- (a) on the same day, if they have residual maturities of less than one month;
- (b) within 7 days of each other, if they have residual maturities of between one month and one year; and
- (c) within 30 days of each other, if they have residual maturities in excess of one year.
Deriving the net position in each debt security: Reduced net underwriting positions in debt securities
BIPRU 7.2.41
See Notes
BIPRU 7.2.42
See Notes
Deriving the net position in the correlation trading portfolio
BIPRU 7.2.42A
See Notes
BIPRU 7.2.42B
See Notes
BIPRU 7.2.42C
See Notes
BIPRU 7.2.42D
See Notes
Specific risk calculation
BIPRU 7.2.43
See Notes
- (1) A firm must calculate the specific risk portion of the interest rate PRR for each debt security by multiplying the market value of the individual net position (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.2.44R or as specified by BIPRU 7.2.45R - BIPRU 7.2.48L R or by BIPRU 7.11.13 R - BIPRU 7.11.17 R.
- (2) Notional positions in zero-specific-risk securities do not attract specific risk.
- (3) For the purpose of (1), a firm may cap the product of multiplying the individual net position by the appropriate position risk adjustment at the maximum possible default-risk-related loss. For a short position in a credit derivative, a firm may calculate the maximum possible default-risk-related loss as a change in value due to the underlying names immediately becoming default-risk-free.
BIPRU 7.2.44
See Notes
Table: specific risk position risk adjustments
This table belongs to BIPRU 7.2.43R.
Issuer | Residual maturity | Position risk adjustment |
Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities which would qualify for credit quality step 1 or which would receive a 0% risk weight under the standardised approach to credit risk. | Any | 0% |
(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities which would qualify for credit quality step 2 or 3 under the standardised approach to credit risk. (B) Debt securities issued or guaranteed by institutions which would qualify for credit quality step 1 or 2 under the standardised approach to credit risk. (C) Debt securities issued or guaranteed by institution which would qualify for credit quality step 3 under BIPRU 3.4.34 R (Exposures to institutions: Credit assessment based method) or which would do so if it had an original effective maturity of three months or less. (D) Debt securities issued or guaranteed by corporates which would qualify for credit quality step 1, 2 or 3 under the standardised approach to credit risk. (E) Other qualifying debt securities (see BIPRU 7.2.49R) |
Zero to six months | 0.25% |
over 6 and up to and including 24 months | 1% | |
Over 24 months | 1.6% | |
(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities or institutions which would qualify for credit quality step 4 or 5 under the standardised approach to credit risk. (B) Debt securities issued or guaranteed by corporates which would qualify for credit quality step 4 under the standardised approach to credit risk. (C) Exposures for which a credit assessment by a nominated ECAI is not available. |
Any | 8% |
(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities or institution which would qualify for credit quality step 6 under the standardised approach to credit risk. (B) Debt securities issued or guaranteed by corporate which would qualify for credit quality step 5 or 6 under the standardised approach to credit risk. (C) An instrument that shows a particular risk because of the insufficient solvency of the issuer of liquidity. This paragraph applies even if the instrument would otherwise qualify for a lower position risk adjustment under this table. |
Any | 12% |
Note: The question of what a corporate is and of what category a debt security falls into must be decided under the rules relating to the standardised approach to credit risk. |
[Note:CAD Annex I point 14 Table 1]
BIPRU 7.2.45
See Notes
BIPRU 7.2.46
See Notes
BIPRU 7.2.46A
See Notes
BIPRU 7.2.43 R includes both actual and notional positions. However, notional positions in a zero-specific-risk security do not attract specific risk. For example:
- (1) interest-rate swaps, foreign-currency swaps, FRAs, interest-rate futures, foreign-currencyforwards, foreign-currencyfutures, and the cash leg of repurchase agreements and reverse repurchase agreements create notional positions which will not attract specific risk; while
- (2) futures, forwards and swaps which are based on the price (or yield) of one or more debt securities will create at least one notional position that attracts specific risk.
Specific risk: securitisations and resecuritisations
BIPRU 7.2.48A
See Notes
- (1) Subject to (3), a firm must calculate the specific risk portion of the interest rate PRR for each securitisation and resecuritisation position by multiplying the market value of the individual net position (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.2.48D R or BIPRU 7.2.48E R, or in accordance with BIPRU 7.2.48F R, as applicable.
- (2) In calculating the specific risk capital charge of an individual net securitisation or resecuritisation position, a firm may cap the product of the weight and the individual net position at the maximum possible default-risk-related loss. For a short position, that limit may be calculated as a change in value due to the underlying names immediately becoming default-risk-free.
- (3) For a transitional period ending on 31 December 2013, where a firm holds securitisation and resecuritisation positions, other than positions included in the correlation trading portfolio, it must calculate:
- (a) the total specific risk capital charges that would apply just to the net long positions; and
- (b) the total specific risk capital charges that would apply just to the net short positions.
BIPRU 7.2.48B
See Notes
BIPRU 7.2.48C
See Notes
BIPRU 7.2.48D
See Notes
Credit quality step | 1 | 2 | 3 | 4 (only for credit assessments other than short-term credit assessments) | All other credit quality steps |
Securitisations | 1.6% | 4% | 8% | 28% | 100% |
Resecuritisations | 3.2% | 8% | 18% | 52% | 100% |
A firm may only apply the position risk adjustments in this table where it would have to calculate a risk weighted exposure amount in accordance with the standardised approach to securitisation and resecuritisation positions if such positions were in its non-trading book under BIPRU 9. The appropriate position risk adjustment is calculated as 8% of the risk weight that would apply to the position under the standardised approach in BIPRU 9.11.2 R, subject to the requirements of BIPRU 9.9 to BIPRU 9.11, where appropriate. |
BIPRU 7.2.48E
See Notes
Credit Quality Step | Securitisation positions | Resecuritisation positions | ||||
Credit assessments other than short term | Short-term credit assessments | A | B | C | D | E |
1 | 1 | 0.56% | 0.96% | 1.6% | 1.6% | 2.4% |
2 | 0.64% | 1.20% | 2% | 2% | 3.2% | |
3 | 0.8% | 1.44% | 2.8% | 2.8% | 4% | |
4 | 2 | 0.96% | 1.6% | 3.2% | 5.2% | |
5 | 1.60% | 2.8% | 4.8% | 8% | ||
6 | 2.8% | 4% | 8% | 12% | ||
7 | 3 | 4.8% | 6% | 12% | 18% | |
8 | 8% | 16% | 28% | |||
9 | 20% | 24% | 40% | |||
10 | 34% | 40% | 52% | |||
11 | 52% | 60% | 68% | |||
all other unrated | 100% | |||||
A firm may only apply the position risk adjustments in this table where it would have to calculate a risk weighted exposure amount in accordance with the IRB approach to securitisation and resecuritisation positions if such positions were in its non-trading book under BIPRU 9. The appropriate position risk adjustment is calculated as 8% of the risk weight that would apply to the position under the IRB approach in BIPRU 9.12.11 R, subject to the requirements in BIPRU 9.12 where appropriate. |
BIPRU 7.2.48F
See Notes
- (1) A firm may use the supervisory formula method to calculate the appropriate position risk adjustment for specific risk where:
- (a) the firm is permitted to apply the supervisory formula method to the same position if it was held in its non-trading book in accordance with BIPRU 9.12; or
- (b) otherwise, the firm is expressly permitted by its VaR model permission to apply the supervisory formula method to calculate the appropriate position risk adjustment for specific risk.
- (2) The appropriate position risk adjustment under the supervisory formula method must be calculated by multiplying the risk weight calculated according to BIPRU 9.12.21 R by 8%.
- (3) Where relevant, estimates of PDs and LGDs as inputs to the supervisory formula method must be determined in accordance with BIPRU 4.
- (4) Where expressly permitted by its VaR model permission, a firm may use the approach outlined in BIPRU 7.10.55A R to BIPRU 7.10.55S G (Incremental Risk Charge) to determine PDs and LGDs as inputs to the supervisory formula method.
BIPRU 7.2.48G
See Notes
BIPRU 7.2.48H
See Notes
BIPRU 7.2.48I
See Notes
- (1) Subject to BIPRU 7.2.48J G, BIPRU 9.15.9 R and BIPRU 9.15.10 R, where the investor, originator or sponsor of a securitisation fails to meet any of the requirements in BIPRU 9.3.18 R to BIPRU 9.3.20 R (Disclosure requirements) and BIPRU 9.15.11 R to BIPRU 9.15.16 R (investor due diligence requirements) in any material respect by reason of its negligence or omission, the appropriate regulator will use its powers under section 55J (Variation etc. on the Authority's own initiative) of the Act to impose an additional capital charge in accordance with BIPRU 7.2.48 GR. The additional capital charge imposed will be progressively increased with each relevant, subsequent infringement of the requirements in BIPRU 9.3.18 R to BIPRU 9.3.20 R and BIPRU 9.15.11 R to BIPRU 9.15.16A R, up to a maximum of 1250% risk weight.
- (2) Subject to BIPRU 9.3.22 G, BIPRU 9.15.9 R and BIPRU 9.15.10 R, where a credit institution fails to meet in any material respect the requirements in BIPRU 9.15.16A R (Group level requirements), the appropriate regulator may consider using its powers under section 55J (Variation etc on the Authority's own initiative) of the Act in the manner described in (1). In order to calculate the risk weights that would apply to the credit institution, the appropriate regulator may treat the securitisation investments of the subsidiary undertaking as if they were securitisation positions held directly by the credit institution.
BIPRU 7.2.48J
See Notes
BIPRU 7.2.48K
See Notes
Specific risk: correlation trading portfolio
BIPRU 7.2.48L
See Notes
- (1) Where a firm holds a position in the correlation trading portfolio, it must calculate:
- (a) The total specific risk capital charges that would apply just to the net long positions of the correlation trading portfolio; and
- (b) The total specific risk capital charges that would apply just to the net short positions of the correlation trading portfolio.
- (2) The higher of (1)(a) and (1)(b) will be the specific risk capital charge for the correlation trading portfolio.
- (3) In calculating the specific risk capital charge of an individual net position in the correlation trading portfolio, a firm may cap the product of multiplying the individual net position by the appropriate position risk adjustment at the maximum possible default-risk-related loss. For a short position, a firm may calculate the maximum possible default-risk-related loss as a change in value due to the underlying names immediately becoming default-risk-free.
Definition of a qualifying debt security
BIPRU 7.2.49
See Notes
A debt security is a qualifying debt security if:
- (1) it qualifies for a credit quality step under the standardised approach to credit risk corresponding at least to investment grade; or
- (2) it has a PD which, because of the solvency of the issuer, is not higher than that of the debt securities referred to under (1) under the IRB approach; or
- (3) it is a debt security for which a credit assessment by a nominated ECAI is unavailable and which meets the following conditions:
- (a) it is considered by the firm to be sufficiently liquid;
- (b) it is of investment quality, according to the firm's own discretion, at least equivalent to that of the debt securities referred to under (1); and
- (c) it is listed on at least one regulated market or designated investment exchange; or
- (4) it is a debt security issued by an institution subject to the capital adequacy requirements set out in the Banking Consolidation Directive that satisfies the following conditions:
- (a) it is considered by the firm to be sufficiently liquid;
- (b) its investment quality is, according to the firm's own discretion, at least equivalent to that of the assets referred to under (1) above; or
- (5) it is a debt security issued by an institution that is deemed to be of equivalent or higher credit quality than that associated with credit quality step 2 under the standardised approach to credit risk and that is subject to supervision and regulatory arrangements comparable to those under the Capital Adequacy Directive.
BIPRU 7.2.50
See Notes
BIPRU 7.2.51
See Notes
General market risk calculation: General
BIPRU 7.2.52
See Notes
A firm must calculate the general market risk portion of the interest rate PRR for each currency using either:
- (1) the interest rate simplified maturity method;
- (2) the interest rate maturity method; or
- (3) the interest rate duration method.
BIPRU 7.2.53
See Notes
BIPRU 7.2.54
See Notes
A firm must not use the interest rate duration method for index-linked securities. Instead, these securities must:
- (1) be attributed a coupon of 3%; and
- (2) be treated separately under either the interest rate simplified maturity method or the interest rate maturity method.
General market risk calculation: Simplified maturity method
BIPRU 7.2.55
See Notes
BIPRU 7.2.56
See Notes
BIPRU 7.2.57
See Notes
This table belongs to BIPRU 7.2.56R.
Zone | Maturity band | position risk adjustment | |
Coupon of 3% or more | Coupon of less than 3% | ||
One | 0 ≤ 1 month | 0 ≤ 1 month | 0.00% |
> 1 ≤ 3 months | > 1 ≤ 3 months | 0.20% | |
> 3 ≤ 6 months | > 3 ≤ 6 months | 0.4% | |
> 6 ≤ 12 months | > 6 ≤ 12 months | 0.7% | |
Two | > 1 ≤ 2 years | > 1.0 ≤ 1.9 years | 1.25% |
> 2 ≤ 3 years | > 1.9 ≤ 2.8 years | 1.75% | |
> 3 ≤ 4 years | > 2.8 ≤ 3.6 years | 2.25% | |
Three | > 4 ≤ 5 years | > 3.6 ≤ 4.3 years | 2.75% |
> 5 ≤ 7 years | > 4.3 ≤ 5.7 years | 3.25% | |
> 7 ≤ 10 years | > 5.7 ≤ 7.3 years | 3.75% | |
> 10 ≤ 15 years | > 7.3 ≤ 9.3 years | 4.5% | |
> 15 ≤ 20 years | > 9.3 ≤ 10.6 years | 5.25% | |
> 20 years | > 10.6 ≤ 12.0 years | 6.00% | |
> 12.0 ≤ 20.0 years | 8.00% | ||
> 20 years | 12.50% |
General market risk calculation: The maturity method
BIPRU 7.2.58
See Notes
BIPRU 7.2.59
See Notes
Under the interest rate maturity method, the portion of the interest rate PRR for general market risk is calculated as follows:
- (1) Step 1: each net position is allocated to the appropriate maturity band in the table in BIPRU 7.2.57R and multiplied by the corresponding position risk adjustment ;
- (2) Step 2: weighted long and short positions are matched within:
- (a) the same maturity band;
- (b) the same zone (using unmatched positions from (a)); and
- (c) different zones (using unmatched positions from (b) and matching between zones 1 and 2 and 2 and 3 before zone 1 and 3); and
- (3) Step 3: the portion of the interest rate PRR for general market risk is the sum of:
- (a) 10% of the total amount matched within maturity bands;
- (b) 40% of the amount matched within zone 1 under (2)(b);
- (c) 30% of the amount matched within zones 2 & 3 under (2)(b);
- (d) 40% of the amounts matched between zones 1 and 2, and between zones 2 and 3;
- (e) 150% of the amount matched between zones 1 and 3; and
- (f) 100% of the weighted positions remaining unmatched after (2)(c).
BIPRU 7.2.60
See Notes
BIPRU 7.2.61
See Notes
General market risk calculation: Duration method
BIPRU 7.2.62
See Notes
BIPRU 7.2.63
See Notes
- (1) A firm must use the following formula to calculate modified duration for the purpose of the interest rate duration method:
- (2)
- (3) For the purpose of the formulae in (1) and (2):
- (a) Ct=cash payment at time t
- (b) m=total maturity
- (c) r=yield to maturity. In the case of a fixed-rate debt security a firm must take the current mark to market of the debt security and thence calculate its yield to maturity, which is the implied discount rate for that instrument. In the case of a floating rate instrument, a firm must take the current mark to market of the debt security and thence calculate its yield on the assumption that the principal is due on the date that the interest rate can next be changed.
- (d) t=time
BIPRU 7.2.64
See Notes
Under the interest rate duration method, the portion of the interest rate PRR for general market risk is calculated as follows:
- (1) Step 1: allocate each net position to the appropriate duration zone in the table in BIPRU 7.2.65R and multiply it by:
- (a) its modified duration (using the formula in BIPRU 7.2.63R); and
- (b) the appropriate assumed interest rate change in the table in BIPRU 7.2.65R;
- (2) Step 2: match weighted long and short positions:
- (a) within zones; and
- (b) across zones (using unmatched positions from (2)(a) and following the process in BIPRU 7.2.59R (2)(c)); and
- (3) Step 3: calculate the portion of the interest rate PRR for general market risk as the sum of:
BIPRU 7.2.65
See Notes
This table belongs to BIPRU 7.2.64R
Zone | Modified Duration | Assumed interest rate change (percentage points) |
1 | 0 ≤ 12 months | 1.00 |
2 | > 12 months ≤ 3.6 years | 0.85 |
3 | > 3.6 years | 0.70 |
BIPRU 7.2.66
See Notes
BIPRU 7.3
Equity PRR and basic interest rate PRR for equity derivatives
- 01/01/2007
General rule
BIPRU 7.3.1
See Notes
- (1) A firm must calculate its equity PRR by:
- (a) identifying which positions must be included within the PRR calculation (see BIPRU 7.3.2R);
- (b) deriving the net position in each equity in accordance with BIPRU 7.3.23R;
- (c) including each of those net positions in either the simplified equity method (see BIPRU 7.3.29R) or, subject to BIPRU 7.3.27R, the standard equity method (see BIPRU 7.3.32R); and
- (d) summing the PRR on each net position as calculated under the simplified equity method and standard equity method.
- (2) All net positions, irrespective of their signs, must be converted on a daily basis into the firm's base currency at the prevailing spot exchange rate before their aggregation.
Scope of the equity PRR calculation
BIPRU 7.3.2
See Notes
A firm's equity PRR calculation must:
- (1) include all trading book positions in equities, unless:
- (a) the position is fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude it; or
- (b) the position is hedging an option or warrant which is being treated under BIPRU 7.6.26R (Table: Appropriate treatment for equities, debt securities or currencies hedging options);
- (2) include notional positions arising from trading book positions in the instruments listed in the table in BIPRU 7.3.3R; and
- (3) (if the firm is the transferor of equities or guaranteed rights relating to title to equities in a repurchase agreement or the lender of equities in an equities lending agreement) include such equities if those equities meet the criteria for inclusion in the trading book.
BIPRU 7.3.3
See Notes
This table belongs to BIPRU 7.3.2R(2)
Instrument | See | |
Depository receipts | BIPRU 7.3.12R | |
Convertibles where: | (a) the convertible is trading at a market price of less than 110% of the underlying equity; and the first date at which conversion can take place is less than three months ahead, or the next such date (where the first has passed) is less than a year ahead; or | BIPRU 7.3.13R |
(b) the conditions in (a) are not met but the firm includes the convertible in its equity PRR calculation rather than including it in its interest rate PRR calculation set out in BIPRU 7.2 (Interest rate PRR). | ||
Futures, forwards, CFDs and synthetic futures on a single equity | BIPRU 7.3.14R | |
Futures, forwards, CFDs and synthetic futures on a basket of equities or equity index | BIPRU 7.3.15R | |
equity legs of an equity swap | BIPRU 7.3.19R | |
Options or warrants on a single equity, an equity future, a basket of equities or an equity index (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6). | BIPRU 7.3.21R |
BIPRU 7.3.4
See Notes
BIPRU 7.3.5
See Notes
BIPRU 7.3.6
See Notes
Firms are reminded that the table in BIPRU 7.6.5R (Table: Appropriate PRR calculation for an option or warrant) divides equity options and warrants into:
BIPRU 7.3.7
See Notes
BIPRU 7.3.8
See Notes
Derivation of notional positions: General approach
BIPRU 7.3.9
See Notes
BIPRU 7.3.10
See Notes
BIPRU 7.3.11
See Notes
- (1) An example of BIPRU 7.3.10R is as follows. The current market value of a particular equity is £2.50. If a firm contracts to sell this equity in five year's time for £3 it would treat the notional short equity position as having a value of £2.50 when calculating the equity PRR.
- (2) In effect, the forward position has been treated as being equivalent to a spot position for the purposes of calculating equity PRR. To capture the risk that the forward price changes relative to the spot price, forward equity positions are included in the firm's interest rate PRR calculation (see BIPRU 7.3.45R or the table in BIPRU 7.2.4R (Table: Instruments which result in notional positions)).
Derivation of notional positions: Depository receipts
BIPRU 7.3.12
See Notes
Derivation of notional positions: Convertibles
BIPRU 7.3.13
See Notes
Where a convertible is included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R):
- (1) it must be treated as a position in the equity into which it converts; and
- (2) the firm's equity PRR must be adjusted by making:
- (a) an addition equal to the current value of any loss which the firm would make if it did convert to equity; or
- (b) a deduction equal to the current value of any profit which the firm would make if it did convert to equity (subject to a maximum deduction equal to the PRR on the notional position underlying the convertible).
Derivation of notional positions: Futures, forwards and CFDs on a single equity
BIPRU 7.3.14
See Notes
Derivation of notional positions: Futures, forwards and CFDs on equity indices or baskets
BIPRU 7.3.15
See Notes
A future (including a synthetic future), forward or CFD on an equity index or basket must be treated as either:
- (1) a position in each of the underlying equities; or
- (2) the positions shown in the table in BIPRU 7.3.16R.
BIPRU 7.3.16
See Notes
This table belongs to BIPRU 7.3.15R(2)
Under the simplified equity method (BIPRU 7.3.29R) | Under the standard equity method (BIPRU 7.3.32R) | |||
Only one country in the index or basket (see BIPRU 7.3.32R) | One position in the index or basket | One position in the index or basket | ||
More than one country in the index or basket | One position in the index or basket | Several notional basket positions, one for each country | or | One notional basket position in a separate, notional country |
BIPRU 7.3.17
See Notes
BIPRU 7.3.18
See Notes
The notional positions created under BIPRU 7.3.15R have the following values:
- (1) where only one notional position is created, it has a value equal to the total market value of the equities underlying the contract; or
- (2) where more than one notional position is created, each one has a value which reflects the relevant equity's or country's contribution to the total market value of the equities underlying the contract.
Derivation of notional positions: Equity legs of equity swaps
BIPRU 7.3.20
See Notes
Derivation of notional positions: Options
BIPRU 7.3.21
See Notes
If included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R), options must be treated as follows:
Deriving the net position in each equity
BIPRU 7.3.22
See Notes
BIPRU 7.3.23
See Notes
- (1) When deriving the net position in each equity, a firm must not net long and short positions except in accordance with this rule.
- (2) Subject to (3), a firm may net long and short positions in the same equity. Two equities are the same if and only if they:
- (a) enjoy the same rights in all respects; and
- (b) are fungible with each other.
- (3) Long and short positions in different tranches of the same equity may be treated as being in the same equity for the purpose of (1), where:
- (a) the tranches enjoy the same rights in all respects; and
- (b) the tranches become fungible with each other within 180 days, and thereafter the equity of one tranche can be delivered in settlement of the other tranche.
BIPRU 7.3.24
See Notes
BIPRU 7.3.25
See Notes
Simplified and standard equity methods
BIPRU 7.3.26
See Notes
BIPRU 7.3.27
See Notes
BIPRU 7.3.28
See Notes
Simplified equity method
BIPRU 7.3.29
See Notes
BIPRU 7.3.30
See Notes
This table belongs to BIPRU 7.3.29R
Instrument | Position risk adjustment |
Single equities | 16% |
Qualifying equity indices (see BIPRU 7.3.38R) | 8% |
All other equity indices or baskets | 16% |
If it is necessary to distinguish between the specific risk position risk adjustment and the general market risk position risk adjustment, the specific risk position risk adjustment for the first and third rows is 8% and that for the second row is 0%. The rest of the position risk adjustment in the second column is the general market risk position risk adjustment |
Standard equity method
BIPRU 7.3.31
See Notes
BIPRU 7.3.32
See Notes
Under the standard equity method, a firm must:
- (1) group equity positions into country portfolios as follows:
- (a) a position in an individual equity belongs to:
- (i) the country it is listed in;
- (ii) any of the countries it is listed in, if more than one; or
- (iii) the country it was issued from, if unlisted;
- (b) a position in an equity basket or index that is treated under BIPRU 7.3.15R(2), is allocated to one or more country portfolios based on the countries to which the underlying equities belong to under (a) or a notional country provided for in the table in BIPRU 7.3.16R; and
- (2) sum:
- (a) the PRRs for specific risk calculated under BIPRU 7.3.33R; and
- (b) the PRRs for general market risk for each country portfolio as calculated under BIPRU 7.3.41R and BIPRU 7.3.42R.
Standard equity method: Specific risk
BIPRU 7.3.33
See Notes
BIPRU 7.3.34
See Notes
This table belongs to BIPRU 7.3.33R
Instrument | Position risk adjustment |
Qualifying equity indices (see BIPRU 7.3.38R) | 0% |
All equities, and other equity indices or equity baskets | 8% |
Definition of a qualifying equity index
BIPRU 7.3.38
See Notes
A qualifying equity index is one which is traded on a recognised investment exchange or a designated investment exchange and:
- (1) is listed in the table in BIPRU 7.3.39R; or
- (2) is not listed in the table in BIPRU 7.3.39R, but is constructed in such a way that:
BIPRU 7.3.39
See Notes
This table belongs to BIPRU 7.3.38R
Country or territory | Name of index |
Australia | All Ordinaries |
Austria | Austrian Traded Index |
Belgium | BEL 20 |
Canada | TSE 35, TSE 100, TSE 300 |
France | CAC 40, SBF 250 |
Germany | DAX |
European | Dow Jones Stoxx 50 Index, FTSE Eurotop 300, MSCI Euro Index |
Hong Kong | Hang Seng 33 |
Italy | MIB 30 |
Japan | Nikkei 225, Nikkei 300, TOPIX |
Korea | Kospi |
Netherlands | AEX |
Singapore | Straits Times Index |
Spain | IBEX 35 |
Sweden | OMX |
Switzerland | SMI |
UK | FTSE 100, FTSE Mid 250, FTSE All Share |
US | S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell 2000 |
Standard equity method: General market risk: General
BIPRU 7.3.40
See Notes
Standard equity method: General market risk: Approach One: No offset between different country portfolios
BIPRU 7.3.41
See Notes
Standard equity method: General market risk: Approach Two: Limited offset between different country portfolios
BIPRU 7.3.42
See Notes
- (1) Under approach two as referred to in BIPRU 7.3.40R, the PRR for general market risk is calculated using the following formula:
- (2) In the formula in (1) CPi denotes the net value of ith country portfolio (converted to the firm's base currency using current spot foreign currency rates).
- (3) The conditions referred to in BIPRU 7.3.40R that must be met for a firm to be able to use approach two as referred to in BIPRU 7.3.40R are as follows:
- (a) at least four country portfolios are included (that is: n ≥ 4);
- (b) only country portfolios for countries which are full members of the OECD, Hong Kong or Singapore are included;
- (c) no individual country portfolio comprises more than 30% of the total gross value of country portfolios included; and
- (d) the total net value of country portfolios included equals zero, that is:
BIPRU 7.3.43
See Notes
Basic interest rate calculation for equity instruments
BIPRU 7.3.44
See Notes
BIPRU 7.3.45
See Notes
This rule applies to a firm that does not include a forward, future, option or swap on an equity, basket of equities or equity index in the calculation of its interest rate PRR calculation under BIPRU 7.2 (Interest rate PRR). However it does not apply to cliquet as defined in BIPRU 7.6.18R (Table: Option PRR: methods for different types of option). A firm must calculate the interest rate PRR for a position being treated under this rule as follows:
- (1) multiply the market value of the notional equity position underlying the instrument by the appropriate percentage from the table in BIPRU 7.3.47R; and
- (2) sum the results from (1), ignoring the sign.
BIPRU 7.3.46
See Notes
BIPRU 7.3.47
See Notes
This table belongs to BIPRU 7.3.45R(1)
Time to expiration | Percentage (%) |
0 ≤ 3 months | 0.20 |
> 3 ≤ 6 months | 0.40 |
> 6 ≤ 12 months | 0.70 |
> 1 ≤ 2 years | 1.25 |
> 2 ≤ 3 years | 1.75 |
> 3 ≤ 4 years | 2.25 |
> 4 ≤ 5 years | 2.75 |
> 5 ≤ 7 years | 3.25 |
> 7 ≤ 10 years | 3.75 |
> 10 ≤ 15 years | 4.50 |
> 15 ≤ 20 years | 5.25 |
> 20 years | 6.00 |
Additional capital charge in relation to equity indices
BIPRU 7.3.48
See Notes
BIPRU 7.4
Commodity PRR
- 01/01/2007
General rule
BIPRU 7.4.1
See Notes
A firm must calculate its commodity PRR by:
- (1) identifying which commodity position must be included within the scope of the PRR calculation (see BIPRU 7.4.2R);
- (2) expressing each such position in terms of the standard unit of measurement of the commodity concerned;
- (3) expressing the spot price in each commodity in the firm's base currency at current spot foreign exchange rates;
- (4) calculating an individual PRR for each commodity (see BIPRU 7.4.20R); and
- (5) summing the resulting individual PRRs.
Scope of the commodity PRR calculation
BIPRU 7.4.2
See Notes
A firm's commodity PRR calculation must, regardless of whether the positions concerned are trading book or non-trading book positions:
- (1) include physical commodity positions;
- (2) (if the firm is the transferor of commodities or guaranteed rights relating to title to commodities in a repurchase agreement or the lender of commodities in a commodities lending agreement) include such commodities;
- (3) include notional positions arising from positions in the instruments listed in the table in BIPRU 7.4.4R; and
- (4) exclude positions constituting a stock financing transaction.
BIPRU 7.4.3
See Notes
BIPRU 7.4.4
See Notes
This table belongs to BIPRU 7.4.2R(3)
Instrument | See |
Forwards, futures, CFDs, synthetic futures and options on a single commodity (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR)) | BIPRU 7.4.8R |
A commitment to buy or sell a single commodity at an average of spot prices prevailing over some future period | BIPRU 7.4.10R |
Forwards, futures, CFDs, synthetic futures and options on a commodity index (unless the firm calculates an PRR on the option under BIPRU 7.6) | BIPRU 7.4.13R - BIPRU 7.4.14R |
Commodity swaps | BIPRU 7.4.16R - BIPRU 7.4.17R |
A warrant relating to a commodity must be treated as an option on a commodity. |
BIPRU 7.4.5
See Notes
BIPRU 7.4.6
See Notes
Firms are reminded that the table in BIPRU 7.6.5R (Table: Appropriate PRR calculation for an option or warrant) divides commodity options into:
Derivation of notional positions: General
BIPRU 7.4.7
See Notes
Derivation of notional positions: Futures, forwards, CFDs and options on a single commodity
BIPRU 7.4.8
See Notes
Where a forward, future, CFD, synthetic future or option (unless already included in the firm's option PRR calculation) settles according to:
- (1) the difference between the price set on trade date and that prevailing at contract expiry, the notional position:
- (a) equals the total quantity underlying the contract; and
- (b) has a maturity equal to the expiry date of the contract; and
- (2) the difference between the price set on trade date and the average of prices prevailing over a certain period up to contract expiry, there is a notional position for each of the reference dates used in the averaging period to calculate the average price, which:
- (a) equals a fractional share of the total quantity underlying the contract; and
- (b) has a maturity equal to the relevant reference date.
BIPRU 7.4.9
See Notes
- (1) The following example illustrates BIPRU 7.4.8R (2).
- (2) A firm buys a Traded Average Price Option (TAPO - a type of Asian option) allowing it to deliver 100 tonnes of Grade A copper and receive $1,750 in June. If there were 20 business days in June the short notional positions will each:
- (a) equal 5 tonnes per day (1/20 of 100 tonnes); and
- (b) have a maturity equal to one of the business days in June (one for each day).
- (3) In this example as each business day in June goes by the quantity per day for the remaining days does not change (5 tonnes per day) only the days remaining changes. Therefore, halfway through June there are ten, 5 tonne short notional positions remaining each for the ten remaining business days in June.
Derivation of notional positions: Buying or selling a single commodity at an average of spot prices prevailing in the future
BIPRU 7.4.10
See Notes
Commitments to buy or sell at the average spot price of the commodity prevailing over some period between trade date and maturity must be treated as a combination of:
- (1) a position equal to the full amount underlying the contract with a maturity equal to the maturity date of the contract which is:
- (a) long, where the firm will buy at the average price; or
- (b) short, where the firm will sell at the average price; and
- (2) a series of notional positions, one for each of the reference dates where the contract price remains unfixed, each of which:
BIPRU 7.4.11
See Notes
The following guidance provides an example of BIPRU 7.4.10R. In January, a firm agrees to buy 100 tonnes of copper for the average spot price prevailing during the 20 business days in February, and will settle on 30 June. After entering into this agreement, the firm faces the risk that the average price for February increases relative to that for 30 June. Therefore, as highlighted in the table below:
BIPRU 7.4.12
See Notes
This table belongs to BIPRU 7.4.11G
Application of BIPRU 7.4.10R(1) | Application of BIPRU 7.4.10R(2) | |
From trade date to start of averaging period | Long position in 100 tonnes of copper with a maturity of 30 June. | A series of 20 notional short positions each equal to 5 tonnes of copper. Each position is allocated a maturity equal to one of the business days in February (one for each day). |
During averaging period | Long position in 100 tonnes of copper with a maturity of 30 June. | As each business day goes by in February the price for 5 tonnes of copper is fixed and so there will be one less notional short position. |
After averaging period | Long position in 100 tonnes of copper with a maturity of 30 June. | No short positions. |
Derivation of notional positions: CFDs and options on a commodity index
BIPRU 7.4.13
See Notes
Commodity index futures and commodity index options (unless the option is included in the firm's option PRR calculation), must be treated as follows:
- (1) Step 1: the total quantity underlying the contract must be either:
- (a) treated as a single notional commodity position (separate from all other commodities); or
- (b) divided into notional positions, one for each of the constituent commodities in the index, of an amount which is a proportionate part of the total underlying the contract according to the weighting of the relevant commodity in the index;
- (2) Step 2: each notional position determined in Step 1 must then be included:
- (a) when using the commodity simplified approach (BIPRU 7.4.24R), without adjustment; or
- (b) when using the commodity maturity ladder approach (BIPRU 7.4.25R) or the commodity extended maturity ladder approach (BIPRU 7.4.32R), with the adjustments in BIPRU 7.4.14R.
BIPRU 7.4.14
See Notes
This table belongs to BIPRU 7.4.13R(2)(b)
Construction of index | Notional position (or positions) and maturity |
Spot level of index is based on the spot price of each constituent commodity | Each quantity determined in Step 1 as referred to in BIPRU 7.4.13R is assigned a maturity equal to the expiry date of the contract. |
Spot level of index is based on an average of the forward prices of each constituent commodity | Each quantity determined in Step 1 as referred to in BIPRU 7.4.13R is divided (on a pro-rata basis) into a series of forward positions to reflect the impact of each forward price on the level of the index. The maturity of each forward position equals the maturity of the relevant forward price determining the level of the index when the contract expires. |
BIPRU 7.4.15
See Notes
- (1) An example of using BIPRU 7.4.13R and the table in BIPRU 7.4.14R is as follows.
- (2) A firm is long a three-month commodity index future where the spot level of the index is based on the one, two and three month forward prices of aluminium, copper, tin, lead, zinc and nickel (18 prices in total).
- (3) Step 1: the firm should decide whether to treat the full quantity underlying the contract as a single notional commodity position or disaggregate it into notional positions in aluminium, copper, tin, lead, zinc and nickel. In this case the firm decides to disaggregate the contract into notional positions in aluminium, copper, tin, lead, zinc and nickel.
- (4) Step 2: if the firm uses the commodity simplified approach, nothing more need be done to arrive at the notional position. In this case the firm uses the commodity maturity ladder approach and so subdivides each position in each metal into three because the level of the index is based on the prevailing one, two and three month forward prices. Since the future will be settled in three months' time at the prevailing level of the index, the three positions for each metal will have maturities of four, five and six months respectively.
Derivation of notional positions: Commodity swaps
BIPRU 7.4.16
See Notes
BIPRU 7.4.17
See Notes
This table belongs to BIPRU 7.4.16R
Receiving amounts which are unrelated to any commodity's price | Receiving the price of commodity 'b' | |
Paying amounts which are unrelated to any commodity's price | N/A | Long positions in commodity 'b' |
Paying the price of commodity 'a' | Short positions in commodity 'a' | Short positions in commodity 'a' and long positions in commodity 'b' |
BIPRU 7.4.18
See Notes
BIPRU 7.4.19
See Notes
Calculating the PRR for each commodity: General
BIPRU 7.4.20
See Notes
BIPRU 7.4.21
See Notes
BIPRU 7.4.22
See Notes
- (1) A firm must treat positions in different grades or brands of the same commodity-class as different commodities unless they:
- (a) can be delivered against each other; or
- (b) are close substitutes and have price movements which have exhibited a stable correlation coefficient of at least 0.9 over the last 12 months.
- (2) If a firm relies on (1)(b) it must then monitor compliance with the conditions in that paragraph on a continuing basis.
BIPRU 7.4.23
See Notes
If a firm intends to rely on the approach in BIPRU 7.4.22R(1)(b):
- (1) it must notify the appropriate regulator in writing at least 20 business days prior to the date the firm starts relying on it; and
- (2) the firm must, as part of the notification under (1), provide to the appropriate regulator the analysis of price movements on which it relies.
Calculating the PRR for each commodity: Simplified approach
BIPRU 7.4.24
See Notes
A firm which calculates a commodity PRR using the commodity simplified approach must do so by summing:
(and for these purposes the excess of a firm's long (short) positions over its short (long) positions in the same commodity (including notional positions under BIPRU 7.4.4R) is its net position in each commodity).
Calculating the PRR for each commodity: Maturity ladder approach
BIPRU 7.4.25
See Notes
BIPRU 7.4.26
See Notes
- (1) A firm must calculate the charges referred to in BIPRU 7.4.25R as follows.
- (2) Step 1: offset long and short positions maturing:
- (a) on the same day; or
- (b) (in the case of positions arising under contracts traded in markets with daily delivery dates) within 10 business days of each other.
- (3) Step 2: allocate the positions remaining after step 1 to the appropriate maturity band in the table in BIPRU 7.4.28R (physical commodity positions are allocated to band 1).
- (4) Step 3: match long and short positions within each band. In each instance, calculate a spread charge equal to the matched amount multiplied first by the spot price for the commodity and then by the spread rate of 3%.
- (5) Step 4: carry unmatched positions remaining after step 3 to another band where they can be matched, then match them. Do this until all matching possibilities are exhausted. In each instance, calculate:
- (a) a carry charge equal to the carried position multiplied by the spot price for the commodity, the carry rate of 0.6% and the number of bands by which the position is carried; and
- (b) a spread charge equal to the matched amount multiplied by the spot price for the commodity and the spread rate of 3%.
- (6) Step 5: calculate the outright charge on the remaining positions (which will either be all long positions or all short positions). The outright charge equals the remaining position (ignoring the sign) multiplied by the spot price for the commodity and the outright rate of 15%.
BIPRU 7.4.27
See Notes
BIPRU 7.4.28
See Notes
This table belongs to BIPRU 7.4.26R
Band | Maturity of position |
Band 1 | 0 ≤ 1 month |
Band 2 | > 1 month ≤ 3 months |
Band 3 | > 3 months ≤ 6 months |
Band 4 | > 6 months ≤ 1 year |
Band 5 | > 1 year ≤ 2 years |
Band 6 | > 2 years ≤ 3 years |
Band 7 | > 3 years |
BIPRU 7.4.29
See Notes
BIPRU 7.4.30
See Notes
This table belongs to BIPRU 7.4.29G
Calculating the PRR for each commodity: Extended maturity ladder approach
BIPRU 7.4.31
See Notes
A firm may use the commodity extended maturity ladder approach to calculate the commodity PRR for a particular commodity provided the firm:
- (1) has a diversified commodities portfolio;
- (2) undertakes significant commodities business;
- (3) is not yet in a position to use the VaR model approach to calculate commodity PRR; and
- (4) at least twenty business days before the date the firm uses that approach notifies the appropriate regulator in writing of:
- (a) its intention to use the commodity extended maturity ladder approach; and
- (b) the facts and matters relied on to demonstrate that the firm meets the criteria in (1) - (3).
BIPRU 7.4.32
See Notes
A firm using the commodity extended maturity ladder approach must calculate its commodity PRR by:
- (1) following the same steps as in BIPRU 7.4.26R but using the rates from the table in BIPRU 7.4.33R rather than those in BIPRU 7.4.26R; and
- (2) summing all spread charges, carry charges and outright charge that result.
BIPRU 7.4.33
See Notes
This table belongs to BIPRU 7.4.32R
Precious metals (excluding gold) | Base metals | Softs (agricultural) | Other (including energy) | |
Spread rate (%) | 2 | 2.4 | 3 | 3 |
Carry rate (%) | 0.3 | 0.5 | 0.6 | 0.6 |
Outright rate (%) | 8 | 10 | 12 | 15 |
BIPRU 7.4.34
See Notes
BIPRU 7.4.35
See Notes
BIPRU 7.4.36
See Notes
Where a firm is:
- (1) treating a commodity index derivative as if it was based on a single separate commodity (see BIPRU 7.4.13R(1)(a)); and
- (2) using the commodity extended maturity ladder approach to calculate the commodity PRR for that commodity;
it must determine which index constituent incurs the highest rate in the table in BIPRU 7.4.33R and apply that rate to the notional position for the purposes of BIPRU 7.4.32R.
BIPRU 7.4.37
See Notes
Liquidity and other risks
BIPRU 7.4.38
See Notes
BIPRU 7.4.39
See Notes
BIPRU 7.4.40
See Notes
BIPRU 7.4.41
See Notes
BIPRU 7.5
Foreign currency PRR
- 01/01/2007
General rule
BIPRU 7.5.1
See Notes
A firm must calculate its foreign currency PRR by:
- (1) identifying which foreign currency and gold positions to include in the PRR calculation;
- (2) calculating the net open position in each currency in accordance with this section (including where necessary the base currency calculated in the same way as it is for foreign currencies) and in gold;
- (3) calculating the open currency position for foreign currencies as calculated under BIPRU 7.5.19R and the net gold position (see BIPRU 7.5.20R); and
- (4) multiplying the sum of the absolutes of that open currency position and that net gold position by 8%.
BIPRU 7.5.2
See Notes
Scope of the foreign currency PRR calculation
BIPRU 7.5.3
See Notes
A firm's foreign currency PRR calculation must include the following items regardless of whether they are trading book or non-trading book positions:
- (1) all gold positions;
- (2) all spot positions in foreign currency (that is, all asset items less all liability items, including accrued interest, in the foreign currency in question);
- (3) all forward positions in foreign currency;
- (4) all CRD financial instruments and other items which are denominated in a foreign currency;
- (5) irrevocable guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable to the extent they give rise to a position in gold or foreign currency; and
- (6) notional positions arising from the instruments listed in the table in BIPRU 7.5.5R.
BIPRU 7.5.4
See Notes
- (1) The following are excluded from a firm's foreign currency PRR calculation:
- (a) foreign currency assets which have been deducted in full from the firm's capital resources under the calculations under the capital resources table;
- (b) positions hedging (a);
- (c) positions that a firm has deliberately taken in order to hedge against the adverse effect of the exchange rate on the ratio of its capital resources to its capital resources requirement; and
- (d) transactions to the extent that they fully hedge net future foreign currency income or expenses which are known but not yet accrued.
- (2) If a firm uses an exclusion under (1) it must:
- (a) notify the appropriate regulator before it makes use of it;
- (b) include in the notification in (a) the terms on which the relevant item will be excluded;
- (c) not change the terms of the exclusion under (b); and
- (d) document its policy on the use of that exclusion in its trading book policy statement.
- (3) A position may only be excluded under (1)(b) or (c) if it is of a non-trading or structural nature.
BIPRU 7.5.5
See Notes
This table belongs to BIPRU 7.5.3R(6).
Instruments | See |
Foreign currency futures, forwards, synthetic futures and CFDs | BIPRU 7.5.11R |
Foreign currency swaps | BIPRU 7.5.13R |
Foreign currency options or warrants (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6 (Option PRR)). | BIPRU 7.5.15R |
Gold futures, forwards, synthetic futures and CFDs | BIPRU 7.5.16R |
Gold options (unless the firm calculates a PRR on the option under BIPRU 7.6). | BIPRU 7.5.17R |
Positions in CIUs | BIPRU 7.5.18R |
BIPRU 7.5.6
See Notes
Firms are reminded that the table in BIPRU 7.6.5R (Table: Appropriate PRR calculation for an option or warrant) divides foreign currency options and warrants into:
BIPRU 7.5.7
See Notes
BIPRU 7.5.8
See Notes
BIPRU 7.5.9
See Notes
Derivation of notional positions: General
BIPRU 7.5.10
See Notes
Derivation of notional positions: Foreign exchange forwards, futures, CFDs and synthetic futures
BIPRU 7.5.11
See Notes
- (1) A firm must treat a foreign currency forward, future, synthetic future or CFD as two notional currency positions as follows:
- (a) a long notional position in the currency which the firm has contracted to buy; and
- (b) a short notional position in the currency which the firm has contracted to sell.
- (2) In (1) the notional positions have a value equal to either:
- (a) the contracted amount of each currency to be exchanged in the case of a forward, future, synthetic future or CFD held in the non-trading book; or
- (b) the present value of the amount of each currency to be exchanged in the case of a forward, future, synthetic future or CFD held in the trading book.
BIPRU 7.5.12
See Notes
- (1) The following example illustrates BIPRU 7.5.11R. In this example, a firm contracts to sell $106 for €108 in one year's time and the present values of each cash flow are $100 and €100 respectively.
- (2) In the non-trading book, this forward would be treated as a combination of a €108 long position and a $106 short position.
- (3) In the trading book, this forward would be treated as a combination of a €100 long position and a $100 short position.
- (4) Firms are reminded that foreign currency forwards held in the trading book should also be included in the firm's interest rate PRR calculation (see BIPRU 7.2.4R (Instruments which result in notional positions for the purpose of the interest rate PRR)).
Derivation of notional positions: Foreign currency swaps
BIPRU 7.5.13
See Notes
- (1) A firm must treat a foreign currency swap as:
- (a) a long notional position in the currency in which the firm has contracted to receive interest and principal; and
- (b) a short notional position in the currency in which the firm has contracted to pay interest and principal.
- (2) In (1) the notional positions have a value equal to either:
- (a) the nominal amount of each currency underlying the swap if it is held in the non-trading book; or
- (b) the present value amount of all cash flows in the relevant currency in the case of a swap held in the trading book.
BIPRU 7.5.14
See Notes
- (1) The following example illustrates BIPRU 7.5.13R. In this example a firm enters into a five year foreign currency swap where it contracts to pay six month US$ Libor on $100 in return for receiving 6% fixed on €100. The present values of each leg are $100 and €98 respectively.
- (2) In the non-trading book, this swap would be treated as a combination of a €100 long position and a $100 short position.
- (3) In the trading book, this swap would be treated as a combination of a €98 long position and a $100 short position.
- (4) Firms are reminded that foreign currency swaps held in the trading book should also be included in the firm's interest rate PRR calculation (see BIPRU 7.2.4R (Instruments which result in notional positions for the purpose of the interest rate PRR)).
Derivation of notional positions: Foreign currency options and warrants
BIPRU 7.5.15
See Notes
Derivation of notional positions: Gold forwards, futures, synthetic futures and CFDs
BIPRU 7.5.16
See Notes
Derivation of notional positions: Gold options
BIPRU 7.5.17
See Notes
Derivation of notional positions: CIUs
BIPRU 7.5.18
See Notes
- (1) This rule deals with positions in CIUs.
- (2) The actual foreign currency positions of a CIU must be included in a firm's foreign currency PRR calculation under BIPRU 7.5.1 R .
- (3) A firm may rely on third party reporting of the foreign currency positions in the CIU, where the correctness of this report is adequately ensured.
- (4) If a firm is not aware of the foreign currency positions in a CIU, the firm must assume that the CIU is invested up to the maximum extent allowed under the CIUs mandate in foreign currency and the firm must, for trading book positions, take account of the maximum indirect exposure that it could achieve by taking leveraged positions through the CIU when calculating its foreign currency PRR. This must be done by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate.
- (5) The assumed position of the CIU in foreign currency calculated in accordance with BIPRU 7.5.18R(4) must be treated as a separate currency according to the treatment of investments in gold, subject to the modification that, if the direction of the CIUs investment is available, the total long position may be added to the total long open foreign currency position and the total short position may be added to the total short open foreign currency position. No netting is allowed between such positions prior to this calculation.
Open currency position
BIPRU 7.5.19
See Notes
A firm must calculate its open currency position by:
- (1) calculating the net position in each foreign currency;
- (2) converting each such net position into its base currency equivalent at current spot rates;
- (3) summing all short net positions and summing all long net positions calculated under (1) and (2); and
- (4) selecting the larger sum (ignoring the sign) from (3).
Net gold position
BIPRU 7.5.20
See Notes
A firm must calculate its net gold position by:
- (1) valuing all gold positions using the prevailing spot price for gold (regardless of the maturity of the positions);
- (2) offsetting long and short positions; and
- (3) converting the resulting net position into the base currency equivalent using the current spot foreign currency rate.
BIPRU 7.6
Option PRR
- 01/01/2007
Option PRR calculation
BIPRU 7.6.1
See Notes
A firm must calculate its option PRR by:
- (1) identifying which option positions must be included within the scope of the option PRR calculation under BIPRU 7.6.3R - BIPRU 7.6.5R;
- (2) calculating the derived position in each option in accordance with BIPRU 7.6.9R - BIPRU 7.6.15R;
- (3) calculating the PRR for each derived position in accordance with BIPRU 7.6.16R - BIPRU 7.6.31R;
- (4) summing all of the PRRs calculated in accordance with (3).
BIPRU 7.6.2
See Notes
Scope of the option PRR calculation
BIPRU 7.6.3
See Notes
Except as permitted under BIPRU 7.6.5R, a firm's option PRR calculation must include:
- (1) each trading book position in an option on an equity, interest rate or debt security;
- (2) each trading book position in a warrant on an equity or debt security;
- (3) each trading book position in a CIU; and
- (4) each trading book and non-trading book position in an option on a commodity, currency or gold.
BIPRU 7.6.4
See Notes
BIPRU 7.6.5
See Notes
This table belongs to BIPRU 7.6.3R
Option type (see BIPRU 7.6.18R) or warrant | PRR calculation |
American option, European option, Bermudan option, Asian option or warrant for which the in the money percentage (see BIPRU 7.6.6R) is equal to or greater than the appropriate position risk adjustment (see BIPRU 7.6.7R and BIPRU 7.6.8R) | Calculate either an option PRR, or the most appropriate to the underlying position of:
(a)an equity PRR; or(b)an interest rate PRR; or(c)a commodity PRR; or(d)a foreign currency PRR; or(e)a collective investment undertaking PRR.
|
American option, European option, Bermudan option, Asian option or warrant:
(a)for which the in the money percentage (see BIPRU 7.6.6R) is less than the appropriate position risk adjustment (see BIPRU 7.6.7R and BIPRU 7.6.8R); or(b)that is at the money; or(c)that is out of the money.
|
Calculate an option PRR |
All other types of option listed in BIPRU 7.6.18R (regardless of whether in the money, at the money or out of the money). |
The in the money percentage
BIPRU 7.6.6
See Notes
- (1) The in the money percentage is calculated in accordance with this rule.
- (2) For a call option:
- Current market price of underlying - Strike price of the option * 100
- Strike price of the option
- (3) For a put option:
- Strike price of option - Current market price of underlying * 100
- Strike price of the option
- (4) In the case of an option on a basket of securities a firm may not treat the option as being in the money by the relevant percentage so as to enable the firm not to apply an option PRR under BIPRU 7.6.5R unless the conditions in BIPRU 7.6.5R are satisfied with respect to each kind of underlying investment.
- (5) (4) also applies to an option on a CIU if a firm is using one of the CIU look through methods.
The appropriate position risk adjustment
BIPRU 7.6.7
See Notes
- (1) The appropriate position risk adjustment for a position is that listed in the table in BIPRU 7.6.8R against the relevant underlying position.
- (2) If the firm uses the commodity extended maturity ladder approach or the commodity maturity ladder approach for a particular commodity under BIPRU 7.4 (Commodity PRR) the appropriate position risk adjustment for an option on that commodity is the outright rate applicable to the underlying position (see BIPRU 7.4.26R (Calculating the PRR for each commodity: Maturity ladder approach) and BIPRU 7.4.33R (Table: Alternative spread, carry and outright rates)).
- (3) If a firm does not have commodity positions treated under BIPRU 7.4 or does not have positions in the commodity in question treated under BIPRU 7.4 the restrictions in BIPRU 7.4 that regulate when a firm can and cannot use a particular method of calculating the commodity PRR apply for the purpose of establishing the appropriate position risk adjustment for the purposes of BIPRU 7.6.
- (4) If a firm is using one of the CIU look through methods for an option on a CIU the leveraging requirements in BIPRU 7.7 (Position risk requirements for collective investment undertakings) apply (see BIPRU 7.7.11R). For this purpose the amount of the appropriate position risk adjustments under BIPRU 7.6.6R(5) is increased by the amount of that leveraging (expressed as a percentage) as calculated under BIPRU 7.7, subject to a maximum appropriate position risk adjustment of 32%.
BIPRU 7.6.8
See Notes
This table belongs to BIPRU 7.6.7R
Underlying position | Appropriate position risk adjustment |
Equity | The position risk adjustment applicable to the underlying equity or equity index in the table in BIPRU 7.3.30R (Simplified equity method) |
Interest rate | The sum of the specific risk position risk adjustment (see BIPRU 7.2.43R to BIPRU 7.2.51G (Specific risk calculation)) and the general market risk position risk adjustment (as set out in BIPRU 7.2.57R (General market risk position risk adjustments)) applicable to the underlying position |
Debt securities | The sum of the specific risk position risk adjustment (see BIPRU 7.2.43R to BIPRU 7.2.51G (Specific risk calculation)) and the general market risk position risk adjustment (as set out in the table in BIPRU 7.2.57R (General market risk position risk adjustments )) applicable to the underlying position |
Commodity | 18% (unless BIPRU 7.6.7R requires otherwise) |
Currency | 8% |
Gold | 8% |
CIU | 32% (subject to BIPRU 7.6.6R and BIPRU 7.6.7R) |
Calculating derived positions
BIPRU 7.6.9
See Notes
Netting positions
BIPRU 7.6.10
See Notes
BIPRU 7.6.11
See Notes
BIPRU 7.6.12
See Notes
Derived positions
BIPRU 7.6.13
See Notes
This table belongs to BIPRU 7.6.9R
Underlying | Option (or warrant) | Derived position |
Equity | Option (warrant) on a single equity or option on a future/forward on a single equity | A notional position in the actual equity underlying the contract valued at the current market price of the equity. |
Option (warrant) on a basket of equities or option on a future/forward on a basket of equities | A notional position in the actual equities underlying the contract valued at the current market price of the equities. | |
Option (warrant) on an equity index or option on a future/forward on an equity index | A notional position in the index underlying the contract valued at the current market price of the index. | |
Interest rate | Option on an interest rate or an interest rate future/FRA | A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the sum of the time to expiry of the contract and the length of the period on which the settlement amount of the contract is calculated valued at the notional amount of the contract. |
Option on an interest rate swap | A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the length of the swap valued at the notional principal amount. | |
Interest rate cap or floor | A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the remaining period of the cap or floor valued at the notional amount of the contract. | |
Debt securities | Option (warrant) on a debt security or option on a future/forward on a debt security | The underlying debt security with a maturity equal to the time to expiry of the option valued as the nominal amount underlying the contract at the current market price of the debt security. |
Option (warrant) on a basket of debt securities or option on a future/forward on a basket of debt securities | A notional position in the actual debt securities underlying the contract valued at the current market price of the debt securities. | |
Option (warrant) on an index of debt securities or option on a future/forward on an index of debt securities | A notional position in the index underlying the contract valued at the current market price of the index. | |
Commodity | Option on a commodity or option on a future/forward on a commodity | An amount equal to the tonnage, barrels or kilos underlying the option with (in the case of a future/forward on a commodity) a maturity equal to the expiry date of the forward or Futures contract underlying the option. In the case of an option on a commodity the maturity of the position falls into Band 1 in the table in BIPRU 7.4.28R (Table: Maturity bands for the maturity ladder approach). |
Option on a commodity swap | An amount equal to the tonnage, barrels or kilos underlying the option with a maturity equal to the length of the swap valued at the notional principal amount. | |
CIU (These provisions about CIUs are subject to BIPRU 7.6.35R) |
Option (warrant) on a single CIU or option on a future/forward on a single CIU | A notional position in the actual CIU underlying the contract valued at the current market price of the CIU. |
Option (warrant) on a basket of CIUs or option on a future/forward on a basket of CIUs | A notional position in the actual CIUs underlying the contract valued at the current market price of the CIUs. | |
Gold | Option on gold or option on a future/forward on gold | An amount equal to the troy ounces underlying the option with (in the case of a future/forward on gold) a maturity equal to the expiry date of the forward or futures contract underlying the option. |
Currency | Currency option | The amount of the underlying currency that the firm will receive if the option is exercised converted at the spot rate into the currency that the firm will sell if the option is exercised. |
Combinations of options which can be treated as one option
BIPRU 7.6.14
See Notes
A firm may treat (for the purpose of calculating an option PRR under BIPRU 7.6) an option strategy listed in the table in BIPRU 7.6.15R as the single position in a notional option specified against that strategy in the table in BIPRU 7.6.15R, if:
- (1) each element of the strategy is transacted with the same counterparty;
- (2) the strategy is documented as a single structure;
- (3) the underlying for each part of the composite position (including any actual holding of the underlying) is the same under the PRR identical product netting rules;
- (4) the netting achieved does not result overall in a greater degree of netting in the calculation of the market risk capital requirement than would be permitted under the other standard market risk PRR rules;
- (5) each option in the structure has the same maturity and underlying; and
- (6) the constituent parts of the structure form an indivisible single contract, so that neither party can unwind or default on one part of the structure without doing so for the contract as a whole;
except that (1) and (6) only apply to the extent possible with respect to any part of the composite position held by the firm that consists of an actual holding of the underlying.
BIPRU 7.6.15
See Notes
This table belongs to BIPRU 7.6.14R
Option strategy (and an example) | Notional option (and rule it must be treated under) |
Bull Spread (e.g. buy 100 call and sell 101 call) |
One purchased option (treat under BIPRU 7.6.20R) |
Bear Spread (e.g. sell 100 put and buy 101 put) |
One written option (treat under BIPRU 7.6.21R) |
Synthetic Long Call (e.g. long underlying and buy 100 put) |
One purchased option (treat under BIPRU 7.6.20R or BIPRU 7.6.24R) |
Synthetic Short Call (e.g. short underlying and sell 100 put) |
One written option (treat under BIPRU 7.6.21R or BIPRU 7.6.24R) |
Synthetic Long Put (e.g. short underlying and buy 100 call) |
One purchased option (treat under BIPRU 7.6.20R or BIPRU 7.6.24R) |
Synthetic Short Put (e.g. buy underlying and sell 100 call) |
One written option (treat under BIPRU 7.6.21R or BIPRU 7.6.24R) |
Long Straddle (e.g. buy 100 call and buy 100 put) |
One purchased option (treat under BIPRU 7.6.20R) |
Short Straddle (e.g. sell 100 call and sell 100 put) |
One written option (treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money) |
Long Strangle (e.g. buy 101 call and buy 99 put) |
One purchased option (treat under BIPRU 7.6.20R) |
Short Strangle (e.g. sell 99 call and sell 101 put) |
One written option (treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money) |
Long Butterfly (e.g. buy one 100 call, sell two 101 calls, and buy one 102 call) |
One purchased option (treat under BIPRU 7.6.20R) |
Short Butterfly (e.g. sell one 100 put, buy two 101 puts, and sell one 102 put) |
One written option (treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money) |
The option PRR for an individual positions
BIPRU 7.6.16
See Notes
BIPRU 7.6.17
See Notes
BIPRU 7.6.18
See Notes
This table belongs to BIPRU 7.6.16R
Option | Description | Method |
American option | An option that may be exercised at any time over an extended period up to its expiry date. | Option standard method or option hedging method if appropriate |
European option | An option that can only be exercised at expiry. | |
Bermudan option | A cross between an American option and European option. The Bermudan option can only be exercised at specific dates during its life. | |
Asian option | The buyer has the right to exercise at the average rate or price of the underlying over the period (or part of the period) of the option. One variant is where the payout is based on the average of the underlying against a fixed strike price; another variant is where the payout gives at expiry the price of the underlying against the average price over the option period. | Option standard method or option hedging method if appropriate |
Barrier option | An option which is either cancelled or activated if the price of the underlying reaches a pre-set level regardless of the price at which the underlying may be trading at the expiry of the option. The knock-out type is cancelled if the underlying price or rate trades through the trigger; while the knock-in becomes activated if the price moves through the trigger. | |
Corridor option | Provides the holder with a pay-out for each day that the underlying stays within a defined range chosen by the investor. | |
Ladder option | Provides the holder with guaranteed pay-outs if the underlying trades through a pre-agreed price(s) or rate(s) at a certain point(s) in time, regardless of future performance. | |
Lock-in option | An option where the pay-out to the holder is locked in at the maximum (or minimum) value of the underlying that occurred during the life of the option. | |
Look-back option | A European style option where the strike price is fixed in retrospect, that is at the most favourable price (i.e. the lowest (highest) price of the underlying in the case of a call (put)) during the life of the option. | |
Forward starting option | An option that starts at a future date. | |
Compound option | An option where the underlying is itself an option (i.e. an option on an option). | Option standard method or option hedging method if appropriate |
Interest rate cap | An interest rate option or series of options under which a counterparty contracts to pay any interest costs arising as a result of an increase in rates above an agreed rate: the effect being to provide protection to the holder against a rise above that agreed interest rate. | Option standard method, but no reduction for the amount the option is out of the money is permitted |
Interest rate floor | An interest rate option or series of options under which a counterparty contracts to pay any lost income arising as a result of a fall in rates below an agreed rate: the effect being to provide protection to the holder against a fall below that agreed interest rate. | |
Performance option | An option based on a reference basket comprising any number of assets, where the pay-out to the holder could be one of the following: the maximum of the worst performing asset, or 0; the maximum of the best performing asset, or 0; the maximum of the spreads between several pairs of the assets, or 0. | Option standard method or option hedging method - using the highest position risk adjustment of the individual assets in the basket |
Quanto | Quanto stands for "Quantity Adjusted Option". A quanto is an instrument where two currencies are involved. The payoff is dependent on a variable that is measured in one of the currencies and the payoff is made in the other currency. | Subject to BIPRU 7.6.31R, the option standard method |
Cliquet option | A cliquet option consists of a series of forward starting options where the strike price for the next exercise date is set equal to a positive constant times the underlying price as of the previous exercise date. It initially acts like a vanilla option with a fixed price but as time moves on, the strike is reset and the intrinsic value automatically locked in at pre-set dates. If the underlying price is below the previous level at the reset date no intrinsic value is locked in but the strike price will be reset to the current price attained by the underlying. If the underlying price exceeds the current level at the next reset the intrinsic value will again be locked in. | Option standard method for a purchased cliquet, or the method specified in BIPRU 7.6.30R for a written cliquet |
Digital option | A type of option where the pay-out to the holder is fixed. The most common types are all-or-nothing and one-touch options. All-or-nothing will pay out the fixed amount if the underlying is above (call) or below (put) a set value at expiry. The one-touch will pay the fixed amount if the underlying reaches a fixed point any time before expiry. | The method specified in BIPRU 7.6.29 R |
Any other option or warrant | The method specified for the type of instrument whose description it most closely resembles. |
BIPRU 7.6.19
See Notes
- (1) The option standard method is described in BIPRU 7.6.20R - BIPRU 7.6.22R.
- (2) The option hedging method is described in BIPRU 7.6.23G - BIPRU 7.6.28R.
The standard method: Purchased options and warrants
BIPRU 7.6.20
See Notes
Under the option standard method, the PRR for a purchased option or warrant is the lesser of:
- (1) the market value of the derived position (see BIPRU 7.6.9R) multiplied by the appropriate position risk adjustment (see BIPRU 7.6.8R); and
- (2) the market value of the option or warrant.
The standard method: Written options and warrants
BIPRU 7.6.21
See Notes
The standard method: Underwriting or sub-underwriting an issue of warrants
BIPRU 7.6.22
See Notes
The hedging method
BIPRU 7.6.23
See Notes
BIPRU 7.6.24
See Notes
Under the option hedging method a firm must calculate the option PRR for individual positions as follows:
- (1) for an option or warrant on an equity, basket of equities or equity index and its equity hedge(s), the firm must, to the extent specified or permitted in the table in BIPRU 7.6.26R, use the calculation in the table in BIPRU 7.6.27R;
- (2) for an option or warrant on a debt security, basket of debt securities or debt security index and its debt security hedge(s), the firm must, to the extent specified or permitted in the table in BIPRU 7.6.26R, use the calculation in the table in BIPRU 7.6.27R;
- (3) for an option on gold and its gold hedge, the firm must, to the extent specified or permitted in the table in BIPRU 7.6.26R, use the calculation in the table in BIPRU 7.6.27R; and
- (4) for an option on a currency and its currency hedge, the firm must, to the extent specified or permitted in the table in BIPRU 7.6.26R, use the calculation in the table in BIPRU 7.6.28R.
BIPRU 7.6.25
See Notes
- (1) A firm may not use the option hedging method for:
- (a) an interest rate option and its hedge; or
- (b) a commodity option and its hedge; or
- (c) a CIU option and its hedge.
- (2) A firm may only use the option hedging method if the item underlying the option or warrant is the same as the hedge of the option or warrant under the PRR identical product netting rules.
BIPRU 7.6.26
See Notes
This table belongs to BIPRU 7.6.24R
Hedge | PRR calculation for the hedge | Limits (if hedging method is used) | Naked position |
An equity (hedging an option or warrant) | The equity must be treated in either BIPRU 7.3 (equity PRR) or the option hedging method (see the table in BIPRU 7.6.27R) | The option hedging method must only be used up to the amount of the hedge that matches the notional amount underlying the option or warrant | To the extent that the amount of the hedge (or option or warrant) exceeds the notional amount underlying the option or warrant (or hedge), a firm must apply an equity PRR, interest rate PRR or foreign currency PRR (or the option standard method) |
A debt security (hedging an option or warrant) | The debt security must be treated in BIPRU 7.2 (interest rate PRR) or the option hedging method (see the table in BIPRU 7.6.27R) | As for the first row | As for the first row |
Gold (hedging a gold option) | The gold must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.27R) | As for the first row | As for the first row |
A currency or currencies (hedging a currency option) | The currency must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.28R) | As for the first row | As for the first row |
BIPRU 7.6.27
See Notes
This table belongs to BIPRU 7.6.24R(1) - (3)
PRR | ||||
Option or warrant position | In the money by more than the position risk adjustment | In the money by less than the position risk adjustment | Out of the money or at the money | |
Long in security or gold | Long put | Zero | Wp | X |
Short call | Y | Y | Z | |
Short in security or gold | Long call | Zero | Wc | X |
Short put | Y | Y | Z | |
Where: | ||||
Wp means | {(position risk adjustment-100%) x The underlying position valued at strike price} | + | The market value of the underlying position | |
Wc means | {(100% + position risk adjustment x The underlying position valued at strike price} | - | The market value of the underlying position | |
X means | The market value of the underlying position multiplied by the appropriate position risk adjustment | |||
Y means | The market value of the underlying position multiplied by the appropriate position risk adjustment. This result may be reduced by the market value of the option or warrant, subject to a maximum reduction to zero. | |||
Z means | The option hedging method is not permitted; the option standard method must be used. |
BIPRU 7.6.28
See Notes
This table belongs to BIPRU 7.6.24R(4)
PRR | |||
Option position | In the money by more than 8% | In the money by less than 8% | Out of the money or at the money |
Long calls & long puts | Zero | WL | X |
Short calls & short puts | Zero | Y | X |
Where: | |||
WL means | (1.08% x U) | - | The market value of the underlying position |
U means | The amount of the underlying currency that the firm will receive if the option is exercised, converted at the strike price into the currency that the firm will sell if the option is exercised | ||
X means | The market value of the underlying position multiplied by 8%. | ||
Y means | The market value of the underlying position multiplied by 8%. This result may be reduced by the market value of the option, subject to a maximum reduction to zero. |
Specific methods and treatments: Digital options
BIPRU 7.6.29
See Notes
Specific methods and treatments: Written cliquet options
BIPRU 7.6.30
See Notes
The option PRR for a written cliquet option is the market value of the derived position (see BIPRU 7.6.9R) multiplied by the appropriate position risk adjustment (see BIPRU 7.6.8R) multiplied by F+1 (see the following provisions of this paragraph). This result may be reduced by the amount the option is out of the money (subject to a maximum reduction to zero). The option PRR for a written cliquet option is therefore defined by the following formula:
[position risk adjustment * underlying * (F + 1)] - OTM
where:
- (1)
- (2) FR= Number of forward re-sets
- (3) Y= Years to maturity
- (4) OTM= the amount by which the option is out of the money
Specific methods and treatments: Quantos
BIPRU 7.6.31
See Notes
Interaction with other chapters
BIPRU 7.6.32
See Notes
BIPRU 7.6.33
See Notes
Options on a commodity
BIPRU 7.6.34
See Notes
Options on a CIU
BIPRU 7.6.35
See Notes
For the purpose of identifying the appropriate treatment for the purpose of BIPRU 7.6.5R, the underlying position for the purpose of BIPRU 7.6.8R and the derived position under BIPRU 7.6.13R a firm may choose between treating an option on a CIU as being:
- (1) a position in the CIU itself; or
- (2) (if the conditions in BIPRU 7.7 (Position risk requirements for collective investment undertakings) for the use of the method in question are satisfied) positions in the underlying investments or assumed positions arising through the use of the standard CIU look through method or the modified CIU look through method.
BIPRU 7.6.36
See Notes
- (1) This paragraph gives an example of how the appropriate position risk adjustment should be calculated for the purpose of deciding whether or not an option on a CIU is sufficiently in the money for the firm to have a choice whether or not to apply an option PRR. This example assumes that there is no leveraging (see BIPRU 7.7.11R (CIU modified look through method)).
- (2) Say that the CIU contains underlying equity position and the firm is using one of the CIU look through methods. The appropriate position risk adjustment for some is 8% and for the others is 12%. The firm should identify the highest appropriate position risk adjustment for the underlyings. In this case it is 12%. Therefore in this case the option would need to be in the money by more than 12% in order for the firm to have a choice between applying the option PRR or one of the other PRR charges.
- (3) However if the firm is not using one of the CIU look through methods the option would need to be in the money by more than 32% in order for the firm to have a choice between applying the option PRR or the CIU PRR.
BIPRU 7.6.37
See Notes
BIPRU 7.7
Position risk requirements for collective investment undertakings
- 01/01/2007
Collective investment undertaking PRR calculation
BIPRU 7.7.1
See Notes
A firm must calculate its CIU PRR by:
- (1) identifying which CIU positions must be included within the scope of the PRR calculation (see BIPRU 7.7.2R);
- (2) identifying which CIU positions are to be subject to the CIU PRR and which positions are to be subject to one of the other PRR charges;
- (3) converting on a daily basis net positions into the firm's base currency at the prevailing spot exchange rate before their aggregation;
- (4) calculating an individual PRR for each position in a CIU (see BIPRU 7.7.5R);
- (5) summing the resulting individual PRRs.
Scope of the PRR calculation for collective investment undertakings
BIPRU 7.7.2
See Notes
- (1) A firm's PRR calculation must include all trading book positions in CIUs.
- (2) A firm's CIU PRR calculation must include all trading book positions in CIUs unless they are treated under one of the CIU look through methods and included in the PRR calculations for the relevant underlying investments or subject to an option PRR.
- (3) A firm's PRR calculation for CIUs must include notional positions arising from trading book positions in options or warrants on collective investment undertakings.
General rules
BIPRU 7.7.3
See Notes
BIPRU 7.7.4
See Notes
Calculation of the collective investment undertaking PRR
BIPRU 7.7.5
See Notes
Look through methods: General criteria
BIPRU 7.7.6
See Notes
A firm may determine the securities PRR requirement for positions in CIUs which meet the criteria set out in BIPRU 7.7.7R, by one of the following methods:
- (1) the standard CIU look through method (BIPRU 7.7.4R and BIPRU 7.7.7R - BIPRU 7.7.10R); or
- (2) the modified CIU look through method (BIPRU 7.7.4R, BIPRU 7.7.7R - BIPRU 7.7.8R and BIPRU 7.7.11R - BIPRU 7.7.12R).
BIPRU 7.7.7
See Notes
The general eligibility criteria for using the methods in BIPRU 7.7.4R and BIPRU 7.7.9R - BIPRU 7.7.11R, for CIUs issued by companies supervised or incorporated within the EEA are that:
- (1) the CIU's prospectus or equivalent document must include:
- (a) the categories of assets the CIU is authorised to invest in;
- (b) if investment limits apply, the relative limits and the methodologies to calculate them;
- (c) if leverage is allowed, the maximum level of leverage; and
- (d) if investment in OTC financial derivatives or repo-style transactions are allowed, a policy to limit counterparty risk arising from these transactions;
- (2) the business of the CIU must be reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period;
- (3) the units/shares of the CIU are redeemable in cash, out of the undertaking's assets, on a daily basis at the request of the unit holder;
- (4) investments in the CIU must be segregated from the assets of the CIU manager; and
- (5) there must be adequate risk assessment, by the investing firm, of the CIU.
BIPRU 7.7.8
See Notes
Standard CIU look through method: General
BIPRU 7.7.9
See Notes
- (1) Where a firm is aware of the underlying investments of the CIU on a daily basis the firm may look through to those underlying investments in order to calculate the securities PRR for position risk (general market risk and specific risk) for those positions in accordance with the methods set out in the securities PRR requirements or, if the firm has a VaR model permission, in accordance with the methods set out in BIPRU 7.10 (Use of a Value at Risk Model).
- (2) Under this approach, positions in CIUs must be treated as positions in the underlying investments of the CIU. Netting is permitted between positions in the underlying investments of the CIU and other positions held by the firm, as long as the firm holds a sufficient quantity of units to allow for redemption/creation in exchange for the underlying investments.
Standard CIU look through method: Index or basket funds
BIPRU 7.7.10
See Notes
- (1) A firm may calculate the securities PRR for position risk (general market risk and specific risk) for positions in CIUs in accordance with the methods set out in the securities PRR requirements or, if the firm has a VaR model permission, in accordance with the methods set out in BIPRU 7.10 (Use of a Value at Risk Model), to assumed positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities or debt securities referred to in (a), subject to the following conditions:
- (a) the purpose of the CIU's mandate is to replicate the composition and performance of an externally generated index or fixed basket of equities or debt securities; and
- (b) a minimum correlation of 0.9 between daily price movements of the CIU and the index or basket of equities or debt securities it tracks can be clearly established over a minimum period of six months.
- (2) Correlation as referred to in (1)(b) means the correlation coefficient between daily returns on the CIU and the index or basket of equities or debt securities it tracks.
CIU modified look through method
BIPRU 7.7.11
See Notes
Where a firm is not aware of the underlying investments of the CIU on a daily basis, the firm may calculate the securities PRR for position risk (general market risk and specific risk) in accordance with the methods set out in the securities PRR requirements, subject to the following conditions:
- (1) it must be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting the highest securities PRR for position risk (general market risk and specific risk), and then continues making investments in descending order until the maximum total investment limit is reached;
- (2) the firm must take account of the maximum indirect exposure that it could achieve by taking leveraged positions through the CIU when calculating its securities PRR for position risk, by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate; and
- (3) should the securities PRR for position risk (general market risk and specific risk) under this approach exceed that set out in BIPRU 7.7.5R, the PRR charge must be capped at that level.
BIPRU 7.7.12
See Notes
CAD 1 models and VaR models
BIPRU 7.7.13
See Notes
Where BIPRU 7.7 permits a firm to calculate the PRR charge for a position in a CIU using the rules in BIPRU 7 relating to the underlying investment, a firm that has:
- (1) a CAD 1 model waiver that covers positions in CIUs may use the rules as modified by that waiver; and
- (2) a VaR model permission that covers positions in CIUs may use its VaR model.
Options on a CIU
BIPRU 7.7.14
See Notes
BIPRU 7.8
Securities underwriting
- 01/01/2007
General rules
BIPRU 7.8.1
See Notes
BIPRU 7.8.2
See Notes
A firm which underwrites or sub-underwrites an issue of securities must, for the purposes of calculating its market risk capital component and its concentration risk capital component:
- (1) identify commitments to underwrite or sub-underwrite which give rise to an underwriting position (see BIPRU 7.8.8R);
- (2) identify the time of initial commitment (see BIPRU 7.8.13R); and
- (3) calculate the net underwriting position (set out in BIPRU 7.8.17R), reduced net underwriting position or the net underwriting exposure.
BIPRU 7.8.3
See Notes
A firm must include the net underwriting position or reduced net underwriting position in whichever one or more of the following is or are relevant:
- (1) BIPRU 7.2.3R (1) where debt securities are being underwritten;
- (2) BIPRU 7.3.2R (1) where equities are being underwritten;
- (3) BIPRU 7.6.22R where warrants are being underwritten; and
- (4) BIPRU 7.5.3R where the equities, debt securities or warrants being underwritten are denominated in a foreign currency.
BIPRU 7.8.4
See Notes
BIPRU 7.8.5
See Notes
BIPRU 7.8.6
See Notes
BIPRU 7.8.7
See Notes
Commitment to underwriting securities
BIPRU 7.8.8
See Notes
- (1) For the purpose of BIPRU 7.8.2R (1), a firm has a commitment to underwrite or sub-underwrite an issue of securities where:
- (a) it gives a commitment to an issuer of securities to underwrite an issue of securities; or
- (b) (where BIPRU 7.8.12R (2) applies) it gives a commitment to a seller of securities to underwrite a sale of those securities;
- (c) it gives a commitment to a person, other than the issuer of securities or, if BIPRU 7.8.12R (2) applies, the seller of the securities, to sub-underwrite an issue of securities; or
- (d) it is a member of a syndicate or group that gives a commitment of the type described in (1)(a)-(c).
- (2) Unless a rule deals with them separately or the context otherwise requires, a provision of BIPRU 7.8 that deals with underwriting also applies to sub-underwriting.
Exclusions from BIPRU 7.8
BIPRU 7.8.9
See Notes
- (1) Block trades, including bought deals, and private placements are not within the scope of BIPRU 7.8 because they involve an outright purchase by the firm of the relevant securities.
- (2) For the purpose of BIPRU 7.8 securities include debt and equity instruments and convertibles but excludes loans.
Grey market transactions
BIPRU 7.8.10
See Notes
- (1) A firm that buys and sells securities before issue is dealing in the grey market for the purposes of BIPRU 7.8.
- (2) BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market unless the firm:
- (a) has an underwriting commitment to the issuer in respect of those securities; or
- (b) has a sub-underwriting commitment in respect of those securities and is using the grey market solely for the purpose of reducing that sub-underwriting commitment.
- (3) BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market if the transaction is undertaken by the proprietary trading part of the firm or is undertaken for proprietary trading purposes.
- (4) BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market except as described in BIPRU 7.8.17R.
BIPRU 7.8.11
See Notes
New securities
BIPRU 7.8.12
See Notes
For the purposes of BIPRU 7.8, a firm must treat securities as being new for the purposes of the definition of underwriting if they are:
- (1) securities that, prior to the allotment following the underwriting, were not in issue; or
- (2) securities that do not fall within (1) but that have not previously been offered for sale or subscription to the public and have not been admitted to trading on a market operated by a recognised investment exchange or an overseas investment exchange.
Time of initial commitment
BIPRU 7.8.13
See Notes
Subject to BIPRU 7.8.14R, the time of initial commitment is the earlier of:
- (1) (in the case of underwriting) the time the firm agrees with the issuer of securities to underwrite those securities; or
- (2) (in the case of underwriting falling under BIPRU 7.8.12R (2)) the time the firm agrees with the seller of securities to underwrite those securities; or
- (3) (in the case of sub-underwriting) the time the firm agrees with the person referred to BIPRU 7.8.8R (1)(c) to sub-underwrite those securities; or
- (4) (in the case of BIPRU 7.8.8R (1)(d)) the time the group or syndicate in question (or a member of that group or syndicate on behalf of the others) agrees with the issuer or other person to whom the commitment is given as referred to in BIPRU 7.8.8R (1)(d) to underwrite or sub-underwrite the securities in question; or
- (5) (if the firm at that time has a commitment, whether legally or binding or not) the time the price and allocation of the issue or offer are set.
BIPRU 7.8.14
See Notes
BIPRU 7.8.15
See Notes
BIPRU 7.8.16
See Notes
Calculating the net underwriting position
BIPRU 7.8.17
See Notes
A firm must calculate a net underwriting position by adjusting the gross amount it has committed to underwrite for:
- (1) any sales or sub-underwriting commitments received that have been confirmed in writing at the time of initial commitment (but excluding any sales in the grey market as defined in BIPRU 7.8.10R (1));
- (2) any underwriting or sub-underwriting commitments obtained from others since the time of initial commitment;
- (3) any purchases or sales of the securities since the time of initial commitment (other than purchases or sales in the grey market as defined in BIPRU 7.8.10R (1));
- (4) (in the case of sales in the grey market as defined in BIPRU 7.8.10R (1)) any sales of the securities as at the time of initial commitment or since the time of initial commitment subject, in both cases, to the following conditions:
- (a) any sales of the securities as at the time of initial commitment must be confirmed in writing at the time of initial commitment; and
- (b) sales must be net of any purchases in the grey market as defined in BIPRU 7.8.10R (1); and
- (5) any allocation of securities granted or received, arising from the commitment to underwrite the securities, since the time of initial commitment.
BIPRU 7.8.18
See Notes
BIPRU 7.8.19
See Notes
BIPRU 7.8.20
See Notes
Over-allotment options
BIPRU 7.8.21
See Notes
- (1) This rule deals with the treatment of short positions that arise when a firm commits to distribute securities that it is underwriting in an amount that exceeds the allocation to the firm made by the issuer of the securities being underwritten.
- (2) When calculating its net underwriting position, a firm may use an over-allotment option granted to it by the issuer of the securities being underwritten to reduce the short positions in (1).
- (3) A firm may also use an over-allotment option granted to another member of the underwriting syndicate for the purpose in (2).
- (4) (2) and (3) only apply from working day 0.
- (5) (2) and (3) only apply to the extent that the treatment is consistent with the terms of the over-allotment option.
BIPRU 7.8.22
See Notes
Working day 0
BIPRU 7.8.23
See Notes
BIPRU 7.8.24
See Notes
BIPRU 7.8.25
See Notes
BIPRU 7.8.26
See Notes
Calculating the reduced net underwriting position
BIPRU 7.8.27
See Notes
To calculate the reduced net underwriting position a firm must apply the reduction factors in the table in BIPRU 7.8.28R to the net underwriting position (calculated under BIPRU 7.8.17R) as follows:
- (1) in respect of debt securities, a firm must calculate two reduced net underwriting positions; one for inclusion in the firm's interest rate PRR specific risk calculation (BIPRU 7.2.43R), the other for inclusion in its interest rate PRR general market risk calculation (BIPRU 7.2.52R); and
- (2) in respect of equities, a firm must calculate only one reduced net underwriting position, and then include it in the simplified equity method (see BIPRU 7.3.29R).
BIPRU 7.8.28
See Notes
This table belongs to BIPRU 7.8.27R
Underwriting timeline | Debt | Equity | |
General market risk | Specific risk | ||
Time of initial commitment until working day 0 | 0% | 100% | 90% |
Working day 1 | 0% | 90% | 90% |
Working day 2 | 0% | 75% | 75% |
Working day 3 | 0% | 75% | 75% |
Working day 4 | 0% | 50% | 50% |
Working day 5 | 0% | 25% | 25% |
Working day 6 and onwards | 0% | 0% | 0% |
BIPRU 7.8.29
See Notes
BIPRU 7.8.30
See Notes
This table belongs to BIPRU 7.8.29G
Time | Net underwriting position (see BIPRU 7.8.17R) | Percentage reduction (see BIPRU 7.8.28R) | Reduced net underwriting position | ||
At initial commitment 9.00am Monday | £100m gross amount is reduced by £20m due to sales/sub-underwriting commitments confirmed in writing at the time of initial commitment (see BIPRU 7.8.17R (1)) and (4)). | = | £80m | 90% | £8m |
Post initial commitment 9.02am Monday | Remaining £80m is reduced by £40m due to further sales, sub-underwriting commitments obtained and allocations granted (see BIPRU 7.8.17R (2) - (5)). | = | £40m | 90% | £4m |
At the end of working day 1 | Remaining £40m is reduced to £20m due to further sales. | = | £20m | 90% | £2m |
End of working day 3 | Remaining £20m is reduced to £5m due to further sales. | = | £5m | 75% | £1.25 m |
End of working day 4 | Remaining £5m is reduced to £2m due to further sales. | = | £2m | 50% | £1m |
End of working day 5 | Remaining £2m is reduced to £1m due to further sales. | = | £1m | 25% | £0.75 m |
Start of working day 6 | £1m remaining | = | £1m | 0% | £1m |
Large exposure risk from underwriting securities: Calculating the net underwriting exposure
BIPRU 7.8.31
See Notes
BIPRU 7.8.32
See Notes
BIPRU 7.8.33
See Notes
BIPRU 7.8.34
See Notes
BIPRU 7.8.35
See Notes
This table belongs to BIPRU 7.8.34R
Time | Reduction factor to be applied to net underwriting position |
Initial commitment to working day 0 | 100% |
Working day 0 | 100% |
Working day 1 | 90% |
Working day 2 | 75% |
Working day 3 | 75% |
Working day 4 | 50% |
Working day 5 | 25% |
Working day 6 onwards | 0% |
BIPRU 7.8.36
See Notes
Large exposure risk from underwriting securities: Monitoring and reporting concentration risk
BIPRU 7.8.37
See Notes
Risk management
BIPRU 7.8.38
See Notes
BIPRU 7.8.39
See Notes
A firm should take reasonable steps to:
- (1) allocate responsibility for the management of its underwriting and sub-underwriting business;
- (2) allocate adequate resources to monitor and control its underwriting and sub-underwriting business;
- (3) satisfy itself that its systems to monitor exposure to counterparties will calculate, revise and update its exposure to each counterparty arising from its underwriting or sub-underwriting business;
- (4) satisfy itself of the suitability of each person who performs functions for it in connection with the firm's underwriting and sub-underwriting business having regard to the person's skill and experience; and
- (5) satisfy itself that its procedures and controls to monitor and manage its underwriting business address, on an on-going basis, the capacity of sub-underwriters to meet sub-underwriting commitments.
BIPRU 7.9
Use of a CAD 1 model
- 01/01/2007
Introduction
BIPRU 7.9.1
See Notes
BIPRU 7.9.2
See Notes
The purpose of BIPRU 7.9 is to provide guidance on the appropriate regulator's policy for granting CAD 1 model waivers under section 138A of the Act (Modification or waiver of rules). The policy recognises that CAD 1 models may vary across firms but, as a minimum, the appropriate regulator will need to be satisfied:
- (1) about the quality of the internal controls and risk management relating to the model (see BIPRU 7.9.19G - BIPRU 7.9.23G for further details);
- (2) about the quality of the model standards; and
- (3) that the CAD 1 model captures and produces an accurate measure of the risks inherent in the portfolio covered by the CAD 1 model (see BIPRU 7.9.25G - BIPRU 7.9.53G for further details).
BIPRU 7.9.3
See Notes
BIPRU 7.9.4
See Notes
BIPRU 7.9.5
See Notes
Scope of CAD 1 models
BIPRU 7.9.6
See Notes
BIPRU 7.9.7
See Notes
This table belongs to BIPRU 7.9.6G
Options risk aggregation models | Interest rate pre-processing models | |
Brief description and eligible instruments | Analyse and aggregate options risks for:
• interest rate options;
• equity options; • foreign currency options; • commodity options; and • CIU options. |
May be used to calculate duration weighted positions for:
• interest rate futures;
• forward rate agreements (FRAs); • forward commitments to buy or sell debt securities; • options, swaps or warrants on interest rates or debt securities and options on such swaps; • amortising bonds; • equity futures, forwards, warrants and options (but only in relation to the interest rate risk inherent in these products); and • foreign currency futures, forwards, swaps and options, but only in relation to the interest rate risk inherent in these products. |
The output and how it is used in the PRR calculation | Depending on the type of model and the requirements in the CAD 1 model waiver granted, the outputs from an options risk aggregation model are used as an input to the market risk capital requirement calculation. | Depending on the type of model and the requirements in the CAD 1 model waiver granted, the individual sensitivity figures produced by this type of CAD 1 model are either input into the calculation of interest rate PRR under the interest rate duration method (see BIPRU 7.2.63R) or are converted into notional position and input into the calculation of interest rate PRR under the interest rate maturity method (see BIPRU 7.2.59R). |
BIPRU 7.9.8
See Notes
Currently the appropriate regulator only envisages allowing recognition for options on CIUs if the CIU satisfies one of the following conditions:
- (1) it is a regulated collective investment scheme; or
- (2) the firm can demonstrate that it has characteristics that are similar to or better than an undertaking in (1) from the point of view of transparency and liquidity.
The CAD 1 model waiver application and review process
BIPRU 7.9.9
See Notes
BIPRU 7.9.10
See Notes
BIPRU 7.9.11
See Notes
BIPRU 7.9.12
See Notes
BIPRU 7.9.13
See Notes
BIPRU 7.9.14
See Notes
BIPRU 7.9.15
See Notes
If the appropriate regulator grants a CAD 1 model waiver, the waiver direction will specify the particular rule which has been modified, and set out the requirements subject to which the waiver has been granted. These requirements may include:
- (1) the details of the calculation of PRR;
- (2) the CAD 1 model waiver methodology to be employed;
- (3) the products covered by the model (e.g. option type, maturity, currency); and
- (4) any notification requirements relating to the CAD 1 model waiver.
BIPRU 7.9.16
See Notes
Maintenance of model recognition
BIPRU 7.9.17
See Notes
BIPRU 7.9.18
See Notes
Risk management standards
BIPRU 7.9.19
See Notes
BIPRU 7.9.20
See Notes
BIPRU 7.9.21
See Notes
- (1) A firm should have a conceptually sound risk management system which is implemented with integrity and should meet the minimum standards set out in this paragraph.
- (2) A firm should have a risk control unit that is independent of business trading units and reports directly to senior management. The unit should be responsible for designing and implementing the firm's risk management system. It should produce and analyse daily reports on the risks run by the business and on the appropriate measures to be taken in terms of the trading limits.
- (3) A firm's senior management should be actively involved in the risk control process and the daily reports produced by the risk control unit should be reviewed by a level of management with sufficient authority to enforce reductions of positions taken by individual traders as well as in the firm's overall risk exposure.
- (4) The risk control group should have a sufficient number of staff with appropriate skills in the use of models.
- (5) A firm should have established procedures for monitoring and ensuring compliance with a documented set of appropriate internal policies and controls concerning the overall operation of the risk measurement and control framework. This should take into account the front, middle and back office functions.
- (6) A firm should conduct, as part of its regular internal audit process, a review of the systems and controls relating to its CAD 1 model. This review should include the valuation process, compliance with the CAD 1 model waiver's scope and the activities of the business trading units and the risk control units. This review should be undertaken by staff independent of the areas being reviewed.
BIPRU 7.9.22
See Notes
In assessing whether the risk management and control framework is implemented with integrity, the appropriate regulator will consider the IT systems used to run the CAD 1 model and associated calculations. The assessment will include, where appropriate:
- (1) feeder systems; risk aggregation systems; the integrity of the data (i.e. whether it is complete, coherent and correct); reconciliations and checks on completeness of capture; and
- (2) system development, change control and documentation; security and audit trails; system availability and contingency procedures; network adequacy.
BIPRU 7.9.23
See Notes
A firm should take appropriate steps to ensure that it has adequate controls relating to:
- (1) the derivation of the PRR from the CAD 1 model output;
- (2) CAD 1 model development, including independent validation;
- (3) reserving;
- (4) valuation (see GENPRU 1.3 (Valuation)), including independent validation; and
- (5) the adequacy of the IT infrastructure.
Model standards
BIPRU 7.9.24
See Notes
Options risk aggregation models
BIPRU 7.9.25
See Notes
BIPRU 7.9.26
See Notes
BIPRU 7.9.27
See Notes
BIPRU 7.9.28
See Notes
BIPRU 7.9.29
See Notes
- (1) This paragraph provides an outline of the initial steps to be taken when using the scenario matrix approach.
- (2) A value for an option should be obtained using the firm's options valuation model.
- (3) The inputs into the options valuation model for implied volatility of the underlying asset and the price of the underlying asset should then be altered so that a new value for the option is obtained (details of the amount by which the implied volatility and the price of the underlying should be amended are set out in BIPRU 7.9.30G - BIPRU 7.9.36G).
- (4) The difference between the original value of the option and the new value obtained following the alterations should be input into the appropriate cell in the matrix. The value in the central cell where there is no change in implied volatility or price of the underlying should therefore be zero.
- (5) The process of obtaining a new price for the option should be repeated until the matrix is completed.
BIPRU 7.9.30
See Notes
BIPRU 7.9.31
See Notes
BIPRU 7.9.32
See Notes
This table belongs to BIPRU 7.9.30G
Remaining life of option | Proportional shift | |
Equities, foreign currency and commodities | Interest rates and CIUs | |
≤ 1 month | 30% | 30% |
> 1 ≤ 3 months | 20% | 20% |
> 3 ≤ 6 months | 15% | 15% |
> 6 ≤ 9 months | 12% | 12% |
> 9 ≤ 12 months | 9% | 9% |
> 1 ≤ 2 years | 6% | 9% |
> 2 ≤ 4 years | 4.5% | 9% |
> 4 years | 3% | 9% |
BIPRU 7.9.33
See Notes
BIPRU 7.9.34
See Notes
This table belongs to BIPRU 7.9.33G
Underlying asset class | Shift |
Equities | ±8% |
Foreign currency | ±8% |
Commodities | ±15%, (but a firm may use the percentages applicable under the commodity extended maturity ladder approach if it would qualify under BIPRU 7.4 (Commodity PRR) to use that approach). |
Interest rates | ±100bp (but a firm may use the sliding scale of shifts by maturity as applicable to the interest rate duration method). |
CIU | ±32%, (but a firm may use the percentages applicable to the underlyings if the firm applies one of the CIU look through methods under BIPRU 7.7 (Position risk requirements for collective investment undertakings)). |
BIPRU 7.9.35
See Notes
BIPRU 7.9.36
See Notes
BIPRU 7.9.37
See Notes
- (1) A different scenario matrix should be set up for each underlying asset type in accordance with this paragraph.
- (2) For equities (including single equities, baskets and indices) there should be a separate matrix for each national market or non-decomposed basket or non-decomposed multi-national index.
- (3) For foreign currency products there should be a separate matrix for each currency pair where appropriate.
- (4) For commodity products there should be a separate matrix for each commodity. The question whether two items are the same commodity should be decided in accordance with BIPRU 7.4 (Commodity PRR).
- (5) For interest rate products there should be a separate matrix for each currency. In addition, a firm should not offset the gamma and vega exposures (except in the circumstances set out in BIPRU 7.9.38G) arising from any one of the following types of product with the gamma and vega exposures arising from any of the other products in the list:
- (a) swaptions (options on interest rates);
- (b) interest rate options (including options on exchange-traded deposit or bill futures);
- (c) bond options (including options on exchange-traded bond futures); and
- (d) other types of options required by the CAD 1 model waiver to form their own separate class of underlying asset.
- (6) The other types of options referred to in (5)(d) will generally be exotic options that do not fall easily into (5)(a) - (c)).
- (7) For CIUs there should be a separate matrix for each CIU fund. If the firm applies one of the CIU look through methods under BIPRU 7.7 (Position risk requirements for collective investment undertakings), then (1) - (6) apply based on what the underlyings are.
BIPRU 7.9.38
See Notes
BIPRU 7.9.39
See Notes
BIPRU 7.9.40
See Notes
BIPRU 7.9.41
See Notes
BIPRU 7.9.42
See Notes
BIPRU 7.9.43
See Notes
Interest rate pre-processing models
BIPRU 7.9.44
See Notes
BIPRU 7.9.45
See Notes
BIPRU 7.9.46
See Notes
BIPRU 7.9.47
See Notes
BIPRU 7.9.48
See Notes
BIPRU 7.9.49
See Notes
This table belongs to BIPRU 7.9.47G
Zone | Modified duration | Assumed interest rate change (percentage points) |
1 | 0 ≤ 1 months | 1.00 |
> 1 ≤ 3 months | 1.00 | |
> 3 ≤ 6 months | 1.00 | |
> 6 ≤ 12 months | 1.00 | |
2 | > 1.0 ≤ 1.9 years | 0.90 |
> 1.9 ≤ 2.8 years | 0.85 | |
> 2.8 ≤ 3.6 years | 0.85 | |
3 | > 3.6 ≤ 4.3 years | 0.75 |
3 | > 4.3 ≤ 5.7 years | 0.70 |
> 5.7 ≤ 7.3 years | 0.70 | |
> 7.3 ≤ 9.3 years | 0.70 | |
> 9.3 ≤ 10.6 years | 0.70 | |
> 10.6 ≤ 12 years | 0.70 | |
> 12.0 ≤ 20 years | 0.70 | |
> 20 years | 0.70 |
BIPRU 7.9.50
See Notes
BIPRU 7.9.51
See Notes
BIPRU 7.9.52
See Notes
BIPRU 7.9.53
See Notes
BIPRU 7.10
Use of a Value at Risk Model
- 01/01/2007
Application
BIPRU 7.10.1
See Notes
Introduction and purpose
BIPRU 7.10.2
See Notes
BIPRU 7.10.3
See Notes
BIPRU 7.10.4
See Notes
BIPRU 7.10.5
See Notes
BIPRU 7.10.6
See Notes
Conditions for granting a VaR model permission
BIPRU 7.10.7
See Notes
BIPRU 7.10.8
See Notes
BIPRU 7.10 sets out the minimum standards that the appropriate regulator expects firms to meet before granting a VaR model permission. The appropriate regulator will not grant a VaR model permission unless it is satisfied that the requirements of BIPRU 7.10 are met and it is satisfied about the procedures in place at a firm to calculate the model PRR. In particular the appropriate regulator will not normally grant a VaR model permission unless it is satisfied about the quality of:
- (1) the internal controls and risk management relating to the VaR model (see BIPRU 7.10.56G - BIPRU 7.10.82R);
- (2) the VaR model standards (see BIPRU 7.10.24R-BIPRU 7.10.55G); and
- (3) stress testing and backtesting procedures relating to a VaR model (see, in addition to (2), BIPRU 7.10.83R - BIPRU 7.10.112G).
BIPRU 7.10.9
See Notes
The VaR model permission application and review process
BIPRU 7.10.10
See Notes
BIPRU 7.10.11
See Notes
BIPRU 7.10.12
See Notes
BIPRU 7.10.13
See Notes
BIPRU 7.10.14
See Notes
BIPRU 7.10.15
See Notes
Conditions for a VaR model outside the United Kingdom
BIPRU 7.10.16
See Notes
BIPRU 7.10.17
See Notes
Scope of VaR models
BIPRU 7.10.18
See Notes
A firm must use the VaR model approach to calculate the PRR for a position:
- (1) to the extent that the risks in relation to that position are within the scope of the VaR model permission (see BIPRU 7.10.136R (Link to standard PRR rules: Incorporation of the model output into the capital calculation)); and
- (2) if the position is of a type that comes within the scope of the VaR model permission.
BIPRU 7.10.19
See Notes
In accordance with BIPRU 7.10.18R (1) a VaR model permission will set out the risk categories that it covers, which are expected to be one or more of the following types:
- (1) interest rate general market risk;
- (2) interest rate specific risk (in conjunction with interest rate general market risk);
- (3) equity general market risk;
- (4) equity specific risk (in conjunction with equity general market risk);
- (5) CIU risk;
- (6) foreign currency risk; and
- (7) commodity risk.
BIPRU 7.10.20
See Notes
BIPRU 7.10.21
See Notes
The broad classes of position referred to in BIPRU 7.10.20G are as follows:
- (1) linear products, which comprise securities with linear pay-offs (e.g. bonds and equities) and derivative products which have linear pay-offs in the underlying risk factor (e.g. interest rate swaps, FRAs, total return swaps);
- (2) European, American and Bermudan put and call options (including caps, floors and swaptions) and investments with these features (see BIPRU 7.6.18R (Table: Option PRR: methods for different types of option) for an explanation of some of these terms);
- (3) Asian options, digital options, single barrier options, double barrier options, lookback options, forward starting options, compound options and investments with these features (see BIPRU 7.6.18R for an explanation of some of these terms); and
- (4) all other option based products (e.g. basket options, quantos, outperformance options, timing options) and investments with these features (see BIPRU 7.6.18R for an explanation of some of these terms).
BIPRU 7.10.22
See Notes
BIPRU 7.10.23
See Notes
Model standards: General
BIPRU 7.10.24
See Notes
BIPRU 7.10.25
See Notes
Model standards: Frequency of calculations and confidence level
BIPRU 7.10.26
See Notes
BIPRU 7.10.27
See Notes
BIPRU 7.10.27A
See Notes
Model standards: Holding period
BIPRU 7.10.28
See Notes
BIPRU 7.10.29
See Notes
Model standards: Observation period
BIPRU 7.10.30
See Notes
BIPRU 7.10.30A
See Notes
BIPRU 7.10.30B
See Notes
Model standards: Data series
BIPRU 7.10.31
See Notes
BIPRU 7.10.32
See Notes
BIPRU 7.10.33
See Notes
- (1) If a weighting scheme or other similar method is used to calculate VaR numbers, then the effective observation period must be at least one year. Where a weighting scheme is used, the weighted average time lag of the individual observations must not be less than six Months.
- (2) If a specific observation period or weighted average time lag is specified in a firm's VaR model permission, the firm must comply with that if it is longer than the period specified in (1).
- (3) However, if a weighting scheme in (1) or (2) would result in imprudent VaR numbers then the weighting scheme must be adjusted so that it is consistent with a prudent VaR number.
BIPRU 7.10.34
See Notes
BIPRU 7.10.35
See Notes
Model standards: Aggregation across risk categories
BIPRU 7.10.36
See Notes
BIPRU 7.10.37
See Notes
In aggregating VaR measures across risk or product categories, a firm must not use the square root of the sum of the squares approach unless the assumption of zero correlation between these categories is empirically justified. If correlations between risk categories are not empirically justified, the VaR measures for each category must simply be added in order to determine its aggregate VaR measure. But to the extent that a firm's VaR model permission provides for a different way of aggregating VaR measures:
- (1) that method applies instead of this rule; and
- (2) if the correlations between risk categories used for that purpose cease to be empirically justified then the firm must notify the appropriate regulator at once.
Model standards: Risk factors: Introduction
BIPRU 7.10.38
See Notes
Model standards: Risk factors: General
BIPRU 7.10.39
See Notes
BIPRU 7.10.39A
See Notes
BIPRU 7.10.39B
See Notes
BIPRU 7.10.40
See Notes
BIPRU 7.10.41
See Notes
BIPRU 7.10.42
See Notes
BIPRU 7.10.43
See Notes
BIPRU 7.10.44
See Notes
- (1) For CIUs the actual foreign currency positions of the CIU must be taken into account.
- (2) A firm may rely on third party reporting of the foreign currency position of the CIU, where the correctness of this report is adequately ensured.
- (3) If a firm is not aware of the foreign currency positions in a CIU, this position must be carved out and treated in BIPRU 7.5.18R (Derivation of notional positions in CIUs for the foreign currency PRR).
BIPRU 7.10.45
See Notes
- (1) This paragraph contains guidance on the inclusion of CIUs in a VaR model.
- (2) The appropriate regulator may allow all types of CIU to be included within the scope of a firm's VaR model permission.
- (3) BIPRU 7.10 does not distinguish between specific risk and general market risk for positions in CIUs. Therefore even if specific risk is not otherwise included within the scope of a firm's VaR model permission, a firm should be able to demonstrate that its VaR model captures specific risk.
- (4) A firm should also be able to demonstrate that its VaR model adequately captures correlations, concentration risk and risks associated with the illiquidity of the CIU itself should this be deemed necessary (see BIPRU 7.10.32G).
- (5) A firm may use a look-through approach, under which the VaR model estimates are based on the underlying positions. If a firm uses a look through approach it should also ensure that all the relevant risk factors relating to the underlying positions are captured. BIPRU 7.7 (Position risk requirements for collective investment undertakings) sets out rules relating to the look through approach when a firm is using the VaR model approach.
Model standards: Risk factors: Specific risk
BIPRU 7.10.46
See Notes
- (1) If a firm's VaR model covers the calculation of PRR with respect to specific risk the firm must meet the VaR specific risk minimum requirements in addition to the other requirements of BIPRU 7.10.
- (2) The VaR model must explain the historical price variation in the portfolios concerned.
- (3) The VaR model must capture concentration in terms of magnitude and changes of composition of the portfolios concerned.
- (4) The VaR model must be robust to an adverse environment.
- (5) The VaR model must capture name-related basis risk. That is the firm must be able to demonstrate that the VaR model is sensitive to material idiosyncratic differences between similar but not identical positions.
- (6) The VaR model must capture event risk.
- (7) In addition to the other requirements in BIPRU 7.10, a firm must have an approach in place to capture, in the calculation of its capital requirements, the incremental risk charge of its trading book positions that is incremental to the default and migration risk captured by the VaR measures, as specified in BIPRU 7.10.55A R to BIPRU 7.10.55S G and BIPRU 7.10.107R (Backtesting: Specific risk backtesting).
- (8) [deleted]
BIPRU 7.10.47
See Notes
BIPRU 7.10.48
See Notes
- (1) [deleted]
- (2) A firm's VaR model must conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios. In addition, the VaR model must meet minimum data standards. Proxies must be appropriately conservative and may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio.
BIPRU 7.10.49
See Notes
Model standards: Materiality
BIPRU 7.10.53
See Notes
BIPRU 7.10.54
See Notes
BIPRU 7.10.55
See Notes
Incremental risk charge: Scope and parameters
BIPRU 7.10.55A
See Notes
BIPRU 7.10.55B
See Notes
BIPRU 7.10.55C
See Notes
BIPRU 7.10.55D
See Notes
BIPRU 7.10.55E
See Notes
Incremental risk charge: Liquidity horizons
BIPRU 7.10.55F
See Notes
- (1) The firm's liquidity horizons for calculating incremental risk charge must be set according to the time required to sell the position or to hedge all material and relevant price risks in a stressed market, having particular regard to the size of the position.
- (2) Liquidity horizons must reflect actual practice and experience during periods of both systematic and idiosyncratic stresses. The liquidity horizon must be measured under conservative assumptions and must be sufficiently long that the act of selling or hedging, in itself, would not materially affect the price at which the selling or hedging would be executed.
BIPRU 7.10.55G
See Notes
BIPRU 7.10.55H
See Notes
BIPRU 7.10.55I
See Notes
Incremental risk charge: Hedges
BIPRU 7.10.55J
See Notes
- (1) Hedges may be incorporated into the calculation of a firm's incremental risk charge. Positions may be netted only when long and short positions refer to the same financial instrument.
- (2) Hedging or diversification effects associated with long and short positions involving different instruments or different securities of the same obligor, as well as long and short positions in different issuers, may only be recognised by explicitly modelling gross long and short positions in the different instruments.
- (3) A firm must reflect the impact of material risks that could occur during the interval between the hedge's maturity and the liquidity horizon, as well as the potential for significant basis risks in hedging strategies by product, seniority in the capital structure, internal or external rating, maturity, vintage and other differences in the instruments. A firm must reflect a hedge only to the extent that it can be maintained even as the obligor approaches a credit or other event.
BIPRU 7.10.55K
See Notes
For trading book positions that are hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the hedged position may be recognised only if the firm:
- (1) chooses to model rebalancing of the hedge consistently over the relevant set of trading book positions;
- (2) demonstrates that the inclusion of rebalancing results in a better risk measurement;
- (3) demonstrates that the markets for the instruments serving as hedges are liquid enough to allow for this rebalancing even during periods of stress; and
- (4) reflects in the capital charge any residual risks resulting from dynamic hedging strategies.
Incremental risk charge: Nonlinear positions and model risk
BIPRU 7.10.55L
See Notes
- (1) The incremental risk charge must reflect the nonlinear impact of options, structured credit derivatives and other positions with material nonlinear behaviour with respect to price changes.
- (2) The firm must also consider the amount of model risk inherent in the valuation and estimation of price risks associated with those products.
BIPRU 7.10.55M
See Notes
Incremental risk charge: Validation
BIPRU 7.10.55N
See Notes
A firm must validate its approach to incremental risk charge. In particular, a firm must:
- (1) validate that its modelling approach for correlations and price changes is appropriate for its portfolio, including the choice and weights of its systematic risk factors;
- (2) perform a variety of stress tests (not limited to the range of events experienced historically), including sensitivity analysis and scenario analysis, to assess the qualitative and quantitative reasonableness of the approach, with particular regard to the treatment of concentrations; and
- (3) apply appropriate quantitative validation including relevant internal modelling benchmarks.
BIPRU 7.10.55O
See Notes
Incremental risk charge: Documentation and frequency of calculation
BIPRU 7.10.55P
See Notes
BIPRU 7.10.55Q
See Notes
Incremental risk charge: Internal approaches based on different parameters
BIPRU 7.10.55R
See Notes
A firm may use an approach for incremental risk charge that does not comply with all the requirements in BIPRU 7.10.55A R to BIPRU 7.10.55P R, only if:
- (1) such an approach is consistent with the firm's internal methodologies for identifying, measuring, and managing risks; and
- (2) the firm can demonstrate that its approach results in a capital requirement that is at least as high as it would be if based on an approach in full compliance with the requirements in BIPRU 7.10.55A R to BIPRU 7.10.55P R.
BIPRU 7.10.55S
See Notes
All price risk measure: General requirements
BIPRU 7.10.55T
See Notes
As part of its VaR model permission, the appropriate regulator may authorise a firm to use the all price risk measure to calculate an additional capital charge in relation to positions in its correlation trading portfolio if it meets the following minimum standards:
- (1) it adequately captures all price risks at a 99.9% confidence interval over a capital horizon of one year under the assumption of a constant level of risk, and adjusted, where appropriate, to reflect the impact of liquidity, concentrations, hedging and optionality;
- (2) it adequately captures the following risks:
- (a) the cumulative risk arising from multiple defaults, including the ordering of defaults, in tranched products;
- (b) credit spread risk, including the gamma and cross-gamma effects;
- (c) volatility of implied correlations, including the cross effect between spreads and correlations;
- (d) basis risk, including both:
- (i) the basis between the spread of an index and those of its constituent single names; and
- (ii) the basis between the implied correlation of an index and that of bespoke portfolios;
- (e) recovery-rate volatility, as it relates to the propensity for recovery rates to affect tranche prices; and
- (f) to the extent that the all price risk measure incorporates benefits from dynamic hedging, the risk of hedge slippage and the potential costs of rebalancing those hedges.
BIPRU 7.10.55U
See Notes
BIPRU 7.10.55V
See Notes
BIPRU 7.10.55W
See Notes
BIPRU 7.10.55X
See Notes
BIPRU 7.10.55Y
See Notes
All price risk measure: Stress testing
BIPRU 7.10.55Z
See Notes
- (1) For positions within its correlation trading portfolio in relation to which a firm may use the all price risk measure, a firm must regularly apply a set of specific, predetermined stress scenarios. These stress scenarios must examine the effects of stress to default rates, recovery rates, credit spreads, and correlations on the profit and loss of the correlation trading portfolio.
- (2) A firm must apply the stress scenarios in (1) at least weekly and report the results to the appropriate regulator in accordance with BIPRU 7.10.129 R.
BIPRU 7.10.55ZA
See Notes
BIPRU 7.10.55ZB
See Notes
BIPRU 7.10.55ZC
See Notes
Risk management standards: Introduction
BIPRU 7.10.56
See Notes
BIPRU 7.10.57
See Notes
Risk management standards: General requirement
BIPRU 7.10.58
See Notes
Risk management standards: Use requirement
BIPRU 7.10.59
See Notes
BIPRU 7.10.60
See Notes
BIPRU 7.10.61
See Notes
Risk management standards: Risk control unit
BIPRU 7.10.62
See Notes
A firm must have a risk control unit which is independent from business trading units and which reports directly to senior management. It:
- (1) must be responsible for designing and implementing the firm's risk management system;
- (2) must produce and analyse daily reports on the output of the VaR model and on the appropriate measures to be taken in terms of the trading limits; and
- (3) conduct the initial and on-going validation of the VaR model.
Risk management standards: Senior management
BIPRU 7.10.63
See Notes
BIPRU 7.10.64
See Notes
Risk management standards: Skilled staff
BIPRU 7.10.65
See Notes
Risk management standards: Controls and compliance
BIPRU 7.10.66
See Notes
A firm must establish, document and maintain policies, controls and procedures to an auditable standard:
- (1) concerning the operation of its VaR model approach; and
- (2) for monitoring and ensuring compliance with the policies, controls and procedures in (1).
Risk management standards: Documentation
BIPRU 7.10.67
See Notes
BIPRU 7.10.68
See Notes
- (1) An example of documents required by BIPRU 7.10.67R may be a manual that describes the basic principles of the risk management framework, clearly setting out empirical techniques, principles and assumptions used within it.
- (2) This documentation should be of sufficient detail for the appropriate regulator to be able to develop a clear understanding of how the VaR model works from that documentation on its own.
Risk management standards: Track record
BIPRU 7.10.69
See Notes
Risk management standards: Development validation
BIPRU 7.10.70
See Notes
BIPRU 7.10.71
See Notes
Risk management standards: Stress testing
BIPRU 7.10.72
See Notes
- (1) A firm must frequently conduct a rigorous programme of stress testing. The results of these tests must be reviewed by senior management and reflected in the policies and limits the firm sets.
- (2) The programme must particularly address:
- (a) concentration risk;
- (b) illiquidity of markets in stressed market conditions;
- (c) one way markets;
- (d) event and jump to default risks;
- (e) non linearity of products;
- (f) deep out of the money positions;
- (g) positions subject to the gapping of prices;
- (h) full revaluation, or a reliable approximation, of positions;
- (i) instant shocks as well as effects of longer term periods of stress;
- (j) calibration changes under stressed conditions;
- (k) secondary risk factors (such as volatility);
- (l) basis risk;
- (m) systemic and localised stresses; and
- (n) other risks that may not be captured appropriately in the VaR model (for example, recovery rate uncertainty, implied correlations and skew risk).
- (3) The shocks applied must reflect the nature of the portfolios and the time it could take to hedge out or manage risks under severe market conditions.
BIPRU 7.10.73
See Notes
BIPRU 7.10.73A
See Notes
Risk management standards: Valuation
BIPRU 7.10.74
See Notes
Risk management standards: Risk review
BIPRU 7.10.75
See Notes
At least once a year, a firm must conduct, as part of its regular internal audit process, a review of its risk management process. This review must include both the activities of the business trading units and of the independent risk control unit, and must be undertaken by suitably qualified staff independent of the areas being reviewed. This review must consider, at a minimum:
- (1) the adequacy of the documentation of the risk management system and process;
- (2) the organisation of the risk control unit;
- (3) the integration of market risk measures into daily risk management;
- (4) the integrity of the management information system;
- (5) the process for approving risk pricing models and valuation systems used in front and back offices;
- (6) the validation of any significant changes in the risk management process;
- (7) the scope of risks and products captured by the VaR model;
- (8) the accuracy and completeness of position data;
- (9) the process used to ensure the consistency, timeliness, independence and reliability of data sources (including the independence of such data sources);
- (10) the accuracy and appropriateness of volatility and correlation assumptions;
- (11) reserving policies and the accuracy of the valuation procedures and risk sensitivity calculations;
- (12) the process employed to evaluate the VaR model's accuracy, including the programme of backtesting;
- (13) the controls surrounding the development of the VaR model; and
- (14) the process employed to produce the calculation of the model PRR.
Risk management standards: Validation and backtesting
BIPRU 7.10.76
See Notes
BIPRU 7.10.77
See Notes
BIPRU 7.10.78
See Notes
A firm must have processes in place to ensure that its VaR model has been adequately validated by suitably qualified parties independent of the development process to ensure that it is conceptually sound and adequately captures all material risks. This validation must be conducted when the VaR model is initially developed and when any significant changes are made to the VaR model. The validation must also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the VaR model no longer being adequate. As techniques and best practices evolve, a firm must avail itself of these advances. Model validation must not be limited to backtesting, but must, at a minimum, also include the following:
- (1) tests to demonstrate that any assumptions made within the VaR model are appropriate and do not underestimate or overestimate the risk (including testing of the validity of the assumptions and approximations underlying the VaR model);
- (2) in addition to the regulatory backtesting programmes, a firm must carry out its own model validation tests in relation to the risks and structures of its portfolios, such as statistical validation techniques and other methods of measuring performance and validity;
- (3) the use of hypothetical portfolios to ensure that the VaR model is able to account for particular structural features that may arise, for example material basis risks and concentration risk; and
- (4) investigation of the limitations of the VaR model including testing of the accuracy of parts of the VaR model as well as of the whole.
BIPRU 7.10.79
See Notes
- (1) In addition to regulatory backtesting programs, testing for model validation should be carried out using additional tests which may include for example:
- (a) testing carried out using hypothetical changes in portfolio value that would occur were end of day positions to remain unchanged;
- (b) testing carried out for longer periods than required for the regular backtesting programme (for example, 3 years);
- (c) testing carried out using confidence intervals other than the 99 percent interval required under the quantitative requirements in BIPRU 7.10; and
- (d) testing of parts of portfolios.
- (2) A longer time period generally improves the power of backtesting. However a longer time period may not be desirable if the VaR model or market conditions have changed to the extent that historical data is no longer relevant.
BIPRU 7.10.80
See Notes
Risk management standards: Information technology
BIPRU 7.10.81
See Notes
In assessing whether the VaR model is implemented with integrity as described in BIPRU 7.10.58R (Stress testing), the appropriate regulator will consider in particular the information technology systems used to run the model and associated calculations. The assessment may include:
- (1) feeder systems; risk aggregation systems; time series databases; the VaR model system; stress testing system; the backtesting system including profit and loss cleaning systems where appropriate; data quality; reconciliations and checks on completeness of capture;
- (2) system development, change control and documentation; security and audit trails; system availability and contingency procedures; network adequacy; and
- (3) operational statistics relating to the VaR model production process, including, for example, statistics relating to timeliness, number of re-runs required and the reliability of data feeds.
Risk management standards: Controls
BIPRU 7.10.82
See Notes
A firm must ensure that it has adequate controls relating to:
- (1) the derivation of the model PRR;
- (2) the integrity of the backtesting programme, including the calculation of the profit and loss account;
- (3) the integrity and appropriateness of the VaR model, including the VaR model's geographic coverage and the completeness of data sources;
- (4) the VaR model's initial and ongoing development, including independent validation;
- (5) the valuation models, including independent validation; and
- (6) the adequacy, security and integrity of the information technology infrastructure.
Stress testing
BIPRU 7.10.83
See Notes
BIPRU 7.10.84
See Notes
BIPRU 7.10.85
See Notes
BIPRU 7.10.86
See Notes
BIPRU 7.10.87
See Notes
BIPRU 7.10.88
See Notes
BIPRU 7.10.89
See Notes
A firm must have procedures to assess and respond to the results produced from stress testing. In particular, stress testing results must be:
- (1) used to evaluate its capacity to absorb such losses or identify steps to be taken to reduce risk; and
- (2) communicated routinely to senior management and periodically to the governing body.
BIPRU 7.10.90
See Notes
BIPRU 7.10.90A
See Notes
Backtesting: Introduction
BIPRU 7.10.91
See Notes
BIPRU 7.10.92
See Notes
BIPRU 7.10.93
See Notes
BIPRU 7.10.94
See Notes
BIPRU 7.10.94A
See Notes
BIPRU 7.10.95
See Notes
Backtesting: Basic testing requirements
BIPRU 7.10.96
See Notes
BIPRU 7.10.97
See Notes
Backtesting: One day VaR measure
BIPRU 7.10.98
See Notes
Backtesting: Calculating the profit and loss
BIPRU 7.10.99
See Notes
BIPRU 7.10.100
See Notes
The profit and loss figure for a particular business day is the firm's actual profit or loss for that day in respect of the trading activities within the scope of the firm's VaR model permission, adjusted by stripping out:
- (1) fees and commissions;
- (2) brokerage;
- (3) additions to and releases from reserves which are not directly related to market risk (e.g. administration reserves); and
- (4) any inception profit exceeding an amount specified for this purpose in the firm's VaR model permission (where inception profit is defined as any profit arising immediately on entering into a new transaction).
BIPRU 7.10.101
See Notes
BIPRU 7.10.102
See Notes
Backtesting: Definition of backtesting exception
BIPRU 7.10.103
See Notes
Backtesting: Obligation to notify the appropriate regulator
BIPRU 7.10.104
See Notes
Backtesting: Summary of the backtesting cycle
BIPRU 7.10.105
See Notes
- (1) This paragraph gives guidance on the backtesting calculation and reporting process in BIPRU 7.10.96R - BIPRU 7.10.104R.
- (2) Let the day on which the loss referred to in BIPRU 7.10.100R is made be day n. The value-at-risk measure for that day will be calculated on day n-1, or overnight between day n-1 and day n. Profit and loss figures are produced on day n+1, and backtesting also takes place on day n+1. The firm's supervisor should be notified of any backtesting exceptions by close of business on day n+2.
- (3) Any backtesting exception initially counts for the purpose of the calculation of the plus factor even if subsequently the appropriate regulator agrees to exclude it under the process described in BIPRU 7.10.106G. Thus, where the firm experiences a backtesting exception and already has four or more backtesting exceptions for the previous 250 business days, changes to the multiplication factor arising from changes to the plus factor become effective at n+3 (using the time-line terminology in (2)).
Backtesting: Process for disregarding backtesting exceptions
BIPRU 7.10.106
See Notes
- (1) This paragraph gives guidance on the process for excluding backtesting exceptions as referred to in BIPRU 7.10.103R.
- (2) The appropriate regulator will respond flexibly to backtesting exceptions. However, the appropriate regulator's starting assumption will be that a backtesting exception should be taken into account for the purpose of the calculation of plus factors. If the firm believes that a backtesting exception should not count for that purpose, then it should seek a variation of its VaR model permission in order to exclude that particular backtesting exception. The appropriate regulator will then decide whether to agree to such a variation.
- (3) One example of when a firm's backtesting exception might properly be disregarded is when it has arisen as a result of a risk that is not captured in its VaR model but against which capital resources are already held.
Backtesting: Specific risk backtesting
BIPRU 7.10.107
See Notes
BIPRU 7.10.108
See Notes
Backtesting: Multiple exceptions
BIPRU 7.10.109
See Notes
BIPRU 7.10.110
See Notes
Backtesting: Hypothetical profit and loss
BIPRU 7.10.111
See Notes
BIPRU 7.10.112
See Notes
- (1) A hypothetical profit and loss figure is based on the day's change in the value of the same portfolio that was used to generate the value-at-risk forecast.
- (2) [deleted]
- (3) The firm may also need to calculate a hypothetical profit and loss figure in order to produce profit attribution reports and to analyse the cause of backtesting exceptions.
BIPRU 7.10.112A
See Notes
Capital calculations: General
BIPRU 7.10.113
See Notes
- The model PRR is, for any business day (the "relevant" business day), calculated in accordance with the following formula:
- (1) the higher of:
- (a) the VaR number for the relevant business day; and
- (b) the average of its daily VaR numbers for each of the 60 business days ending with the relevant business day, multiplied by the multiplication factor for the relevant business day; and
- (2) (in the case of a VaR model permission that covers specific risk) the higher of:
- (a) the incremental risk charge for the relevant business day; and
- (b) the average of the twelve-week incremental risk charge; and
- (3) the higher of:
- (a) the latest stressed VaR number; and
- (b) the average of the firm's daily stressed VaR number for the 60 business days ending with the relevant business day, multiplied by the multiplication factor applied to the stressed VaR measure for the relevant business day; and
- (4) (in the case of a VaR model permission that covers all price risk measure) the higher of:
- (a) the all price risk measure for the relevant business day; and
- (b) the average of the twelve-week all price risk measure.
BIPRU 7.10.114
See Notes
BIPRU 7.10.115
See Notes
BIPRU 7.10.116
See Notes
BIPRU 7.10.116A
See Notes
BIPRU 7.10.117
See Notes
The following equation expresses BIPRU 7.10.113R mathematically:
where:
- (1) PRR Var is a firm's model PRR;
- (2) VaR t represents the previous day's value-at-risk figure;
- (3) VaR t-i represents the value-at-risk calculated for i business days earlier;
- (4) f is the multiplication factor for VaR;
- (5) SVAR t represents the latest stressed VaR figure;
- (6) SVAR t-i represents the stressed VaR calculated for i business days earlier;
- (7) s is the multiplication factor for stressed VaR;
- (8) y is the number of times the stressed VaR was calculated in the last 60 business days;
- (9) IRC t represents the latest incremental risk charge;
- (10) IRC t-i represents the incremental risk charge calculated for i business days earlier;
- (11) z is the number of times the incremental risk charge was calculated in the last 12 weeks;
- (12) APR t represents the latest all price risk measure;
- (13) APR t-i represents the all price risk measure calculated for i business days earlier; and
- (14) w is the number of times the all price risk measure was calculated in the last 12 weeks.
Capital calculations: Multiplication factors
BIPRU 7.10.118
See Notes
BIPRU 7.10.119
See Notes
BIPRU 7.10.120
See Notes
BIPRU 7.10.121
See Notes
BIPRU 7.10.122
See Notes
BIPRU 7.10.123
See Notes
BIPRU 7.10.124
See Notes
BIPRU 7.10.125
See Notes
This table belongs to BIPRU 7.10.124R
Zone | Number of recorded exceptions | Plus factor |
Green | 4 or less | 0.00 |
Yellow | 5 | 0.40 |
6 | 0.50 | |
7 | 0.65 | |
8 | 0.75 | |
9 | 0.85 | |
Red | 10 or more | 1.00 |
BIPRU 7.10.126
See Notes
Capital calculations: Specific risk surcharge: transitional requirements
BIPRU 7.10.127
See Notes
Reporting procedures and requirements
BIPRU 7.10.128
See Notes
BIPRU 7.10.129
See Notes
A firm must, no later than the number of business days after the end of each quarter specified in the VaR model permission for this purpose, submit, in respect of that quarter, a report to the appropriate regulator about the operation of the VaR model, the systems and controls relating to it and any changes to the VaR model and those systems and controls. Each report must outline as a minimum the following information in respect of that quarter:
- (1) methodological changes and developments to the VaR model;
- (2) the introduction of all new pricing models used in connection with the VaR model and any changes to any pricing models used in connection with the VaR model, including details of any material associated valuation or risk management issues;
- (3) a summary of backtesting performance against profit and loss figures (if calculated) and hypothetical profit and loss figures, which must be provided in electronic format as stipulated by the VaR model permission;
- (4) (if the VaR model permission covers specific risk) the results of the specific risk backtesting including specific risk backtesting exceptions;
- (5) any change to any feeder or pre-processing systems in connection with the VaR model, including changes to any of the systems set out in the list described in BIPRU 7.10.131G (1) (as it exists at the date of the VaR model permission), and any introduction of a new such system;
- (6) any changes to the products coming within the scope of the VaR model;
- (7) any material changes or additions to any of the matters referred to in the firm's internal documentation in relation to the VaR model (as it exists at the date of the VaR model permission) or to any matters subsequently notified under (7);
- (8) any changes in senior management;
- (9) an up-to-date list of products covered by the VaR model permission showing all changes made since the VaR model permission was granted;
- (10) where applicable (nil returns are not required), details of:
- (a) any use of a changed historical observation period in accordance with BIPRU 7.10.30R or any change in the use of any weighting scheme as described in BIPRU 7.10.33R;
- (b) any data series becoming unreliable as described in BIPRU 7.10.31R and any subsequent use of alternative value-at-risk measurement techniques;
- (c) the frequency of updating data sets being increased in accordance with BIPRU 7.10.34R;
- (d) any change in the method employed to derive 10-day VaR measure (see BIPRU 7.10.28R);
- (e) to the extent that the use of correlations is permitted by a firm's VaR model permission, a summary of any notifications that are required under BIPRU 7.10.37R; and
- (f) the VaR model not accurately capturing risks (as referred to in BIPRU 7.10.53R) and any steps taken under BIPRU 7.10.53R; and
- (11) the results of the stress tests on the firm's correlation trading portfolio under BIPRU 7.10.55Z R, including a comparison to the current capital charge.
BIPRU 7.10.130
See Notes
Updating the VaR model permission
BIPRU 7.10.131
See Notes
The VaR model permission will generally contain a list of the following:
- (1) feeder systems and pre-processing systems;
- (2) products covered by the VaR model permission; and
- (3) the firm's internal documentation in relation to the VaR model.
BIPRU 7.10.132
See Notes
Link to standard PRR rules: Incorporation of the model output into the capital calculation
BIPRU 7.10.133
See Notes
BIPRU 7.10.134
See Notes
BIPRU 7.10.135
See Notes
BIPRU 7.10.136
See Notes
- (1) This rule applies to a position of a type that comes within the scope of a firm's VaR model permission.
- (2) Subject to BIPRU 7.10.136A R, if, where the standard market risk PRR rules apply, a position is subject to a PRR charge and the firm's VaR model permission says that it covers the risks to which that PRR charge relates, the firm must, for those risks, calculate the PRR for that position under the VaR model approach rather than under the standard market risk PRR rules.
- (3) If, where the standard market risk PRR rules apply, a position is subject to one or more PRR charges and the firm's VaR model permission does not cover all the risks to which those PRR charges relate, the firm must calculate the PRR for that position under the VaR model approach (for those risks that are covered) and under the standard market risk PRR rules (for those other risks).
- (4) Where the standard market risk PRR rules distinguish between specific risk and general market risk a firm's VaR model permission covers specific risk to the extent that it says it does. If the firm's VaR model permission does not cover specific risk, BIPRU 7.10.143R and BIPRU 7.10.144R apply.
- (5) If a firm's VaR model permission covers positions in CIUs it covers specific risk with respect to those positions.
BIPRU 7.10.136A
See Notes
BIPRU 7.10.137
See Notes
BIPRU 7.10.138
See Notes
- (1) If a firm calculates its market risk capital requirement using a combination of the standard market risk PRR rules and either the VaR model approach or the VaR model approach with the CAD 1 model approach the PRR from each method must be added together.
- (2) A firm must take appropriate steps to ensure that all of the approaches are applied in a consistent manner.
BIPRU 7.10.139
See Notes
BIPRU 7.10.140
See Notes
If:
- (1) the standard market risk PRR rules provide for a choice of which of the PRR charges to use or specify that one type must be used in some circumstances and that another type must be used in other circumstances;
- (2) one of those types is disapplied under BIPRU 7.10.136R; and
- (3) the other type is not disapplied;
- (4) must use the VaR model approach if under the standard market risk PRR rules the firm must use the standard market risk PRR rules in (2); and
- (5) may use the VaR model approach if under the standard market risk PRR rules the firm may use the standard market risk PRR rules in (2).
BIPRU 7.10.141
See Notes
BIPRU 7.10.142
See Notes
Link to standard PRR rules: General market risk only
BIPRU 7.10.143
See Notes
Link to standard PRR rules: General market risk only
BIPRU 7.10.144
See Notes
Link to standard PRR rules: Miscellaneous
BIPRU 7.10.145
See Notes
- (1) To the extent that a firm's VaR model permission does not allow it to use an approach set out in BIPRU 7.10 the relevant provisions in BIPRU 7.10 do not apply to that firm.
- (2) If a provision of the Handbook refers to BIPRU 7.10, that reference must, in the case of a particular firm with a VaR model permission, be treated as excluding provisions of BIPRU 7.10 that do not apply under the VaR model permission and as taking into account any modifications to BIPRU 7.10 made by the VaR model permission. Such references also include requirements and conditions contained in the VaR model permission but not BIPRU 7.10 and to the rules modified by the VaR model permission.
Requirement to use value at risk methodology
BIPRU 7.10.146
See Notes
Ceasing to meet the requirements of BIPRU 7.10
BIPRU 7.10.147
See Notes
BIPRU 7.10.148
See Notes
Changes to a VaR model
BIPRU 7.10.149
See Notes
A firm may change its VaR model to such extent as it sees fit, except that it must not make a change that (either on its own or together with other changes since the date of VaR model permission) would:
- (1) be inconsistent with VaR model permission or BIPRU 7.10; or
- (2) mean that backtesting in accordance with BIPRU 7.10 and the VaR model permission would result in the use of data that is inappropriate for the purposes of measuring the performance of the VaR model.
BIPRU 7.11
Credit derivatives in the trading book
- 01/01/2007
Scope
BIPRU 7.11.1
See Notes
Establishment of positions created by credit derivatives: Treatment of the protection seller
BIPRU 7.11.2
See Notes
BIPRU 7.11.3
See Notes
- (1) When calculating the PRR of the protection seller, unless specified differently by other rules and subject to (2), the notional amount of the credit derivative contract must be used. For the purpose of calculating the specific risk PRR charge, other than for total return swaps, the maturity of the credit derivative contract is applicable instead of the maturity of the obligation.
- (2) When calculating the PRR of the protection seller, a firm may choose to replace the notional value of the credit derivative by the notional value adjusted for changes in the market value of the credit derivative since trade inception.
BIPRU 7.11.4
See Notes
BIPRU 7.11.5
See Notes
BIPRU 7.11.6
See Notes
BIPRU 7.11.7
See Notes
BIPRU 7.11.8
See Notes
BIPRU 7.11.9
See Notes
BIPRU 7.11.10
See Notes
BIPRU 7.11.11
See Notes
Establishment of positions created by credit derivatives: Treatment of the protection buyer
BIPRU 7.11.12
See Notes
For the protection buyer, the positions are determined as the mirror principle of the protection seller, with the exception of a credit linked note (which entails no short position in the issuer). If at a given moment there is a call option in combination with a step-up, such moment is treated as the maturity of the protection. In the case of first-to-default credit derivatives and nth to default credit derivatives, the treatment in BIPRU 7.11.12AR and BIPRU 7.11.12B R applies instead of the mirror principle.
[Note: CAD Annex I point 8.B]
BIPRU 7.11.12A
See Notes
Where a firm obtains credit protection for a number of reference entities underlying a credit derivative under the terms that the first default among the assets will trigger payment and that this credit event will terminate the contract, the firm may off-set specific risk for the reference entity to which the lowest specific risk percentage charge among the underlying reference entities applies according to the Table in BIPRU 7.2.44R.
[Note: CAD Annex I point 8.B]
BIPRU 7.11.12B
See Notes
Where the nth default among the exposures triggers payment under the credit protection, the protection buyer may only off-set specific risk if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In those cases, the methodology set out in BIPRU 7.11.12AR for first-to-default credit derivatives must be followed, appropriately modified for nth-to-default products.
[Note: CAD Annex I point 8.B]
Deriving the net position in each debt security: Credit derivatives
BIPRU 7.11.12C
See Notes
Recognition of hedging provided by credit derivatives
BIPRU 7.11.13
See Notes
- (1) BIPRU 7.11.14R - BIPRU 7.11.17R relate to specific risk PRR for trading book positions hedged by credit derivatives for the purposes of the calculation of the securities PRR.
- (2) A firm may take an allowance for protection provided by credit derivatives for the purposes in (1) in accordance with the principles set out in the rules referred to in (1).
- (3) [deleted]
BIPRU 7.11.14
See Notes
- (1) A firm may take full allowance when the value of two legs always move in the opposite direction and broadly to the same extent.
- (2) This will be the case in the following situations:
- (a) the two legs consist of completely identical instruments; or
- (b) a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e., the cash position).
- (3) The maturity of the swap itself may be different from that of the underlying exposure for the purposes of (2)(b).
- (4) In these situations, a firm must not apply a specific risk PRR to either side of the position.
BIPRU 7.11.15
See Notes
BIPRU 7.11.16
See Notes
- (1) A firm may take partial allowance when the value of two legs usually move in the opposite direction. This would be the case in the situations set out in (2) - (4).
- (2) The first situation referred to in (1) is that the position falls under BIPRU 7.11.16 R (2)(b) but there is an asset mismatch between the reference obligation and the underlying exposure. However, the positions meet the following requirements:
- (a) the reference obligation ranks pari passu with or is junior to the underlying obligation; and
- (b) the underlying obligation and reference obligation share the same obligor and have legally enforceable cross-default or cross-acceleration clauses.
- (3) The second situation referred to in (1) is that the position falls under BIPRU 7.11.14 R (2)(a) or BIPRU 7.11.15 R but there is a currency or maturity mismatch between the credit protection and the underlying asset (currency mismatches must be included in the normal reporting with respect to the foreign currency PRR).
- (4) The third situation referred to in (1) is that the position falls under BIPRU 7.11.15 R but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.
- (5) In each of those situations, rather than adding the specific risk PRR requirements for each side of the transaction, only the higher of the two PRR requirements applies.
BIPRU 7.11.17
See Notes
Specific risk calculation
BIPRU 7.11.20
See Notes
Valuation
BIPRU 7.11.59
See Notes
Other risks relating to credit derivatives
BIPRU 7.11.60
See Notes
BIPRU 7.11.61
See Notes
BIPRU 7.11.62
See Notes
BIPRU 7.11.63
See Notes
BIPRU 8
Group risk consolidation
BIPRU 8.1
Application
- 01/01/2007
BIPRU 8.1.1
See Notes
This chapter applies to:
- (1) a BIPRU firm that is a member of a UK consolidation group;
- (2) a BIPRU firm that is a member of a non-EEA sub-group; and
- (3) [deleted]
- (4) a firm that is not a BIPRU firm and is a parent financial holding company in a Member State in a UK consolidation group.
BIPRU 8.1.2
See Notes
Purpose
BIPRU 8.1.3
See Notes
How this chapter is organised
BIPRU 8.1.4
See Notes
BIPRU 8.1.5
See Notes
BIPRU 8.1.6
See Notes
BIPRU 8.1.7
See Notes
BIPRU 8.1.8
See Notes
BIPRU 8.1.9
See Notes
BIPRU 8.1.10
See Notes
BIPRU 8.1.11
See Notes
Consolidation requirements for BIPRU firms elsewhere in the Handbook
BIPRU 8.1.12
See Notes
BIPRU 8.1.13
See Notes
BIPRU 8.1.14
See Notes
BIPRU 8.1.15
See Notes
BIPRU 8.1.16
See Notes
BIPRU 8.2
Scope and basic consolidation requirements for UK consolidation groups
- 01/01/2007
Main consolidation rule for UK consolidation groups
BIPRU 8.2.1
See Notes
A firm that is a member of a UK consolidation group must comply, to the extent and in the manner prescribed in BIPRU 8.5, with the obligations laid down in GENPRU 1.2 (Adequacy of financial resources), the main BIPRU firm Pillar 1 rules (but not the base capital resources requirement) and BIPRU 10 (Large exposures requirements) on the basis of the consolidated financial position of:
- (1) where either Test 1A or Test 1B in BIPRU 8 Annex 1 (Decision tree identifying a UK consolidation group) apply, the parent institution in a Member State in the UK consolidation group; or
- (2) where either Test 1C or Test 1D in BIPRU 8 Annex 1 apply, the parent financial holding company in a Member State.
BIPRU 8.2.2
See Notes
BIPRU 8.2.3
See Notes
Definition of UK consolidation group
BIPRU 8.2.4
See Notes
A firm's UK consolidation group means a group that is identified as a UK consolidation group in accordance with the decision tree in BIPRU 8 Annex 1 R (Decision tree identifying a UK consolidation group); the members of that group are:
- (1) where either Test 1A or Test 1B in BIPRU 8 Annex 1 R apply, the members of the consolidation group made up of the sub-group of the parent institution in a Member State identified in BIPRU 8 Annex 1 R together with any other person who is a member of that consolidation group because of a consolidation Article 12(1) relationship or an Article 134 relationship; or
- (2) where either Test 1C or Test 1D in BIPRU 8 Annex 1 R apply, the members of the consolidation group made up of the sub-group of the parent financial holding company in a Member State identified in BIPRU 8 Annex 1 R together with any other person who is a member of that consolidation group because of a consolidation Article 12(1) relationship or an Article 134 relationship;
in each case only persons included under BIPRU 8.5 (Basis of consolidation) are included in the UK consolidation group.
BIPRU 8.2.5
See Notes
BIPRU 8.2.6
See Notes
BIPRU 8.2.7
See Notes
BIPRU 8.3
Scope and basic consolidation requirements for non-EEA sub-groups
- 01/01/2007
Main consolidation rule for non-EEA sub-groups
BIPRU 8.3.1
See Notes
- (1) A BIPRU firm that is a subsidiary undertaking of a BIPRU firm or of a financial holding company must apply the requirements laid down in GENPRU 1.2 (Adequacy of financial resources), the main BIPRU firm Pillar 1 rules (but not the base capital resources requirement) and BIPRU 10 (Large exposures requirements) on a sub-consolidated basis if the BIPRU firm, or the parent undertaking where it is a financial holding company, have a third country banking or investment services undertaking as a subsidiary undertaking or hold a participation in such an undertaking.
- (2) (1) only applies if the appropriate regulator is required by the Banking Consolidation Directive or the Capital Adequacy Directive to supervise the group established under (1) under Article 73(2) of the Banking Consolidation Directive (Non-EEA sub-groups).
BIPRU 8.3.2
See Notes
BIPRU 8.3.3
See Notes
BIPRU 8.3.4
See Notes
How to identify a non-EEA sub-group
BIPRU 8.3.5
See Notes
BIPRU 8.3.6
See Notes
BIPRU 8.3.7
See Notes
A firm will not be a member of a non-EEA sub-group unless it is also a member of a UK consolidation group. So the first step is to identify each undertaking in the firm's UK consolidation group that satisfies the following conditions:
- (1) it is an institution, financial institution or asset management company whose head office is outside the EEA (a third country banking or investment services undertaking);
- (2) one of the following applies:
- (a) it is a subsidiary undertaking of a BIPRU firm in that UK consolidation group; or
- (b) a BIPRU firm in that UK consolidation group holds a participation in it; and
- (3) that BIPRU firm is not a parent institution in a Member State.
BIPRU 8.3.8
See Notes
BIPRU 8.3.9
See Notes
BIPRU 8.3.10
See Notes
BIPRU 8.3.11
See Notes
BIPRU 8.3.12
See Notes
The firm should then identify each undertaking in the firm's UK consolidation group that satisfies the following conditions:
- (1) it is an institution, financial institution or asset management company whose head office is outside the EEA (a third country banking or investment services undertaking);
- (2) one of the following applies:
- (a) it is a subsidiary undertaking of a financial holding company in that UK consolidation group; or
- (b) a financial holding company in that UK consolidation group holds a participation in it;
- (3) the head office of that financial holding company is in the United Kingdom; and
- (4) that financial holding company has a subsidiary undertaking that is a BIPRU firm.
BIPRU 8.3.13
See Notes
BIPRU 8.3.14
See Notes
BIPRU 8.3.15
See Notes
BIPRU 8.3.16
See Notes
BIPRU 8.3.17
See Notes
BIPRU 8.3.18
See Notes
Having identified potential non-EEA sub-groups for each third country banking or investment services undertaking in its UK consolidation group the firm should then eliminate overlapping potential non-EEA sub-groups in the following way. If:
- (1) one potential non-EEA sub-group is contained within a wider potential non-EEA sub-group; and
- (2) the third country banking or investment services undertakings in the two potential non-EEA sub-groups are the same;
then the smaller potential non-EEA sub-group is eliminated.
BIPRU 8.3.19
See Notes
BIPRU 8.3.20
See Notes
BIPRU 8.3.21
See Notes
BIPRU 8.3.22
See Notes
BIPRU 8.3.23
See Notes
BIPRU 8.3.24
See Notes
BIPRU 8.5
Basis of consolidation
- 01/01/2007
Undertakings to be included in consolidation
BIPRU 8.5.1
See Notes
A firm must include only the following types of undertaking in a UK consolidation group or non-EEA sub-group for the purposes of this chapter:
- (1) a BIPRU firm;
- (2) an institution;
- (3) a financial institution;
- (4) an asset management company;
- (5) a financial holding company; and
- (6) an ancillary services undertaking.
BIPRU 8.5.2
See Notes
BIPRU 8.5.3
See Notes
Basis of inclusion of undertakings in consolidation
BIPRU 8.5.4
See Notes
BIPRU 8.5.5
See Notes
In carrying out the calculations for the purposes of this chapter a firm must only include the relevant proportion of an undertaking that is a member of the UK consolidation group or non-EEA sub-group:
- (1) by virtue of a consolidation Article 12(1) relationship;
- (2) by virtue of an Article 134 relationship; or
- (3) because the group holds a participation in it.
BIPRU 8.5.6
See Notes
In BIPRU 8.5.5 R, the relevant proportion is either:
- (1) (in the case of a participation) the proportion of shares issued by the undertaking held by the UK consolidation group or the non-EEA sub-group; or
- (2) (in the case of a consolidation Article 12(1) relationship or an Article 134 relationship), such proportion (if any) as stated in the Part 4A permission of the firm.
Basis of inclusion of UCITS investment firms in consolidation
BIPRU 8.5.7
See Notes
BIPRU 8.5.8
See Notes
Exclusion of undertakings from consolidation: Balance sheet size
BIPRU 8.5.9
See Notes
A firm may, having first notified the appropriate regulator in writing in accordance with SUP 15.7 (Form and method of notification), exclude an institution, asset management company, financial institution or ancillary services undertaking that is a subsidiary undertaking in, or an undertaking in which a participation is held by, the UK consolidation group or non-EEA sub-group if the balance sheet total of that undertaking is less than the smaller of the following two amounts:
- (1) 10 million Euros;
- (2) 1% of the balance sheet total of the parent undertaking or the undertaking that holds the participation.
BIPRU 8.5.10
See Notes
Exclusion of undertakings from consolidation: Other reasons
BIPRU 8.5.11
See Notes
Article 73(1) of the Banking Consolidation Directive allows the appropriate regulator to decide to exclude an institution, financial institution, asset management company or ancillary services undertaking that is a subsidiary undertaking in, or an undertaking in which a participation is held by, the UK consolidation group or non-EEA sub-group for the purposes of this chapter in the following circumstances:
- (1) where the head office of the undertaking concerned is situated in a country outside the EEA where there are legal impediments to the transfer of the necessary information; or
- (2) where, in the opinion of the appropriate regulator, the undertaking concerned is of negligible interest only with respect to the objectives of monitoring institutions; or
- (3) where, in the opinion of the appropriate regulator, the consolidation of the financial situation of the undertaking concerned would be inappropriate or misleading as far as the objectives of the supervision of institutions are concerned.
BIPRU 8.5.12
See Notes
BIPRU 8.5.13
See Notes
Information about excluded undertakings
BIPRU 8.5.14
See Notes
BIPRU 8.6
Consolidated capital resources
- 01/01/2007
General
BIPRU 8.6.1
See Notes
Notification of issuance of capital instruments
BIPRU 8.6.1A
See Notes
BIPRU 8.6.1B
See Notes
A firm must notify the appropriate regulator in writing of the intention of another member of its group which is not a firm to issue a capital instrument which the firm intends to include within its capital resources or the consolidated capital resources of its UK consolidation group or non-EEA sub-group as soon as it becomes aware of the intention of the group undertaking to issue the capital instrument. When giving notice, a firm must:
- (1) provide details of the amount of capital to be raised through the intended issue and whether the capital is intended to be issued to external investors or within its group;
- (2) identify the stage of the capital resources table the capital instrument is intended to fall within;
- (3) include confirmation from a senior manager of the firm responsible for authorising the inclusion of the issue within capital resources or consolidated capital resources that the capital instrument complies with the rules applicable to instruments included in the stage of the capital resources table identified in (2); and
- (4) provide details of any features of the capital instrument which are novel, unusual or different from a capital instrument of a similar nature previously issued by the firm or widely available in the market or not specifically contemplated by GENPRU 2.2.
This rule does not apply to a firm if a group undertaking intends to issue a capital instrument listed in BIPRU 8.6.1E R.
BIPRU 8.6.1C
See Notes
BIPRU 8.6.1D
See Notes
If a group undertaking proposes to establish a debt securities program for the issue of capital instruments which the firm intends to include within its capital resources or the consolidated capital resources of its UK consolidation group or non-EEA sub-group, it must:
- (1) notify the appropriate regulator of the establishment of the program; and
- (2) provide the information required by BIPRU 8.6.1BR (1) to (4);
as soon as it becomes aware of the proposed establishment. The appropriate regulator must be notified of any changes, in accordance with BIPRU 8.6.1C R.
BIPRU 8.6.1E
See Notes
The capital instruments to which BIPRU 8.6.1B R does not apply are:
- (1) ordinary shares issued by a group undertaking which:
- (a) are the most deeply subordinated capital instrument issued by that group undertaking;
- (b) meet the criteria set out in GENPRU 2.2.83R (2) and GENPRU 2.2.83R (3) and GENPRU 2.2.83A R; and
- (c) are the same as ordinary shares previously issued by that group undertaking;
- (2) debt instruments issued from a debt securities program established by a group undertaking, provided the program was notified to the appropriate regulator prior to its first drawdown, in accordance with BIPRU 8.6.1D R; and
- (3) capital instruments which are not materially different in terms of their characteristics and eligibility for inclusion in a particular tier of capital to capital instruments previously issued by a group undertaking for inclusion in the firm's capital resources or consolidated capital resources of its UK consolidation group or non-EEA sub-group.
BIPRU 8.6.1F
See Notes
A firm must notify the appropriate regulator in writing, no later than the date of issue, of the intention of a group undertaking to issue a capital instrument listed in BIPRU 8.6.1E R which the firm intends to include within its capital resources or the consolidated capital resources of its UK consolidation group or non-EEA sub-group. When giving notice a firm must:
- (1) provide the information set out at BIPRU 8.6.1BR (1) to (3); and
- (2) confirm that the terms of the capital instrument have not changed since the previous issue of that type of capital instrument by that group undertaking.
Limits on the use of different forms of capital
BIPRU 8.6.2
See Notes
BIPRU 8.6.3
See Notes
BIPRU 8.6.4
See Notes
BIPRU 8.6.5
See Notes
Calculation of consolidated capital resources if there is a building society in the group
BIPRU 8.6.6
See Notes
Calculation of consolidated capital resources if there is a bank or credit institution in the group
BIPRU 8.6.7
See Notes
Calculation of consolidated capital resources for an investment firm group
BIPRU 8.6.8
See Notes
BIPRU 8.6.9
See Notes
Treatment of minority interests
BIPRU 8.6.10
See Notes
- (1) This rule sets out how to determine whether minority interests in an undertaking in a UK consolidation group or non-EEA sub-group may be included in tier one capital, tier two capital or tier three capital for the purpose of calculating consolidated capital resources (each referred to as a "tier" of capital in this rule).
- (2) A firm must identify the item of capital of the undertaking in question that gives rise to that minority interest.
- (3) A firm must include the minority interest in the tier of capital in which that undertaking would have to include the capital referred to in (2) if it were a firm calculating its capital resources on a solo basis under whichever method applies to the group under BIPRU 8.6.6 R to BIPRU 8.6.8 R.
- (4) This rule does not apply to a minority interest created by consolidated indirectly issued capital.
Indirectly issued capital and group capital resources
BIPRU 8.6.11
See Notes
BIPRU 8.6.12
See Notes
Consolidated indirectly issued capital means any capital instrument issued by a member of the UK consolidation group or non-EEA sub-group where:
- (1) some or all of the following conditions are satisfied:
- (a) that capital is issued to an SPV; or
- (b) that capital is issued by an SPV; or
- (c) the subscription for the capital issued by the member of the group in question is funded directly or indirectly by an SPV; and
- (2) any of the SPVs referred to in (1) is a member of the UK consolidation group or non-EEA sub-group or a subsidiary undertaking of any member of the UK consolidation group or non-EEA sub-group.
BIPRU 8.6.13
See Notes
A firm may only include consolidated indirectly issued capital in the consolidated capital resources of its UK consolidation group or non-EEA sub-group if:
- (1) it is issued by an SPV that is a member of the UK consolidation group or non-EEA sub-group to persons who are not members of the UK consolidation group or non-EEA sub-group; and
- (2) the conditions in BIPRU 8.6.16 R to BIPRU 8.6.18 R are satisfied.
BIPRU 8.6.14
See Notes
BIPRU 8.6.15
See Notes
For the purposes of this section, an undertaking is an SPV if the main activity of the SPV is to raise funds for undertakings in:
- (1) (in the case of a UK consolidation group) that UK consolidation group; or
- (2) (in the case of a non-EEA sub-group) that non-EEA sub-group or any UK consolidation group of which it forms part.
BIPRU 8.6.16
See Notes
The SPV referred to in BIPRU 8.6.13 R must satisfy the conditions in GENPRU 2.2.127 R (Conditions that an SPV has to satisfy if indirectly issued capital is to be included in capital resources on a solo basis) as modified by the following:
- (1) references in GENPRU 2.2.127R (1) to being controlled by the firm are to being controlled by a member of the firm's UK consolidation group or non-EEA sub-group as the case may be; and
- (2) references to the firm's group are to the firm's UK consolidation group or non-EEA sub-group as the case may be.
BIPRU 8.6.17
See Notes
The capital issued by the SPV referred to in BIPRU 8.6.13 R must satisfy the conditions in GENPRU 2.2.129 R (Conditions that capital issued by an SPV has to satisfy if indirectly issued capital is to be included in capital resources on a solo basis) as modified by the following:
- (1) references to the firm's group are to the firm's UK consolidation group or non-EEA sub-group as the case may be;
- (2) the substitution obligation in GENPRU 2.2.129R (2) need not be the firm's but may apply to any member of the UK consolidation group or non-EEA sub-group as the case may be; and
- (3) that substitution obligation applies if the consolidated capital resources of the UK consolidation group or non-EEA sub-group, as the case may be, fall, or are likely to fall, below its consolidated capital resources requirement.
BIPRU 8.6.18
See Notes
The SPV referred to in BIPRU 8.6.13 R must invest the funds raised from the issue of capital by the SPV by subscribing for capital resources issued by an undertaking that is a member of the UK consolidation group or non-EEA sub-group. Those capital resources must satisfy the following conditions:
- (1) those capital resources must at least comply with the requirements for lower tier two capital; and
- (2) the first call date or fixed maturity date (if any) of those capital resources must not arise before the first call date on the instrument issued by the SPV.
BIPRU 8.6.19
See Notes
BIPRU 8.6.20
See Notes
Venture Capital Investments
BIPRU 8.6.21
See Notes
Deductions from the totals of tier one and tier two | (M) | |||
... | ... | ... | ||
... Investments in subsidiary undertakings and participations excluding: |
... GENPRU 2.2.216A G |
(Part 2 of stage M) | ||
(1) | any amount which is already deducted as material holdings or qualifying holdings; and | |||
(2) | any investment in an undertaking that meets the following conditions: | |||
(a) | the investment has been made by a Venture Capital Investor and the firm is entitled to ignore (i) the Venture Capital Investor making that investment in accordance with GENPRU 2.2.209R (2) or (ii) the Venture Capital Holding Company (or a proportion of it) which holds the Venture Capital Investor in accordance with GENPRU 2.2.209R (3) for the purposes of determining whether there is a material holding; | |||
(b) | the investment is a venture capital investment; and | |||
(c) | the undertaking is not (i) a credit institution or (ii) financial institution the principal activity of which is to perform any activity other than the acquisition of holdings in other undertakings. |
BIPRU 8.7
Consolidated capital resources requirements
- 01/01/2007
General approach
BIPRU 8.7.1
See Notes
BIPRU 8.7.2
See Notes
BIPRU 8.7.3
See Notes
The first step is for a firm to identify what sort of group it belongs to as the calculation of the consolidated capital resources requirement differs between different types of groups. This is set out in BIPRU 8 Annex 5 (Decision tree for identifying the consolidated capital resources requirement of a UK consolidation group or a non-EEA sub-group). BIPRU 8 Annex 5 shows, for each type of group:
- (1) which of the consolidated requirement components apply and which do not; and
- (2) how to add up the different consolidated requirement components to reach the overall consolidated capital resources requirement.
BIPRU 8.7.4
See Notes
BIPRU 8.7.5
See Notes
BIPRU 8.7.6
See Notes
BIPRU 8.7.7
See Notes
BIPRU 8.7.8
See Notes
BIPRU 8.7.9
See Notes
Method of calculation to be used
BIPRU 8.7.10
See Notes
Calculation of the consolidated requirement components
BIPRU 8.7.11
See Notes
BIPRU 8.7.12
See Notes
This table belongs to BIPRU 8.7.11 R
Choice of consolidation method
BIPRU 8.7.13
See Notes
- (1) A firm must calculate a consolidated requirement component by using one of the methods in this rule.
- (2) Under the first method a firm must:
- (a) apply the risk capital requirement set out in BIPRU 8.7.12 R to each undertaking in the UK consolidation group or non-EEA sub-group; and
- (b) add the risk capital requirements together.
- (3) Under the second method a firm must:
- (a) treat the whole UK consolidation group or non-EEA sub-group as a single undertaking; and
- (b) apply the risk capital requirement set out in BIPRU 8.7.12 R to the group on an accounting consolidation basis.
- (4) The third method is a mixture of methods one and two. Under the third method a firm must:
- (a) treat one or more parts of the UK consolidation group or non-EEA sub-group as separate single undertakings;
- (b) apply the risk capital requirement set out in BIPRU 8.7.12 R to each such part of the group on an accounting consolidation basis;
- (c) apply the risk capital requirement set out in BIPRU 8.7.12 R to each of the remaining undertakings in the UK consolidation group or non-EEA sub-group (if any); and
- (d) add the risk capital requirements together.
- (5) A firm may use different methods for different consolidated requirement components.
BIPRU 8.7.14
See Notes
BIPRU 8.7.15
See Notes
Notifying the appropriate regulator of the choice of consolidation technique
BIPRU 8.7.16
See Notes
Special rules for the consolidated credit risk requirement
BIPRU 8.7.17
See Notes
BIPRU 8.7.18
See Notes
BIPRU 8.7.20
See Notes
BIPRU 8.7.21
See Notes
BIPRU 8.7.22
See Notes
BIPRU 8.7.23
See Notes
- (1) A firm may only treat an exposure as exempt under BIPRU 3.2.25 R (Zero risk-weighting for intra-group exposures) as applied on a consolidated basis if the member of the UK consolidation group or non-EEA sub-group that has the exposure:
- (a) is a BIPRU firm and that exposure is exempt under BIPRU 3.2.25 R as it applies to that BIPRU firm on a solo basis; or
- (b) meets the conditions in BIPRU 3.2.25 R (1)(d) (Condition relating to establishment in the UK) and that exposure would be exempt under (a) if that member was a BIPRU firm.
- (2) The notification obligation in BIPRU 3.2.35 R applies.
Special rules for the consolidated market risk requirement
BIPRU 8.7.24
See Notes
BIPRU 8.7.25
See Notes
A firm may not apply the second method in BIPRU 8.7.13R (3) (accounting consolidation for the whole group) or apply accounting consolidation to parts of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a) for the purposes of the calculation of the consolidated market risk requirement unless the group or sub-group and the undertakings in that group or sub-group satisfy the conditions in this rule. Instead the firm must use the aggregation approach described in BIPRU 8.7.13R (2) (method one) or BIPRU 8.7.13R (4)(c). Those conditions are as follows:
- (1) each of the undertakings in that group or sub-group is an institution that is:
- (a) a BIPRU firm;
- (b) an EEA firm;
- (c) a recognised third country credit institution; or
- (d) a recognised third country investment firm;
- (2) each of the undertakings referred to in (1) that is a BIPRU firm has capital resources that are equal to or in excess of its capital resources requirement and complies with BIPRU 10(Large exposures requirements);
- (3) each of the undertakings referred to in (1) that is an EEA firm complies with the CRD implementation measures in its EEA State that correspond to the requirements in (2);
- (4) each of the undertakings referred to in (1) that is a recognised third country credit institution or recognised third country investment firm complies with laws in the state or territory in which it has its head office that are equivalent to the requirements of the Banking Consolidation Directive or Capital Adequacy Directive relating to capital adequacy and concentration risk;
- (5) there is no material legal, regulatory or contractual impediment to the transfer of funds between those undertakings in that group or sub-group;
- (6) there is no material legal, regulatory or contractual impediment to mutual financial support between those undertakings in that group or sub-group;
- (7) the market risk position of the undertakings are monitored and managed on a co-ordinated basis; and
- (8) there is satisfactory allocation of capital within the group or sub-group.
Special rules for the consolidated operational risk requirement
BIPRU 8.7.26
See Notes
BIPRU 8.7.27
See Notes
- (1) This rule sets out how BIPRU 6.3.2 R (3) (Negative figure arising in calculation of the relevant indicator under the basic indicator approach) applies on a consolidated basis.
- (2) If the calculation for any individual undertaking under method one in BIPRU 8.7.13R (2) (application of aggregation approach to the whole group) or method three as described in BIPRU 8.7.13R (4)(c) (mixture of aggregation and accounting consolidation) or for any sub-group created under method three as described in BIPRU 8.7.13R (4)(a) results in a figure of zero or a negative figure, that figure must be excluded.
- (3) If a firm is using method two in BIPRU 8.7.13 R (accounting consolidation approach for the whole group), BIPRU 6.3.2 R (3) applies to the UK consolidation group or non-EEA sub-group as if it were a single undertaking.
- (4) (3) also applies to a sub-group created under method 3 as described in BIPRU 8.7.13R (4)(a).
Special rules for calculating specific consolidated requirement components
BIPRU 8.7.28
See Notes
Elimination of intra-group transactions
BIPRU 8.7.29
See Notes
In accordance with BIPRU 8.2.1 R and BIPRU 8.3.1 R (The basic consolidation rules for a UK consolidation group or non-EEA sub-group), a firm may exclude that part of the risk capital requirement that arises as a result of:
- (1) (in respect of the consolidated credit risk requirement) intra-group balances; or
- (2) (in respect of the consolidated operational risk requirement and consolidated fixed overheads requirement) intra-group transactions;
with other undertakings in the UK consolidation group or non-EEA sub-group.
Other provisions about calculating risk capital requirements
BIPRU 8.7.30
See Notes
- (1) This rule applies when the rules applicable under BIPRU 8.7.12 R apply differently for different types of firms.
- (2) Where a firm's UK consolidation group or non-EEA sub-group is a group identified at Stage 1 in BIPRU 8 Annex 5 (Decision tree for identifying the consolidated capital resources requirement of a UK consolidation group or a non-EEA sub-group), the rules that apply are those that apply to a bank that is a BIPRU firm.
- (3) Where a firm's UK consolidation group or non-EEA sub-group is a group identified at Stage 2 in BIPRU 8 Annex 5, the rules that apply are those that apply to a full scope BIPRU investment firm.
- (4) Where a firm's UK consolidation group or non-EEA sub-group is a group identified at Stage 3 in BIPRU 8 Annex 5, the rules that apply are those that apply to a BIPRU limited activity firm.
- (5) Where a firm's UK consolidation group or non-EEA sub-group is a group identified at Stage 4 in BIPRU 8 Annex 5, the rules that apply are those that apply to a BIPRU limited licence firm.
BIPRU 8.7.31
See Notes
BIPRU 8.7.32
See Notes
BIPRU 8.7.33
See Notes
Use of the solo requirements of another EEA competent authority
BIPRU 8.7.34
See Notes
Use of the consolidated requirements of another EEA competent authority
BIPRU 8.7.37
See Notes
- (1) This rule applies if:
- (a) a firm is applying an accounting consolidation approach to part of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a); and
- (b) the part of the group in (a) constitutes the whole of a group subject to the consolidated capital requirements of a competent authority under the CRD implementation measures relating to consolidation under the Banking Consolidation Directive or the Capital Adequacy Directive.
- (2) If the conditions in this rule are satisfied, a firm may apply the consolidated capital requirement in (1)(b) as the risk capital requirement for the group identified in (1)(a) so far as that consolidated capital requirement corresponds to the appropriate regulator's rules that would otherwise apply under this section.
Prohibition on using the standardised rules of a regulator outside the EEA
BIPRU 8.7.38A
See Notes
- (1) This rule applies to a firm if:
- (a) an institution in its UK consolidation group or non-EEA sub-group is subject to any of the rules or requirements of, or administered by, a third-country competent authority applicable to its financial sector that correspond to the sectoral rules applicable to that financial sector ("corresponding sectoral rules"); or
- (b) a part of its UK consolidation group or non-EEA sub-group constitutes the whole of a group subject to the consolidated capital requirements of a third-country competent authority under the corresponding sectoral rules applicable to the banking sector or the investment services sector for a state or territory outside the EEA.
- (2) A firm may not use the requirements under any of the corresponding sectoral rules of a state or territory outside the EEA in order to calculate the consolidated capital resources requirement of its UK consolidation group or non-EEA sub-group for the purpose of this chapter.
Use of an advanced prudential calculation approach under the rules of an overseas regulator
BIPRU 8.7.39
See Notes
BIPRU 8.8
Advanced prudential calculation approaches
- 01/01/2007
General
BIPRU 8.8.1
See Notes
BIPRU 8.8.2
See Notes
Prohibition on using the rules of an overseas regulator
BIPRU 8.8.3
See Notes
Special provisions relating to the internal ratings based approach
BIPRU 8.8.4
See Notes
Special provisions relating to the advanced measurement approach
BIPRU 8.8.5
See Notes
BIPRU 8.8.6
See Notes
BIPRU 8.8.7
See Notes
Special provisions relating to the CCR internal model method
BIPRU 8.8.8
See Notes
Corporate governance arrangement for the IRB approach and the AMA
BIPRU 8.8.9
See Notes
BIPRU 8.9A
Consolidated large exposure requirements
- 31/12/2010
Integrated groups: core UK group and non-core large exposures group
BIPRU 8.9A.1
See Notes
- (1) BIPRU 10 (Large exposures) applies to a firm's UK consolidation group or (subject to (2)) non-EEA sub-group as if it were a single undertaking.
- (2) A firm may exempt the exposures of its non-EEA sub-group to its core concentration risk group counterparty or non-core concentration risk group counterparty from the limits in BIPRU 10.5 (Limits on exposures) that apply to the non-EEA sub-group on a sub-consolidated basis.
BIPRU 8.9A.2
See Notes
BIPRU 8.9A.3
See Notes
BIPRU 8 Annex 1
Decision tree identifying a UK consolidation group
- 01/01/2007
See Notes
BIPRU 8 Annex 2
Examples of how to identify a UK consolidation group
- 01/01/2007
See Notes
BIPRU 8 Annex 3
Examples of how to identify a non-EEA sub-group
- 01/01/2007
See Notes
BIPRU 8 Annex 4
Text of Articles 125 and 126 of the Banking Consolidation Directive
- 01/01/2007
See Notes
Article 125 | ||
1. | Where a parent undertaking is a parent credit institution in a Member State or an EU parent credit institution, supervision on a consolidated basis shall be exercised by the competent authorities that authorised it under Article 6. | |
2. | Where the parent of a credit institution is a parent financial holding company in a Member State or an EU parent financial holding company, supervision on a consolidated basis shall be exercised by the competent authorities that authorised that credit institution under Article 6. | |
Article 126 | ||
1. | Where credit institutions authorised in two or more Member States have as their parent the same parent financial holding company in a Member State or the same EU parent financial holding company supervision on a consolidated basis shall be exercised by the competent authorities of the credit institution authorised in the Member State in which the financial holding company was set up. | |
Where the parents of credit institutions authorised in two or more Member States comprise more than one financial holding company with head offices in different Member States and there is a credit institution in each of these States, supervision on a consolidated basis shall be exercised by the competent authority of the credit institution with the largest balance sheet total. | ||
2. | Where more than one credit institution authorised in the Community has as its parent the same financial holding company and none of these credit institutions has been authorised in the Member State in which the financial holding company was set up, supervision on a consolidated basis shall be exercised by the competent authority that authorised the credit institution with the largest balance sheet total, which shall be considered, for the purposes of this Directive, as the credit institution controlled by an EU parent financial holding company. | |
3. | In particular cases, the competent authorities may by common agreement waive the criteria referred to in paragraphs 1 and 2 if their application would be inappropriate, taking into account the credit institutions and the relative importance of their activities in different countries, and appoint a different competent authority to exercise supervision on a consolidated basis. In these cases, before taking their decision, the competent authorities shall give the EU parent credit institution, or EU parent financial holding company, or credit institution with the largest balance sheet total, as appropriate, an opportunity to state its opinion on that decision. | |
4. | [Omitted] | |
Note | The Capital Adequacy Directive says that generally references in Articles 125 and 126 of the Banking Consolidation Directive to credit institution should be read as including ones to CAD investment firms. Also, the Banking Consolidation Directive and the Capital Adequacy Directive apply to the EEA. Therefore for the purposes of BIPRU 8 Articles 125 and 126 of the Banking Consolidation Directive should be read with the following adjustments: | |
(1) | a reference to a credit institution should be read as being one to a credit institution or CAD investment firm; | |
(2) | a reference to a parent credit institution in a Member State should be read as being one to a parent institution in a Member State; | |
(3) | a reference to a EU parent credit institution should be read as being one to an EEA parent institution; | |
(4) | a reference to a EU parent financial holding company should be read as being one to an EEA parent financial holding company; | |
(5) | a reference to a Member State should be read as being one to an EEA State; | |
(6) | a reference to a credit institution authorised in the Community should be read as being to a credit institution or CAD investment firm authorised in an EEA State. | |
Parent financial holding company in a Member State and financial holding company have the same meaning as they do in the Glossary. |
BIPRU 8 Annex 5
Decision tree for identifying the consolidated capital resources requirement of a UK consolidation group or a non-EEA sub-group.
- 01/01/2007
See Notes
BIPRU 8 Annex 6
Non-EEA regulators' requirements deemed CRD-equivalent for individual risks
- 01/01/2007
See Notes
Part 1 (Non-EEA banking regulators' requirements deemed CRD-equivalent for individual risks) | |||
Regime regulators | Market risk |
Credit
risk | Operational Risk |
USA
Office of the Comptroller of the Currency Board of Governors of the Federal Reserve System * a US banking subsidiary will be deemed equivalent for credit risk if: • it is categorised as well capitalised: and•it scales up its US Basel 1 credit risk requirement by 25% | √ √ | X* X* | X X |
Australia
Australian Prudential Regulation Authority [APRA] | √ | √ | X |
Canada
Office of the Superintendent of Financial Institutions [OSFI] | √ | √ | √ |
Switzerland
Swiss Federal Banking Commission [EBK] | √ | √ See note 2 | √ |
Japan
Financial Services Agency, Japan [JFSA] | √ | X | X |
South Africa
South African Reserve Bank [SARB] | √ | √ | √ |
Hong Kong
Hong Kong Monetary Authority [HKMA] | √ | √ | √ |
Singapore
Monetary Authority of Singapore [MAS] | √ | √ | √ |
India
Reserve Bank of India [RBI] | √ | √ | √ |
Korea
Financial Supervisory Service [FSS] | √ | X | X |
Jersey | √ | √ | √ |
Guernsey | X | √ | √ |
Isle of Man | X | √ | √ |
Note 1: A √ denotes that the requirements have been assessed as equivalent to EEA standards. A X denotes that the requirements have been assessed as not being equivalent to EEA standards. | |||
Note 2: √ International standardised approach only. The treatment of the Lombard loans is not equivalent and they must be treated under the appropriate regulator's rules. |
Part 2 (Non-EEA investment firm regulators' requirements deemed CRD-equivalent for individual risks) | |||
Regime regulators | Market risk | Credit risk | Operational Risk |
Australia
Sydney Futures Exchange Australian Stock Exchange | √ √ | X X | X X |
Canada
Ontario Securities Commission Quebec Securities Commission British Columbia Securities Commission Alberta Securities Commission Investment dealers Association of Canada | √ √ √ √ √ | X X X X X | X X X X X |
Hong Kong
Hong Kong Monetary Authority [HKMA] Hong Kong Securities and Futures Commission | √ √ | X X | X X |
Japan
Financial Services Agency, Japan [JFSA] | √ | X | X |
Singapore
Monetary Authority of Singapore [MAS] Stock Exchange of Singapore | √ √ | X X | X X |
South Africa
South African Futures Exchange Johannesburg Stock Exchange Bond Exchange of South Africa | √ √ √ | X X X | X X X |
Switzerland
Swiss Federal Banking Commission [EBK] | √ | √ Note 2 | √ |
USA
Securities & Exchange Commission (SEC): Net Capital rule only Commodities and Futures Trading Commission | √ Note 3 √ | √ X | X X |
Note 1: A √ denotes that the requirements have been assessed as equivalent to EEA standards. A X denotes that the requirements have been assessed as not being equivalent to EEA standards. | |||
Note 2: √ International standardised approach only. The treatment of Lombard loans is not equivalent and they must be treated under the appropriate regulator's rules. | |||
Note 3: √ Where entities are subject to a local regulatory capital requirement. |
Export chapter as
BIPRU 9
Securitisation
BIPRU 9.1
Application and purpose
- 01/01/2007
Application
BIPRU 9.1.1
See Notes
Purpose
BIPRU 9.1.2
See Notes
The purpose of BIPRU 9 is to implement:
- (1) Articles 94 to 96, paragraphs (1) and (5) of Article 97, Article 99, Article 100(1) and Article 101;
- (2) Points 8 and 9 of Annex V; and
- (3) Parts 2, 3 (in part) and 4 of Annex IX;
of the Banking Consolidation Directive.
General obligations: Risk-weighted exposures
BIPRU 9.1.3
See Notes
BIPRU 9.1.4
See Notes
BIPRU 9.1.5
See Notes
General obligations: Systems
BIPRU 9.1.6
See Notes
The risks arising from securitisation transactions in relation to which a firm is investor, originator or sponsor, including reputational risks, must be evaluated and addressed through appropriate policies and procedures, to ensure in particular that the economic substance of the transaction is fully reflected in risk assessment and management decisions.
[Note: BCD Annex V point 8]
BIPRU 9.1.7
See Notes
BIPRU 9.1.8
See Notes
BIPRU 9.1.8A
See Notes
- (1) The appropriate regulator expects firms to conduct regular stress testing in relation to their securitisation activities and off-balance sheet exposures. The stress tests should consider the firm-wide impact of those activities and exposures in stressed market conditions and the implications for other sources of risk, for example, credit risk, concentration risk, counterparty risk, market risk, liquidity risk and reputational risk. Stress testing of securitisation activities should take into account both existing securitisations and pipeline transactions, as there is a risk that these would not be completed in a stressed market scenario.
- (2) The frequency and extent of the stress testing should be determined by the materiality of the firm's securitisation activities and off-balance sheet exposures.
- (3) A firm should have procedures in place to assess and respond to the results produced from the stress testing and these should be taken into account under the overall Pillar 2 rule.
Trading book and non-trading book
BIPRU 9.1.9
See Notes
BIPRU 9 deals with:
- (1) requirements for investors, originators and sponsors of securitisations of non-trading book exposures;
- (2) the calculation of risk weighted exposure amount for securitisation positions for the purposes of calculating either the credit risk capital component or the counterparty risk capital component; and
- (3) the requirements that investors, originators and sponsors of securitisations in the trading book will have to meet (BIPRU 9.3.1AR, BIPRU 9.3.15R to BIPRU 9.3.20R, BIPRU 9.6.1A R and BIPRU 9.15R).
BIPRU 9.1.10
See Notes
BIPRU 9.2
Approach to be used
- 01/01/2007
BIPRU 9.2.1
See Notes
- (1) Where a firm uses the standardised approach set out in BIPRU 3 (Standardised approach to credit risk) for the calculation of risk weighted exposure amount for the standardised credit risk exposure class to which the securitised exposures would otherwise be assigned under BIPRU 3, then it must calculate the risk weighted exposure amount for a securitisation position in accordance with the standardised approach to securitisations set out in BIPRU 9.9, BIPRU 9.10, BIPRU 9.11 and BIPRU 9.13.
- (2) In all other cases it must calculate a risk weighted exposure amount in accordance with the IRB approach to securitisations set out in BIPRU 9.9, BIPRU 9.10, BIPRU 9.12, BIPRU 9.13 and BIPRU 9.14.
[Note: BCD Article 94]
BIPRU 9.3
Requirements for originators and sponsors
- 31/12/2010
- Past version of BIPRU 9.3 before 31/12/2010
BIPRU 9.3.1
See Notes
- (1) Where significant credit risk associated with securitised exposures has been transferred from the originator in accordance with the terms of BIPRU 9.4 or BIPRU 9.5, that originator may:
- (a) in the case of a traditional securitisation, exclude from its calculation of risk weighted exposure amounts and, as relevant, expected loss amounts, the exposures which it has securitised; and
- (b) in the case of a synthetic securitisation, calculate risk weighted exposure amounts and, as relevant, expected loss amounts in respect of such exposures, in accordance with the provisions of BIPRU 9.5.
- (2) Where (1) applies, the originator must calculate the risk weighted exposure amounts prescribed in this chapter for the positions it may hold in the securitisation.
- (3) Where the originator fails to transfer significant credit risk in accordance with (1), it need not calculate risk weighted exposure amounts for any positions it may hold in the securitisation in question.
[Note: BCD Article 95]
BIPRU 9.3.1A
See Notes
The provisions of BIPRU 9.3.15R to BIPRU 9.3.20R apply with respect to:
- (1) new securitisations issued on or after 1 January 2011; and
- (2) from 31 December 2014, to existing securitisations where new underlying exposures are added or substituted after that date.
[Note: BCD, Article 122a, paragraph 8]
BIPRU 9.3.2
See Notes
BIPRU 9.3.6
See Notes
BIPRU 9.3.7
See Notes
Significant credit risk will be considered to have been transferred for originators in the following cases:
- (1) the risk weighted exposure amounts of the mezzanine securitisation positions held by the originator in the securitisation do not exceed 50% of the risk weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation;
- (2) where there are no mezzanine securitisation positions in a given securitisation and the originator can demonstrate that the exposure value of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin, the originator does not hold more than 20% of the exposure values of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight.
[Note: BCD, Annex IX, Part 2, Point 1, paragraph 1a and Point 2 paragraph 2a]
BIPRU 9.3.8
See Notes
An originator must notify the appropriate regulator that it is relying on the deemed transfer of significant credit risk under BIPRU 9.3.7R within a reasonable period before or after a relevant transfer, not being later than one month after the date of the transfer. The notification must include the following information:
- (1) the risk weighted exposure amount of the securitised exposures and retained securitisation positions;
- (2) the exposure value of the securitised exposures and the retained securitisation positions;
- (3) details of the securitisation positions, including rating, exposure value broken down by securitisation positions sold and retained;
- (4) a statement that sets out why the firm is satisfied that the reduction in risk weighted exposure amounts is justified by a commensurate transfer of credit risk to third parties;
- (5) any relevant supporting documents, for example, a summary of the transaction.
BIPRU 9.3.9
See Notes
BIPRU 9.3.10
See Notes
BIPRU 9.3.11
See Notes
- (1) it has policies and methodologies in place which ensure that the possible reduction of capital requirements which the originator achieves by the securitisation is justified by a commensurate transfer of credit risk to third parties; and
- (2) that such transfer of credit risk to third parties is also recognised for the purposes of the originator's internal risk management and its internal capital allocation.
[Note: BCD, Annex IX, Part 2, Point 1, paragraph 1c and Point 2 paragraph 2c]
BIPRU 9.3.12
See Notes
BIPRU 9.3.13
See Notes
BIPRU 9.3.14
See Notes
Origination criteria
BIPRU 9.3.15
See Notes
A credit institution, whether acting as sponsor or originator, must apply the same sound and well-defined criteria used for credit-granting in respect of exposures held on their trading and non-trading book under SYSC 7.1.9 R to exposures to be securitised. The criteria applied must include the processes for approving and, where relevant, amending, renewing and re-financing credits.
[Note: BCD, Article 122a, paragraph 6]
BIPRU 9.3.16
See Notes
A credit institution, whether acting as sponsor or originator, must apply the same standards of analysis as are applied under BIPRU 9.3.15R to participations or underwritings in securitisation issues purchased from third parties regardless of whether those participations or underwritings are to be held on their trading or non-trading book.
[Note: BCD, Article 122a, paragraph 6]
BIPRU 9.3.17
See Notes
Where a credit institution as originator fails to meet the requirements under BIPRU 9.3.15R to BIPRU 9.3.16R, it may not rely on and apply BIPRU 9.3.1R (1) to reduce its risk weighted exposure amounts or exclude the relevant securitised exposures from the calculation of its risk weighted exposure amounts, and, as relevant, expected loss amounts of those exposures.
[Note: BCD, Article 122a, paragraph 6]
Disclosure requirements
BIPRU 9.3.18
See Notes
The sponsor or originator credit institution of a securitisation must disclose to investors the level of its commitment to maintain a net economic interest in the securitisation under BIPRU 9.15.3R.
[Note: BCD, Article 122a, paragraph 7]
BIPRU 9.3.19
See Notes
The sponsor or originator credit institutions of a securitisation must ensure that prospective investors have readily available access to all materially relevant data concerning it, including:
- (1) on the credit quality and performance of the individual underlying exposures;
- (2) cash flows and collateral supporting the securitisation exposure; and
- (3) such information as is necessary to conduct comprehensive and well-informed stress-tests on the cash flows and collateral values supporting the underlying exposures.
[Note: BCD, Article 122a, paragraph 7]
BIPRU 9.3.20
See Notes
Under BIPRU 9.3.19R, materially relevant data is determined as at the date of the securitisation and where appropriate due to the nature of the securitisation thereafter.
[Note: BCD, Article 122a, paragraph 7]
BIPRU 9.3.21
See Notes
Subject to BIPRU 9.3.22G, BIPRU 9.15.9R and BIPRU 9.15.10R, where the originator or sponsor of a securitisation fails to meet any of the requirements in BIPRU 9.3.18R to BIPRU 9.3.20R (disclosure requirements) in any material respect by reason of its negligence or omission, the appropriate regulator will use its powers under section 55J (Variation etc on the Authority's own initiative) of the Act to impose an additional risk weight of no less than 250% (capped at 1250%) of the risk weight that would otherwise apply to the relevant securitisation positions under the rules in BIPRU 9.11 to BIPRU 9.14. The additional risk weight imposed will be progressively increased with each relevant, subsequent infringement of the requirements in BIPRU 9.3.18R to BIPRU 9.3.20R.
[Note: BCD, Article 122a, paragraph 5]
BIPRU 9.3.22
See Notes
When calculating the additional risk weight it will impose, the appropriate regulator will take into account the exemption of certain securitisations from the scope of BIPRU 9.15.3R under BIPRU 9.15.9R and BIPRU 9.15.10R and, if those exemptions are relevant, reduce the risk weight it would otherwise impose.
[Note: BCD, Article 122a, paragraph 5]
BIPRU 9.4
Traditional securitisation
- 01/01/2007
Minimum requirements for recognition of significant credit risk transfer
BIPRU 9.4.1
See Notes
The originator of a traditional securitisation may exclude securitised exposures from the calculation of risk weighted exposure amounts and expected loss amounts if either of the following conditions is fulfilled:
- (1) significant credit risk associated with the securitised exposures is considered to have been transferred to third parties; or
- (2) the originator applies a 1250% risk weight to all securitisation positions it holds in the securitisation or deducts these securitisation positions from capital resources according to GENPRU 2.2.237 R;
and the transfer complies with the conditions in BIPRU 9.4.2RBIPRU 9.4.14R.
[Note: BCD Annex IX Part 2 point 1, paragraph 1]
BIPRU 9.4.2
See Notes
The securitisation documentation must reflect the economic substance of the transaction.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.3
See Notes
The securitised exposures must be put beyond the reach of the originator and its creditors, including in bankruptcy and receivership. This must be supported by the opinion of qualified legal counsel.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.4
See Notes
BIPRU 9.4.5
See Notes
The securities issued must not represent payment obligations of the originator.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.6
See Notes
The transferee must be a securitisation special purpose entity.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.7
See Notes
The originator must not maintain effective or indirect control over the transferred exposures.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.8
See Notes
Where there is a clean-up call option, the following conditions must be satisfied:
- (1) the clean-up call option is exercisable at the discretion of the originator;
- (2) the clean-up call option may only be exercised when 10% or less of the original value of the exposures securitised remains unamortised; and
- (3) the clean-up call option is not structured to avoid allocating losses to credit enhancement positions or other positions held by investors and is not otherwise structured to provide credit enhancement.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.9
See Notes
The securitisation documentation must not contain clauses that:
- (1) other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator including but not limited to altering the underlying credit exposures or increasing the yield payable to investors in response to a deterioration in the credit quality of the securitised exposures; or
- (2) increase the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.10
See Notes
For the purposes of BIPRU 9.4.7 R, an originator will be considered to have maintained effective control over the transferred exposures if it has the right to repurchase from the transferee the previously transferred exposures in order to realise their benefits or if it is obligated to re-assume transferred risk. The originator's retention of servicing rights or obligations in respect of the exposures does not of itself constitute indirect control of the exposures.
[Note: BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.11
See Notes
Significant credit risk will be considered to be transferred for an originator in the following cases:
- (1) the risk weighted exposure amounts of the mezzanine securitisation positions held by the originator in the securitisation do not exceed 50% of the risk weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation;
- (2) where there are no mezzanine securitisation positions in a given securitisation and the originator can demonstrate that the exposure value of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin, the originator does not hold more than 20% of the exposure values of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight.
[Note: BCD, Annex IX, Part 2, Point 1, paragraph 1a]
BIPRU 9.4.12
See Notes
An originator must notify the appropriate regulator that it is relying on the deemed transfer of significant credit risk under BIPRU 9.4.11R within a reasonable period before or after a relevant transfer, not being later than one month after the date of the transfer. The notification must include the following information:
- (1) the risk weighted exposure amount of the securitised exposures and retained securitisation positions;
- (2) the exposure value of the securitised exposures and the retained securitisation positions;
- (3) details of the securitisation positions, including rating, exposure value broken down by securitisation positions sold and retained;
- (4) a statement that sets out why the firm is satisfied that the reduction in risk weighted exposure amounts is justified by a commensurate transfer of credit risk to third parties;
- (5) any relevant supporting documents, for example, a summary of the transaction.
BIPRU 9.4.13
See Notes
BIPRU 9.4.14
See Notes
BIPRU 9.4.15
See Notes
- (1) it has policies and methodologies in place which ensure that the possible reduction of capital requirements which the originator achieves by the securitisation is justified by a commensurate transfer of credit risk to third parties; and
- (2) that such a transfer of credit risk to third parties is also recognised for the purposes of all the firm's internal risk management and internal capital allocation.
[Note: BCD, Annex IX, Part 2, Point 1, paragraph 1c]
BIPRU 9.4.16
See Notes
BIPRU 9.4.17
See Notes
BIPRU 9.4.18
See Notes
BIPRU 9.5
Synthetic securitisation
- 01/01/2007
Minimum requirements for recognition of significant credit risk transfer
BIPRU 9.5.1
See Notes
- (1) An originator of a synthetic securitisation may calculate risk weighted exposure amounts , and, as relevant, expected loss amounts, for the securitised exposures in accordance with BIPRU 9.5.3 R and BIPRU 9.5.4 R, if either of the following conditions is fulfilled:
- (a) significant credit risk is considered to have been transferred to third parties, either through funded or unfunded credit protection; or
- (b) the originator applies a 1250% risk weight to all securitisation positions he holds in this securitisation or deducts these securitisation positions from capital resources according to GENPRU 2.2.237 R;
- and the transfer complies with the conditions in (2)-(8).
- [Note: BCD, Annex IX, Part 2, Point 2, paragraph 2]
- (2) The securitisation documentation must reflect the economic substance of the transaction.
- (3) The credit protection by which the credit risk is transferred must comply with the eligibility and other requirements under BIPRU 5 (Credit risk mitigation) and, so far as applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) for the recognition of such credit protection. For the purposes of this rule, securitisation special purpose entities must not be recognised as eligible unfunded protection providers.
- (4) The instruments used to transfer credit risk must not contain terms or conditions that:
- (a) impose significant materiality thresholds below which credit protection is deemed not to be triggered if a credit event occurs;
- (b) allow for the termination of the protection due to deterioration of the credit quality of the underlying exposures;
- (c) other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator; or
- (d) increase the originator's cost of credit protection or the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.
- (5) An opinion must be obtained from qualified legal counsel confirming the enforceability of the credit protection in all relevant jurisdictions.
- [Note: BCD Annex IX Part 2 point 2]
- (6) Significant credit risk will be considered to have been transferred if either of the following conditions is met:
- (a) the risk weighted exposure amounts of the mezzanine securitisation positions which are held by the originator in this securitisation do not exceed 50% of the risk weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation;
- (b) where there are no mezzanine securitisation positions in a given securitisation and the originator can demonstrate that the exposure value of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin, the originator does not hold more than 20% of the exposure values of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight.
- [Note: BCD, Annex IX, Part 2, Point 2, paragraph 2a]
- (7) An originator must notify the appropriate regulator that it is relying on the deemed transfer of significant credit risk under BIPRU 9.5.1R (6) within a reasonable period before or after a relevant transfer, not being later than one month after the date of the transfer. The notification must include the following information:
- (a) the risk weighted exposure amount of the securitised exposures and retained securitisation positions;
- (b) the exposure value of the securitised exposures and the retained securitisation positions;
- (c) details of the securitisation positions, including rating, exposure value broken down by securitisation positions sold and retained;
- (d) a statement that sets out why the firm is satisfied that the reduction in risk weighted exposure amounts is justified by a commensurate transfer of credit risk to third parties;
- (e) any relevant supporting documents, for example, a summary of the transaction.
BIPRU 9.5.1A
See Notes
BIPRU 9.5.1B
See Notes
- (1) it has policies and methodologies in place which ensure that the possible reduction of capital requirements which the originator achieves by the securitisation is justified by a commensurate transfer of credit risk to third parties; and
- (2) that such transfer of credit risk to third parties is also recognised for the purposes of all the originator's internal risk management and its internal capital allocation.
[Note: BCD, Annex IX, Part 2, Point 2, paragraph 2c]
BIPRU 9.5.1C
See Notes
BIPRU 9.5.1D
See Notes
BIPRU 9.5.1E
See Notes
BIPRU 9.5.1F
See Notes
Originators' calculation of risk-weighted exposure amounts for exposures securitised in a synthetic securitisation
BIPRU 9.5.2
See Notes
BIPRU 9.5.3
See Notes
- (1) In calculating risk weighted exposure amounts for the securitised exposures, where the conditions in BIPRU 9.5.1 R are met, the originator of a synthetic securitisation must, subject to the treatment of maturity mismatches set out in BIPRU 9.5.6 R-BIPRU 9.5.8 R, use the relevant calculation methodologies set out in BIPRU 9.9-BIPRU 9.14and not those set out in BIPRU 3 (Standardised credit risk) or BIPRU 4 (IRB approach).
- (2) For firms calculating risk weighted exposure amounts and expected loss amounts under the IRB approach, the expected loss amount in respect of such exposures must be zero.
- (3) For clarity, this paragraph refers to the entire pool of exposures included in the securitisation.
[Note: BCD Annex IX Part 2 point 3 and point 4 (part)]
BIPRU 9.5.4
See Notes
Subject to the treatment of maturity mismatches set out in BIPRU 9.5.6 R-BIPRU 9.5.8 R, the originator must calculate risk weighted exposure amounts in respect of all tranches in the securitisation in accordance with the provisions of BIPRU 9.9-BIPRU 9.14. For example, where a tranche is transferred by means of unfunded credit protection to a third party, the risk weight of that third party must be applied to the tranche in the calculation of the originators risk weighted exposure amount.
[Note: BCD Annex IX Part 2 point 4 (part)]
Treatment of maturity mismatches in synthetic securitisations
BIPRU 9.5.5
See Notes
BIPRU 9.5.6
See Notes
For the purposes of calculating risk weighted exposure amounts in accordance with BIPRU 9.5.3 R, any maturity mismatch between the credit protection by which the tranching is achieved and the securitised exposures must be taken into consideration in accordance with BIPRU 9.5.7 R-BIPRU 9.5.8 R.
[Note: BCD Annex IX Part 2 point 5]
BIPRU 9.5.7
See Notes
The maturity of the securitised exposures must be taken to be the longest maturity of any of those exposures subject to a maximum of five years. The maturity of the credit protection must be determined in accordance with BIPRU 5 (Credit risk mitigation) and, so far as relevant, BIPRU 4.10 (Credit risk mitigation under the IRB approach).
[Note: BCD Annex IX Part 2 point 6]
BIPRU 9.5.8
See Notes
- (1) An originator must ignore any maturity mismatch in calculating risk weighted exposure amounts for tranches appearing pursuant to BIPRU 9.9-BIPRU 9.14 with a risk weight of 1250%. For all other tranches the maturity mismatch treatment prescribed in BIPRU 5.8 (Maturity mismatches) must be applied in accordance with the following formula:
- RW* is [RW(SP) x (t-t*)/(T-t*)] + [RW(Ass) x (T-t)/(T-t*)]
- (2) The following apply for the purposes of the formula in (1):
- (a) RW* is risk weighted exposure amounts;
- (b) RW(Ass) is risk weighted exposure amounts for exposures if they had not been securitised calculated on a pro-rata basis;
- (c) RW(SP) is risk weighted exposure amounts calculated under BIPRU 9.6.3 G as if there was no maturity mismatch;
- (d) T is maturity of the underlying exposures expressed in years;
- (e) t is maturity of credit protection expressed in years; and
- (f) t* is 0.25.
[Note: BCD Annex IX Part 2 point 7]
BIPRU 9.6
Implicit support
- 01/01/2007
BIPRU 9.6.1
See Notes
An originator which, in respect of a securitisation in the non-trading book, has made use of BIPRU 9.3.1 R in the calculation of risk weighted exposure amounts, or a sponsor, must not, with a view to reducing potential or actual losses to investors, provide support to the securitisation beyond its contractual obligations.
[Note: BCD Article 101(1)]
BIPRU 9.6.1A
See Notes
An originator which has sold instruments in its trading book to an SSPE and no longer holds market risk capital requirements for these instruments, or a sponsor, must not, with a view to reducing potential or actual losses to investors, provide support to the securitisation beyond its contractual obligations.
[Note: BCD Article 101(1)]
BIPRU 9.6.2
See Notes
If an originator or sponsor fails to comply with BIPRU 9.6.1 R or BIPRU 9.6.1A R in respect of a securitisation, it must:
- (1) hold capital against all of the securitised exposures associated with the securitisation transaction as if they had not been securitised; and
- (2) disclose publicly:
- (a) that it has provided non-contractual support; and
- (b) the regulatory capital impact of doing so.
[Note: BCD Article 101(2)]
BIPRU 9.6.3
See Notes
- (1) Securitisation documentation should make clear, where applicable, that any repurchase of securitised exposures or securitisation positions by the originator or sponsor beyond its contractual obligations is not mandatory and may only be made at fair market value. In general, any such repurchase should be subject to a firm's credit review and approval process, which should be adequate to ensure that the repurchase complies with BIPRU 9.6.1 R.
- (2) If an originator or sponsor repurchases securitised exposures or securitisation positions, it should be able to satisfy the appropriate regulator that it has adequately considered the following:
- (a) the price of the repurchase;
- (b) the firm's capital and liquidity position before and after repurchase;
- (c) the performance of the securitised exposures; and
- (d) the performance of the issued securities;
- and has concluded that, taking into account those factors and any other relevant factors, the repurchase is not structured to provide support.
- (3) A firm should keep adequate records of the matters in (1) and (2).
BIPRU 9.6.4
See Notes
BIPRU 9.6.5
See Notes
A firm may need to consider three main situations to determine whether there is a breach of the prohibition against implicit support in BIPRU 9.6.1 R:
- (1) support given under a contractual obligation;
- (2) support given under the contractual documentation for the securitisation which the firm is entitled, but not obliged, to give; and
- (3) support which is not provided for under the contractual documentation for the securitisation.
BIPRU 9.6.6
See Notes
- (1) The support described in BIPRU 9.6.5 G (1) is permitted by BIPRU 9.6.1 R.
- (2) The support described in BIPRU 9.6.5 G (3) is not permitted by BIPRU 9.6.1 R.
- (3) The support described in BIPRU 9.6.5 G (2) may be permitted by BIPRU 9.6.1 R under the following conditions:
- (a) the fact that the firm may give it is expressly set out in the contractual and marketing documents for the securitisation;
- (b) the nature of the support that the firm may give is precisely described in the documentation;
- (c) the maximum degree of support that can be given can be ascertained at the time of the securitisation both by the firm and by a person whose only information comes from the marketing documents for the securitisation;
- (d) the assessment of whether there has been significant risk transfer and the amount of that transfer is made on the basis that the firm will provide support to the maximum degree possible; and
- (e) the firm's capital resources and capital resources requirement are adjusted at the time of the securitisation on the basis that the firm has provided support to the maximum degree possible, whether by an immediate deduction from capital or appropriate risk weighting.
BIPRU 9.6.7
See Notes
A waiver of the right to future margin income may not breach the prohibition against implicit support:
- (1) the degree of support that can be given can be defined precisely by reference to the securitisation contractual documentation , albeit the amount of support may not be ascertainable in absolute monetary terms; and
- (2) no adjustment to the firm's capital resources or capital resources requirement is required, as a firm should not in any case reflect future margin income in its income or capital resources.
BIPRU 9.6.8
See Notes
BIPRU 9.7
Recognition of credit assessments of ECAIs
- 01/01/2007
BIPRU 9.7.1
See Notes
An ECAI's credit assessment may be used to determine the risk weight of a securitisation position in accordance with BIPRU 9.9 only if the ECAI is an eligible ECAI.
[Note: BCD Article 97(1)]
BIPRU 9.7.2
See Notes
- (1) A firm must not use a credit assessment of an eligible ECAI to determine the risk weight of a securitisation position in accordance with BIPRU 9.9 unless it complies with the principles of credibility and transparency as elaborated in (2) to (6).
- (2) There must be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which the firm is entitled under the contract giving rise to the securitisation position in question.
- (3) The credit assessment must be available publicly to the market. Credit assessments may only be treated as publicly available if:
- (a) they have been published in a publicly accessible forum, and
- (b) they are included in the ECAI's transition matrix.
- (4) Credit assessments that are made available only to a limited number of entities may not be treated as publicly available.
- (5) The credit assessment must not be based, or partly based, on unfunded support provided by the firm itself.
- (6) In the case of a credit assessment referred to in (5), the firm must consider the relevant position as if it were not rated and must apply the relevant treatment of unrated positions as set out in BIPRU 9.11 and BIPRU 9.12.
[Note: BCD Article 97(5) and Annex IX Part 3 point 1]
BIPRU 9.7.2A
See Notes
BIPRU 9.7.3
See Notes
BIPRU 9.7.4
See Notes
Where BIPRU 9.7.2R (5) applies to securitisation positions in an ABCP programme, the firm may be granted a waiver which allows it to use the risk weight assigned to a liquidity facility in order to calculate the risk weighted exposure amount for the positions in the ABCP programme, provided that the liquidity facility ranks pari passu with the positions in the ABCP programme so that they form overlapping positions and 100% of the commercial paper issued by the ABCP programme is covered by liquidity facilities. For the purposes of this provision, overlapping positions means that the positions represent, wholly or partially, an exposure to the same risk such that, to the extent of the overlap, there is a single exposure.
[Note: BCD, Annex IX, Part 4, Point 5]
BIPRU 9.8
Use of ECAI credit assessments for the determination of applicable risk weights
- 01/01/2007
BIPRU 9.8.1
See Notes
The use of ECAIs' credit assessments for the calculation of a firm's risk weighted exposure amounts under BIPRU 9 must be consistent and in accordance with BIPRU 9.8.2 RBIPRU 9.8.7 R. Credit assessments must not be used selectively.
[Note: BCD Article 99]
BIPRU 9.8.2
See Notes
A firm may nominate one or more eligible ECAIs the credit assessments of which must be used in the calculation of its risk weighted exposure amounts under BIPRU 9 (a nominated ECAI).
[Note: BCD Annex IX Part 3 point 2]
BIPRU 9.8.3
See Notes
Subject to BIPRU 9.8.5 RBIPRU 9.8.7 R, a firm must use credit assessments from nominated ECAIs consistently in respect of its securitisation positions.
[Note: BCD Annex IX Part 3 point 3]
BIPRU 9.8.4
See Notes
Subject to BIPRU 9.8.5 R and BIPRU 9.8.6 R, a firm must not use an ECAI's credit assessments for its positions in some tranches and another ECAI's credit assessments for its positions in other tranches within the same structure that may or may not be rated by the first ECAI.
[Note: BCD Annex IX Part 3 point 4]
BIPRU 9.8.5
See Notes
Where a position has two credit assessments by nominated ECAIs, the firm must use the less favourable credit assessment.
[Note: BCD Annex IX Part 3 point 5]
BIPRU 9.8.6
See Notes
Where a position has more than two credit assessments by nominated ECAIs, the two most favourable credit assessments must be used. If the two most favourable assessments are different, the least favourable of the two must be used.
[Note: BCD Annex IX Part 3 point 6]
BIPRU 9.8.7
See Notes
- (1) Where credit protection eligible under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) is provided directly to the SSPE, and that protection is reflected in the credit assessment of a position by a nominated ECAI, the risk weight associated with that credit assessment may be used.
- (2) If the protection is not eligible under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach), the credit assessment must not be recognised.
- (3) In the situation where the credit protection is not provided to the SSPE but rather is provided directly to a securitisation position, the credit assessment must not be recognised.
[Note: BCD Annex IX Part 3 point 7]
BIPRU 9.9
Calculation of risk-weighted exposure amounts for securitisation positions
- 01/01/2007
BIPRU 9.9.1
See Notes
To calculate the risk weighted exposure amount of a securitisation position, the relevant risk weight must be assigned to the exposure value of the position in accordance with BIPRU 9.9 - BIPRU 9.14 based on the credit quality of the position.
[Note: BCD Article 96(1) (part) and Annex IX, Part 4 point 1]
BIPRU 9.9.2
See Notes
For the purpose of BIPRU 9.9.1 R, the credit quality of a position may be determined by reference to an ECAI credit assessment or otherwise, as set out in BIPRU 9.9 BIPRU 9.14.
[Note: BCD Article 96(1) (part)]
BIPRU 9.9.3
See Notes
- (1) Where there is an exposure to different tranches in a securitisation, the exposure to each tranche must be considered a separate securitisation position.
- (2) The providers of credit protection to securitisation positions must be treated as holding positions in the securitisation.
- (3) securitisation positions include exposures to a securitisation arising from interest rate or currency derivative contracts.
[Note: BCD Article 96(2)]
BIPRU 9.9.4
See Notes
Subject to BIPRU 9.9.5 R,
- (1) where a firm calculates risk weighted exposure amounts under the standardised approach to securitisations outlined in BIPRU 9.11, the exposure value of an on-balance sheet securitisation position must be its balance sheet value;
- (2) where a firm calculates risk weighted exposure amounts under the IRB approach to securitisations outlined in BIPRU 9.12, the exposure value of an on-balance sheet securitisation position must be measured gross of value adjustments;
- (3) the exposure value of an off-balance sheet securitisation position must be its nominal value multiplied by a conversion figure as prescribed in this chapter; and
- (4) the conversion figure referred to in (3) must be 100% unless otherwise specified.
[Note: BCD Annex IX Part 4 point 2]
BIPRU 9.9.5
See Notes
The exposure value of a securitisation position arising from a financial derivative instrument must be determined in accordance with BIPRU 13 (Treatment of derivative instruments).
[Note: BCD Annex IX Part 4 point 3]
BIPRU 9.9.6
See Notes
Where a securitisation position is subject to funded credit protection, the exposure value of that position may be modified in accordance with and subject to the requirements of BIPRU 5 (Credit risk mitigation) as further specified in BIPRU 9.11.13 R and BIPRU 9.14.
[Note: BCD Annex IX Part 4 point 4]
BIPRU 9.9.7
See Notes
Where a securitisation position is subject to funded or unfunded credit protection the risk weight to be applied to that position may be modified in accordance with BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) read in conjunction with BIPRU 9.14.
[Note: BCD Article 96(3)]
BIPRU 9.9.8
See Notes
- (1) Where a firm has two or more overlapping positions in a securitisation the firm must, to the extent that the positions overlap, include in its calculation of risk weighted exposure amounts only the position, or portion of a position, producing the higher risk weighted exposure amounts. The firm may also recognise such an overlap between capital charges for specific risk in relation to positions in the trading book and capital charges for positions in the non-trading book, provided that the firm is able to calculate and compare the capital charges for the relevant positions.
- (2) For the purposes of (1), overlapping means that the positions, wholly or partially, represent an exposure to the same risk such that to the extent of the overlap there is a single exposure.
[Note: BCD Annex IX Part 4 point 5]
BIPRU 9.9.9
See Notes
Subject to the provisions of GENPRU that deal with the deduction of securitisation positions at stage M in the relevant capital resources table, the risk weighted exposure amount must be included in the firm's total of risk weighted exposure amounts for the purposes of the calculation of its credit risk capital requirement.
[Note: BCD Article 96(4)]
BIPRU 9.9.10
See Notes
Where BIPRU 9.7.2R (5) applies to securitisation positions in an ABCP programme, the firm may be granted a waiver in the terms described in BIPRU 9.7.4 G.
[Note: BCD, Annex IX, Part 4, Point 5]
BIPRU 9.10
Reduction in risk-weighted exposure amounts
- 01/01/2007
BIPRU 9.10.1
See Notes
BIPRU 9.10 applies as follows:
- (1) BIPRU 9.10.2 R and BIPRU 9.10.3 R apply to both the standardised approach and the IRB approach; and
- (2) BIPRU 9.10.4 R BIPRU 9.10.7 R apply to the IRB approach.
BIPRU 9.10.2
See Notes
In respect of a securitisation position in respect of which a 1250% risk weight is assigned, a firm may, as an alternative to including the position in its calculation of risk weighted exposure amounts, deduct from its capital resources the exposure value of the position. For these purposes, the calculation of the exposure value may reflect eligible funded protection in a manner consistent with BIPRU 9.14.
[Note: BCD Annex IX Part 4 points 35, 74 and 75(b)]
BIPRU 9.10.3
See Notes
Where a firm applies BIPRU 9.10.2 R, 12.5 times the amount deducted in accordance with that paragraph must, for the purposes of BIPRU 9.11.5 R and BIPRU 9.12.8 R, be subtracted from the amount specified in whichever of those rules applies as the maximum risk weighted exposure amount to be calculated by a firm to which one of those rules applies.
[Note: BCD Annex IX Part 4 point 36 and point 76]
BIPRU 9.10.4
See Notes
The risk weighted exposure amount of a securitisation position to which a 1250% risk weight is assigned may be reduced by 12.5 times the amount of any value adjustments made by the firm in respect of the securitised exposures.
[Note: BCD Annex IX Part 4 point 72 (part)]
BIPRU 9.10.5
See Notes
To the extent that value adjustments are taken account of for the purposes of BIPRU 9.10.4 R they must not be taken account of for the purposes of the calculation indicated in BIPRU 4.3.8 R (Treatment of expected loss amounts).
[Note: BCD Annex IX Part 4 point 72 (part)]
BIPRU 9.10.6
See Notes
The risk weighted exposure amount of a securitisation position may be reduced by 12.5 times the amount of any value adjustments made by the firm in respect of the position.
[Note: BCD Annex IX Part 4 point 73]
BIPRU 9.10.7
See Notes
For the purposes of BIPRU 9.10.2 R (as it applies to the IRB approach):
- (1) the exposure value of the position may be derived from the risk weighted exposure amounts taking into account any reductions made in accordance with BIPRU 9.10.4 RBIPRU 9.10.6 R;
- (2) where the supervisory formula method is used to calculate risk weighted exposure amounts and L KIRBR and [L+T] > KIRBR the position may be treated as two positions with L equal to KIRBR for the more senior of the positions.
[Note: BCD Annex IX Part 4 point 75(a) and (c)]
BIPRU 9.11
Calculation of risk weighted exposure amounts under the standardised approach to securitisations
- 01/01/2007
BIPRU 9.11.1
See Notes
Subject to BIPRU 9.11.5 R, the risk weighted exposure amount of a rated securitisation position or resecuritisation position must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment has been determined to be associated, as prescribed in BIPRU 9.11.2 R.
[Note: BCD Annex IX Part 4 point 6]
BIPRU 9.11.2
See Notes
Table:
This table belongs to BIPRU 9.11.1 R
Credit Quality step |
1 | 2 | 3 | 4 (only for credit assessments other than short-term credit assessments) | All other credit quality steps |
Securitisation positions | 20% | 50% | 100% | 350% | 1250% |
Resecuritisation positions | 40% | 100% | 225% | 650% | 1250% |
[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: http://www.fca.org.uk/your-fca/documents/fsa-ecais-securitisation for the FCA and http://www.bankofengland.co.uk/publications/Documents/other/pra/policy/2013/ecaissecuritisation.pdf for the PRA]
[Note: BCD, Annex IX, Part 4, point 6, Table 1]
BIPRU 9.11.4
See Notes
Subject to BIPRU 9.11.6 R BIPRU 9.11.12 R, the risk weighted exposure amount of an unrated securitisation position must be calculated by applying a risk weight of 1250%.
[Note: BCD Annex IX Part 4 point 7]
Originator and sponsor firms
BIPRU 9.11.5
See Notes
For an originator or sponsor, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to the risk weighted exposure amounts which would be calculated for the securitised exposures had they not been securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to regulatory high risk categories (see BIPRU 3.4.104 R and BIPRU 3 Annex 3 R) amongst the securitised exposures.
[Note: BCD Annex IX Part 4 point 8]
Treatment of unrated securitisation positions
BIPRU 9.11.6
See Notes
- (1) A firm having an unrated securitisation position may apply the treatment set out in this paragraph for calculating the risk weighted exposure amount for that position provided the composition of the pool of exposures securitised is known at all times.
- (2) A firm may apply the weighted-average risk weight that would be applied to the securitised exposures referred to in (1) under the standardised approach by a firm holding the exposures multiplied by a concentration ratio.
- (3) This concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to, or pari passu with, the tranche in which the position is held including that tranche itself.
- (4) The resulting risk weight must not be higher than 1250% or lower than any risk weight applicable to a rated more senior tranche.
- (5) Where the firm is unable to determine the risk weights that would be applied to the securitised exposures under the standardised approach, it must apply a risk weight of 1250% to the position.
[Note: BCD Annex IX Part 4 points 9 and 10]
BIPRU 9.11.7
See Notes
- (1) This provision contains guidance on the requirement in BIPRU 9.11.6 R (1) that the composition of the pool of exposures securitised must be known at all times.
- (2) The composition should be known sufficiently at the time of purchase for the firm to be able accurately to calculate the risk weighted exposure amounts of the pool under the standardised approach.
- (3) Thereafter, any change to the composition of the pool during the life of the transaction that would lead to an increase in the risk weighted exposure amount of the pool of exposures under the standardised approach should be either:
- (a) prohibited by the documentation; or
- (b) included in the firm's capital calculations.
- (4) It would be sufficient for the purposes of (2) for the composition of the pool to be reported to the firm at least daily, via information service providers, secure web-sites or other appropriate sources.
Treatment of securitisation positions in a second loss tranche or better in an ABCP programme
BIPRU 9.11.8
See Notes
Subject to the availability of a more favourable treatment by virtue of the provisions concerning liquidity facilities in BIPRU 9.11.10 R BIPRU 9.11.12 R, a firm may apply to securitisation positions meeting the conditions set out in BIPRU 9.11.9 R a risk weight that is the greater of:
- (1) 100%, or
- (2) the highest of the risk weights that would be applied to any of the securitised exposures under the standardised approach by a firm holding the exposures.
[Note: BCD Annex IX Part 4 point 11]
BIPRU 9.11.9
See Notes
For the treatment in BIPRU 9.11.8 R to be available,:
- (1) the securitisation position must be in an ABCP programme;
- (2) the securitisation position must be in a tranche which is economically in a second loss position or better in the securitisation and the first loss tranche must provide meaningful credit enhancement to the second loss tranche;
- (3) the securitisation position must be of a quality the equivalent of investment grade or better; and
- (4) the firm in question must not hold a position in the first loss tranche.
[Note: BCD Annex IX Part 4 point 12]
Treatment of unrated liquidity facilities
BIPRU 9.11.10
See Notes
When the conditions in this paragraph have been met, and in order to determine its exposure value, a conversion figure of 50% may be applied to the nominal amount of a liquidity facility. The risk weight to be applied is the highest risk weight that would be applied to any of the securitised exposures under the standardised approach by a firm holding the exposures. Those conditions are as follows:
- (1) the liquidity facility documentation must clearly identify and limit the circumstances under which the facility may be drawn;
- (2) it must not be possible for the facility to be drawn so as to provide credit support by covering losses already incurred at the time of draw for example, by providing liquidity in respect of exposures in default at the time of draw or by acquiring assets at more than fair value;
- (3) the facility must not be used to provide permanent or regular funding for the securitisation;
- (4) repayment of draws on the facility must not be subordinated to the claims of investors other than to claims arising in respect of interest rate or currency derivative contracts, fees or other such payments, nor be subject to waiver or deferral;
- (5) it must not be possible for the facility to be drawn after all applicable credit enhancements from which the liquidity facility would benefit are exhausted; and
- (6) the facility must include a provision that results in an automatic reduction in the amount that can be drawn by the amount of exposures that are in default, where default has the meaning given to it for the purposes of the IRB approach, or where the pool of securitised exposures consists of rated instruments, that terminates the facility if the average quality of the pool falls below investment grade.
[Note: BCD Annex IX Part 4 point 13]
Cash advance facilities
BIPRU 9.11.12
See Notes
To determine its exposure value, a conversion figure of 0% may be applied to the nominal amount of a liquidity facility that is unconditionally cancellable provided that the conditions set out at BIPRU 9.11.10 R are satisfied and that repayment of draws on the facility are senior to any other claims on the cash flows arising from the securitised exposures.
[Note: BCD Annex IX Part 4 point 15]
Standardised approach: recognition of credit risk mitigation on securitisation positions
BIPRU 9.11.13
See Notes
Where a firm calculates the risk weighted exposure amount of a securitisation position under the standardised approach, where credit protection is obtained on a securitisation position, the calculation of risk weighted exposure amounts may be modified in accordance with BIPRU 5 (Credit risk mitigation).
[Note: BCD Annex IX Part 4 point 34]
BIPRU 9.12
Calculation of risk-weighted exposure amounts under the IRB approach
- 01/01/2007
BIPRU 9.12.1
See Notes
BIPRU 9.12 applies to the calculation of risk weighted exposure amounts of securitisation positions under the IRB approach.
[Note: BCD Annex IX Part 4 point 37 (part)]
Hierarchy of methods
BIPRU 9.12.2
See Notes
For a rated position or a position in respect of which an inferred rating may be used, the ratings based method must be used to calculate the risk weighted exposure amount.
[Note: BCD Annex IX Part 4 point 38]
BIPRU 9.12.3
See Notes
For an unrated position the supervisory formula method must be used except where a firm uses the ABCP internal assessment approach.
[Note: BCD Annex IX Part 4 point 39]
BIPRU 9.12.4
See Notes
BIPRU 9.12.5
See Notes
A firm other than an originator or a sponsor may not use the supervisory formula method unless its IRB permission expressly permits it to do so.
[Note: BCD Annex IX Part 4 point 40]
BIPRU 9.12.6
See Notes
Subject to any IRB permission of the type described in BIPRU 9.12.28 G, in the case of an originator or sponsor unable to calculate KIRB and which has not obtained approval to use the ABCP internal assessment approach, and in the case of other firms where they have not obtained approval to use the supervisory formula method or, for positions in ABCP programmes, the ABCP internal assessment approach, a risk weight of 1250% must be assigned to securitisation positions which are unrated and in respect of which an inferred rating may not be used.
[Note: BCD Annex IX Part 4 point 41]
Use of inferred ratings
BIPRU 9.12.7
See Notes
When the following minimum operational requirements are satisfied a firm must attribute to an unrated position an inferred credit assessment equivalent to the credit assessment of those rated positions (the reference positions) which are the most senior positions which are in all respects subordinate to the unrated securitisation position in question:
- (1) the reference positions must be subordinate in all respects to the unrated securitisation position;
- (2) the maturity of the reference positions must be equal to or longer than that of the unrated position in question; and
- (3) on an ongoing basis, any inferred rating must be updated to reflect any changes in the credit assessment of the reference positions.
[Note: BCD Annex IX Part 4 point 42]
Maximum risk-weighted exposure amounts
BIPRU 9.12.8
See Notes
For an originator, a sponsor, or for other firms which can calculate KIRB, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to that which would produce an amount in respect of its credit risk capital requirement equal to the sum of 8% of the risk weighted exposure amount which would be produced if the securitised assets had not been securitised and were on the balance sheet of the firm plus the expected loss amounts of those exposures.
[Note: BCD Annex IX Part 4 point 45]
Ratings based method
BIPRU 9.12.9
See Notes
BIPRU 9.12.10
See Notes
Under the ratings based method, the risk weighted exposure amount of a rated securitisation position or resecuritisation position must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment is associated as prescribed in BIPRU 9.12.11 R multiplied by 1.06.
[Note: BCD Annex IX Part 4 point 46]
BIPRU 9.12.11
See Notes
Table:
This table belongs to BIPRU 9.12.10 R
Credit Quality Step | Securitisation positions | Resecuritisation positions | ||||
Credit assessments other than short term | Short-term credit assessments | A | B | C | D | E |
1 | 1 | 7% | 12% | 20% | 20% | 30% |
2 | 8% | 15% | 25% | 25% | 40% | |
3 | 10% | 18% | 35% | 35% | 50% | |
4 | 2 | 12% | 20% | 40% | 65% | |
5 | 20% | 35% | 60% | 100% | ||
6 | 35% | 50% | 100% | 150% | ||
7 | 3 | 60% | 75% | 150% | 225% | |
8 | 100% | 200% | 350% | |||
9 | 250% | 300% | 500% | |||
10 | 425% | 500% | 650% | |||
11 | 650% | 750% | 850% | |||
all other, unrated | 1250% |
[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: http://www.fca.org.uk/your-fca/documents/fsa-ecais-securitisation for the FCA and http://www.bankofengland.co.uk/publications/Documents/other/pra/policy/2013/ecaissecuritisation.pdf for the PRA.]
[Note: BCD, Annex IX, Part 4, point 46]
BIPRU 9.12.13
See Notes
For the purposes of BIPRU 9.12.10 R:
- (1) the weightings in column C of BIPRU 9.12.11 R must be applied where the securitisation position is not a resecuritisation position and where the effective number of exposures securitised is less than six;
- (2) for the remainder of the securitisation positions that are not resecuritisation positions, the weightings in column B must be applied unless the position is in the most senior tranche of a securitisation, in which case the weightings in column A must be applied; and
- (3) for resecuritisation positions, the weightings in column E must be applied unless the resecuritisation position is in the most senior tranche of the resecuritisation and none of the underlying exposures were themselves resecuritisation exposures, in which case column D must be applied.
[Note: BCD Annex IX Part 4 point 47(part)]
BIPRU 9.12.14
See Notes
When determining under BIPRU 9.12.13 R whether a tranche is the most senior for these purposes, a firm need not take into consideration amounts due under interest rate or currency derivative contracts, fees due, or other similar payments.
[Note: BCD Annex IX Part 4 point 47 (part)]
BIPRU 9.12.15
See Notes
BIPRU 9.12.17
See Notes
In calculating the effective number of exposures securitised, multiple exposures to one obligor must be treated as one exposure. The effective number of exposures is calculated as:
N = (((i)(EADi))2)/((i)(EADi2))
where EADi represents the sum of the exposure values of all exposures to the ith obligor. If the portfolio share associated with the largest exposure, C1, is available, the firm may compute N as 1/C1.
[Note: BCD Annex IX Part 4 point 49]
The ABCP internal assessment approach
BIPRU 9.12.20
See Notes
- (1) If:
- (a) a firm's IRB permission allows it to use this treatment; and
- (b) the conditions in (2)(16) are satisfied,
- a firm may attribute to an unrated position in an asset backed commercial paper programme a derived rating as laid down in (3).
- (2) Positions in the commercial paper issued from the programme must be rated positions.
- (3) Under the ABCP internal assessment approach, the unrated position must be assigned by the firm to one of the rating grades described in (5). The position must be attributed a derived rating that is the same as the credit assessments corresponding to that rating grade as laid down in (5). Where this derived rating is, at the inception of the securitisation, at the level of investment grade or better, it must be treated in the same way as an eligible credit assessment by an eligible ECAI for the purposes of calculating risk weighted exposure amounts.
- (4) The internal assessment methodology must be used in the firms internal risk management processes, including its decision making, management information and capital allocation processes.
- (5) The firms internal assessment methodology must include rating grades. There must be a correspondence between such rating grades and the credit assessments of eligible ECAIs. This correspondence must be explicitly documented.
- (6) The firm must be able to satisfy the appropriate regulator that its internal assessment of the credit quality of the position reflects the publicly available assessment methodology of one or more eligible ECAIs, for the rating of securities backed by the exposures of the type securitised.
- (7) If a firm's IRB permission permits this, a firm need not comply with the requirement for the assessment methodology of the ECAI to be publicly available where it can demonstrate that due to the specific features of the securitisation for example its unique structure - there is as yet no publicly available ECAI assessment methodology.
- (8) The ECAIs, the methodology of which must be reflected as required by (6), must include those ECAIs which have provided an external rating for the commercial paper issued from the programme. Quantitative elements such as stress factors used in assessing the position to a particular credit quality must be at least as conservative as those used in the relevant assessment methodology of the ECAIs in question.
- (9) In developing its internal assessment methodology the firm must take into consideration relevant published ratings methodologies of the eligible ECAIs that rate the commercial paper of the ABCP programme. This consideration must be documented by the firm and updated regularly, as outlined in (15).
- (10) The ABCP programme must have collections policies and processes that take into account the operational capability and credit quality of the servicer. The programme must mitigate seller/servicer risk through various methods, such as triggers based on current credit quality that would preclude commingling of funds.
- (11) The ABCP programme must incorporate structural features for example wind down triggers - into the purchase of exposures in order to mitigate potential credit deterioration of the underlying portfolio.
- (12) The ABCP programme must incorporate underwriting standards in the form of credit and investment guidelines. In deciding on an asset purchase, the programme administrator must consider the type of asset being purchased, the type and monetary value of the exposures arising from the provision of liquidity facilities and credit enhancements, the loss distribution, and the legal and economic isolation of the transferred assets from the entity selling the assets. A credit analysis of the asset sellers risk profile must be performed and must include analysis of past and expected future financial performance, current market position, expected future competitiveness, leverage, cash flow, and interest coverage, and debt rating. In addition, a review of the sellers underwriting standards, servicing capabilities, and collection processes must be performed.
- (13) The ABCP programme's underwriting standards must establish minimum asset eligibility criteria that, in particular,
- (a) exclude the purchase of assets that are significantly past due or defaulted;
- (b) limit excess concentration to individual obligor or geographic area; and
- (c) limit the tenor of the assets to be purchased.
- (14) The aggregated estimate of loss on an asset pool that the ABCP programme is considering purchasing must take into account all sources of potential risk, such as credit risk and dilution risk. If the seller-provided credit enhancement is sized based on only credit-related losses, then a separate reserve must be established for dilution risk, if dilution risk is material for the particular exposure pool. In addition, in sizing the required enhancement level, the programme must review several years of historical information, including losses, delinquencies, dilutions, and the turnover rate of the receivables.
- (15) Internal or external auditors, an ECAI, or the firm's internal credit review or risk management function must perform regular reviews of the internal assessment process and the quality of the internal assessments of the credit quality of the firms exposures to an ABCP programme. If the firms internal audit, credit review, or risk management functions perform the review, then these functions must be independent of the ABCP programme business line, as well as the customer relationship.
- (16) The firm must track the performance of its internal ratings over time to evaluate the performance of its internal assessment methodology and must make adjustments, as necessary, to that methodology when the performance of the exposures routinely diverges from that indicated by the internal ratings.
[Note: BCD Annex IX Part 4 points 43 and 44]
Supervisory formula method
BIPRU 9.12.21
See Notes
Subject to any permission of the type described in BIPRU 9.12.28 G, under the supervisory formula method, the risk weight for a securitisation position must be the risk weight to be applied in accordance with BIPRU 9.12.22 R. However, the risk weight must be no less than 20% for resecuritisation positions and no less than 7% for all other securitisation positions.
BIPRU 9.12.22
See Notes
- (1) Subject to any permission of the type described in BIPRU 9.12.28 G, the risk weight to be applied to the exposure amount must be:
- 12.5 (S[L+T] - S[L]) / T
- (2) The remaining provisions of this paragraph define the terms used in the formulae in (1) and (3).
- (3)
- (4)
- (5)
- (6)
- (7)
- (8)
- (9)
- (10)
- (11)
- (12)
- (13)
- (14)
- (15) In these expressions, Beta [x; a, b]refers to the cumulative beta distribution with parameters a and b evaluated at x.
- (16) T (the thickness of the tranche in which the position is held) is measured as the ratio of (a) the nominal amount of the tranche to (b) the sum of the exposure values of the exposures that have been securitised. For these purposes the exposure value of a financial derivative instrument must, where the current replacement cost is not a positive value, be the potential future credit exposure calculated in accordance with BIPRU 13 (Treatment of derivative instruments).
- (17) KIRBR is the ratio of (a) KIRB to (b) the sum of the exposure values of the exposures that have been securitised. KIRBR is expressed in decimal form (for example, KIRB equal to 15% of the pool would be expressed as KIRBR of 0.15).
- (18) L (the credit enhancement level) is measured as the ratio of the nominal amount of all tranches subordinate to the tranche in which the position is held to the sum of the exposure values of the exposures that have been securitised. Capitalised future income must not be included in the measured L. Amounts due by counterparties to financial derivative instruments that represent tranches more junior than the tranche in question may be measured at their current replacement cost (without the potential future credit exposures) in calculating the enhancement level.
- (19) N is the effective number of exposures calculated in accordance with BIPRU 9.12.17 R - BIPRU 9.12.18 R. In the case of resecuritisations, the firm must look at the number of securitisation exposures in the pool and not the number of underlying exposures in original pools from which the underlying securitisation exposures stem.
- (20) ELGD, the exposure-weighted average loss-given-default, is calculated as follows:
- (21) In (20) LGDi represents the average LGD associated with all exposures to the ith obligor, where LGD is determined in accordance with BIPRU 4. In the case of resecuritisation, an LGD of 100% must be applied to the securitised positions. When default risk and dilution risk for purchased receivables are treated in an aggregate manner within a securitisation (e.g. a single reserve or over-collateralisation is available to cover losses from either source), the LGD input must be constructed as a weighted average of the LGD for credit risk and the 75% LGD for dilution risk. The weights are the stand-alone capital charges for credit risk and dilution risk respectively.
[Note: BCD Annex IX Part 4 point 53 (part)]
Simplified inputs
BIPRU 9.12.23
See Notes
- (1) Under the supervisory formula method, if the exposure value of the largest securitised exposure, C1, is no more than 3% of the sum of the exposure values of the securitised exposures, then for the purposes of the supervisory formula method the firm may set LGD equal 50% and N equal to either:
- (a)
- ;or
- (b) N=1/ C1.
- (2) Cm is the ratio of the sum of the exposure values of the largest 'm' exposures to the sum of the exposure values of the exposures securitised. The level of m may be set by the firm.
- (3) For securitisations involving retail exposures, the supervisory formula method may be implemented using the simplifications: h = 0 and v = 0.
[Note: BCD Annex IX Part 4 point 53 (part)]
BIPRU 9.12.24
See Notes
Liquidity Facilities
BIPRU 9.12.25
See Notes
The provisions in BIPRU 9.12.26 R to BIPRU 9.12.28 G apply for the purposes of determining the exposure value of an unrated securitisation position in the form of certain types of liquidity facility.
[Note: BCD Annex IX Part 4 point 55]
Cash advance facilities
BIPRU 9.12.27
See Notes
A conversion figure of 0% may be applied to the nominal amount of a liquidity facility that meets the conditions set out in BIPRU 9.11.12 R.
[Note: BCD Annex IX Part 4 point 57]
Exceptional treatment for liquidity facilities where KIRB cannot be calculated
BIPRU 9.12.28
See Notes
- (1) When it is not practical for the firm to calculate the risk weighted exposure amounts for the securitised exposures as if they had not been securitised and the position does not qualify for the ABCP internal assessment approach, a firm may apply to the appropriate regulator for a variation of its IRB permission under which, on an exceptional basis, it may temporarily apply the method in (2) for the calculation of risk weighted exposure amounts for an unrated securitisation position in the form of a liquidity facility that meets the conditions to be a liquidity facility set out in BIPRU 9.11.10 R.
- (2) Under the method in this paragraph, the highest risk weight that would be applied under the standardised approach to any of the securitised exposures had they not been securitised may be applied to the securitisation position represented by the liquidity facility. To determine the exposure value of the position a conversion figure of 50% may be applied to the nominal amount of the liquidity facility if the facility has an original maturity of one year or less. In other cases a conversion factor of 100% must be applied.
[Note: BCD Annex IX Part 4 points 58 and 59]
BIPRU 9.13
Securitisations of revolving exposures with early amortisation provisions
- 01/01/2007
BIPRU 9.13.1
See Notes
Where there is a securitisation of revolving exposures subject to an early amortisation provision, the originator must calculate an additional risk weighted exposure amount in accordance with this section in respect of the risk that the levels of credit risk to which it is exposed may increase following the operation of the early amortisation provision. Accordingly this section sets out how an originator must calculate a risk weighted exposure amount when it sells revolving exposures into a securitisation that contains an early amortisation provision.
[Note: BCD Article 100(1), Annex IX Part 4 points 16 and 68]
Additional capital requirements for securitisations of revolving exposures with early amortisation provisions
BIPRU 9.13.2
See Notes
A firm must calculate a risk weighted exposure amount in respect of the sum of the originators interest and the investors interest.
[Note: BCD Annex IX Part 4 point 17]
BIPRU 9.13.3
See Notes
For securitisation structures where the securitised exposures comprise revolving exposures and non-revolving exposures, an originator must apply the treatment set out in this section to that portion of the underlying pool containing revolving exposures.
[Note: BCD Annex IX Part 4 point 18]
BIPRU 9.13.4
See Notes
For the purposes of this section, subject to BIPRU 9.13.6 R:
- (1) originators interest means the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure determines the proportion of the cash-flows generated by principal and interest collections and other associated amounts which are not available to make payments to those having securitisation positions in the securitisation;
- (2) to qualify as such the originators interest may not be subordinate to the investors interest; and
- (3) investors interest means the exposure value of the remaining notional part of the pool of drawn amounts.
[Note: BCD Annex IX Part 4 point 19]
BIPRU 9.13.5
See Notes
Subject to BIPRU 9.13.7 R, the exposure of the originator associated with its rights in respect of the originators interest must not be treated as a securitisation position but as a pro rata exposure to the securitised exposures as if they had not been securitised.
[Note: BCD Annex IX Part 4 point 20]
BIPRU 9.13.6
See Notes
- (1) For firms using the IRB approach set out in BIPRU 4, this paragraph applies in place of BIPRU 9.13.4 R.
- (2) For the purposes of this section, originators interest means the sum of:
- (a) the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure determines the proportion of the cash-flows generated by principal and interest collections and other associated amounts which are not available to make payments to those having securitisation positions in the securitisation; and
- (b) the exposure value of that part of the pool of undrawn amounts of the credit lines, the drawn amounts of which have been sold into the securitisation, the proportion of which to the total amount of such undrawn amounts is the same as the proportion of the exposure value described in (a) to the exposure value of the pool of drawn amounts sold into the securitisation.
- (3) To qualify as such the originators interest may not be subordinate to the investors interest.
- (4) Investors interest means the exposure value of the notional part of the pool of drawn amounts not falling within (2)(a) plus the exposure value of that part of the pool of undrawn amounts of credit lines, the drawn amounts of which have been sold into the securitisation, not falling within (2)(b).
[Note: BCD Annex IX Part 4 points 69 and 70]
BIPRU 9.13.7
See Notes
For firms using the IRB approach set out in BIPRU 4, this paragraph applies in place of BIPRU 9.13.5 R. The exposure of the originator associated with its rights in respect of that part of the originators interest described in BIPRU 9.13.6 R (2)(a) must not be treated as a securitisation position but as a pro rata exposure to the securitised drawn amounts as if they had not been securitised in an amount equal to that described in BIPRU 9.13.6 R (2)(a). The originator must also be considered to have a pro rata exposure to the undrawn amounts of the credit lines, the drawn amounts of which have been sold into the securitisation, in an amount equal to that described in BIPRU 9.13.6 R (2)(b).
[Note: BCD Annex IX Part 4 point 71]
Exemptions from early amortisation treatment
BIPRU 9.13.8
See Notes
Originators of the following types of securitisation are exempt from the capital requirement in BIPRU 9.13.1 R:
- (1) securitisations of revolving exposures whereby investors remain fully exposed to all future draws by borrowers so that the risk on the underlying facilities does not return to the originator even after an early amortisation event has occurred; and
- (2) securitisations where any early amortisation provision is solely triggered by events not related to the performance of the securitised assets or the originator, such as material changes in tax laws or regulations.
[Note: BCD Annex IX Part 4 point 21]
Maximum capital requirement
BIPRU 9.13.9
See Notes
For an originator subject to the capital requirement in BIPRU 9.13.1 R the total of the risk weighted exposure amounts in respect of its positions in the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) and the risk weighted exposure amounts calculated under BIPRU 9.13.1 R must be no greater than the greater of:
- (1) the risk weighted exposure amounts calculated in respect of its positions in the investors interest (as so defined); and
- (2) the risk weighted exposure amounts that would be calculated in respect of the securitised exposures by a firm holding the exposures as if they had not been securitised in an amount equal to the investors interest (as so defined).
[Note: BCD Annex IX Part 4 point 22]
BIPRU 9.13.10
See Notes
Deduction of net gains, if any, arising from the capitalisation of future income required under GENPRU 2.2.90 R (Core tier one capital: profit and loss account and other reserves: Securitisation) must be treated outside the maximum amount indicated in BIPRU 9.13.9 R.
[Note: BCD Annex IX Part 4 point 23]
Calculation of risk-weighted exposure amounts
BIPRU 9.13.11
See Notes
The risk weighted exposure amount to be calculated in accordance with BIPRU 9.13.1 R must be determined by multiplying the amount of the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) by the product of:
- (1) the appropriate conversion figure as indicated in BIPRU 9.13.16 R, BIPRU 9.13.19 R or BIPRU 9.13.20 R; and
- (2) the weighted average risk weight that would apply to the securitised exposures if the exposures had not been securitised.
[Note: BCD Annex IX Part 4 point 24]
BIPRU 9.13.12
See Notes
An early amortisation provision must be treated as controlled for the purposes of this section where the following conditions are met:
- (1) the originator has an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortisation;
- (2) throughout the duration of the transaction there is a pro rata sharing between the originators interest and the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) of payments of interest and principal, expenses, losses and recoveries based on the balance of receivables outstanding at one or more reference points during each month;
- (3) the amortisation period is considered sufficient for 90% of the total debt (originators and investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R)) outstanding at the beginning of the early amortisation period to have been repaid or recognised as in default; and
- (4) the speed of repayment is no more rapid than would be achieved by straight-line amortisation over the period set out in (3).
[Note: BCD Annex IX Part 4 point 25]
BIPRU 9.13.13
See Notes
In the case of a securitisation meeting the following conditions:
- (1) it is subject to an early amortisation provision;
- (2) the securitisation is of retail exposures which are uncommitted and unconditionally cancellable without prior notice; and
- (3) the early amortisation is triggered by the excess spread level falling to a specified level
a firm must, to calculate the appropriate conversion figure referred to in BIPRU 9.13.11 R, compare the three-month average excess spread level with the excess spread levels at which excess spread is required to be trapped.
[Note: BCD Annex IX Part 4 point 26]
BIPRU 9.13.14
See Notes
Where the securitisation does not require excess spread to be trapped, the trapping point is deemed to be 4.5 percentage points greater than the excess spread level at which an early amortisation is triggered.
[Note: BCD Annex IX Part 4 point 27]
BIPRU 9.13.15
See Notes
The conversion figure to be applied must be determined by the level of the actual three month average excess spread in accordance with BIPRU 9.13.16 R.
[Note: BCD Annex IX Part 4 point 28]
BIPRU 9.13.16
See Notes
This table belongs to BIPRU 9.13.15 R
Securitisations subject to a controlled early amortisation provision | Securitisation subject to a non-controlled early amortisation provision | |
3 months average excess spread | Conversion figure | Conversion figure |
Above level A | 0% | 0% |
Level A | 1% | 5% |
Level B | 2% | 15% |
Level C | 10% | 50% |
Level D | 20% | 100% |
Level E | 40% | 100% |
BIPRU 9.13.17
See Notes
In BIPRU 9.13.16 R:
- (1) Level A means levels of excess spread less than 133.33% of the trapping level of excess spread but not less than 100% of that trapping level;
- (2) Level B means levels of excess spread less than 100% of the trapping level of excess spread but not less than 75% of that trapping level;
- (3) Level C means levels of excess spread less than 75% of the trapping level of excess spread but not less than 50% of that trapping level;
- (4) Level D means levels of excess spread less than 50% of the trapping level of excess spread but not less than 25% of that trapping level; and
- (5) Level E means levels of excess spread less than 25% of the trapping level of excess spread.
[Note: BCD Annex IX Part 4 point 29]
BIPRU 9.13.18
See Notes
In the case of a securitisation meeting the conditions in this paragraph, a firm may apply to the appropriate regulator for a waiver that would allow a treatment which approximates closely to that prescribed in BIPRU 9.13.13 R to BIPRU 9.13.17 R for determining the conversion figure indicated. If a firm wants such a waiver, it should satisfy the appropriate regulator that:
- (1) the securitisation is subject to an early amortisation provision of retail exposures;
- (2) those retail exposures are uncommitted and unconditionally cancellable without prior notice;
- (3) the early amortisation is triggered by a quantitative value in respect of something other than the three month average excess spread;
- (4) the firm can establish a quantitative measure equivalent, in relation to the value in (3), to the trapping level of excess spread; and
- (5) that treatment is a prudent measure of the risk that the levels of credit risk to which it is exposed may increase following the operation of the early amortisation provision (referred to in BIPRU 9.13.1R).
[Note: BCD Annex IX Part 4 point 30]
BIPRU 9.13.19
See Notes
All other securitisations subject to a controlled early amortisation provision of revolving exposures are subject to a credit conversion figure of 90%.
[Note: BCD Annex IX Part 4 point 32]
BIPRU 9.13.20
See Notes
All other securitisations subject to a non-controlled early amortisation provision of revolving exposures are subject to a credit conversion figure of 100%.
[Note: BCD Annex IX Part 4 point 33]
Liquidity plans
BIPRU 9.13.21
See Notes
A firm which is an originator of a revolving securitisation transaction involving early amortisation provisions should have liquidity plans to address the implications of both scheduled and early amortisation.
[Note: BCD Annex V point 9]
BIPRU 9.14
Recognition of credit risk mitigation on securitisation positions under the IRB approach
- 01/01/2007
BIPRU 9.14.1
See Notes
This section applies to credit risk mitigation in relation to a securitisation position for a firm calculating risk weighted exposure amounts using the IRB approach.
[Note: BCD Annex IX Part 4 point 37 (part)]
BIPRU 9.14.2
See Notes
Where a firm uses the ratings based method to calculate the risk weighted exposure amounts of securitisation positions, the firm may recognise credit risk mitigation in accordance with BIPRU 9.14.4 R to BIPRU 9.14.6 R.
[Note: BCD Annex IX Part 4 point 51]
BIPRU 9.14.3
See Notes
Where a firm uses the supervisory formula method to calculate the risk weighted exposure amounts of securitisation positions, the firm may recognise credit risk mitigation in accordance with BIPRU 9.14.4 R to BIPRU 9.14.5 R and BIPRU 9.14.7 R to BIPRU 9.14.13 R.
[Note: BCD Annex IX Part 4 point 54]
Funded protection
BIPRU 9.14.4
See Notes
Eligible funded protection is limited to that which is eligible for the calculation of risk weighted exposure amounts under the standardised approach as laid down under BIPRU 5 and recognition is subject to compliance with the relevant minimum requirements as laid down under BIPRU 5.
[Note: BCD Annex IX Part 4 point 60]
Unfunded credit protection
BIPRU 9.14.5
See Notes
Eligible unfunded credit protection and unfunded protection providers are limited to those which are eligible under BIPRU 5 (Credit risk mitigation) and BIPRU 4.10 (Credit risk mitigation under the IRB approach) and recognition is subject to compliance with the relevant minimum requirements laid down under those provisions.
[Note: BCD Annex IX Part 4 point 61]
Credit risk mitigation under the ratings based method
BIPRU 9.14.6
See Notes
Where risk weighted exposure amounts are calculated using the ratings based method, the exposure value and/or the risk weighted exposure amount for a securitisation position in respect of which credit protection has been obtained may be modified in accordance with the provisions of BIPRU 5 (Credit risk mitigation) as they apply for the calculation of risk weighted exposure amounts under the standardised approach set out in BIPRU 3.
[Note: BCD Annex IX Part 4 point 62]
Credit risk mitigation under the supervisory formula method full credit protection
BIPRU 9.14.7
See Notes
BIPRU 9.14.8 R BIPRU 9.14.10 R apply where risk weighted exposure amounts are calculated using the supervisory formula method where there is full credit protection.
[Note: BCD Annex IX Part 4 point 63 (part)]
BIPRU 9.14.8
See Notes
A firm must determine the effective risk weight of the position. It must do this by dividing the risk weighted exposure amount of the position by the exposure value of the position and multiplying the result by 100.
[Note: BCD Annex IX Part 4 point 63 (part)]
BIPRU 9.14.9
See Notes
In the case of funded credit protection, the risk weighted exposure amount of the securitisation position must be calculated by multiplying the funded protection-adjusted exposure amount of the position (E*, as calculated under BIPRU 5.4.28 R (3), taking the amount of the securitisation position to be E) by the effective risk weight.
[Note: BCD Annex IX Part 4 point 64]
BIPRU 9.14.10
See Notes
In the case of unfunded credit protection, the risk weighted exposure amount of the securitisation position must be calculated by multiplying GA (the amount of the protection adjusted for any currency mismatch and maturity mismatch in accordance BIPRU 5.7.23 R (2)) by the risk weight of the protection provider; and adding this to the amount arrived at by multiplying the amount of the securitisation position minus GA by the effective risk weight.
[Note: BCD Annex IX Part 4 point 65]
Credit risk mitigation under the supervisory formula method partial protection
BIPRU 9.14.11
See Notes
BIPRU 9.14.12
See Notes
If the credit risk mitigation covers the first loss or losses on a proportional basis on the securitisation position, a firm may apply BIPRU 9.14.7 R to BIPRU 9.14.10 R.
[Note: BCD Annex IX Part 4 point 66]
BIPRU 9.14.13
See Notes
In other cases the firm must treat the securitisation position as two or more positions with the uncovered portion being the position with the lower credit quality. For the purposes of calculating the risk weighted exposure amount for this position, the provisions in BIPRU 9.12.22 R to BIPRU 9.12.24 G apply subject to the modifications that T is adjusted to e* in the case of funded credit protection; and to T-g in the case of unfunded credit protection, where e* denotes the ratio of E* to the total notional amount of the underlying pool, where E* is the adjusted exposure amount of the securitisation position calculated in accordance with BIPRU 5.4.28 R (3) taking the amount of the securitisation position to be E; and g is the ratio of the nominal amount of credit protection (adjusted for any currency or maturity mismatch in accordance with the provisions of BIPRU 5 (Credit risk mitigation)) to the sum of the exposure amounts of the securitised exposures. In the case of unfunded credit protection the risk weight of the protection provider must be applied to that portion of the position not falling within the adjusted value of T.
[Note: BCD Annex IX Part 4 point 67]
BIPRU 9.15
Requirements for investors
- 31/12/2010
Application
BIPRU 9.15.1
See Notes
Subject to BIPRU 9.15.1A R, BIPRU 9.15 applies to:
- (1) new securitisations issued on or after 1 January 2011; and
- (2) from 31 December 2014, to existing securitisations where new underlying exposures are added or substituted after that date.
[Note: BCD, Article 122a, paragraph 8]
BIPRU 9.15.1A
See Notes
BIPRU 9.15.16A R and BIPRU 9.15.16B R only apply to:
- (1) new securitisations issued on or after 31 December 2011; and
- (2) from 31 December 2014, to existing securitisations where new underlying exposures are added or substituted after that date.
BIPRU 9.15.1B
See Notes
Purpose
BIPRU 9.15.2
See Notes
Exposures to transferred credit risk
BIPRU 9.15.3
See Notes
Subject to BIPRU 9.15.9 R and BIPRU 9.15.10R, a credit institution, other than when acting as an originator, a sponsor or original lender, will be exposed to the credit risk of a securitisation position in its trading book or non-trading book only if the originator, sponsor or original lender has explicitly disclosed to the credit institution that it will retain, on an ongoing basis, a material net economic interest which, in any event, must not be less than 5%.
[Note: BCD, Article 122a, paragraphs 1 and 3]
Retention of net economic interest
BIPRU 9.15.4
See Notes
Retention of net economic interest means any of the following:
- (1) retention of no less than 5% of the nominal value of each of the tranches sold or transferred to the investors;
- (2) in the case of securitisations of revolving exposures, retention of the originator's interest of no less than 5% of the nominal value of the securitised exposures;
- (3) retention of randomly selected exposures, equivalent to no less than 5% of the nominal amount of the securitised exposures, where those exposures would otherwise have been securitised in the securitisation provided that the number of potentially securitised exposures is no less than 100 at origination;
- (4) retention of the first loss tranche and, if necessary, other tranches having the same or a more severe risk profile than those transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total no less than 5% of the nominal value of the securitised exposures.
[Note: BCD, Article 122a, paragraph 1]
BIPRU 9.15.5
See Notes
Net economic interest is measured at the origination and must be maintained on an ongoing basis. It must not be subject to any credit risk mitigation or any short positions or any hedge. The net economic interest must be determined by the notional value for off-balance sheet items.
[Note: BCD, Article 122a, paragraph 1]
BIPRU 9.15.6
See Notes
Multiple applications of the retention of net economic interest requirements for any given securitisation are not required.
[Note: BCD, Article 122a, paragraph 1]
BIPRU 9.15.7
See Notes
Subject to BIPRU 9.15.8R, where an EEA parent credit institution or an EEA financial holding company, or one of its subsidiaries, as an originator or a sponsor, securitises exposures from several credit institutions, investment firms or other institutions which are included within the scope of supervision on a consolidated basis, the requirement to retain a net economic interest referred to in BIPRU 9.15.3R may be satisfied on the basis of the consolidated situation of the related EEA parent credit institution or EEA financial holding company.
[Note: BCD, Article 122a, paragraph 2]
BIPRU 9.15.8
See Notes
BIPRU 9.15.7R only applies where the credit institutions, investment firms or institutions which created the securitised exposures have committed themselves to adhere to the requirements in BIPRU 9.3.15R to BIPRU 9.3.17R and deliver, in a timely manner, to the originator or sponsor and to the EEA parent credit institution or an EEA financial holding company the information needed to satisfy BIPRU 9.3.18R to BIPRU 9.3.20R.
[Note: BCD, Article 122a, paragraph 2]
BIPRU 9.15.9
See Notes
BIPRU 9.15.3R does not apply where the securitised exposures are claims or contingent claims on, or fully, unconditionally and irrevocably guaranteed by:
- (1) central governments or central banks;
- (2) regional governments, local authorities and public sector entities of EEA States;
- (3) institutions to which a 50% risk weight or less is assigned under BIPRU 3.4.31 R to BIPRU 3.4.46 R; or
- (4) multilateral development banks.
[Note: BCD, Article 122a, paragraph 3]
BIPRU 9.15.10
See Notes
The requirements in BIPRU 9.15.3R do not apply with respect to the following:
- (1) transactions based on a clear, transparent and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions; or
- (2) syndicated loans, purchased receivables or credit default swaps where these instruments are not used to package and/or hedge a securitisation that is within the scope of BIPRU 9.15.3 R.
[Note: BCD, Article 122a, paragraph 3]
Investor due diligence
BIPRU 9.15.11
See Notes
Before investing, and as appropriate thereafter, a credit institution must be able to demonstrate to the PRA for each of its individual securitisation positions, that it has a comprehensive and thorough understanding of, and has implemented, formal policies and procedures appropriate to its trading and non-trading book and commensurate with the risk profile of its investments in securitised positions for analysing and recording:
- (1) information disclosed under BIPRU 9.15.3R, by originators or sponsors to specify the net economic interest that they maintain, on an ongoing basis, in the securitisation;
- (2) the risk characteristics of the individual securitisation position;
- (3) the risk characteristics of the exposures underlying the securitisation position;
- (4) the reputation and loss experience in earlier securitisations of the originators or sponsors in the relevant exposure classes underlying the securitisation position;
- (5) the statements and disclosures made by the originators or sponsors, or their agents or advisors, about their due diligence on the securitised exposures and, where applicable, on the quality of the collateral supporting the securitised exposures;
- (6) where applicable, the methodologies and concepts on which the valuation of collateral supporting the securitised exposures is based and the policies adopted by the originator or sponsor to ensure the independence of the valuer; and
- (7) all the structural features of the securitisation that can materially impact the performance of the credit institution's securitisation position.
[Note: BCD, Article 122a, paragraph 4]
BIPRU 9.15.12
See Notes
A credit institution must regularly perform its own stress tests appropriate to its securitisation positions.
[Note: BCD, Article 122a, paragraph 4]
BIPRU 9.15.13
See Notes
For the purposes of BIPRU 9.15.12R, a credit institution may rely on financial models developed by an ECAI provided that the credit institution can demonstrate, when requested by the PRA, that they took due care prior to investing to validate the relevant assumptions in and structuring of the models and to understand methodology, assumptions and results.
[Note: BCD, Article 122a, paragraph 4]
Monitoring requirements
BIPRU 9.15.14
See Notes
A credit institution, other than when acting as originator or sponsor or original lender, must establish formal procedures appropriate to its trading and non-trading book, and commensurate with the risk profile of its investments in securitised positions, to monitor, on an ongoing basis and in a timely manner, performance information on the exposures underlying its securitisation positions.
[Note: BCD, Article 122a, paragraph 5]
BIPRU 9.15.15
See Notes
- (1) Where relevant, the information required to be monitored under BIPRU 9.15.14R must include:
- (a) the exposure type;
- (b) the percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure;
- (c) collateral type and occupancy;
- (d) frequency distribution of credit scores or other measures of credit worthiness across underlying exposures;
- (e) industry and geographical diversification; and
- (f) frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis.
- (2) Where underlying exposures are themselves securitisation positions, a credit institution must have the information set out in paragraph (1) not only on the underlying securitisation tranches, such as the issuer name and credit quality, but also on the characteristics and performance of the pools underlying those securitisation tranches.
[Note: BCD, Article 122a, paragraph 5]
BIPRU 9.15.16
See Notes
A credit institution must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of its exposures to the transaction, such as the contractual waterfall and waterfall related triggers, credit enhancements, liquidity enhancements, market value triggers and deal-specific definition of default.
[Note: BCD, Article 122a, paragraph 5]
Group level requirements
BIPRU 9.15.16A
See Notes
Subject to BIPRU 9.15.16B R, a credit institution must ensure that any undertaking in relation to which the credit institution is a parent undertaking:
- (1) becomes exposed to the credit risk of a securitisation only where the originator, sponsor or original lender in the securitisation has explicitly disclosed to the undertaking that it will retain, on an ongoing basis, a material net economic interest which, in any event, must not be less than 5%, as set out in BIPRU 9.15.3 R to BIPRU 9.15.10 R;
- (2) complies before investing in a securitisation, and continues to comply thereafter, with the investor due diligence requirements set out in BIPRU 9.15.11 R to BIPRU 9.15.13 R; and
- (3) complies in relation to its investments in securitisations with the monitoring requirements set out in BIPRU 9.15.14 R to BIPRU 9.15.16 R.
BIPRU 9.15.16B
See Notes
BIPRU 9.15.16C
See Notes
BIPRU 9.15.16D
See Notes
BIPRU 9.15.16E
See Notes
Consequences of failure to meet requirements
BIPRU 9.15.17
See Notes
- (1) Subject to BIPRU 9.3.22 G, BIPRU 9.15.9 R to BIPRU 9.15.10 R and BIPRU 9.15.18 G, where a credit institution fails to meet any of the requirements in BIPRU 9.3.18 R to BIPRU 9.3.20 R (disclosure requirements), and BIPRU 9.15.11 R to BIPRU 9.15.16 R (investor due diligence requirements) in any material respect by reason of its negligence or omission, the PRA will use its powers under section 55J (Variation etc on the Authority's own initiative) of the Act to impose an additional risk weight of no less than 250% (capped at 1250%) of the risk weight that would otherwise apply to the relevant securitisation positions under BIPRU 9.11 to BIPRU 9.14. The additional risk weight imposed will be progressively increased with each relevant, subsequent infringement of the requirements in BIPRU 9.3.18 R to BIPRU 9.3.20 R and BIPRU 9.15.11 R to BIPRU 9.15.16 R.
- [Note: BCD, Article 122a, paragraph 5]
- (2) Subject to BIPRU 9.3.22 G, BIPRU 9.15.9 R to BIPRU 9.15.10 R and BIPRU 9.15.18 G, where a credit institution fails to meet in any material respect the requirements in BIPRU 9.15.16A R (Group level requirements), the PRA may consider using its powers under section 55J (Variation etc on the Authority's own initiative) of the Act in the manner described in (1). In order to calculate the risk weights that would apply to the credit institution, the PRA may treat the securitisation investments of the subsidiary undertaking as if they were securitisation positions held directly by the credit institution.
BIPRU 9.15.18
See Notes
When calculating the additional risk weight it will impose, the PRA will take into account the exemption of certain securitisations from the scope of BIPRU 9.15.3R under BIPRU 9.15.9R and BIPRU 9.15.10R and, if those exemptions are relevant, reduce the risk weight it would otherwise impose.
[Note: BCD, Article 122a, paragraph 5]
BIPRU 10
Large exposures requirements
BIPRU 10.1
Application and Purpose
- 01/01/2007
Application
BIPRU 10.1.1
See Notes
- (1) This chapter applies to a BIPRU firm unless it is:
- (a) a BIPRU limited licence firm; or
- (b) a BIPRU limited activity firm
- (2) It applies irrespective of whether the firm adopts the standardised approach or the IRB approach. If it adopts the IRB approach, it applies irrespective of whether the firm adopts the foundation IRB approach or the advanced IRB approach.
Purpose
BIPRU 10.1.2
See Notes
BIPRU 10.1.3
See Notes
BIPRU 10.1.4
See Notes
BIPRU 10.2
Identification of exposures and recognition of credit risk mitigation
- 31/12/2010
- Past version of BIPRU 10.2 before 31/12/2010
BIPRU 10.2.1
See Notes
Unless BIPRU 10.2.2 R applies, an exposure is:
- (1) any of the items included in BIPRU 3.2.9 R (Exposure classes for the purposes of the standardised approach) or the table in BIPRU 3.7.2 R (Classification of off-balance-sheet items for the purposes of the standardised approach), whether held in the trading book or the non-trading book, without application of the risk weight or degrees of risk there provided for;
- [Note: BCD Article 106(1) first paragraph]
- (2) any exposure arising from financial derivative instruments;
- [Note: BCD Article 106(1) second paragraph (part)]
- (3) any exposure to an individual counterparty that arises in the trading book calculated by summing the following items:
- (a) the excess - where positive - of the firm's long positions over its short positions in all the CRD financial instruments issued by the counterparty in question, the net position of each of the different CRD financial instruments being calculated in accordance with the relevant method in BIPRU 7;
- (b) the firm's net underwriting exposure to that counterparty; and
- (c) any exposure due to the transactions, agreements and contracts referred to in BIPRU 14.2.2 R (List of trading book exposures that give rise to a counterparty credit risk charge).
- [Note: CAD Article 29(1) first paragraph]
BIPRU 10.2.2
See Notes
An exposure does not include:
- (1) an exposure which is entirely deducted from a firm's capital resources; or
- (2) in the case of foreign currency transactions, exposures incurred in the ordinary course of settlement during the two business days following payment; or
- (3) in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five business days following payment or delivery of the securities, whichever is earlier; or
- (4) in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other exposures arising from client activity which do not last longer than the following business day; or
- (5) in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking, intra-day exposures to institutions providing those services.
[Note: BCD Articles 106(1) third paragraph and 106(2)]
BIPRU 10.2.2A
See Notes
BIPRU 10.2.3A
See Notes
- (1) An exposure does not include exposures outstanding with a central counterparty to which a firm has attributed an exposure value of zero for CCR in accordance with BIPRU 13.3.13 R (Exposures to a central counterparty).
- (2) BIPRU 13.3.13 R applies to derivative contracts and long settlement transactions, or to other exposures arising in respect of those contracts or transactions (but excluding an exposure arising from collateral held to mitigate losses in the event of default of other participants in the central counterparty's arrangements).
Calculation of exposures
BIPRU 10.2.5
See Notes
BIPRU 10.2.6
See Notes
A firm must calculate the value of its exposures in its trading book in the manner laid down in BIPRU 14 (Capital requirements for settlement and counterparty risk) for the calculation of exposure values. For these purposes the reference in BIPRU 14.2.11 R (How to calculate exposure values and risk weighted exposure amounts for the purpose of calculating the counterparty risk capital component) to the provisions of the IRB approach does not apply.
[Note: CAD Article 29(1)(c) (part) and fourth paragraph]
BIPRU 10.2.7
See Notes
Exposures arising from financial derivative instruments must be calculated in accordance with one of the methods set out in BIPRU 13 (Financial derivatives, SFTs and long settlement transactions). For the purposes of this chapter, BIPRU 13.6.6 R (Scope of CCR internal model method) also applies.
[Note: BCD Article 106(1) second paragraph]
BIPRU 10.2.8
See Notes
Recognition of credit risk mitigation
BIPRU 10.2.9
See Notes
Subject to this section, funded credit protection or unfunded credit protection that complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation) and, if relevant, BIPRU 4.10 (The IRB approach: Credit risk mitigation) is permitted to be recognised for the purposes of calculating a firm's exposure. A firm utilising the methods below must still report to the appropriate regulator the gross value of its exposures.
[Note: BCD Articles 111(1) first paragraph (part) and 112(2)]
BIPRU 10.2.10
See Notes
The financial collateral simple method under the standardised approach
BIPRU 10.2.11
See Notes
BIPRU 10.2.12
See Notes
A firm may only recognise collateral for the purpose of BIPRU 10.2.9R (Recognition of credit risk mitigation) if the collateral complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation) for the purposes of calculating the risk weighted exposure amounts under the standardised approach using the financial collateral simple method or, if applicable, the method in BIPRU 5.5 (Other funded credit risk mitigation). In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral simple method or other applicable method.
[Note: BCD Article 112(2) (part)]
BIPRU 10.2.13
See Notes
For the purpose of BIPRU 10.2.9R (Recognition of credit risk mitigation):
- (1) the requirements set out in BIPRU 5 (Credit risk mitigation) include:
- (a) the securities used as collateral should be valued at market price and should be either traded or effectively negotiable and regularly quoted on a recognised investment exchange or a designated investment exchange; and
- (b) where there is a mismatch between the maturity of the exposure and the maturity of the credit protection, the collateral must not be recognised; and
- (2) where the issuer of securities used as collateral is an institution, that collateral may not constitute the institution's capital resources.
The financial collateral comprehensive method
BIPRU 10.2.14
See Notes
A firm which uses the financial collateral comprehensive method (but not under the full IRB approach (see BIPRU 10.2.10R)) may calculate the value of its exposures to a counterparty or to a group of connected clients as being the fully adjusted value of the exposures to the counterparty or group of connected clients calculated in accordance with the financial collateral comprehensive method under BIPRU 5 (Credit risk mitigation) and, if relevant, BIPRU 4.10 (The IRB approach: Credit risk mitigation) taking into account the credit risk mitigation, volatility adjustments and any maturity mismatch (E*) in accordance with those rules.
[Note: BCD Article 114(1) first paragraph]
BIPRU 10.2.15
See Notes
BIPRU 10.2.16
See Notes
For the purposes of BIPRU 10.2.9R (Recognition of credit risk mitigation), a firm may use both the financial collateral comprehensive method and the financial collateral simple method where it is permitted to use both those methods under BIPRU 5.4.16 R.
[Note: BCD Article 117(1) last paragraph]
BIPRU 10.2.17
See Notes
BIPRU 10.2.18
See Notes
Firms using full IRB approach
BIPRU 10.2.19
See Notes
A firm that uses the full IRB approach (see BIPRU 10.2.10R) may recognise the effects described in (1) in calculating the value of its exposures to a counterparty or to a group of connected clients for the purposes of BIPRU 10.5 (Limits on exposures) if:
- (1) the firm is able to satisfy the appropriate regulator that it can estimate the effects of financial collateral on its exposures separately from other LGD-relevant aspects;
- (2) the firm is able to demonstrate the suitability of the estimates produced; and
- (3) the firm's IRB permission specifically allows it (also see BIPRU 4.1.23 R (4)).
[Note: BCD Article 114(2) first and second paragraphs]
BIPRU 10.2.20
See Notes
If a firm that uses the full IRB approach (see BIPRU 10.2.10R) uses its own estimates of the effects of financial collateral on its exposures for large exposures purposes, it must do so on a consistent basis and on a basis consistent with the approach adopted in the calculation of capital requirements. A firm may only use one of BIPRU 10.2.14R (Financial collateral comprehensive method under standardised approach and IRB approach) and BIPRU 10.2.19R (Own estimates of effects of financial collateral).
[Note: BCD Article 114(2) third and fourth paragraphs]
BIPRU 10.2.21
See Notes
If a firm relies on BIPRU 10.2.19R (Own estimates of effects of financial collateral) the recognition of credit protection is subject to the relevant requirements of the IRB approach.
[Note: BCD Article 112(3)]
Stress testing of credit risk concentrations
BIPRU 10.2.22
See Notes
- (1) A firm which:
- (a) uses the financial collateral comprehensive method; or
- (b) calculates the value of its exposures in accordance with BIPRU 10.2.19R (Own estimates of effects of financial collateral);
- must conduct periodic stress tests of its credit risk concentrations including in relation to the realisable value of any collateral taken.
- (2) The stress tests required by this rule must address:
- (a) risks arising from potential changes in market conditions that could adversely impact the firm's adequacy of capital resources; and
- (b) risks arising from the realisation of collateral in stressed situations.
- (3) A firm must be able to satisfy the appropriate regulator that the stress tests it carries out under this rule are adequate and appropriate for the assessment of such risks.
- (4) In the event that a stress test carried out in accordance with this rule indicates a lower realisable value of collateral taken than would be permitted to be taken into account under BIPRU 10.2.14R (Financial collateral comprehensive method) or BIPRU 10.2.19R (Own estimates of effect of financial collateral) as appropriate, the value of collateral permitted to be recognised in calculating the value of exposures for the purposes of BIPRU 10.5 (Limits on exposures) is the lower value.
- (5) A firm to which this rule applies must include in its strategy to address concentration risk:
- (a) policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures;
- (b) policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account under BIPRU 10.2.14R (Financial collateral comprehensive method) or BIPRU 10.2.19R (Own estimates of effects of financial collateral); and
- (c) policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, and in particular large indirect credit exposures (for example to a single issuer of securities taken as collateral).
[Note: BCD Article 114(3)]
BIPRU 10.2.23
See Notes
Unless, and to the extent, permitted under BIPRU 10.6.3R (11) (Residential mortgages and leasing transactions) or BIPRU 10.6.3R (12) (Commercial mortgages and leasing transactions), a firm must not take into account the following collateral for the purposes of this section:
- (1) amounts receivable linked to a commercial transaction or transactions with an original maturity of less than or equal to one year;
- (2) a physical item of a type other than those types indicated in BIPRU 4.10.6 R to BIPRU 4.10.12 R (Eligibility of real estate collateral); and
- (3) property leased under a leasing transaction.
[Note: BCD Article 112(4)]
BIPRU 10.2.24
See Notes
BIPRU 10.3
Identification of counterparties
- 01/01/2007
BIPRU 10.3.1
See Notes
BIPRU 10.3.2
See Notes
Examples of a counterparty include:
- (1) the customer or borrower; this includes governments, local authorities, public sector entities, individual trusts, corporations, unincorporated businesses (whether as sole traders or partnerships) and non-profit making bodies;
- (2) where the firm is providing a guarantee, the person guaranteed;
- (3) for a derivatives contract, the person with whom the contract was made;
- (4) for exchange traded contracts novated through a central clearing mechanism, that central clearing mechanism;
- (5) where a bill held by a firm has been accepted by a credit institution, the acceptor; and
- (6) where a firm is funding the activities of a company that trades on an exchange (whether as principal or on behalf of clients), that company.
Identification of counterparties for guaranteed and collateralised exposures
BIPRU 10.3.3
See Notes
- (1) Where an exposure to a counterparty is:
- (a) guaranteed by a third party, a firm may treat the portion of the exposure which is guaranteed as having been incurred to the guarantor rather than to the counterparty, provided that the unsecured exposure to the guarantor would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the counterparty under the standardised approach; or
- (b) secured by collateral issued by a third party, a firm may treat the portion of the exposure collateralised by the market value of recognised collateral as having been incurred to the third party rather than to the counterparty, provided that the collateralised portion of the exposure would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the counterparty under the standardised approach.
- [Note: BCD Article 117(1)(a) and (b)]
- (2) In deciding whether or not to treat the exposure as an exposure to the third party a firm must ensure that the identification of counterparties for concentration risk purposes is applied in a consistent manner.
- (3) [deleted]
- (4) [deleted]
- (5) [deleted]
- (6) A guarantee or collateral may only be treated in accordance with (1) if the firm complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation)and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) for the purposes of calculating risk weighted exposure amounts.
- (7) For the purpose of this rule, guarantee includes a credit derivative recognised under BIPRU 5 and, if applicable, BIPRU 4.10, other than a credit linked note.
- [Note: BCD Article 112(1)]
BIPRU 10.3.4
See Notes
- (1) If a firm treats an exposure to a counterparty as guaranteed, or secured by collateral issued, by a third party for the purposes of BIPRU 5 (Credit risk mitigation), it should apply the same approach on a consistent basis when identifying a counterparty for the purposes of this chapter.
- (2) An example of the eligibility requirements and other minimum requirements set out in BIPRU 5 as referred to in BIPRU 10.3.3 R (6) is the requirement for a legal review in BIPRU 5.2.3 R.
- (3) Where the guarantee is denominated in a currency different from that in which the exposure is denominated, the provisions on the treatment of currency mismatch for unfunded credit protection in BIPRU 5.7 (Unfunded credit protection) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the calculation of the amount of the exposure deemed to be covered.
- [Note: BCD Article 117(2)(a)]
- (4) Where there is a mismatch between the maturity of the exposure and the maturity of the protection provided by guarantee, BIPRU 5.8 (Maturity mismatches) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the treatment for mismatch.
- [Note: BCD Article 117(2)(b)]
- (5) For the purpose of BIPRU 10.3.3R (1), where there is a mismatch between the maturity of the exposure and the maturity of the protection provided by collateral, BIPRU 5.8.7 R (Valuation of protection: Transactions subject to funded credit protection - financial collateral simple method) requires that the collateral must not be recognised.
- [Note: BCD Article 117(1) second paragraph]
- (6) In relation to a guarantee, BIPRU 5.7 (Unfunded credit protection) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the treatment of partial coverage.
- [Note: BCD Article 117(2)(c)]
Groups of connected clients
BIPRU 10.3.5
See Notes
A group of connected clients means one of the following:
- (1) two or more persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others; or
- (2) two or more persons between whom there is no relationship of control as set out in (1) but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, in particular funding or repayment difficulties, the other or all of the others would be likely to encounter funding or repayment difficulties.
[Note: Article 4(45) of the Banking Consolidation Directive]
BIPRU 10.3.5A
See Notes
BIPRU 10.3.5B
See Notes
BIPRU 10.3.6
See Notes
- (1) In identifying a group of connected clients, a firm should consider both third party clients and counterparties that are, or may be, connected to the firm itself.
- (2) Relationships between individual counterparties or between the firm and a counterparty which might be considered to constitute a single risk for the purposes of the definition of group of connected clients include:
- (a) undertakings in the same group;
- (b) companies whose ultimate owner (whether wholly or significantly) is the same individual or individuals, and which do not have a formal group structure;
- (c) companies having common directors or management;
- (d) where the same persons significantly influence the governing body of each of the undertakings;
- (e) where the firm has an exposure to an undertaking that was not incurred for the clear commercial advantage of the firm or the firm's group and which is not on an arm's length basis;
- (f) counterparties linked by cross guarantees;
- (g) where it is likely that the financial problems of one counterparty would cause difficulties for the other counterparty or counterparties in terms of full and timely repayment of liabilities;
- (h) where the funding problems of one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source, which may be the firm itself;
- (i) where counterparties rely on the firm for their main funding source, for example through explicit or implicit liquidity support or credit support; and
- (j) where the insolvency or default of one of them is likely to be associated with the insolvency or default of the other(s).
BIPRU 10.3.7
See Notes
BIPRU 10.3.8A
See Notes
- (1) The Committee of European Banking Supervisors (CEBS) has issued guidelines in relation to the definition of a group of connected clients, in particular with reference to the concepts of control and economic interconnection. These guidelines can be found at: www.eba.europa.eu/documents/Publications/Standards---Guidelines/2009/Large-exposures_all/Guidelines-on-Large-Exposures-reporting.aspx.
- (2) In applying the CEBS guidelines in relation to counterparties that are connected to the firm itself, the PRA has issued guidance in respect of structured finance vehicles. This guidance can be found at http://www.fsa.gov.uk/library/policy/policy/2012/12-21.shtml.
Exposures to counterparties and groups of connected clients
BIPRU 10.3.9
See Notes
BIPRU 10.3.10
See Notes
Exposures to trustees
BIPRU 10.3.12
See Notes
BIPRU 10.3.13
See Notes
When considering whether the treatment described in BIPRU 10.3.12 G is misleading, factors a firm should consider include:
- (1) the degree of independence of control of the fund, including the relation of the fund's board and senior management to the firm or to other funds or to both;
- (2) the terms on which the counterparty, when acting as trustee, is able to satisfy its obligation to the firm out of the fund of which it is trustee;
- (3) whether the beneficial owners of the fund are connected to the firm, or related to other funds managed within the firm's group, or both; and
- (4) for a counterparty that is connected to the firm itself, whether the exposure arises from a transaction entered into on an arm's length basis.
BIPRU 10.3.14
See Notes
In deciding whether a transaction is at arm's length for the purposes of BIPRU 10.3.6G (2)(f), BIPRU 10.3.13 G (4) and BIPRU 10.10A.1R (1)(d), the following factors should be taken into account:
- (1) the extent to which the person to whom the firm has an exposure ('A') can influence the firm's operations, through e.g. the exercise of voting rights;
- (2) the management role of A where A is also a director of the firm; and
- (3) whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.
Exposures to underlying assets
BIPRU 10.3.15
See Notes
Where under a transaction or scheme (for example, securitisation positions or claims in the form of CIUs) there is an exposure to underlying assets, a firm must assess the exposure to the transaction or scheme, or its underlying exposures, or both, in order to determine the existence of a group of connected clients. For the purpose of this rule, a firm must evaluate the economic substance and the risks inherent in the structure of the transaction.
[Note: BCD Article 106(3)]
BIPRU 10.3.16
See Notes
BIPRU 10.5
Limits on exposures
- 31/12/2010
- Past version of BIPRU 10.5 before 31/12/2010
Definition of large exposure
BIPRU 10.5.1
See Notes
A large exposure of a firm means its total exposure to a counterparty or a group of connected clients, whether in the firm's non-trading book or trading book or both, which in aggregate equals or exceeds 10% of the firm's capital resources.
[Note: BCD Article 108]
Definition of capital resources
BIPRU 10.5.2
See Notes
BIPRU 10.5.3
See Notes
BIPRU 10.5.4
See Notes
BIPRU 10.5.5
See Notes
A firm must not take into account the following items:
- (1) surplus provisions (see GENPRU 2.2.190 R to GENPRU 2.2.193 R); or
- (2) expected loss amounts and other negative amounts (see GENPRU 2.2.236 R); or
- (3) securitisation positions (see GENPRU 2.2.237 R).
[Note: BCD Article 66(3)]
Large exposure limits
BIPRU 10.5.6
See Notes
A firm must ensure that the total amount of its exposures to the following does not exceed 25% of its capital resources (as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R):
- (1) a counterparty; or
- (2) a group of connected clients
[Note: BCD Article 111(1) first paragraph]
BIPRU 10.6
Exemptions
- 01/01/2007
General exemptions
BIPRU 10.6.1
See Notes
BIPRU 10.6.2
See Notes
- (1) In BIPRU 10.6.3 R and BIPRU 10.6.4 R, references to guarantees include credit derivatives recognised under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation), other than credit linked notes.
- [Note: BCD Article 112(1)]
- (2) BIPRU 10.3.3 R (6) (Compliance with minimum credit risk mitigation requirements) applies for the purpose of BIPRU 10.6.3 R and BIPRU 10.6.4 R.
BIPRU 10.6.3
See Notes
The following exposures are exempt from the limits described in BIPRU 10.5 (Limits on exposures):
- (1) asset items constituting claims on central governments or central banks which claims would unsecured receive a 0% risk weight under the standardised approach;
- (2) asset items constituting claims on international organisations or multilateral development banks which claims would unsecured receive a 0% risk weight under the standardised approach;
- (3) asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations or multilateral development banks, where unsecured claims on the entity providing the guarantee would receive a 0% risk weight under the standardised approach;
- (4) other exposures attributable to, or guaranteed by, central governments, central banks, international organisations, multilateral development banks or public sector entities where unsecured claims on the entity to which the exposure is attributable or by which it is guaranteed would receive a 0% risk weight under the standardised approach;
- (5) [deleted]
- (6) [deleted]
- (7) asset items constituting claims on EEA States' regional governments or local authorities which claims would receive a 0% risk weight under the standardised approach;
- (8) other exposures to or guaranteed by EEA States' regional governments or local authorities claims on which would receive a 0% risk weight under the standardised approach;
- (9) [deleted]
- (10) [deleted]
- (11) loans secured by mortgages on residential property and leasing transactions under which the lessor retains full ownership of the residential property leased for as long as the lessee has not exercised his option to purchase, in all cases up to 50% of the value of the residential property concerned;
- (12) the following, where they would receive a 50% risk weight under the standardised approach, and only up to 50% of the value of the commercial property concerned:
- (a) exposures secured by mortgages on offices or other commercial premises; and
- (b) exposures related to property leasing transactions concerning offices or other commercial premises;
- (13) [deleted]
- (14) asset items and other exposures secured by collateral in the form of cash deposits placed with the lending firm or with a credit institution which is the parent undertaking or a subsidiary undertaking of the lending firm;
- (15) asset items and other exposures secured by collateral in the form of certificates of deposit issued by the lending firm or by a credit institution which is the parent undertaking or a subsidiary undertaking of the lending firm and lodged with either of them; and
- (16) exposures arising from undrawn credit facilities that are classified as low risk off-balance sheet items in BIPRU 3.7.2 R and provided that an agreement has been concluded with the counterparty or group of connected clients under which the facility may be drawn only if it has been ascertained that it will not cause the limit in BIPRU 10.5.6 R (Limits on exposures) to be exceeded.
[Note: BCD Articles 113(3), 115(1) sub-paragraphs (a) and (b) and 115(2) sub-paragraphs (a) and (b)]
BIPRU 10.6.4
See Notes
For the purposes of BIPRU 10.6.3R (11) (Loan secured by residential mortgages and leasing transactions):
- (1) the requirements set out in BIPRU 3.4.64 R to BIPRU 3.4.73 R (Requirements for recognition of real estate collateral) apply;
- (2) the value of the property must be calculated on the basis of prudent valuation standards laid down by law, regulation or administrative provisions;
- (3) valuation must be carried out at least once every three years;
- (4) the valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R apply; and
- (5) residential property means a residence to be occupied or let by the borrower.
[Note: BCD Article 115(1) second to fourth paragraphs]
BIPRU 10.6.28
See Notes
For the purposes of BIPRU 10.6.3R (12) (Loans secured by commercial mortgages and leasing transactions):
- (1) the value of the property must be calculated on the basis of prudent valuation standards laid down by law, regulation or administrative provisions; and
- (2) the commercial property concerned must be fully constructed, leased and produce appropriate rental income.
[Note: BCD Article 115(2) second and third paragraphs]
BIPRU 10.6.29
See Notes
BIPRU 10.6.30
See Notes
BIPRU 10.6.31
See Notes
Institutional exemption
BIPRU 10.6.32
See Notes
Where a counterparty is an institution or where a group of connected clients includes one or more institutions:
- (1) the total amount of a firm's exposures to the same counterparty or group of connected clients may exceed 25% of the firm's capital resources so long as the total amount of such exposures does not exceed €150 million;
- (2) the firm must ensure that the total amount of its exposures, after taking into account the effect of credit risk mitigation, to other persons in that group of connected clients which are not institutions does not exceed 25% of the firm's capital resources;
- (3) where the amount of €150 million in (1) is higher than an amount equivalent to 25% of the firm's capital resources, the firm must ensure the following:
- (a) the total amount of those exposures in (1) in relation to the same counterparty or group of connected clients does not exceed a reasonable limit in terms of the firm's capital resources; and
- (b) in any case, the limit in this rule must not exceed 100% of the firm's capital resources; and
capital resources are as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R (Stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions)); and
- (4) for the purpose of (3), the firm must determine the limit consistently with the policies and procedures required under BIPRU 10.12.3 R (Concentration risk policies).
[Note: BCD Article 111(1) second to fourth paragraphs]
BIPRU 10.6.33
See Notes
Sovereign large exposure waiver
BIPRU 10.6.34
See Notes
BIPRU 10.6.35
See Notes
BIPRU 10.6.36
See Notes
For the purpose of the sovereign large exposure waiver, and in relation to a firm, the exposures referred to in BIPRU 10.6.35R are limited to the following:
- (1) asset items constituting claims on central banks not within BIPRU 10.6.3R (1), which are in the form of required minimum reserves held at those central banks which are denominated and funded in their national currencies; and
- (2) asset items constituting claims on central governments not within BIPRU 10.6.3R (1), which are in the form of statutory liquidity requirements held in government securities denominated and funded in their national currencies.
[Note: BCD Article 113(4)(g) and (h)]
BIPRU 10.6.37
See Notes
BIPRU 10.8A
Intra-group exposures: core UK group
- 31/12/2010
Application
BIPRU 10.8A.1
See Notes
This section applies to a firm if:
- (1) it is a member of a core UK group (under BIPRU 3.2.25 R and this section); and
- (2) it has a core UK group waiver.
Definition of core UK group
BIPRU 10.8A.2
See Notes
An undertaking is a member of a firm's core UK group if, in relation to the firm, that undertaking satisfies the following conditions:
- (1) it is a core concentration risk group counterparty;
- (2) it is an institution, financial holding company, financial institution, asset management company or ancillary services undertaking;
- (3) (in relation to a subsidiary undertaking) 100% of the voting rights attaching to the shares in its capital is held by the firm or a financial holding company (or a subsidiary undertaking of the financial holding company), whether individually or jointly, and that firm or financial holding company (or its subsidiary undertaking) must have the right to appoint or remove a majority of the members of the board of directors, committee of management or other governing body of the undertaking;
- (4) it is subject to the same risk evaluation, measurement and control procedures as the firm;
- (5) it is incorporated in the United Kingdom; and
- (6) there is no current or foreseen material practical or legal impediment to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.
BIPRU 10.8A.3
See Notes
BIPRU 10.8A.4
See Notes
Minimum standards
BIPRU 10.8A.5
See Notes
- (1) For the purpose of BIPRU 10.8A.2R (6), a firm must be able to demonstrate fully to the appropriate regulator the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.
- (2) In relation to a counterparty that is not a firm, the arrangements referred to in (1) must include a legally binding agreement with each firm that is a member of the core UK group that it will promptly on demand by the firm increase that firm's capital resources by an amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 (Large exposures requirements) and any other requirements relating to capital resources or concentration risk imposed on a firm by or under the regulatory system.
BIPRU 10.8A.6
See Notes
The appropriate regulator will consider the following criteria when assessing whether the condition in BIPRU 10.8A.2R (6) is going to be met:
- (1) the speed with which funds can be transferred or liabilities repaid to the firm and the simplicity of the method for the transfer or repayment;
- (2) whether there are any interests other than those of the firm in the core concentration risk group counterparty and what impact those other interests may have on the firm's control over the core group concentration risk group counterparty and the ability of the firm to require a transfer of funds or repayment of liabilities;
- (3) whether there are any tax disadvantages for the firm or the core concentration risk group counterparty as a result of the transfer of funds or repayment of liabilities;
- (4) whether the purpose of the core concentration risk group counterparty prejudices the prompt transfer of funds or repayment of liabilities;
- (5) whether the legal structure of the core concentration risk group counterparty prejudices the prompt transfer of funds or repayment of liabilities;
- (6) whether the contractual relationships of the core concentration risk group counterparty with the firm and other third parties prejudices the prompt transfer of funds or repayment of liabilities; and
- (7) whether past and proposed flows of funds between the core concentration risk group counterparty and the firm demonstrate the ability to make prompt transfer of funds or repayment of liabilities.
BIPRU 10.8A.7
See Notes
- (1) Firms are referred to the guidance relating to 0% risk weights for exposures within a core UK group under the standardised approach as follows:
- (a) BIPRU 3.2.28 G in respect of BIPRU 10.8A.2R (3) on same risk evaluation, measurement and control procedures; and
- (b) BIPRU 3.2.30 G and BIPRU 3.2.31 G in respect of BIPRU 10.8A.2R (6) on prompt transfer of capital resources and repayment of liabilities.
- (2) For the purpose of BIPRU 10.8A.5R (2), the obligation to increase the firm's capital resources may be limited to capital resources available to the counterparty and may reasonably exclude such amount of capital resources that, if transferred to the firm, would cause the counterparty to become balance sheet insolvent in the manner contemplated in section 123(2) of the Insolvency Act 1986.
Exemption for a core UK group
BIPRU 10.8A.8
See Notes
BIPRU 10.8A.9
See Notes
Calculation of capital resources for a core UK group
BIPRU 10.8A.10
See Notes
BIPRU 10.8A.11
See Notes
Notification
BIPRU 10.8A.12
See Notes
BIPRU 10.9A
Intra-group exposures: non-core large exposures group
- 31/12/2010
Application
BIPRU 10.9A.1
See Notes
This section applies to a firm if it has:
- (1) a non-core large exposures group; and
- (2) a non-core large exposures group waiver.
Definition of non-core large exposures group
BIPRU 10.9A.3
See Notes
The non-core large exposures group of a firm consists of each non-core concentration risk group counterparty of the firm that is not a member of its core UK group but satisfies all other conditions for membership of the firm's core UK group except for the following:
- (1) BIPRU 10.8A.2R (1) (Core concentration risk group counterparty);
- (2) BIPRU 10.8A.2R (5) (Establishment in the United Kingdom); and
- (3) BIPRU 10.8A.5R (2) (Capital maintenance arrangements).
Definition of non-core concentration risk group counterparty
BIPRU 10.9A.4
See Notes
A non-core concentration risk group counterparty (in relation to a firm) is a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking, provided that (in each case) both the counterparty and the firm satisfy one of the following conditions:
- (1) they are included within the scope of consolidation on a full basis with respect to the same UK consolidation group and BIPRU 8.3.1 R applies to the firm with respect to that UK consolidation group; or
- (2) they are included within the scope of consolidation on a full basis with respect to the same group by a competent authority of an EEA State other than the United Kingdom under the CRD implementation measures about consolidated supervision for that EEA State; or
- (3) they are included within the scope of consolidation on a full basis with respect to the same group by a third country competent authority under prudential rules for the banking sector or investment services sector of or administered by that third country competent authority and the firm or another EEA firm in that group has been notified in writing by the appropriate regulator or a competent authority of another EEA State pursuant to Article 143 of the Banking Consolidation Directive that that group is subject to equivalent supervision.
Revised large exposure limits for a non-core large exposures group
BIPRU 10.9A.5
See Notes
A firm to which this section applies must ensure that the rules listed in BIPRU 10.9A.6R are complied with on a consolidated basis subject to the following modifications:
- (1) (if the firm is not a member of a core UK group) the rules apply in relation to exposures of the firm to its non-core large exposures group as if it is a single undertaking;
- (2) if the firm is a member of a core UK group:
- (a) the rules apply in relation to its core UK group rather than in relation to the firm; and
- (b) the core UK group and the non-core large exposures group must each be treated as a single undertaking.
BIPRU 10.9A.6
See Notes
The rules referred to in BIPRU 10.9A.5R are:
- (1) BIPRU 10.5.6 R (25% large exposures limit);
- (2) BIPRU 10.10A.2 R (Trading book limits) other than BIPRU 10.10A.2R (2) (CNCOM); and
- (3) BIPRU 10.10A.3 R (500% limit for trading book excess exposures).
Non-trading book backstop limit for a non-core large exposures group
BIPRU 10.9A.7
See Notes
A firm must ensure that the total amount of non-trading book exposures between:
- (1) itself and members of its non-core large exposures group does not exceed 100% of the firm's capital resources; or
- (2) if it is a member of a core UK group, the members of its core UK group and members of its non-core large exposures group does not exceed 100% of the capital resources of the firm's core UK group.
Concentrated exposures in a non-core large exposures group
BIPRU 10.9A.8
See Notes
- (1) Subject to the limit in BIPRU 10.9A.7R (Back-stop large exposures limit), a firm may concentrate its intra-group exposure to a particular member of its non-core large exposures group in excess of 25% of the capital resources of the firm's core UK group.
- (2) A firm may not apply (1) unless it has given prior written notice to the appropriate regulator that it intends to do so.
- (3) The written notice referred to in (2) must contain the following:
- (a) an explanation on how the firm will ensure that it will still meet the requirement in BIPRU 10.9A.7R (Backstop large exposures limit) on a continuing basis when applying (1);
- (b) details of the counterparty, the size of the exposure and the expected duration of the exposure; and
- (c) an explanation of the reason for the exposure.
- (4) If a firm stops applying (1) it may start to apply it again if it notifies the appropriate regulator under (2) that it intends to do so.
Calculation of capital resources for a core UK group
BIPRU 10.9A.9
See Notes
Exemption for intra-group exposures on a solo basis
BIPRU 10.9A.10
See Notes
BIPRU 10.9A.11
See Notes
Notification
BIPRU 10.9A.12
See Notes
BIPRU 10.10A
Trading book limits
Application
BIPRU 10.10A.1
See Notes
This section only applies to exposures in a firm's trading book to counterparties which fulfil the following conditions:
- (1) subject to (2), and in relation to a firm, a counterparty ('P') to whom the firm has an exposure and who fulfils at least one of the following conditions:
- (a) P is closely related to the firm; or
- (b) P is an associate of the firm; or
- (c) the same persons significantly influence the governing body of P and of the firm; or
- (d) the firm has an exposure to P that was not incurred for the clear commercial advantage of the firm or the firm's group and which is not on an arm's length basis;
- (2) where P is Business Growth Fund plc or another financial institution which makes venture capital investments and the firm is entitled to ignore that financial institution in accordance with GENPRU 2.2.209 R (2) for the purposes of determining whether there is a material holding, (1) applies with the following modifications to the definition of associate:
- (a) paragraph (3)(c) (community of interest) of that definition does not apply; and
- (b) in applying paragraph (3)(a) (affiliated company) of that definition, paragraph (1)(e) (participating interests) of the definition of group does not apply.
BIPRU 10.10A.1A
See Notes
Trading book limits
BIPRU 10.10A.2
See Notes
Exposures in a firm's trading book to counterparties falling within BIPRU 10.10A.1 R are exempt from the 25% limit in BIPRU 10.5.6 R (large exposures limit) if:
- (1) the total amount of the exposures on the firm's non-trading book to counterparties falling within BIPRU 10.10A.1 R does not exceed the limit laid down in that rule, calculated with reference to the definition of capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) as set out in BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R, so that the excess arises entirely on the trading book; and
- (2) the firm meets the additional capital requirements relating to the concentration risk capital component (CNCOM) in relation to the relevant trading book exposures.
BIPRU 10.10A.2A
See Notes
BIPRU 10.10A.3
See Notes
How to calculate the concentration risk capital component
BIPRU 10.10A.4
See Notes
BIPRU 10.10A.5
See Notes
BIPRU 10.10A.6
See Notes
BIPRU 10.10A.7
See Notes
BIPRU 10.10A.8
See Notes
A firm must calculate its individual counterparty CNCOM for its exposures to its counterparties falling within BIPRU 10.10A.1 R as follows:
- (1) break down its total exposure into its trading book and non-trading book components;
- (2) calculate 25% of the firm's capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) to determine the total amount of the exposures in the firm's non-trading book does not exceed this limit in accordance with BIPRU 10.10A.2R (1);
- (3) calculate 25% of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions) and deduct those parts of the total exposure which are in the non-trading book falling within the limit in (2);
- (4) a firm must allocate (in the order set out in (6)) trading book exposures to its counterparties falling within BIPRU 10.10A.1 R to the unutilised portion of the 25% limit of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions) remaining after deducting the non-trading book exposures in accordance with (3);
- (5) no further trading book exposures can be allocated once the 25% limit in (4) has been reached; the remaining trading book exposures constitute the trading book concentration risk excess with respect to its counterparties falling within BIPRU 10.10A.1 R;
- (6) for the purposes of (4), a firm must allocate the trading book exposures in the order of the level of capital requirements, starting with the lowest capital requirements for specific risk under the market risk capital requirement and/or the lowest capital requirements under the counterparty risk capital component and moving towards those trading book exposures with the highest capital requirements last;
- (7) the individual counterparty CNCOM is the sum of the capital requirements for each individual exposure included in the trading book concentration risk excess in accordance with (8) and (9) (each such capital requirement being an individual CNCOM);
- (8) if the trading book concentration risk excess has persisted for 10 business days or less (irrespective of the age of each component part), the individual CNCOMs must be calculated in accordance with this formula:
- each individual CNCOM = capital requirement referred to in (6) 200%;
- (9) if the trading book concentration risk excess has persisted for more than 10 business days (irrespective of the age of each component part), the individual CNCOMs must be calculated in accordance with this formula:
- each individual CNCOM = capital requirement referred to in (6) appropriate percentage in BIPRU 10.10A.9R.
BIPRU 10.10A.9
See Notes
The appropriate percentage referred to in BIPRU 10.10A.8R (9) must be established in accordance with the following:
- (1) the individual exposures included in the trading book concentration risk excess must be assigned to the bands in the first column of the table in BIPRU 10.10A.10R;
- (2) the maximum amount that may be put in any band other than the last equals the percentage of the firm's capital resources in column 1 of that table;
- (3) no amount may be allocated to the second or any later band unless the one before has been filled;
- (4) exposures must be assigned to the bands in the order established by BIPRU 10.10A.8R (6); and
- (5) for the purposes of (4), those exposures with the lowest capital requirements (as referred to in BIPRU 10.10A.8R (6)) must be assigned first and those with the highest last.
Percentages applicable under BIPRU 10.10A.9R
BIPRU 10.10A.10
See Notes
Trading book concentration risk excess (as a percentage of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions)) | Percentage |
Up to 40% | 200% |
Portion from 40% - 60% | 300% |
Portion from 60% - 80% | 400% |
Portion from 80% - 100% | 500% |
Portion from 100% - 250% | 600% |
Portion over 250% | 900% |
How CNCOM applies to the non-core large exposures group
BIPRU 10.10A.11
See Notes
A firm that has a non-core large exposures group waiver must meet the CNCOM in relation to exposures to members of its non-core large exposures group in accordance with this section, subject to the following:
- (1) in BIPRU 10.10A.8 R, 25% is substituted with 100%; and
- (2) the excess exposures for the purpose of BIPRU 10.10A.8R (9) must be assigned to the bands in the first column of the table in BIPRU 10.10A.10 R beginning with the portion from 100% - 250%.
Core UK group and non-core large exposures group: treatment of the trading book concentration risk excess
BIPRU 10.10A.12
See Notes
- (1) This rule applies to a firm that has a core UK group waiver or a non-core large exposures group waiver.
- (2) A firm must calculate the CNCOM in relation to the core UK group in question in accordance with BIPRU 10.10A.2 R (Trading book limits).
- (3) A firm must then calculate the percentage of the amount calculated under (2) which is attributable to exposures of the firm.
- (4) A firm must add the result of the calculation in (3) to the CNCOM applied to the firm on a solo basis in accordance with BIPRU 10.10A.5R to BIPRU 10.10A.11R (How to calculate the concentration risk capital component).
Examples
BIPRU 10.10A.13
See Notes
- (1) The table in BIPRU 10.10A.14G sets out an example of a CNCOM calculation under BIPRU 10.10A.8R.
- (2) BIPRU 10 Annex 2 G (Examples of treatment of exposures under BIPRU 10) sets out examples of how the large exposures limits apply, particularly in relation to a core UK group and non-core large exposures group, taking into account various examples of firm's exposure profiles.
Example of a CNCOM calculation (all numbers 000s)
BIPRU 10.10A.14
See Notes
Capital resources position | |||
(1) | An firm's capital resources comprises: | ||
Tier one and tier two capital resources | 1000 | ||
Eligible tier three capital resources | 100 | ||
Amended capital resources | 1100 | ||
(2) | The components of the large exposure comprise: | ||
(a) Non-trading book exposure | 200 | ||
(b) Mark to market value of trading book securities: | |||
% specific risk weight | |||
Short: qualifying bond | 1.00 | (20) | |
Long: qualifying commercial paper | 0.25 | 100 | |
Long: equity | 4.00 | 150 | |
Long: qualifying convertible | 1.60 | 30 | |
Total net long securities position: | 260 | ||
Total net large exposures position [(a) + (b)] | 460 | ||
Calculating the exposure for which incremental capital is needed | |||
(3) | The short position in the qualifying bond is offset against the highest specific risk weight items - in this case equities: | ||
Net long equity position (150- 20) | 130 | ||
(4) | The remaining items are ranked according to specific risk weight. | ||
% specific risk weight | Security | ||
0.25 | Qualifying commercial paper | 100 | |
1.60 | Qualifying convertible | 30 | |
4.00 | Equity (net) | 130 | |
(5) | The 'headroom' between the non-trading book exposure and 25% of the amended capital resources is calculated. | ||
25% of amended capital base (1100) | 275 | ||
Non-trading book exposure | 200 | ||
Headroom | 75 | ||
(6) | Applying the securities positions in ascending order of specific risk weight, 75 of the 100 qualifying commercial paper may be counted before 25% of the amended capital base is reached. The remaining 25 of qualifying commercial paper, along with 30 qualifying convertible and 130 equity (net) are traded securities exposures in excess of the limit and should therefore be covered by incremental capital. The amount of incremental capital should be included in the calculation for determining how much trading book capital a firm should have. |
||
(7) | If the excess exposure has been outstanding for 10 days or less, the specific risk weights for the elements over 25% of amended capital resources should be doubled. The 25% limit (275) is taken up by 200 non-trading book exposure and 75 trading book exposure within the limit. These two items, when added to the items in bold below, total 460. 460 is the total net large exposures position as set out in (2) above. |
||
Qualifying commercial paper | 25 x 0.25% x 200% = | 0.125 | |
Qualifying convertible | 30 x 1.60% x 200% = | 0.960 | |
Equity | 130 x 4% x 200% = | 10.400 | |
Additional capital requirement | 11.485 | ||
(8) | If the excess exposure has been outstanding for more than 10 days, the 25% limit (275) is taken up by 200 non-trading book exposure and 75 trading book exposure within the limit. These two items, when added to the items in bold below, total 460. 460 is the total net large exposures position as set out in (2) above. | ||
(a) | Over 25% and up to 40% of amended capital base at 200% (40% of 1100 = 440) | ||
Amount of trading book concentration risk excess = 185 Appropriate % Multiplier Band = 200% |
|||
25 x 0.25% x 200% = | 0.125 | ||
30 x 1.60% x 200% = | 0.960 | ||
110 x 4.00% x 200% = | 8.800 | ||
(b) | Excess exposure 40% - 60% of amended capital base at 300% | ||
20 x 4.00% x 300% = | 2.400 | ||
Additional capital requirement [(a)+(b)] | 12.285 |
BIPRU 10.12
Systems and controls and general
- 01/01/2007
Systems and controls
BIPRU 10.12.1
See Notes
BIPRU 10.12.2
See Notes
Concentration risk policies
BIPRU 10.12.3
See Notes
A firm must be able to demonstrate to the appropriate regulator that:
- (1) it has written policies and procedures to address and control the concentration risk arising from:
- (a) exposures to counterparties and groups of connected clients;
- (b) counterparties in the same economic sector or geographic region;
- (c) the same activity or commodity; and
- (d) the application of credit risk mitigation techniques, including in particular risks associated with large indirect credit exposures (for example to a single collateral issuer); and
- (2) those policies and procedures are implemented.
Reporting
BIPRU 10.12.4
See Notes
Artificial transactions
BIPRU 10.12.5
See Notes
In line with the general principle in GENPRU 2.2.1 R (Purposive interpretation) a firm must not, with a view to avoiding the additional capital requirements that it would otherwise incur on exposures exceeding the limits laid down in BIPRU 10.5 (Limits on exposures and large exposures) once those exposures have been maintained for more than ten business days:
BIPRU 10.12.6
See Notes
BIPRU 10 Annex 2
Examples of treatment of intra-group exposures under BIPRU 10
- 31/12/2010
See Notes
Export chapter as
BIPRU 11
Disclosure (Pillar 3)
BIPRU 11.1
Application and purpose
- 01/01/2007
Application
BIPRU 11.1.1
See Notes
Purpose
BIPRU 11.1.2
See Notes
The purpose of BIPRU 11 is to implement:
- (1)
- (a) Article 68(3);
- (b) Article 72;
- (c) Articles 145 to 149; and
- (d) Annex XII;
- of the Banking Consolidation Directive; and
- (2)
- (a) Article 2, in part;
- (b) Point 3 of Article 23, in part; and
- (c) Article 39;
- of the Capital Adequacy Directive.
BIPRU 11.2
Basis of disclosures
- 01/01/2007
Disclosure on an individual basis
BIPRU 11.2.1
See Notes
The following must comply with the obligations laid down in BIPRU 11.3 on an individual basis:
- (1) a firm which is neither a parent undertaking nor a subsidiary undertaking;
- (2) a firm which is excluded from a UK consolidation group or non-EEA sub-group pursuant to BIPRU 8.5; and
- [Note: BCD Article 68(3)]
- (3) a firm which is part of a group which has been granted an investment firm consolidation waiver under BIPRU 8.4;
- [Note: CAD. Article 23]
EEA parent institutions
BIPRU 11.2.2
See Notes
A firm which is an EEA parent institution must comply with the obligations laid down in BIPRU 11.3 on the basis of its consolidated financial situation.
[Note: BCD Article 72(1)]
BIPRU 11.2.3
See Notes
Firms controlled by an EEA parent financial holding company
BIPRU 11.2.4
See Notes
A firm controlled by an EEA parent financial holding company must comply with the obligations laid down in BIPRU 11.3 on the basis of the consolidated financial situation of that EEA parent financial holding company.
[Note: BCD Article 72(2)]
BIPRU 11.2.5
See Notes
Waiver: Comparable disclosures provided on a consolidated basis by a parent undertaking established in a third country
BIPRU 11.2.6
See Notes
A firm which is included within comparable disclosures provided on a consolidated basis by a parent undertaking whose head office is not in an EEA State may apply for a waiver from the relevant disclosure requirements in BIPRU 11.2.2 R - BIPRU 11.2.5 R. The appropriate regulator's approach to granting waivers is set out in the Supervision manual (see SUP 8).
[Note: BCD Article 72(3)]
BIPRU 11.2.7
See Notes
A firm applying for a waiver from one or more of the disclosure requirements in BIPRU 11.2.2 R - BIPRU 11.2.5 R will need to:
- (1) satisfy the appropriate regulator that it is included within comparable disclosures provided on a consolidated basis by a parent undertaking whose head office is not in an EEA State; and
- (2) notify the appropriate regulator of the location where the comparable disclosures are provided.
BIPRU 11.3
Disclosures: Information to be disclosed; Frequency, media and location of disclosures; Verification
- 01/01/2007
Information to be disclosed
BIPRU 11.3.1
See Notes
A firm must publicly disclose the information laid down in BIPRU 11.5 subject to the provisions laid down in BIPRU 11.3.5 R to BIPRU 11.3.7 R.
BIPRU 11.3.2
See Notes
- (1) A firm which has an IRB permission must publicly disclose the information laid down in BIPRU 11.6.1 R to BIPRU 11.6.4 R.
- (2) A firm which recognises credit risk mitigation in accordance with BIPRU 5 must publicly disclose the information laid down in BIPRU 11.6.5 R.
- (3) A firm using the advanced measurement approach for the calculation of its operational risk capital requirement must publicly disclose the information laid down in BIPRU 11.6.6 R.
Disclosure policy
BIPRU 11.3.3
See Notes
- (1) A firm must adopt a formal policy to comply with the disclosure requirements laid down in BIPRU 11.3.1 R and BIPRU 11.3.2 R and have policies for assessing the appropriateness of its disclosures, including their verification and frequency.
- (2) A firm must also have policies for assessing whether its disclosures convey its risk profile comprehensively to market participants. Where those disclosures do not convey its risk profile comprehensively to market participants, a firm must publicly disclose the information necessary in addition to that required according to BIPRU 11.3.3R (1). However, a firm may omit one or more items of information if those items are not, in the light of the criterion specified in BIPRU 11.4.1 R, regarded as material, or if those items are, in the light of the criteria specified in BIPRU 11.4.2 R and BIPRU 11.4.3 R, regarded as proprietary or confidential.
[Note: BCD Article 145(3)]
Rating decisions
BIPRU 11.3.4
See Notes
Exemption from disclosure: Materiality
BIPRU 11.3.5
See Notes
A firm may omit one or more of the disclosures listed in BIPRU 11.5 if the information provided by such disclosures is not, in the light of the criterion specified in BIPRU 11.4.1 R, regarded as material.
[Note: BCD Article 146(1)]
Exemption from disclosure: Proprietary or confidential information
BIPRU 11.3.6
See Notes
A firm may omit one or more items of information included in the disclosures listed in BIPRU 11.5 and BIPRU 11.6 if those items include information which, in the light of the criteria specified in BIPRU 11.4.2 R and BIPRU 11.4.3 R, is regarded as proprietary or confidential.
[Note: BCD Article 146(2)]
BIPRU 11.3.7
See Notes
In the exceptional cases referred to in BIPRU 11.3.6 R, a firm must:
- (1) state in its disclosures:
- (a) the fact that the specific items of information are not disclosed; and
- (b) the reason for non-disclosure; and
- (2) publish more general information about the subject matter of the disclosure requirement, except where these are to be classified as secret or confidential under the criteria set out in BIPRU 11.4.2 R and BIPRU 11.4.3 R.
[Note: BCD Article 146(3)]
Frequency of publication
BIPRU 11.3.8
See Notes
A firm must:
- (1) publish the disclosures required under BIPRU 11.3.1 R to BIPRU 11.3.5 R on an annual basis at a minimum;
- (2) publish disclosures as soon as practicable.
[Note: BCD Article 147(1)]
BIPRU 11.3.9
See Notes
A firm must also determine whether more frequent publication than is provided for in BIPRU 11.3.8 R is necessary in the light of the criteria set out in BIPRU 11.4.4 R.
[Note: BCD Article 147(2)]
Media and location of publication
BIPRU 11.3.10
See Notes
- (1) A firm may determine the appropriate medium, location and means of verification to comply effectively with the disclosure requirements laid down in BIPRU 11.3.1 R to BIPRU 11.3.4 R.
- (2) To the degree feasible, a firm must provide all disclosures in one medium or location.
- (3) Equivalent disclosures made by a firm under accounting, listing or other requirements may be deemed to constitute compliance with BIPRU 11.3.1 R to BIPRU 11.3.4 R.
- (4) If disclosures are not included in the financial statements, a firm must indicate where they can be found.
[Note: BCD Article 148]
BIPRU 11.4
Technical criteria on disclosure: General criteria
- 01/01/2007
Criterion for materiality
BIPRU 11.4.1
See Notes
Criteria: Proprietary or confidential information
BIPRU 11.4.2
See Notes
- (1) A firm must regard information as proprietary information if sharing that information with the public would undermine its competitive position.
- (2) Proprietary information may include information on products or systems which, if shared with competitors, would render a firm's investments therein less valuable.
[Note: BCD Annex XII Part 1 point 2]
BIPRU 11.4.3
See Notes
Criteria: Frequency of publication
BIPRU 11.4.4
See Notes
- (1) A firm must assess the need to publish some or all disclosures more frequently than annually in the light of the relevant characteristics of its business such as:
- (a) scale of operations;
- (b) range of activities;
- (c) presence in different countries;
- (d) involvement in different financial sectors;
- (e) participation in international financial markets; and
- (f) participation in payment, settlement and clearing systems.
- (2) In making its assessment under (1) a firm must pay particular attention to the possible need for more frequent disclosure of:
- (a) items of information laid down in BIPRU 11.5.3 R (2) and BIPRU 11.5.3 R (5), and BIPRU 11.5.4 R (2) - BIPRU 11.5.4 R (5);
- (b) information on risk exposure and other items prone to rapid change.
[Note: BCD Annex XII Part 1 point 4]
Disclosures: Significant subsidiaries
BIPRU 11.4.5
See Notes
A firm which is a significant subsidiary of:
- (1) an EEA parent institution; or
- (2) an EEA parent financial holding company;
must disclose the information specified in BIPRU 11.5.3 R to BIPRU 11.5.4 R on an individual or sub-consolidated basis.
[Note: BCD Annex XII Part 1 point 5]
BIPRU 11.5
Technical criteria on disclosure: General requirements
- 01/01/2007
Disclosure: Risk management objectives and policies
BIPRU 11.5.1
See Notes
A firm must disclose its risk management objectives and policies for each separate category of risk, including the risks referred to under BIPRU 11.5.1 R to BIPRU 11.5.17 R. These disclosures must include:
- (1) the strategies and processes to manage those risks;
- (2) the structure and organisation of the relevant risk management function or other appropriate arrangements;
- (3) the scope and nature of risk reporting and measurement systems; and
- (4) the policies for hedging and mitigating risk, and the strategies and processes for monitoring the continuing effectiveness of hedges and mitigants.
[Note: BCD Annex XII Part 2 point 1]
Disclosure: Scope of application of directive requirements
BIPRU 11.5.2
See Notes
A firm must disclose the following information regarding the scope of application of the requirements of the Banking Consolidation Directive:
- (1) the name of the firm which is the subject of the disclosures;
- (2) an outline of the differences in the basis of consolidation for accounting and prudential purposes, with a brief description of the entities that are:
- (a) fully consolidated;
- (b) proportionally consolidated;
- (c) deducted from capital resources;
- (d) neither consolidated nor deducted;
- (3) any current or foreseen material practical or legal impediment to the prompt transfer of capital resources or repayment of liabilities among the parent undertaking and its subsidiary undertakings;
- (4) the aggregate amount by which the actual capital resources are less than the required minimum in all subsidiary undertakings not included in the consolidation, and the name or names of such subsidiary undertakings; and
- (5) if applicable, the circumstance of making use of the provisions laid down in BIPRU 2.1 (Solo consolidation waiver).
[Note: BCD Annex XII Part 2 point 2]
Disclosure: Capital resources
BIPRU 11.5.3
See Notes
A firm must disclose the following information regarding its capital resources:
- (1) summary information on the terms and conditions of the main features of all capital resources items and components thereof, including:
- (a) hybrid capital;
- (b) capital instruments which provide an incentive for the firm to redeem them; and
- (c) capital instruments which the firm treats as tier one capital under GENPRU TP8A;
- (2) tier one capital resources , with separate disclosure of:
- (a) all positive items and deductions;
- (b) the overall amount of hybrid capital, with specification of those instruments treated as tier one capital under GENPRU TP 8A.1; and
- (c) the overall amount of capital instruments that provide for an incentive to redeem them, with specification of those instruments treated as tier one capital under GENPRU TP 8A.1;
- (3) the total amount (for the purposes of (3), the total amount must be stated gross of deductions) of:
- (a) tier two capital resources plus any innovative tier one capital resources; and
- (b) tier three capital resources;
- (4) deductions from tier one capital resources and tier two capital resources, with separate disclosure of items referred to in GENPRU 2.2.236 R; and
- (5) total capital resources, net of deductions in GENPRU 2.2 and limits laid down in GENPRU 2.2.25 R to GENPRU 2.2.30 R and GENPRU 2.2.42 R to GENPRU 2.2.50 R.
[Note: BCD Annex XII Part 2 point 3]
Disclosure: Compliance with BIPRU 3, BIPRU 4, BIPRU 6, BIPRU 7, BIPRU 10 and the overall Pillar 2 rule
BIPRU 11.5.4
See Notes
A firm must disclose the following information regarding compliance with BIPRU 3, BIPRU 4, BIPRU 6, BIPRU 7, BIPRU 10 and the overall Pillar 2 rule:
- (1) a summary of the firm's approach to assessing the adequacy of its internal capital to support current and future activities;
- (2) for a firm calculating risk weighted exposure amounts in accordance with the standardised approach to credit risk, 8% of the risk weighted exposure amounts for each of the standardised credit risk exposure classes;
- (3) for a firm calculating risk weighted exposure amounts in accordance with the IRB approach, 8% of the risk weighted exposure amounts for each of the IRB exposure classes;
- [Note: BCD Annex XII Part 2 point 4 (part)]
- (4) the firm's minimum capital requirements for the following:
- (a) in respect of its trading-book business, its:
- (i) interest rate PRR;
- (ii) equity PRR;
- (iii) option PRR;
- (iv) collective investment schemes PRR;
- (v) counterparty risk capital component;
- (vi) concentration risk capital component; and
- (b) in respect of all of its business activities, its:
- (i) commodity PRR; and
- (ii) foreign currency PRR;
- (5) its operational risk capital requirement calculated in accordance with the basic indicator approach, the standardised approach and the advanced measurement approach and disclosed separately.
- [Note: BCD Annex XII Part 2 point 4(part)]
BIPRU 11.5.5
See Notes
For retail exposures, the requirement under BIPRU 11.5.4 R (3) applies to each of the following categories:
- (1) exposures to retail SMEs;
- (2) retail exposures secured by real estate collateral;
- (3) qualifying revolving retail exposures; and
- (4) other retail exposures.
[Note: BCD Annex XII Part 2 point 4(part)]
BIPRU 11.5.6
See Notes
For equity exposures, the requirement under BIPRU 11.5.4 R (3) applies to:
- (1) each of the approaches ( the simple risk weight approach, the PD/LGD approach and the internal models approach) provided for in BIPRU 4.7.5 R to BIPRU 4.7.6 R, BIPRU 4.7.9 R to BIPRU 4.7.11 R, BIPRU 4.7.14 R to BIPRU 4.7.16 R, BIPRU 4.7.24 R to BIPRU 4.7.25 R;
- (2) exchange traded exposures, private equity exposures in sufficiently diversified portfolios, and other exposures;
- (3) exposures subject to supervisory transition regarding capital requirements; and
- (4) exposures subject to grandfathering provisions regarding capital requirements.
[Note: BCD Annex XII Part 2 point 4(part)]
BIPRU 11.5.7
See Notes
A firm must disclose the following information regarding its exposure to counterparty credit risk:
- (1) a discussion of the methodology used to assign internal capital and credit limits for counterparty credit exposures;
- (2) a discussion of policies for securing collateral and establishing credit reserves;
- (3) a discussion of policies with respect to wrong-way risk exposures;
- (4) a discussion of the impact of the amount of collateral the firm would have to provide given a downgrade in its credit rating;
- (5) gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held and 'net derivatives credit exposure', where 'net derivatives credit exposure' is the credit exposure on derivatives transactions after considering both the benefits from legally enforceable netting agreements and collateral arrangements;
- (6) measures for exposure value under the CCR mark to market method, the CCR standardised method or the CCR internal model method, whichever is applicable;
- (7) the notional value of credit derivative hedges, and the distribution of current credit exposure by types of credit exposure;
- (8) credit derivative transactions (notional), segregated between use for the firm's own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivatives products used, broken down further by protection bought and sold within each product group; and
- (9) the estimate of alpha (α) if the firm's CCR internal model method permission permits it to estimate α.
[Note: BCD Annex XII Part 2 point 5]
Disclosure: Credit risk and dilution risk
BIPRU 11.5.8
See Notes
A firm must disclose the following information regarding its exposure to credit risk and dilution risk:
- (1) the definitions for accounting purposes of past due and impaired;
- (2) a description of the approaches and methods adopted for determining value adjustments and provisions;
- (3) the total amount of exposures after accounting offsets and without taking into account the effects of credit risk mitigation, and the average amount of the exposures over the period broken down by different types of exposure classes;
- (4) the geographic distribution of the exposures, broken down in significant areas by material exposure classes, and further detailed if appropriate;
- (5) the distribution of the exposures by industry or counterparty type, broken down by exposure classes, and further detailed if appropriate;
- (6) the residual maturity breakdown of all the exposures, broken down by exposure classes, and further detailed if appropriate;
- (7) by significant industry or counterparty type, the amount of:
- (a) impaired exposures and past due exposures, provided separately;
- (b) value adjustments and provisions; and
- (c) charges for value adjustments during the period;
- (8) the amount of the impaired exposures and past due exposures, provided separately, broken down by the significant geographical areas including, if practical, the amounts of value adjustments and provisions related to each geographical area;
- (9) the reconciliation of changes in the value adjustments and provisions for impaired exposures, shown separately; and
- (10) value adjustments and recoveries recorded directly to the income statement must be disclosed separately.
[Note: BCD Annex XII Part 2 point 6 (part)]
BIPRU 11.5.9
See Notes
The information to be disclosed under BIPRU 11.5.8 R (9) must comprise:
- (1) a description of the type of value adjustments and provisions;
- (2) the opening balances;
- (3) the amounts taken against the provisions during the period;
- (4) the amounts set aside or reversed for estimated probable losses on exposures during the period, any other adjustments including those determined by exchange rate differences, business combinations, acquisitions and disposals of subsidiary undertakings, and transfers between provisions; and
- (5) the closing balances.
[Note: BCD Annex XII Part 2 point 6 (part)]
Disclosure: Firms calculating risk weighted exposure amounts in accordance with the standardised approach
BIPRU 11.5.10
See Notes
For a firm calculating risk weighted exposure amounts in accordance with the standardised approach to credit risk, the following information must be disclosed for each of the standardised credit risk exposure classes;
- (1) the names of the nominated ECAIs and export credit agencies and the reasons for any changes;
- (2) the standardised credit risk exposure classes for which each ECAI or export credit agency is used;
- (3) a description of the process used to transfer the issuer and issue credit assessments onto items not included in the trading book;
- (4) the association of the external rating of each nominated ECAI or export credit agency with the credit quality steps prescribed in BIPRU 3, taking into account that this information need not be disclosed if the firm complies with the credit quality assessment scale; and
- (5) the exposure values and the exposure values after credit risk mitigation associated with each credit quality step prescribed in BIPRU 3, as well as those deducted from capital resources.
[Note: BCD Annex XII Part 2 point 7]
Disclosure: Firms calculating risk weighted exposure amounts using the IRB approach
BIPRU 11.5.11
See Notes
A firm calculating risk weighted exposure amounts for specialised lending exposures in accordance with BIPRU 4.5.8 R to BIPRU 4.5.10 R or equity exposures in accordance with BIPRU 4.7.9 R to BIPRU 4.7.10 R (the simple risk weight approach) must disclose the exposures assigned:
- (1) to each category of the table in BIPRU 4.5.9 R; or
- (2) to each risk weight mentioned in BIPRU 4.7.9 R to BIPRU 4.7.10 R.
[Note: BCD Annex XII Part 2 point 8]
Disclosure: Market risk
BIPRU 11.5.12
See Notes
A firm must disclose its capital resources requirements separately for each risk referred to in (1), (2) and (3):
- (1) in respect of its trading-book business, its:
- (a) interest rate PRR;
- (b) equity PRR;
- (c) option PRR;
- (d) collective investment schemes PRR;
- (e) counterparty risk capital component; and
- (f) concentration risk capital component; and
- (2) in respect of all of its business activities, its:
- (a) commodity PRR; and
- (b) foreign currency PRR; and
- (3) its specific interest-rate risk of securitisation positions.
[Note: BCD Annex XII Part 2 point 9]
Disclosure: Use of VaR model for calculation of market risk capital requirement
BIPRU 11.5.13
See Notes
The following information must be disclosed by a firm which calculates its market risk capital requirement using a VaR model:
- (1) for each sub-portfolio covered:
- (a) the characteristics of the models used;
- (b) a description of stress testing applied to the sub-portfolio;
- (c) a description of the approaches used for back-testing and validating the accuracy and consistency of the internal models and modelling processes;
- (d) for the capital charges calculated according to the incremental risk charge and the all price risk measure separately, the methodologies used and the risks measured through the use of an internal model, including a description of the approach used by the firm to determine liquidity horizons, the methodologies used to achieve a capital assessment that is consistent with the required soundness standard and the approaches used in the validation of the model;
- (2) the scope of the firm's VaR model permission;
- (3) a description of the extent and methodologies for compliance with the requirements set out in GENPRU 1.3.13 R (2) and GENPRU 1.3.13 R (3) and GENPRU 1.3.14 R to GENPRU 1.3.34 R;
- (4) the highest, the lowest and the mean of the following:
- (a) the daily VaR measures over the reporting period and the VaR measure as per the period end;
- (b) the stressed VaR measures over the reporting period and the stressed VaR measure as per the period end;
- (c) the capital charge according to the incremental risk charge over the reporting period and as per the period end;
- (d) the capital charge according to the all price risk measure over the reporting period and as per the period end;
- (5) the amount of capital according to the incremental risk charge and the amount of capital according to the all price risk measure shown separately, together with the weighted average liquidity horizon for each sub-portfolio covered; and
- (6) a comparison of the daily end-of-day VaR measures to the one-day changes of the portfolio's value by the end of the subsequent business day together with an analysis of any important overshooting during the reporting period.
[Note: BCD Annex XII Part 2 point 10]
Disclosure: Operational risk
BIPRU 11.5.14
See Notes
The following information must be disclosed by a firm on operational risk:
- (1) the approaches for the assessment of the operational risk capital requirement that the firm qualifies for; and
- (2) if the firm uses the advanced measurement approach:
- (a) a description of the methodology used in the advanced measurement approach, including a discussion of relevant internal and external factors considered in the firm's measurement approach; and
- (b) in the case of partial use, the scope and coverage of the different methodologies used.
[Note: BCD Annex XII Part 2 point 11]
Disclosure: Non-trading book exposures in equities
BIPRU 11.5.15
See Notes
A firm must disclose the following information regarding the exposures in equities not included in the trading book:
- (1) the differentiation between exposures based on their objectives, including for capital gains relationship and strategic reasons, and an overview of the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation and any significant changes in these practices;
- (2) the balance sheet value, the fair value and, for those exchange-traded, a comparison to the market price where it is materially different from the fair value;
- (3) the types, nature and amounts of exchange-traded exposures, private equity exposures in sufficiently diversified portfolios, and other exposures;
- (4) the cumulative realised gains or losses arising from sales and liquidations in the period; and
- (5) the total unrealised gains or losses, the total latent revaluation gains or losses, and any of these amounts included in tier one, tier two or tier three capital resources.
[Note: BCD Annex XII Part 2 point 12]
Disclosures: Exposures to interest rate risk in the non-trading book
BIPRU 11.5.16
See Notes
A firm must disclose the following information on its exposure to interest rate risk on positions not included in the trading book:
- (1) the nature of the interest rate risk and the key assumptions (including assumptions regarding loan prepayments and behaviour of non-maturity deposits), and frequency of measurement of the interest rate risk; and
- (2) the variation in earnings, economic value or other relevant measure used by the management for upward and downward rate shocks according to management's method for measuring the interest rate risk, broken down by currency.
[Note: BCD Annex XII Part 2 point 13]
Disclosures: Securitisation
BIPRU 11.5.17
See Notes
A firm calculating risk weighted exposure amounts in accordance with BIPRU 9 or capital resource requirements according to BIPRU 7.2.48A R to BIPRU 7.2.48K R must disclose the following information, where relevant separately for its trading book and non-trading book:
- (1) a description of the firm's objectives in relation to securitisation activity;
- (1A) the nature of other risks, including liquidity risk inherent in securitised assets;
- (1B) the type of risks in terms of seniority of underlying securitisation positions and in terms of assets underlying these latter securitisation positions assumed and retained with resecuritisation activity;
- (2) the differentroles played by the firm in the securitisation process;
- (3) an indication of the extent of the firm's involvement in each of them;
- (3A) a description of the processes in place to monitor changes in the credit and market risk of securitisation exposures, including how the behaviour of the underlying assets impacts securitisation positions and a description of how those processes differ for resecuritisation positions;
- (3B) a description of the firm's policy governing the use of hedging and unfunded protection to mitigate the risks of retained securitisation and resecuritisation positions, including identification of material hedge counterparties by relevant type of risk exposure;
- (4) the approaches to calculating risk weighted exposure amounts that the firm follows for its securitisation activities, including the types of securitisation exposures to which each approach applies;
- (4A) the types of SSPEs that the firm, as sponsor, uses to securitise third-party exposures, including whether, and in what form, and to what extent, the firm has exposures to these SSPEs, separately for on and off-balance sheet exposures, as well as a list of the entities that the firm manages, or advises, and that invest in either the securitisation positions that the firm has securitised or in SSPEs that the firm sponsors;
- (5) a summary of the firm's accounting policies for securitisation activities, including:
- (a) whether the transactions are treated as sales or financings;
- (b) the recognition of gains on sales;
- (c) the methods, key assumptions, inputs and the changes from the previous period for valuing securitisation positions;
- (d) the treatment of synthetic securitisations if this is not covered by other accounting policies;
- (e) how assets awaiting securitisation are valued and whether they are recorded in the firm's non-trading book or trading book; and
- (f) policies for recognising liabilities on the balance sheet for arrangements that could require the firm to provide financial support for securitised assets;
- (6) the names of the ECAIs used for securitisations and the types of exposure for which each agency is used;
- (6A) where applicable, a description of the ABCP internal assessment approach as set out in BIPRU 9.12.20 R including the structure of the internal assessment process and relation between internal assessment and external ratings, the use of internal assessment other than for ABCP internal assessment approach capital purposes, the control mechanisms for the internal assessment process (including discussion of independence, accountability, and internal assessment process review), the exposure types to which the internal assessment process is applied and the stress factors used for determining credit enhancement levels, by exposure type;
- (6B) an explanation of significant changes to any of the quantitative disclosures in (8) and (13) to (15) since the last reporting period;
- (7) [deleted]
- (8) for the non-trading book and for exposures securitised by the firm, the amount of impaired and past due exposures securitised, and the losses recognised by the firm during the current period, broken down by exposure type;
- (9) [deleted]
- (10) [deleted]
- (11) [deleted]
- (12) [deleted]
- (13) separately for the trading book and the non-trading book, the following information broken down by exposure type:
- (a) the total outstanding amount of exposures securitised by the firm, separately for traditional securitisations and synthetic securitisations, and securitisations for which the firm acts only as sponsor;
- (b) the aggregate amount of on-balance sheet securitisation positions retained or purchased, and off-balance sheet securitisation exposures;
- (c) the aggregate amount of assets awaiting securitisation;
- (d) for securitised facilities subject to an early amortisation provision, the aggregate drawn-down exposures attributed to the originator's and investors' interests respectively, the aggregate capital resources requirement incurred by the firm against the originator's interest and the aggregate capital resources requirement incurred by the firm against the investors' shares of drawn balances and undrawn lines;
- (e) the amount of securitisation positions that have been risk weighted at 1250% or deducted; and
- (f) a summary of the securitisation activity of the current period, including the amount of exposures securitised and recognised gain or loss on sale;
- (14) separately for the trading book and the non-trading book, the following information:
- (a) the aggregate amount of securitisation positions retained or purchased and the associated capital resources requirements, broken down by securitisation and resecuritisation exposures, and further broken down into a meaningful number of risk weight or capital resources requirement bands, for each capital resources requirement approach used; and
- (b) the aggregate amount of resecuritisation exposures retained or purchased, broken down according to the exposure before and after hedging or insurance, and the exposure to financial guarantors, broken down according to guarantor credit worthiness categories or guarantor name; and
- (15) for the trading book, the total outstanding exposures securitised by the firm and subject to a market risk capital requirement, broken down into traditional and synthetic, and by exposure type.
[Note: BCD Annex XII Part 2 point 14]
Disclosures: remuneration
BIPRU 11.5.18
See Notes
A firm must disclose the following information, including regular, at least annual, updates, regarding its remuneration policy and practices for those categories of staff whose professional activities have a material impact on its risk profile:
- (1) information concerning the decision-making process used for determining the remuneration policy, including if applicable, information about the composition and the mandate of a remuneration committee, the external consultant whose services have been used for the determination of the remuneration policy and the role of the relevant stakeholders;
- (2) information on the link between pay and performance;
- (3) the most important design characteristics of the remuneration system, including information on the criteria used for performance measurement and risk adjustment, deferral policy and vesting criteria;
- (4) information on the performance criteria on which the entitlement to shares, options or variable components of remuneration is based;
- (5) the main parameters and rationale for any variable component scheme and any other non-cash benefits;
- (6) aggregate quantitative information on remuneration, broken down by business area;
- (7) aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm, indicating the following:
- (a) the amounts of remuneration for the financial year, split into fixed and variable remuneration, and the number of beneficiaries;
- (b) the amounts and forms of variable remuneration, split into cash, shares, share-linked instruments and other types;
- (c) the amounts of outstanding deferred remuneration, split into vested and unvested portions;
- (d) the amounts of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments;
- (e) new sign-on and severance payments made during the financial year, and the number of beneficiaries of those payments;
- (f) the amounts of severance payments awarded during the financial year, number of beneficiaries and highest such award to a single person.
[Note: Paragraph 15 of Annex XII to the Banking Consolidation Directive.]
BIPRU 11.5.19
See Notes
BIPRU 11.5.20
See Notes
- (1) A firm that is significant in terms of its size, internal organisation and the nature, scope and the complexity of its activities must also disclose the quantitative information referred to in BIPRU 11.5.18 R at the level of senior personnel.
- (2) Firms must comply with the requirements set out in BIPRU 11.5.18 R in a manner that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities and without prejudice to the UK or other national transposition of Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data.
- [Note: Paragraph 15 of Annex XII to the Banking Consolidation Directive.]
[Note: The appropriate regulator has given guidance for the purpose of providing a framework for complying with the disclosure requirements of BIPRU 11.5.18 R in accordance with the proportionality test set out in BIPRU 11.5.20 R (2). The guidance divides firms into four levels, and indicates which requirements should be complied with for each level. This was published as finalised guidance FG12/19 'General Guidance on Proportionality' and is available at http://www.bankofengland.co.uk/PRA/Pages/publications/default.aspx. Feedback on CP10/27 and final rules' and is available at http://www.bankofengland.co.uk/PRA/Pages/publications/default.aspx]
BIPRU 11.5.21
See Notes
BIPRU 11.6
Qualifying requirements for the use of particular instruments or methodologies
- 01/01/2007
Disclosures: Firms using the IRB approach
BIPRU 11.6.1
See Notes
A firm calculating risk weighted exposure amounts in accordance with the IRB approach must disclose the following information:
- (1) the scope of the firm's IRB permission;
- (2) an explanation and review of:
- (a) the structure of internal rating systems and relation between internal and external ratings;
- (b) the use of internal estimates other than for calculating risk weighted exposure amounts in accordance with the IRB approach;
- (c) the process for managing and recognising credit risk mitigation; and
- (d) the control mechanisms for rating systems including a description of independence, accountability, and rating systems review;
- (3) a description of the internal ratings process, provided separately for the following IRB exposure classes:
- (a) central governments and central banks;
- (b) institutions;
- (c) corporate, including SMEs, specialised lending and purchased corporate receivables;
- (d) retail, for exposures to retail SMEs exposures, retail exposures secured by real estate collateral, qualifying revolving retail exposures, and other retail exposures; and
- (e) equities;
- (4) the exposure values for each of the IRB exposure classes;
- (5) for each of the IRB exposure classes central governments and central banks, institutions, corporate and equity, and across a sufficient number of obligor grades (including default) to allow for a meaningful differentiation of credit risk, a firm must disclose:
- (a) the total exposures (for the IRB exposure classes central governments and central banks, institutions and corporate exposures, the sum of outstanding loans and exposure values for undrawn commitments; for equity exposures, the outstanding amount);
- (b) for a firm using own LGD estimates for the calculation of risk weighted exposure amounts, the exposure-weighted average LGD in percentage;
- (c) the exposure-weighted average risk weight; and
- (d) for a firm using own estimates of conversion factors for the calculation of risk weighted exposure amounts, the amount of undrawn commitments and exposure-weighted average exposure values for each IRB exposure class;
- (6) for the retail exposure class and for each of the categories of:
- (a) exposures to retail SMEs;
- (b) retail exposures secured by real estate collateral;
- (c) qualifying revolving retail exposures; and
- (d) other retail exposures;
- either the disclosures outlined under (5) (if applicable, on a pooled basis), or an analysis of exposures (outstanding loans and exposure values for undrawn commitments) against a sufficient number of EL grades to allow for a meaningful differentiation of credit risk (if applicable, on a pooled basis);
- (7) the actual value adjustments in the preceding period for each IRB exposure class (for retail exposures, for each of the categories in (6)(a) to (d)) and how they differ from past experience;
- (8) a description of the factors that impacted on the loss experience in the preceding period (for example, whether the firm experienced higher than average default rates, or higher than average LGDs and conversion factors); and
- (9) the firm's estimates against actual outcomes over a longer period including, at a minimum, information on estimates of losses against actual losses in each IRB exposure class (for retail exposures, for each of the categories in (6)(a) to (d)) over a period sufficient to allow for a meaningful assessment of the performance of the internal rating processes for each IRB exposure class (for retail exposures, for each of the categories in (6)(a) to (d)).
[Note: BCD Annex XII Part 3 point 1 (part)]
BIPRU 11.6.2
See Notes
For the purposes of BIPRU 11.6.1 R (3), the description must include the types of exposure included in the IRB exposure class, the definitions, methods and data for estimation and validation of PD and, if applicable, LGD and conversion factors, including assumptions employed in the derivation of these variables, and the descriptions of material deviations from the definition of default, including the broad segments affected by such deviations.
[Note: BCD Annex XII Part 3 point 1 (part)]
BIPRU 11.6.3
See Notes
For the purposes of BIPRU 11.6.1 R (4), where a firm uses its own estimates of LGDs or conversion factors for the calculation of risk weighted exposure amounts for exposures falling into the sovereign, institution and corporate IRB exposure class, the firm must disclose those exposures separately from exposures for which it does not use such estimates.
[Note: BCD Annex XII Part 3 point 1 (part)]
BIPRU 11.6.4
See Notes
For the purposes of BIPRU 11.6.1 R (9), where appropriate, a firm must further decompose the information to provide analysis of PD and, for a firm using own estimates of LGDs and/or conversion factors, LGD and conversion factor outcomes against estimates provided in the quantitative risk assessment disclosures under BIPRU 11.6.1 R to BIPRU 11.6.4 R.
[Note: BCD Annex XII Part 3 point 1 (part)]
Disclosures: Credit risk mitigation
BIPRU 11.6.5
See Notes
A firm applying credit risk mitigation techniques must disclose the following information:
- (1) the policies and processes for, and an indication of the extent to which the firm makes use of, on- and off-balance sheet netting;
- (2) the policies and processes for collateral valuation and management;
- (3) a description of the main types of collateral taken by the firm;
- (4) the main types of guarantor and credit derivative counterparty and their creditworthiness;
- (5) information about market risk or credit risk concentrations within the credit mitigation taken;
- (6) for firms calculating risk weighted exposure amounts using the standardised approach to credit risk or the IRB approach, but not providing own estimates of LGDs or conversion factors in respect of the exposure class, separately for each exposure class, the total exposure value (after, where applicable, on- or off-balance sheet netting) that is covered - after the application of volatility adjustments - by eligible financial collateral, and other eligible collateral; and
- (7) for firms calculating risk weighted exposure amounts using the standardised approach or the IRB approach, separately for each exposure class, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees or credit derivatives; for equity exposures, this requirement applies to each of the approaches ( the simple risk weight approach, the PD/LGD approach and the internal models approach) provided for in BIPRU 4.7.5 R to BIPRU 4.7.6 R, BIPRU 4.7.9 R to BIPRU 4.7.11 R, BIPRU 4.7.14 R to BIPRU 4.7.16 R, BIPRU 4.7.24 R to BIPRU 4.7.25 R.
[Note: BCD Annex XII Part 3 point 2]
Disclosure: Insurance for the purpose of mitigating operational risk
BIPRU 11.6.6
See Notes
A firm using the advanced measurement approach for the calculation of its operational risk capital requirement must disclose a description of the use of insurance and other risk transfer mechanisms for the purpose of mitigating the risk.
[Note: BCD Annex XII Part 3 point 3]
BIPRU 12
Liquidity standards
BIPRU 12.1
Application
- 01/12/2009
- Past version of BIPRU 12.1 before 01/12/2009
BIPRU 12.1.1
See Notes
Subject to BIPRU 12.1.2R, BIPRU 12 applies to:
- (1) a BIPRU firm;
- (2) an incoming EEA firm which:
- (a) is a full BCD credit institution; and
- (b) has a branch in the United Kingdom; and
- (3) a third country BIPRU firm which:
- (a) is a bank; and
- (b) has a branch in the United Kingdom.
BIPRU 12.1.2
See Notes
BIPRU 12.1.3
See Notes
BIPRU 12.1.4
See Notes
- (1) An exempt full scope BIPRU investment firm is a full scope BIPRU investment firm that at all times has total net assets which are less than or equal to 50 million.
- (2) In this rule, total net assets are the sum of a firm's total trading book assets and its total non-trading book assets, less the sum of its called up share capital, reserves and minority interests.
- (3) For the purpose of (2), the value attributed to each of the specified balance sheet items must be that which is reported to the FCA in the firm's most recent FSA001 data item.
BIPRU 12.1.5
See Notes
BIPRU 12.1.6
See Notes
BIPRU 12.1.7
See Notes
BIPRU 12.2
Adequacy of liquidity resources
- 01/12/2009
The overall liquidity adequacy rule
BIPRU 12.2.1
See Notes
- (1) A firm must at all times maintain liquidity resources which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.
- (2) For the purpose of (1):
- (a) a firm may not include liquidity resources that can be made available by other members of its group;
- (b) an incoming EEA firm or a third country BIPRU firm may not, in relation to its UK branch, include liquidity resources other than those which satisfy the conditions in BIPRU 12.2.3R;
- (c) a firm may not include liquidity resources that may be made available through emergency liquidity assistance from a central bank (including the European Central Bank).
BIPRU 12.2.2
See Notes
Branch liquidity resources
BIPRU 12.2.3
See Notes
The conditions to which BIPRU 12.2.1R (2)(b) refers are that the firm's liquidity resources are:
- (1) under the day-to-day control of the UK branch's senior management;
- (2) held in an account with one or more custodians in the sole name of the UK branch;
- (3) unencumbered; and
- (4) for the purpose of the overall liquidity adequacy rule only, attributed to the balance sheet of the UK branch.
BIPRU 12.2.4
See Notes
Liquidity resources: general
BIPRU 12.2.5
See Notes
For the purposes of the overall liquidity adequacy rule, liquidity resources are not confined to the amount or value of a firm's marketable, or otherwise realisable, assets. Rather, in assessing the adequacy of those resources, a firm should have regard to the overall character of the resources available to it which enable it to meet its liabilities as they fall due. Therefore, for the purposes of that rule, a firm should ensure that:
- (1) it holds sufficient assets which are marketable, or otherwise realisable;
- (2) it is able to generate funds from those assets in a timely manner;
- (3) it maintains a prudent funding profile in which its assets are of appropriate maturities, taking account of the expected timing of that firm's liabilities; and
- (4) it is able to generate unsecured funding of appropriate tenor in a timely manner.
BIPRU 12.2.6
See Notes
BIPRU 12.2.7
See Notes
Liquid assets buffer and funding profile
BIPRU 12.2.8
See Notes
For the purposes of the overall liquidity adequacy rule, an ILAS BIPRU firm must also ensure that:
- (1) its liquidity resources contain an adequate buffer of high quality, unencumbered assets; and
- (2) it maintains a prudent funding profile.
BIPRU 12.2.9
See Notes
BIPRU 12.2.10
See Notes
BIPRU 12.2.11
See Notes
BIPRU 12.2.12
See Notes
BIPRU 12.2.13
See Notes
Individual assessments of liquidity adequacy
BIPRU 12.2.14
See Notes
The adequacy of an ILAS BIPRU firm's liquidity resources needs to be assessed both by that firm and by the appropriate regulator. This process involves:
- (1) in the case of a standard ILAS BIPRU firm, an Individual Liquidity Adequacy Assessment (ILAA) which such a firm is obliged to carry out in accordance with BIPRU 12.5;
- (2) in the case of a simplified ILAS BIPRU firm, an Individual Liquidity Systems Assessment (ILSA) which such a firm is obliged to carry out in accordance with BIPRU 12.6; and
- (3) a Supervisory Liquidity Review Process (SLRP), which is conducted by the appropriate regulator.
BIPRU 12.2.15
See Notes
BIPRU 12.2.16
See Notes
As part of its SLRP, the appropriate regulator will, having regard to the liquidity risk profile of the firm, consider:
BIPRU 12.2.17
See Notes
BIPRU 12.2.18
See Notes
BIPRU 12.2.19
See Notes
BIPRU 12.3
Liquidity risk management
- 01/12/2009
BIPRU 12.3.1
See Notes
The approach taken in BIPRU 12.3 is to set out:
- (1) overarching systems and controls provisions in relation to a firm's management of its liquidity risk;
- (2) provisions outlining the responsibilities of that firm's governing body and senior managers for the oversight of liquidity risk;
- (3) more detailed provisions covering a number of specific areas, including:
- (a) pricing liquidity risk;
- (b) intra-day management of liquidity;
- (c) management of collateral;
- (d) management of liquidity across legal entities, business lines and currencies; and
- (e) funding diversification and market access.
BIPRU 12.3.2
See Notes
BIPRU 12.3.3
See Notes
Overarching liquidity systems and controls requirements
BIPRU 12.3.4
See Notes
BIPRU 12.3.4A
See Notes
The strategies, policies, processes and systems referred to in BIPRU 12.3.4 R should include those which enable it to assess and maintain on an ongoing basis the amounts, types and distribution of liquidity resources that it considers adequate to cover:
- (1) the nature and level of the liquidity risk to which it is or might be exposed;
- (2) the risk that the firm cannot meet its liabilities as they fall due; and
- (3) in the case of an ILAS BIPRU firm, the risk that its liquidity resources might in the future fall below the level, or differ from the quality and funding profile, of those resources advised as appropriate by the appropriate regulator in that firm's individual liquidity guidance or, as the case may, its simplified buffer requirement.
BIPRU 12.3.5
See Notes
The strategies, policies, processes and systems referred to in BIPRU 12.3.4 R must be proportionate to the complexity, risk profile and scope of operation of the firm, and the liquidity risk tolerance set by the firm's governing body in accordance with BIPRU 12.3.8 R, and must reflect the firm's importance in each EEA State, in which it carries on business.
[Note: annex V paragraph 14a of the Banking Consolidation Directive]
BIPRU 12.3.6
See Notes
- (1) [deleted]
- (2) [deleted]
- (3) A firm should ensure that its strategies, policies, processes and systems in relation to liquidity risk enable it to identify, measure, manage and monitor its liquidity risk positions for:
- (a) all sources of contingent liquidity demand (including those arising from off-balance sheet activities);
- (b) all currencies in which that firm is active; and
- (c) correspondent, custody and settlement activities.
- (4) [deleted]
- (5) A firm should ensure that it has in place early warning indicators to identify immediately the emergence of increased liquidity risk or vulnerabilities, including indicators that signal whether embedded triggers in funding or security arrangements such as warranties, covenants, events of default, conditions precedent or terms having similar effect are likely to, or will, be breached, occur or fail to be satisfied, or contingent risks will or are likely to crystallise, in either case with the result that access to liquidity resources may be impaired.
- (6) A firm should ensure that it has in place reliable management information systems to provide its governing body, senior managers and other appropriate personnel with timely and forward-looking information on the liquidity position of the firm.
- (7) Contravention of any of (3), (5) and (6) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.
BIPRU 12.3.7
See Notes
Governing body and senior management oversight: liquidity risk tolerance
BIPRU 12.3.8
See Notes
A firm must ensure that:
- (1) its governing body establishes that firm's liquidity risk tolerance and that this is appropriately documented;
- (2) its liquidity risk tolerance is appropriate for its business strategy and reflects its financial condition and funding capacity; and
- (3) its liquidity risk tolerance is communicated to all relevant business lines.
[Note: annex V paragraph 14a of the Banking Consolidation Directive]
BIPRU 12.3.9
See Notes
Governing body and senior management oversight: approval and review of arrangements
BIPRU 12.3.10
See Notes
BIPRU 12.3.11
See Notes
A firm must ensure that its governing body reviews regularly (and not less frequently than annually):
- (1) the continued adequacy of any strategies, policies, processes and systems approved in accordance with BIPRU 12.3.10R; and
- (2) the firm's liquidity risk tolerance.
BIPRU 12.3.12
See Notes
A firm must ensure that its senior managers:
- (1) continuously review that firm's liquidity position, including its compliance with the overall liquidity adequacy rule; and
- (2) report to its governing body on a regular basis adequate information as to that firm's liquidity position and its compliance with the overall liquidity adequacy rule and with BIPRU 12.3.4R.
BIPRU 12.3.13
See Notes
BIPRU 12.3.14
See Notes
Pricing liquidity risk
BIPRU 12.3.15
See Notes
- (1) In relation to all significant business activities, a firm should ensure that it accurately quantifies liquidity costs, benefits and risks and fully incorporates them into:
- (a) product pricing;
- (b) performance measurement and incentives; and
- (c) the approval process for new products.
- (2) For the purposes of (1), a firm should ensure that it:
- (a) includes significant business activities whether or not they are accounted for on-balance sheet; and
- (b) carries out the exercise of quantification and incorporation both in normal financial conditions and under the stresses required by BIPRU 12.4.1R.
- (3) A firm should ensure that the liquidity costs, benefits and risks are clearly and transparently attributed to business lines and are understood by business line management.
- (4) Contravention of any of (1), (2) or (3) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.
BIPRU 12.3.16
See Notes
Intra-day management of liquidity
BIPRU 12.3.17
See Notes
BIPRU 12.3.18
See Notes
BIPRU 12.3.19
See Notes
For the purposes of BIPRU 12.3.17R, a firm must ensure that:
- (1) it is able to meet its payment and settlement obligations on a timely basis under both normal financial conditions and under the stresses required by BIPRU 12.4.1R; and
- (2) its arrangements for the management of intra-day liquidity enable it to identify and prioritise the most time-critical payment and settlement obligations.
BIPRU 12.3.20
See Notes
BIPRU 12.3.21
See Notes
- (1) A firm should ensure that its intra-day liquidity management arrangements enable it, in relation to the markets in which it is active and the currencies in which it has significant positions, to:
- (a) measure expected daily gross liquidity inflows and outflows, anticipate the intra-day timing of these flows where possible, and forecast the range of potential net funding shortfalls that might arise at different points during the day;
- (b) monitor its intra-day liquidity positions against expected activities and available resources;
- (c) identify gross liquidity inflows and outflows attributable to any correspondent, custodian or settlement agency services provided by that firm;
- (d) manage the timing of its liquidity outflows such that priority is given to that firm's most time-critical obligations;
- (e) deal with unexpected disruptions to its intra-day liquidity flows;
- (f) acquire sufficient intra-day funding such that it is able to meet its most time-critical obligations when expected and other less time-critical obligations as soon as possible thereafter; and
- (g) manage and mobilise collateral as necessary for the purposes of achieving the aim in (f).
- (2) Contravention of any of (1)(a) to (g) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.
Management of collateral
BIPRU 12.3.22
See Notes
BIPRU 12.3.22A
See Notes
A firm must distinguish between pledged and unencumbered assets that are available at all times, in particular during emergency situations. A firm must also take into account the legal entity in which assets reside, the country where assets are legally recorded either in a register or in an account as well as their eligibility and must monitor how assets can be mobilised in a timely manner.
[Note: annex V paragraph 16 of the Banking Consolidation Directive]
BIPRU 12.3.22B
See Notes
A firm must also have regard to existing legal, regulatory and operational limitations to potential transfers of liquidity and unencumbered assets amongst entities, both within and outside the EEA.
[Note: annex V paragraph 17 of the Banking Consolidation Directive]
BIPRU 12.3.23
See Notes
For the purposes of BIPRU 12.3.22R, a firm must, in relation to all currencies in which it has significant positions and all jurisdictions in which it carries on significant business activities, ensure that it:
- (1) can calculate all of its collateral positions, including assets currently provided as collateral, relative to the total amount of security required;
- (2) can calculate the amount of unencumbered assets available to it to be provided as collateral;
- (3) can mobilise collateral in a timely manner;
- (4) monitors the location of available collateral;
- (5) takes into account the extent to which counterparties with which it has deposited collateral may have re-hypothecated that collateral;
- (6) has access to adequately diversified sources of collateral;
- (7) assesses the eligibility of each major asset class that it holds for use as collateral with central banks;
- (8) assesses on an ongoing basis the acceptability of its assets to major counterparties and providers of funds in secured funding markets; and
- (9) monitors and manages the impact that the terms of existing funding or security arrangements, such as warranties, covenants, events of default, negative pledges and cross default clauses could have on its ability to mobilise collateral including for use in borrowing under any central bank facility (in particular, emergency liquidity assistance on a secured basis).
BIPRU 12.3.24
See Notes
BIPRU 12.3.25
See Notes
- (1) A firm should ensure that its arrangements for the management of liquidity risk:
- (a) enable it to monitor shifts between intra-day and overnight or term collateral usage;
- (b) enable it to appropriately adjust its calculation of available collateral to account for assets that are part of a tied hedge;
- (c) include adequate consideration of the potential for uncertainty around, or disruption to, intra-day asset flows; and
- (d) take into account the potential for additional collateral requirements under the terms of contracts governing existing collateral positions (for example, as a result of a deterioration in its own credit rating).
- (2) Contravention of any of (1)(a) to (d) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.
Managing liquidity across legal entities, business lines and currencies
BIPRU 12.3.26
See Notes
In complying with BIPRU 12.3.4 R, a firm must ensure that:
- (1) it actively manages its liquidity risk exposures and related funding needs; and
- (2) it takes into account:
- (a) the impact on its own liquidity position of its forming part of a group;
- (b) the need to manage the liquidity position of individual business lines in addition to that of the firm as a whole; and
- (c) the liquidity risk arising from its taking positions in foreign currencies; and
- (3) where it forms part of a group, it understands and has regard to any legal, regulatory, operational or other constraints on the transferability to it of funds and collateral by other entities in that group.
BIPRU 12.3.27
See Notes
A firm must develop methodologies for the identification, measurement, management and monitoring of funding positions. Those methodologies must include the current and projected material cash-flows in and arising from assets, liabilities, off-balance-sheet items, including contingent liabilities and the possible impact of reputational risk.
[Note: annex V paragraph 15 of the Banking Consolidation Directive]
BIPRU 12.3.28
See Notes
Funding diversification and market access
BIPRU 12.3.29
See Notes
BIPRU 12.3.30
See Notes
A firm must ensure that its governing body:
- (1) is aware of the composition, characteristics and degree of diversification of its assets and funding sources; and
- (2) regularly reviews its funding strategy in the light of any changes in the environment in which it operates.
BIPRU 12.3.31
See Notes
BIPRU 12.3.32
See Notes
- (1) A firm should ensure that funding diversification is taken into account in that firm's business planning process.
- (2) A firm should ensure that its funding arrangements take into account correlations between market conditions and the ability to access funds from different sources.
- (3) A firm should ensure that in establishing adequate diversification it sets limits on its funding according to the following variables:
- (a) maturity;
- (b) nature of depositor or counterparty;
- (c) levels of secured and unsecured funding;
- (d) instrument type;
- (e) securitisation vehicle;
- (f) currency; and
- (g) geographic market.
- (4) A firm should ensure that it maintains an ongoing presence in its chosen funding markets and strong relationships with its chosen providers of funds.
- (5) A firm should regularly test its capacity to raise funds quickly from its chosen funding sources to provide short, medium and long-term liquidity.
- (6) A firm should ensure that its senior managers identify the main factors that affect its ability to raise funds and should monitor those factors closely to ensure that their estimates of fund raising capacity remain valid.
- (7) Contravention of any of (1) to (6) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.
BIPRU 12.4
Stress testing and contingency funding
- 01/12/2009
BIPRU 12.4.-2
See Notes
A firm must consider different liquidity risk mitigation tools, including a system of limits and liquidity buffers in order to be able to withstand a range of different stress events and an adequately diversified funding structure and access to funding sources. Those arrangements must be reviewed regularly.
[Note: annex V paragraph 18 of the Banking Consolidation Directive]
Stress testing
BIPRU 12.4.-1
See Notes
A firm must consider alternative scenarios on liquidity positions and on risk mitigants and must review regularly the assumptions underlying decisions concerning the funding position. For these purposes, alternative scenarios must address, in particular, off-balance sheet items and other contingent liabilities, including those of securitisation special purpose entities (SSPEs) or other special purpose entities, in relation to which the firm acts as sponsor or provides material liquidity support.
[Note: annex V paragraph 19 of the Banking Consolidation Directive]
BIPRU 12.4.1
See Notes
In order to ensure compliance with the overall liquidity adequacy rule and with BIPRU 12.3.4R and BIPRU 12.4.-1 R, a firm must:
- (1) conduct on a regular basis appropriate stress tests so as to:
- (a) identify sources of potential liquidity strain;
- (b) ensure that current liquidity exposures continue to conform to the liquidity risk tolerance established by that firm's governing body; and
- (c) identify the effects on that firm's assumptions about pricing; and
- (2) analyse the separate and combined impact of possible future liquidity stresses on its:
- (a) cash flows;
- (b) liquidity position;
- (c) profitability; and
- (d) solvency.
BIPRU 12.4.2
See Notes
BIPRU 12.4.3
See Notes
BIPRU 12.4.4
See Notes
For the purposes of BIPRU 12.4.2R, a review should take into account:
BIPRU 12.4.5A
See Notes
A firm must consider the potential impact of institution-specific, market-wide and combined alternative scenarios. Different time horizons and varying degrees of stressed conditions must be considered.
[Note: annex V paragraph 20 of the Banking Consolidation Directive]
BIPRU 12.4.6
See Notes
BIPRU 12.4.7
See Notes
In conducting its stress testing, a firm should also, where relevant, consider the impact of its chosen stresses on the appropriateness of its assumptions relating to:
- (1) correlations between funding markets;
- (2) the effectiveness of diversification across its chosen sources of funding;
- (3) additional margin calls and collateral requirements;
- (4) contingent claims, including potential draws on committed lines extended to third parties or to other entities in that firm's group;
- (5) liquidity absorbed by off-balance sheet vehicles and activities (including conduit financing);
- (6) the transferability of liquidity resources;
- (7) access to central bank market operations and liquidity facilities;
- (8) estimates of future balance sheet growth;
- (9) the continued availability of market liquidity in a number of currently highly liquid markets;
- (10) ability to access secured and unsecured funding (including retail deposits);
- (11) currency convertibility; and
- (12) access to payment or settlement systems on which the firm relies.
BIPRU 12.4.8
See Notes
- (1) A firm should ensure that the results of its stress tests are:
- (a) reviewed by its senior managers;
- (b) reported to that firm's governing body, specifically highlighting any vulnerabilities identified and proposing appropriate remedial action;
- (c) reflected in the processes, strategies and systems established in accordance with BIPRU 12.3.4R;
- (d) used to develop effective contingency funding plans;
- (e) integrated into that firm's business planning process and day-to-day risk management; and
- (f) taken into account when setting internal limits for the management of that firm's liquidity risk exposure.
- (2) Contravention of any of (1)(a) to (f) may be relied upon as tending to establish contravention of BIPRU 12.3.4 R.
BIPRU 12.4.9
See Notes
Contingency funding plans
BIPRU 12.4.10
See Notes
A firm must adjust its strategies, internal policies and limits on liquidity risk and develop an effective contingency funding plan, taking into account the outcome of the alternative scenarios referred to in BIPRU 12.4.-1 R.
[Note: annex V paragraph 21of the Banking Consolidation Directive]
BIPRU 12.4.11
See Notes
In order to deal with liquidity crises, a firm must have in place contingency plans setting out adequate strategies and proper implementation measures in order to address possible liquidity shortfalls. Those plans must be regularly tested, updated on the basis of the outcome of the alternative scenarios set out in BIPRU 12.4.-1 R, and be reported to and approved by the firm's governing body, so that internal policies and processes can be adjusted accordingly.
[Note: annex V paragraph 22 of the Banking Consolidation Directive]
BIPRU 12.4.12
See Notes
BIPRU 12.4.13
See Notes
A firm must ensure that its contingency funding plan:
- (1) outlines strategies, policies and plans to manage a range of stresses;
- (2) establishes a clear allocation of roles and clear lines of management responsibility;
- (3) is formally documented;
- (4) includes clear invocation and escalation procedures;
- (5) is regularly tested and updated to ensure that it remains operationally robust;
- (6) outlines how that firm will meet time-critical payments on an intra-day basis in circumstances where intra-day liquidity resources become scarce;
- (7) outlines that firm's operational arrangements for managing a retail funding run;
- (8) in relation to each of the sources of funding identified for use in emergency situations, is based on a sufficiently accurate assessment of:
- (a) the amount of funding that can be raised from that source; and
- (b) the time needed to raise funding from that source;
- (9) is sufficiently robust to withstand simultaneous disruptions in a range of payment and settlement systems;
- (10) outlines how that firm will manage both internal communications and those with its external stakeholders; and
- (11) establishes mechanisms to ensure that the firm's governing body and senior managers receive management information that is both relevant and timely.
BIPRU 12.4.14
See Notes
- (1) In designing a contingency funding plan a firm should ensure that it takes into account:
- (a) the impact of stressed market conditions on its ability to sell or securitise assets;
- (b) the impact of extensive or complete loss of typically available market funding options;
- (c) the financial, reputational and any other additional consequences for that firm arising from the execution of the contingency funding plan itself;
- (d) its ability to transfer liquid assets having regard to any legal, regulatory or operational constraints; and
- (e) its ability to raise additional funding from central bank market operations and liquidity facilities.
- (2) Contravention of any of (1)(a) to (e) may be relied upon as tending to establish contravention of BIPRU 12.3.4R.
BIPRU 12.4.15
See Notes
BIPRU 12.4.16
See Notes
BIPRU 12.5
Individual Liquidity Adequacy Standards
- 01/12/2009
Individual Liquidity Adequacy Assessment
BIPRU 12.5.1
See Notes
BIPRU 12.5.2
See Notes
BIPRU 12.5.3
See Notes
BIPRU 12.5.4
See Notes
A firm must ensure that:
- (1) it regularly carries out an ILAA;
- (2) it makes a written record of its ILAA;
- (3) its ILAA is proportionate to the nature, scale and complexity of its activities;
- (4) its ILAA takes into account whole-firm and group-wide liquidity resources only to the extent that reliance on these is permitted by the appropriate regulator;
- (5) its ILAA includes an assessment of the results of the stress tests required by BIPRU 12.5.6 R; and
- (6) its ILAA includes an assessment of the firm's compliance with BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4.
BIPRU 12.5.5
See Notes
BIPRU 12.5.6
See Notes
A firm must ensure that in carrying out its ILAA it considers how that firm's liquidity resources change as a result of:
- (1) the stress in BIPRU 12.5.8 R (the first liquidity stress);
- (2) the stress in BIPRU 12.5.11 R (the second liquidity stress); and
- (3) the first and second liquidity stresses occurring simultaneously.
ILAA stresses
BIPRU 12.5.7
See Notes
First liquidity stress
BIPRU 12.5.8
See Notes
The first liquidity stress to which BIPRU 12.5.6R refers is an unforeseen, name-specific, liquidity stress in which:
- (1) financial market participants and retail depositors consider that in the short-term the firm will be or is likely to be unable to meet its liabilities as they fall due;
- (2) the firm's counterparties reduce the amount of intra-day credit which they are willing to extend to it;
- (3) the firm ceases to have access to foreign currency spot and swap markets; and
- (4) over the longer-term the firm's obligations linked to its credit rating crystallise as a result of a reduction in that credit rating.
BIPRU 12.5.9
See Notes
BIPRU 12.5.10
See Notes
Second liquidity stress
BIPRU 12.5.11
See Notes
BIPRU 12.5.12
See Notes
For the purpose of BIPRU 12.5.11R, a firm must assume that the second liquidity stress is characterised by:
- (1) uncertainty as to the accuracy of the valuation attributed to that firm's assets and those of its counterparties;
- (2) inability to realise, or ability to realise only at excessive cost, particular classes of assets, including those which represent claims on other participants in the financial markets or which were originated by them;
- (3) uncertainty as to the ability of a significant number of firms to ensure that they can meet their liabilities as they fall due; and
- (4) risk aversion among participants in the markets on which the firm relies for funding.
ILAA methodology
BIPRU 12.5.13
See Notes
In carrying out the liquidity stresses required by BIPRU 12.5.6R, a firm must:
- (1) analyse each of the sources of risk identified in BIPRU 12.5.14R;
- (2) record the evidence which supports any behavioural assumptions that it makes in carrying out those stress tests;
- (3) record the evidence which supports its assessment of the adequacy of its liquid assets buffer; and
- (4) identify those of the measures set out in its contingency funding plan that it would implement.
BIPRU 12.5.14
See Notes
The sources of risk referred to in BIPRU 12.5.13R are:
- (1) wholesale secured and unsecured funding risk;
- (2) retail funding risk;
- (3) intra-day liquidity risk;
- (4) intra-group liquidity risk;
- (5) cross-currency liquidity risk;
- (6) off-balance sheet liquidity risk;
- (7) franchise-viability risk;
- (8) marketable assets risk;
- (9) non-marketable assets risk; and
- (10) funding concentration risk.
Wholesale secured and unsecured funding risk
BIPRU 12.5.15
See Notes
BIPRU 12.5.16
See Notes
In assessing its wholesale funding risk, a firm must:
- (1) identify its wholesale liabilities;
- (2) determine how those liabilities behave under normal financial conditions;
- (3) assess how they will behave under the stresses required by BIPRU 12.5.6R; and
- (4) divide its wholesale liabilities into funding which the firm assesses as having a higher than average likelihood of withdrawal in response to actual or perceived changes in the firm's credit-worthiness (Type A wholesale funding) and other funding (Type B wholesale funding).
BIPRU 12.5.17
See Notes
BIPRU 12.5.18
See Notes
In the appropriate regulator's view, Type A wholesale funding is likely to include at least funding which:
- (1) is accepted from a credit institution, local authority, insurance undertaking, pension fund, money market fund, asset manager (including a hedge fund manager), government-sponsored agency, sovereign government, or sophisticated non-financial corporation; or
- (2) is accepted through the treasury function of a sophisticated non-financial corporation which may be assumed to respond swiftly to negative news about a firm's credit-worthiness; or
- (3) is accepted on wholesale market terms as a part of a firm's money market operations; or
- (4) is accepted from a depositor with whom a firm does not have a long-established relationship or to whom a firm does not supply a range of services; or
- (5) is accepted from overseas counterparties (other than those in the country or territory of incorporation of a firm's parent undertaking or, in the case of a UK branch, of the firm of which it forms part); or
- (6) is obtained through unsecured debt instruments (such as certificates of deposit, medium-term notes and commercial paper); or
- (7) is not obtained through repo against assets of the type described in BIPRU 12.7.2R (1) or BIPRU 12.7.2R (2); or
- (8) is obtained from counterparties with a relatively low creditor seniority on the liquidation of the firm.
BIPRU 12.5.19
See Notes
Retail funding risk
BIPRU 12.5.20
See Notes
BIPRU 12.5.21
See Notes
For the purpose of assessing its retail funding risk, a firm must:
- (1) estimate the gross retail outflows that could occur under the liquidity stresses required by BIPRU 12.5.6R;
- (2) identify the stress, or combination of stresses, to which it considers its retail funding to be most vulnerable and estimate the gross retail outflows that could occur under that stress or combination of stresses; and
- (3) divide its retail funding into funding which the firm assesses as having a higher than average likelihood of withdrawal in response to actual or perceived changes in the firm's credit-worthiness (Type A retail funding) and other funding (Type B retail funding).
BIPRU 12.5.22
See Notes
BIPRU 12.5.23
See Notes
BIPRU 12.5.24
See Notes
A firm should also be mindful that its retail funding profile is unlikely to be constant. In carrying out its ILAA, a firm should have regard to any changes to its retail funding profile since the previous ILAA and also to the possible impact of any future changes on its ability to maintain retail funding during periods of stress. In its ILAA submission to the appropriate regulator, a firm should include an analysis of:
- (1) its retail funding profile as at the date of its ILAA;
- (2) its retail funding profile over the twelve months preceding its ILAA;
- (3) its projected retail funding profile over the twelve months following the date of its ILAA; and
- (4) its approach to assessing which of its retail funding it has classed as Type A retail funding and which as Type B retail funding.
BIPRU 12.5.25
See Notes
In the appropriate regulator's view Type A retail funding is likely to include at least funding which:
- (1) has been accepted through the internet; or
- (2) is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or
- (3) in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or
- (4) is not accepted from a depositor with whom the firm has had a long relationship; or
- (5) is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or
- (6) is not held in an account which is maintained for transactional purposes.
Intra-day liquidity risk
BIPRU 12.5.26
See Notes
For the purpose of assessing its intra-day liquidity risk arising from its direct participation in a payment or settlement system, a firm must in relation to each such system in which it participates:
- (1) calculate on an intra-day basis the net amounts of collateral and cash required by that firm to fund participation in that system; and
- (2) estimate how the amounts in (1) could change under the liquidity stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.27
See Notes
For the purpose of calculating the net amounts of collateral and cash under BIPRU 12.5.26R, a firm should separately analyse:
- (1) the amounts of collateral and cash needed in relation to both its own payments and those of its customers; and
- (2) the intra-day timing of the payment of cash and the posting of the collateral, including the time at which the demand for its collateral and cash is greatest.
BIPRU 12.5.28
See Notes
For the purpose of BIPRU 12.5.26R, a firm should ensure that it takes into account, in both normal financial conditions and in periods of stress, the effect of:
- (1) other participants in a payment system withholding some or all of the payments expected from them; and
- (2) its customers increasing either or both the volume and value of their payments.
BIPRU 12.5.29
See Notes
At the same time as it carries out the calculation and estimation in BIPRU 12.5.26 R, a firm which participates directly in one or more payment or settlement systems must also estimate the impact on its liquidity position of the customer to which it has the largest intra-day credit exposure defaulting on its payment obligations to the firm:
- (1) under normal financial conditions; and
- (2) under the stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.30
See Notes
BIPRU 12.5.31
See Notes
A firm must, as part of its ILAA submission to the appropriate regulator:
- (1) identify those payment and settlement systems in which it is a direct participant; and
- (2) provide details of the intra-day credit policies that it applies, including the criteria against which it sets credit limits, when extending credit to a customer which is not a direct participant in the payment or settlement system in question.
BIPRU 12.5.32
See Notes
For the purpose of BIPRU 12.5.31R, the appropriate regulator would expect a firm, in relation to each payment or settlement system in which it participates directly, to provide details of:
- (1) that firm's charges for providing intra-day credit;
- (2) any collateral requirements which it applies to its customers;
- (3) the credit limits that it imposes (and the circumstances, if any, in which credit may be provided notwithstanding a limit breach);
- (4) the extent to which the customers of that firm make use of the credit extended to them; and
- (5) where relevant, the points during the day at which a customer is required to settle, or provide assets as collateral to cover, that firm's credit exposure to it.
BIPRU 12.5.33
See Notes
BIPRU 12.5.34R applies to a firm which:
- (1) is not a direct participant in a given payment or settlement system;
- (2) is a customer of a firm that is a direct participant in such a system for the purposes of gaining access to that system; and
- (3) receives intra-day credit from that participant firm or prefunds its account with such a firm.
BIPRU 12.5.34
See Notes
For the purpose of assessing its intra-day liquidity risk a firm to which BIPRU 12.5.33R applies must assess the effect on its own position of a participant firm from which it receives intra-day credit or with which it has a prefunded account being unable to perform its obligations to that firm:
- (1) under normal financial conditions; and
- (2) under the stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.35
See Notes
As part of its ILAA submission to the appropriate regulator , a firm to which BIPRU 12.5.33R applies should include:
- (1) details of any alternative arrangements that it has in place to ensure that it continues to be able to meet its liabilities as they fall due in the circumstances set out in BIPRU 12.5.34R; and
- (2) details of the policies governing the use of intra-day credit provided to it by a firm which is a direct participant in a given payment or settlement system, including details of the criteria against which that participant will decide whether to reduce or cease the provision of intra-day credit.
Intra-group liquidity risk
BIPRU 12.5.36
See Notes
Where a firm has an intra-group liquidity modification permitting it to rely on liquidity from other members of its group in order to satisfy the overall liquidity adequacy rule, or may be exposed to calls on its own liquidity resources from others in its group, then in assessing its intra-group liquidity risk it must:
- (1) take into account:
- (a) the extent to which it and other entities in its group have access to central bank funding;
- (b) in relation to any group entity on which a firm relies for liquidity support, the legal and regulatory regime to which that entity is subject, in particular that covering liquidity regulation; and
- (c) the contractual arrangements governing any agreed forms of intra-group liquidity support (including committed funding lines); and
- (2) assume that in periods of stress, group entities will not repay loans or deposits made by the firm to them, but that the firm will meet its liabilities that fall due to other group entities during the period of the relevant stress.
BIPRU 12.5.37
See Notes
BIPRU 12.5.38
See Notes
In relation to an incoming EEA firm or third country BIPRU firm which does not have a whole-firm liquidity modification, that firm must assess the risk that its UK branch may be exposed to calls on liquidity under its control from its head office:
- (1) in normal financial conditions; and
- (2) under the liquidity stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.39
See Notes
Cross-currency liquidity risk
BIPRU 12.5.40
See Notes
For the purpose of assessing its cross-currency liquidity risk, a firm must:
- (1) in relation to each currency in which it has significant positions, calculate its gross outflows and gross inflows having regard to their respective maturities;
- (2) where it identifies a net outflow in (1), assess how it will fund that outflow; and
- (3) estimate how the amounts in (1) and the assessment in (2) could change under the liquidity stresses required by BIPRU 12.5.6R.
BIPRU 12.5.41
See Notes
A firm must, as part of its ILAA submission to the appropriate regulator, in relation to each currency in which it has significant positions:
- (1) identify the type of financial instruments which that firm uses to raise funding in that currency;
- (2) identify the main counterparties which provide funding to that firm in that currency; and
- (3) describe the arrangements that it has in place to fund net outflows in that currency on a timely basis.
Off-balance sheet liquidity risk
BIPRU 12.5.42
See Notes
For the purpose of assessing its off-balance sheet liquidity risk, a firm must:
- (1) identify all off-balance sheet activities that might affect its cash flows;
- (2) calculate the effect on its cash flows of those activities in normal financial conditions; and
- (3) estimate the effect on its cash flows of those activities under the liquidity stresses required by BIPRU 12.5.6R.
BIPRU 12.5.43
See Notes
BIPRU 12.5.44
See Notes
For the purpose of BIPRU 12.5.42R, a firm must in particular consider the impact on its cash flows of:
- (1) derivatives positions;
- (2) contingent liabilities;
- (3) commitments given; and
- (4) liquidity facilities to support securitisation programmes.
BIPRU 12.5.45
See Notes
In relation to derivatives positions, a firm should:
- (1) assess the effect on its cash flows arising from the maturity, exercise and repricing of derivatives in which it holds a position, including the impact of counterparties:
- (a) who may require the posting of additional margin or collateral in the event of a decline in that firm's credit rating;
- (b) who may require the posting of additional margin or collateral (or the return to them of margin or collateral) in the event of a change in the value of a derivative or of the posted collateral;
- (c) who (in the case of those that are any of a recognised investment exchange, a designated investment exchange or a recognised clearing house) may require the posting of additional margin in volatile market conditions;
- (d) who may choose to terminate an OTC derivative which they have entered into with the firm rather than post additional margin or collateral;
- (e) who, in periods of name-specific liquidity stress experienced by the firm, may choose to terminate out of the money derivatives which they have entered into with that firm; and
- (f) who, in periods of stress, may choose to post less liquid collateral than would likely be the case in normal financial conditions; and
- (2) assume that under the stresses required by BIPRU 12.5.6 R there may be uncertainty as to the accuracy of the valuation attributed to a derivative contract.
BIPRU 12.5.46
See Notes
In relation to its contingent liabilities, a firm should:
- (1) calculate the impact on its cash flows of those of its contingent obligations that will be triggered in normal financial conditions; and
- (2) estimate the impact on its cash flows of those of its contingent obligations that may be triggered under the liquidity stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.47
See Notes
BIPRU 12.5.48
See Notes
In relation to its commitments (other than liquidity facilities to support securitisation programmes)), a firm should:
- (1) calculate its maximum contractual exposure arising from those commitments;
- (2) calculate the effect on its cash flows of the drawing of those commitments in normal financial conditions; and
- (3) estimate the effect on its cash flows of the drawing of those commitments under the liquidity stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.49
See Notes
For the purpose of BIPRU 12.5.48G, a firm should:
- (1) consider its contractual exposure to the following types of commitment: committed funding facilities, undrawn loans and advances to wholesale counterparties, mortgages that have been agreed but not yet been drawn down, credit cards, overdrafts (and other retail lending facilities);
- (2) ensure that its analysis of each type of commitment is sufficiently granular to enable that firm to:
- (a) assess the circumstances in which counterparties will draw down;
- (b) identify the extent of any correlations as between counterparties in deciding whether or not to draw down;
- (c) identify the extent to which decisions by the firm's counterparties to draw down may be correlated to a decline in the firm's own liquidity resources; and
- (d) assess the proportion of its total commitments attributable to particular counterparties; and
- (3) assess the extent to which draw down requires the counterparty in question to deliver to the firm collateral in the form of marketable assets, while also assessing the anticipated effect of such a requirement on:
- (a) the likelihood that the counterparty in question will draw down; and
- (b) the firm's liquidity position if the counterparty in question delivers collateral on draw down; and
- (4) assess the impact on its cash flows of its commitment counterparties experiencing liquidity stress at the same time as that firm is subject to the stresses required by BIPRU 12.5.6 R.
BIPRU 12.5.50
See Notes
In relation to liquidity facilities to support securitisation programmes, a firm should:
- (1) assess the extent of its contractual obligations to provide liquidity support to sponsored and third-party structured vehicles;
- (2) identify the circumstances in which support will, or is likely to, be called; and
- (3) assess the impact on that firm's cash flows of such support being called:
- (a) in normal financial conditions; and
- (b) under the liquidity stresses required by BIPRU 12.5.6R.
BIPRU 12.5.51
See Notes
Franchise-viability risk
BIPRU 12.5.52
See Notes
BIPRU 12.5.53
See Notes
BIPRU 12.5.54
See Notes
In complying with BIPRU 12.5.52R, a firm should assess the extent to which it can and realistically will:
- (1) restrict new retail lines without significantly damaging customer relationships;
- (2) restrict new wholesale lending without significantly damaging its ability to resume such lending following the period of stress in question;
- (3) cease to provide liquidity support to its sponsored vehicles;
- (4) decline to exercise call options whose effect if not exercised might be to cause market participants to question the firm's ability to continue to meet its liabilities as they fall due; and
- (5) continue any regular programme of buying back its issued debt.
BIPRU 12.5.55
See Notes
Marketable assets risk
BIPRU 12.5.56
See Notes
For the purpose of assessing its exposure to marketable assets risk, a firm must assess how the marketable assets comprised in its liquidity resources will behave:
- (1) under normal financial conditions; and
- (2) under the liquidity stresses identified in BIPRU 12.5.6R, including an assessment of the effect of these stresses on:
- (a) its ability to derive funding from its marketable assets in a timely fashion;
- (b) the potential for using those assets as collateral to raise secured funding and the size of the haircut likely to be required by a counterparty;
- (c) the likelihood and extent of forced-sale loss; and
- (d) the effect on its business activities of any changes in (a) to (c) identified as likely to result from those liquidity stresses.
BIPRU 12.5.57
See Notes
BIPRU 12.5.58
See Notes
BIPRU 12.5.59
See Notes
BIPRU 12.5.60
See Notes
The behaviour of a firm's marketable assets under conditions of stress is likely to depend on a number of different factors, including:
- (1) the depth and competitiveness of the market for the marketable asset in question, the size of the bid-offer spread, the presence of committed market-makers, the nature of the information available to potential counterparties, the degree of structural complexity of the assets in question and the assets eligibility in central bank market operations and liquidity facilities; and
- (2) that firm's operational capability to generate funding from those assets in a timely manner.
BIPRU 12.5.61
See Notes
In considering its operational capability to generate funding from assets, a firm should be aware that its capability in this regard is likely to depend on:
- (1) whether it has in place arrangements for repo;
- (2) the extent to which that firm already holds a significant proportion of the market for the marketable asset in question;
- (3) the extent to which that firm periodically realises some or all of its holdings of that asset; and
- (4) that firm's accounting treatment and valuation of that asset.
BIPRU 12.5.62
See Notes
For the purpose of its ILAA submission to the appropriate regulator, a firm must provide the appropriate regulator with an analysis of the profile of its marketable assets as at the date of submission in a way that:
- (1) separately identifies its marketable assets according to asset class, maturity, currency, their eligibility for use in central bank monetary operations and liquidity facilities and any other characteristic that it uses in its liquidity management; and
- (2) assesses the degree of diversification achieved across its marketable assets.
Non-marketable assets risk
BIPRU 12.5.63
See Notes
For the purpose of assessing its exposure to non-marketable assets risk, a firm must assess how the non-marketable assets in its liquidity resources will behave:
- (1) under normal financial conditions; and
- (2) under the liquidity stresses required by BIPRU 12.5.6 R, including an assessment of the effect of these stresses on:
BIPRU 12.5.64
See Notes
BIPRU 12.5.65
See Notes
BIPRU 12.2.5 G notes that a firm should include in its liquidity resources sufficient assets which are marketable or otherwise realisable. The appropriate regulator considers those assets which are capable of realisation, but other than through repo or outright sale, as non-marketable assets. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to non-marketable assets risk. Different forms of non-marketable assets risk arise, particularly in relation to:
- (1) retail loans; and
- (2) unsecured wholesale assets.
BIPRU 12.5.66
See Notes
BIPRU 12.5.67
See Notes
BIPRU 12.5.68
See Notes
BIPRU 12.5.69
See Notes
For the purpose of the assessment in BIPRU 12.5.67R, a firm should in particular have regard to the risk associated with:
- (1) repayment defaults; and
- (2) exercise by its counterparties of contractual rights to repay before the expected maturity date or to delay repayment beyond that date.
BIPRU 12.5.70
See Notes
BIPRU 12.5.71
See Notes
The assessment required by BIPRU 12.5.63R is particularly important for a firm which:
- (1) ordinarily does not raise funding from its non-marketable assets in this way; or
- (2) places proportionately greater reliance on securitisation programmes as compared to other funding strategies to generate liquidity.
BIPRU 12.5.72
See Notes
In complying with BIPRU 12.5.63R, a firm must in particular assess the non-marketable assets risk associated with asset securitisations, having regard to:
- (1) the existence of early amortisation triggers and the consequences of their operation; and
- (2) its financing of assets which are warehoused prior to their securitisation.
BIPRU 12.5.73
See Notes
Funding concentration risk
BIPRU 12.5.74
See Notes
BIPRU 12.5.75
See Notes
BIPRU 12.5.76
See Notes
For the purpose of BIPRU 12.5.75R, a firm should take into account the extent to which its liquidity resources are diversified according to:
- (1) type of instrument and product;
- (2) currency;
- (3) counterparty;
- (4) liability term structure; and
- (5) market for their realisation (provided that such market is open to the firm as counterparty).
BIPRU 12.5.77
See Notes
A firm should be aware that the degree of diversification in its liquidity resources can be compromised, particularly in periods of stress, by a number of factors, including:
- (1) reduced or terminated funding provision from some counterparties as a result of that firm's credit-rating being downgraded or its financial condition deteriorating;
- (2) disputes over the terms of legally binding commitments to lend which delay the provision of funding;
- (3) markets previously used by the firm for raising funding ceasing to be open or operating but at reduced capacity;
- (4) reliance on a small number of brokers to access funding sources; and
- (5) positive correlations in the behaviour of different instruments and products.
BIPRU 12.6
Simplified ILAS
- 01/12/2009
BIPRU 12.6.1
See Notes
BIPRU 12.6.2
See Notes
An ILAS BIPRU firm that wishes to operate the simplified ILAS approach must:
- (1) satisfy the conditions in BIPRU 12.6.6R to BIPRU 12.6.8R; and
- (2) obtain a simplified ILAS waiver from the appropriate regulator.
BIPRU 12.6.3
See Notes
BIPRU 12.6.4
See Notes
BIPRU 12.6.5
See Notes
Simplified ILAS conditions
BIPRU 12.6.6
See Notes
The first condition is that:
- (1) no less than 75% of the firm's total liabilities are accounted for by retail deposits and:
- (a) the firm's total assets do not exceed 250 million; or
- (b) the firms total assets do not exceed 1 billion and no less than 70% of those assets are accounted for by:
- (i) assets of the kind that fall into BIPRU 12.7.2 R and which the firm counts towards its simplified buffer requirement; and
- (ii) retail loans; or
- (c) no less than 70% of the firm's total assets are accounted for by retail loans; or
- (d) no less than 70% of the firm's total assets are accounted for by:
- (i) money-market instruments with a residual contractual maturity of three months or less; or
- (ii) sight deposits held with a credit institution; or
- (iii) term deposits with a residual contractual maturity of three months or less held with a credit institution; or
- (2) no less than 80% of the firm's total liabilities are accounted for by liabilities owed to its parent undertaking and the amount of the firm's total assets does not exceed 1 billion.
- (a) [deleted]
- (b) [deleted]
- (c) [deleted]
- (3) [deleted]
BIPRU 12.6.6A
See Notes
BIPRU 12.6.7
See Notes
In this section:
- (1) a retail deposit is a deposit accepted from a consumer; and
- (2) SME deposits are deposits accepted from, and account balances where the account holders are, small and medium-sized enterprises (or partnerships or sole traders or charities which would be small and medium-sized enterprises if they were companies).
BIPRU 12.6.8
See Notes
Size of the simplified buffer requirement
BIPRU 12.6.9
See Notes
- (1) A simplified ILAS BIPRU firm must ensure that the size of its liquid assets buffer is at all times greater than or equal to 50% of the amount produced by adding:
- (a) the wholesale net cash outflow component;
- (b) the retail and SME deposit component; and
- (c) the credit pipeline component.
- (2) This is the simplified buffer requirement.
The wholesale net cash outflow component
BIPRU 12.6.10
See Notes
- (1) The wholesale net cash outflow component is a firm's peak cumulative wholesale net cash outflow over the next three months where the peak is established by:
- (a) calculating the daily wholesale net cash flow by reference to a firm's wholesale assets maturing that day and its wholesale liabilities falling due on that day;
- (b) for each of the business days in the next three months, calculating the cumulative total of such daily net cash flows as at the business day in question; and
- (c) identifying the minimum cumulative total figure out of all of the cumulative total figures calculated in accordance with (b).
- (2) The figure identified in (1)(c) is the peak cumulative wholesale net cash outflow.
- (3) For the purpose of calculating the peak cumulative wholesale net cash outflow, a firm must:
- (a) exclude from the calculation in (1)(a) cash flows attributable to repo and reverse repo, forward sales, forward purchases, redemptions and any other transactions entered into by the firm where the security leg of the transaction in question is in respect of securities of the type described in BIPRU 12.7.2R (1) and (2);
- (b) include wholesale cash outflows in that calculation according to their earliest contractual maturity;
- (c) exclude wholesale cash flows attributable to reserves in the form of sight deposits with a central bank and designated money market funds that it includes in its liquid assets buffer in accordance with the rules on asset eligibility in BIPRU 12.7; and
- (d) exclude any retail deposits or SME deposits.
The retail and SME deposit component
BIPRU 12.6.11
See Notes
- (1) The retail and SME deposit component is the sum represented by:
- (a) 20% of a firm's Type A retail deposits;
- (b) 10% of a firm's Type B retail deposits; and
- (c) 20% of a firm's SME deposits.
- (2) A firm must:
- (a) assess the likelihood that retail deposits that it holds will be withdrawn in response to actual or perceived changes in the firm's credit-worthiness;
- (b) calculate the amount of retail deposits that it assesses as having a higher than average likelihood of withdrawal in the circumstances described in (a) (Type A retail deposits); and
- (c) class all other of its retail deposits as Type B retail deposits.
BIPRU 12.6.12
See Notes
In the appropriate regulator's view, a Type A retail deposit is likely to include one which:
- (1) has been accepted through the internet; or
- (2) is considered to have a more than average sensitivity to interest rate changes (such as a deposit whose acceptance can reasonably be attributed to the use of price-focused advertising by the firm accepting the deposit); or
- (3) in relation to any individual depositor exceeds to a significant extent the amount of that individuals deposits with the accepting firm that are covered by a national deposit guarantee scheme; or
- (4) is not accepted from a depositor with whom the firm has had a long relationship; or
- (5) is accepted from retail depositors who can access their deposits before their residual contractual maturity subject to a loss of interest or payment of another form of early access charge (as a general proposition, the behaviour of liabilities to retail depositors is likely to depend in part on the contractual terms and conditions which give rise to those liabilities); or
- (6) is not held in an account which is maintained for transactional purposes.
BIPRU 12.6.13
See Notes
Before applying for a simplified ILAS waiver, a firm must prepare a written policy statement recording its approach to assessing the likelihood of withdrawal of its retail deposits in the circumstances described in BIPRU 12.6.11R (2)(a) and ensure that:
- (1) the firm's governing body approves and conducts appropriate reviews of the policy statement; and
- (2) the firm submits a copy of the policy statement to its usual supervisory contact at the appropriate regulator.
BIPRU 12.6.14
See Notes
The credit pipeline component
BIPRU 12.6.15
See Notes
Buffer securities restriction
BIPRU 12.6.16
See Notes
- (1) A simplified ILAS BIPRU firm may only include in its liquid assets buffer eligible government and designated multilateral development bank debt securities up to the value of the buffer securities restriction.
- (2) For the purpose of calculating the buffer securities restriction, a firm must:
- (a) calculate its daily net flow in government and designated multilateral development bank debt securities eligible as classes of assets for inclusion in the firm's liquid assets buffer;
- (b) for each of the business days in the next three months calculate the cumulative total of such daily securities flows, including the opening balance, as at the business day in question; and
- (c) identify the minimum cumulative total figure out of all of the cumulative total figures calculated in accordance with (b).
- (3) For the purpose of (2)(a), a firm must include:
- (a) all contractual inflows and outflows of eligible debt securities arising from repo, reverse repo, forward sales, forward purchases, redemptions and any other transactions involving those securities; and
- (b) those cash flows excluded under BIPRU 12.6.10 R (3)(a).
BIPRU 12.6.17
See Notes
Foreign currency positions
BIPRU 12.6.18
See Notes
- (1) Subject to (3), a simplified ILAS BIPRU firm that has assets or liabilities denominated in either or both euros and United States dollars must carry out separate calculations under BIPRU 12.6.9R in relation to its positions in each of those currencies, in addition to that which it carries out in relation to its sterling positions (if any).
- (2) A firm to which (1) applies must ensure that, for the purpose of meeting the simplified buffer requirement, it holds in its liquid assets buffer assets denominated in either or both euros and United States dollars (as relevant) greater than or equal to the amount produced by the calculation in the corresponding currency required under (1), in addition to any sterling liquid assets that it is required to hold in its buffer in respect of its sterling positions.
- (3) Paragraph (1) does not apply to a simplified ILAS BIPRU firm that hedges fully its positions in either or both euros and United States dollars such that the firm is not exposed to any cross-currency liquidity risk in respect of those positions.
Content of the simplified ILAS liquid assets buffer
BIPRU 12.6.19
See Notes
BIPRU 12.6.20
See Notes
ILSA
BIPRU 12.6.21
See Notes
- (1) A simplified ILAS BIPRU firm must regularly carry out an ILSA which contains an assessment of the firm's compliance with the standards set out in BIPRU 12.3 and BIPRU 12.4, including the results of the stress tests required by the rules in BIPRU 12.4.
- (2) The firm must make a written record of its ILSA.
- (3) The ILSA must be proportionate to the nature, scale and complexity of that firm's activities.
- (4) The ILSA must take into account group-wide liquidity resources only to the extent that reliance on these is permitted by the appropriate regulator.
BIPRU 12.6.22
See Notes
BIPRU 12.7
Liquid assets buffer
- 01/12/2009
BIPRU 12.7.1
See Notes
BIPRU 12.7.2
See Notes
For the purpose of satisfying BIPRU 12.2.8R, a firm to which this section applies may include in its liquid assets buffer only:
- (1) high quality debt securities issued by a government or central bank;
- (2) securities issued by a designated multilateral development bank;
- (3) reserves in the form of sight deposits with a central bank of the kind specified in BIPRU 12.7.5R and BIPRU 12.7.6R; and
- (4) in the case of a simplified ILAS BIPRU firm only, investments in a designated money market fund.
BIPRU 12.7.3
See Notes
Subject to BIPRU 12.7.4R, for the purpose of BIPRU 12.7.2R (1), a firm may include only a debt security which is:
- (1) issued by the central government or central bank of an EEA State; or
- (2) issued by the central government or central bank of Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.
BIPRU 12.7.4
See Notes
For the purpose of BIPRU 12.7.3R, a firm may not include a debt security unless:
- (1) the central government or central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the appropriate regulator for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs credit assessments to credit quality steps (Long term mapping)); and
- (2) that debt security is either:
- (a) denominated in the domestic currency of the country in question; or
- (b) denominated in a currency other than the domestic currency, provided it is denominated in any of Canadian dollars, euros, Japanese yen, sterling, Swiss francs or United States dollars.
BIPRU 12.7.5
See Notes
Subject to BIPRU 12.7.6R, for the purpose of BIPRU 12.7.2R (3) a firm may include only reserves in the form of sight deposits held by the firm with the central bank of:
- (1) an EEA State; or
- (2) Canada, the Commonwealth of Australia, Japan, Switzerland or the United States of America.
BIPRU 12.7.6
See Notes
For the purpose of BIPRU 12.7.5R, a firm may not include reserves held at a central bank unless:
- (1) the central bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the appropriate regulator for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs credit assessments to credit quality steps (Long term mapping)); and
- (2) those reserves are denominated in the domestic currency of the central bank in question.
BIPRU 12.7.6A
See Notes
For the purpose of BIPRU 12.7.2R (2), a firm may not include securities issued by a designated multilateral development bank unless:
- (1) the designated multilateral development bank in question has been assessed by at least two eligible ECAIs as having a credit rating associated with credit quality step 1 in the credit quality assessment scale published by the appropriate regulator for the purpose of BIPRU 3 (The Standardised Approach: mapping of the ECAIs' credit assessments to credit quality steps (Long term mapping)); and
- (2) those securities are denominated in any of Canadian dollars, euros, Japanese yen, sterling, Swiss francs or United States dollars.
BIPRU 12.7.7
See Notes
BIPRU 12.7.8
See Notes
BIPRU 12.7.9
See Notes
For the purposes of BIPRU 12.7.2R (1) and (2), a firm must only count securities:
- (1) which are unencumbered;
- (2)
- (a) to which it has legal title; or
- (b) to which a central bank has legal title but which meet the requirements of BIPRU 12.7.9AR (1), subject to BIPRU 12.7.9AR (2); and
- (3) which that firm realises on a regular basis.
BIPRU 12.7.9A
See Notes
- (1) For the purposes of BIPRU 12.7.9R (2)(b) the requirements are that:
- (a) the securities are in excess of the amount of collateral required to be held by that central bank; and
- (b) the firm is entitled to regain legal title to such securities without any encumbrance.
- (2) The firm may only count securities that meet the requirements of BIPRU 12.7.9 R and BIPRU 12.7.9AR (1) from the point in time when the firm would regain legal title to the securities from the central bank, subsequent to any required notice period.
- (3) For the purposes of BIPRU 12.7.9AR (2) any required notice period is deemed to commence on the first business day that the central bank could receive notice from the firm.
BIPRU 12.7.10
See Notes
BIPRU 12.7.11
See Notes
- (1) For the purpose of BIPRU 12.7.9R (3), a firm must periodically realise a proportion of the assets in its liquid assets buffer through repo or outright sale to the market.
- (2) [deleted]
- (3) A firm must ensure that in carrying out such periodic realisation:
- (a) it does so without reference to the firm's day-to-day liquidity needs;
- (b) it realises in varying amounts the assets in its liquid assets buffer;
- (c) the cumulative effect of its periodic realisation over any twelve month period is that a significant proportion of the assets in its liquid assets buffer is realised; and
- (d) in repo to the market it enters into transactions of varying durations.
- (4) A firm must establish and maintain a written policy setting out its approach to periodic realisation of its assets.
- (5) A firm must also ensure that it periodically tests its operational ability to raise funds, through the use of central bank liquidity facilities to which it has access, using a proportion of those of its assets not in its liquid assets buffer.
BIPRU 12.7.12
See Notes
BIPRU 12.8
Cross-border and intra-group management of liquidity
- 01/12/2009
BIPRU 12.8.1
See Notes
BIPRU 12.8.2
See Notes
BIPRU 12.8.3
See Notes
BIPRU 12.8 provides guidance on two types of modification to the overall liquidity adequacy rule and to other rules in BIPRU 12 for which the appropriate regulator considers a firm may wish to apply, namely:
- (1) an intra-group liquidity modification; and
- (2) a whole-firm liquidity modification.
BIPRU 12.8.4
See Notes
BIPRU 12.8.5
See Notes
BIPRU 12.8.6
See Notes
Intra-group liquidity modification: general
BIPRU 12.8.7
See Notes
BIPRU 12.8.8
See Notes
BIPRU 12.8.9
See Notes
BIPRU 12.8.10
See Notes
BIPRU 12.8.11
See Notes
In each application for an intra-group liquidity modification, the appropriate regulator will consider the extent to which it is appropriate to modify the overall liquidity adequacy rule to allow reliance by an applicant firm on liquidity resources elsewhere in a firm's group. However, it is unlikely that the appropriate regulator would consider the conditions in section 138A of the Act to be met in circumstances in which the overall liquidity adequacy rule was modified to allow unlimited reliance on liquidity resources that are not the applicant firm's own. As a general principle, the appropriate regulator is likely to wish to ensure that, having regard to the results of an applicant firm's ILAA:
- (1) once modified, the overall liquidity adequacy rule still requires the firm to have adequate liquidity resources to enable it to wind down its business in an orderly and controlled manner in circumstances in which its business ceases to be viable; and
- (2) the amount of liquidity support permitted in the modification is a reasonable one having regard to the total liquidity resources of the group entity on which it is proposed that reliance should be placed.
BIPRU 12.8.12
See Notes
BIPRU 12.8.13
See Notes
Consideration of an application for an intra-group liquidity modification
BIPRU 12.8.14
See Notes
BIPRU 12.8.15
See Notes
In relation to the regime of liquidity regulation imposed by the authority that regulates for liquidity purposes an applicant firm's parent undertaking which is constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will ordinarily expect to be satisfied that:
- (1) the regime of liquidity regulation to which that undertaking is subject delivers outcomes as regards the regulation of that undertaking's liquidity risk that are broadly equivalent to those intended by BIPRU 12; and
- (2) there is clarity as to any legal constraints imposed by the authority which regulates that undertaking for liquidity purposes on the provision of liquidity from that undertaking to the applicant firm.
BIPRU 12.8.16
See Notes
BIPRU 12.8.17
See Notes
In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will ordinarily expect to reach agreement with the authority that regulates that undertaking for liquidity purposes in a number of areas, including agreement that:
- (1) it will notify the appropriate regulator of any material or persistent breaches by that undertaking of that authoritys liquidity rules, or of risks that such breaches are imminent;
- (2) it is satisfied with the adequacy of the parent undertaking's arrangements for liquidity risk management;
- (3) it is satisfied as to the adequacy of the parent undertaking's liquidity resources including:
- (a) the size and quality of its liquid assets buffer; and
- (b) the size and quality of any liquidity resources that are held in the United Kingdom for the purpose of meeting the liabilities of an applicant firm as they fall due;
- (4) it does not object to any undertakings given by that parent undertaking in respect of an applicant firm to ensure that the firm has adequate liquidity resources; and
- (5) it will have due regard to the views of the appropriate regulator in its supervision of the liquidity position of that parent undertaking.
BIPRU 12.8.18
See Notes
In relation to an applicant firm wishing to rely on liquidity support from a parent undertaking constituted under the law of a country or territory outside the United Kingdom, the appropriate regulator will, before granting an intra-group liquidity modification, ordinarily expect to have reached agreement with that parent undertaking that:
- (1) it will make available liquidity resources at all times to that applicant firm if needed;
- (2) it will enter into an undertaking in a suitable form with an applicant firm committing it to provide liquidity support to that firm on the occurrence of certain defined events;
- (3) it will ensure that the applicant firm maintains liquidity resources of appropriate size and quality in the United Kingdom for the purposes of meeting the liquidity needs of that firm;
- (4) it will maintain arrangements, including having adequate liquidity resources, to ensure that it, the applicant firm and any other entities in its group to which it provides liquidity support are able to wind down their businesses in an orderly and controlled manner in circumstances where its, or their, businesses cease to be viable;
- (5) it will make available to the appropriate regulator information in an appropriate format on group liquidity; and
- (6) it will participate in the appropriate regulator's thematic supervisory work in relation to liquidity when requested to do so by the appropriate regulator.
BIPRU 12.8.19
See Notes
BIPRU 12.8.20
See Notes
Ongoing requirements
BIPRU 12.8.21
See Notes
The appropriate regulator also anticipates that an intra-group liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:
- (1) the appropriate regulator receiving annual confirmation from the authority that regulates an applicant firm's parent undertaking for liquidity purposes that it remains satisfied with the arrangements in respect of that undertaking for liquidity supervision and their operation; and
- (2) an annual meeting with the same authority to discuss liquidity supervision of that undertaking.
Whole-firm liquidity modification: general
BIPRU 12.8.22
See Notes
BIPRU 12.8.23
See Notes
BIPRU 12.8.24
See Notes
Accordingly, a whole-firm liquidity modification envisages:
- (1) a modification to the overall liquidity adequacy rule so as to permit reliance by the firm, in relation to its UK branch, on liquidity resources wherever held in the firm for the purposes of meeting that rule; and
- (2) a waiver of the remainder of the substantive rules in BIPRU 12, with the effect that the UK branch of the applicant firm becomes subject for the purpose of day-to-day liquidity supervision to the liquidity regime of the Home State regulator or third country competent authority in question.
BIPRU 12.8.25
See Notes
Consideration of an application for a whole-firm liquidity modification
BIPRU 12.8.26
See Notes
In relation to the Home State regulator's or third country competent authority's regime of liquidity regulation, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to be satisfied that:
- (1) the regime in question delivers outcomes as regards the regulation of the applicant firm's liquidity risk that are broadly equivalent to those intended by this chapter; and
- (2) there is clarity as to any legal constraints imposed by the Home State regulator or third country competent authority on the provision of liquidity by a firm to its UK branch, as well as the potential for such restrictions to be imposed in the future.
BIPRU 12.8.27
See Notes
In relation to the applicant firm in question, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with the Home State regulator or third country competent authority in a number of areas, including agreement that:
- (1) it will notify the appropriate regulator promptly of any material or persistent breaches by that firm of its liquidity rules, or of risks that such breaches are imminent;
- (2) it is satisfied with the adequacy of the arrangements in place for firm-wide liquidity risk management;
- (3) it is satisfied as to the adequacy of that firm's liquidity resources including the size and quality of its liquid assets buffer;
- (4) it does not object to any undertakings given by that firm in respect of its UK branch to ensure that the branch has adequate liquidity resources; and
- (5) it will have due regard to the views of the appropriate regulator in its supervision of that firm's liquidity position.
BIPRU 12.8.28
See Notes
In relation to the applicant firm in question, the appropriate regulator will, before granting a whole-firm liquidity modification, ordinarily expect to have reached agreement with that firm in a number of areas, including agreement that:
- (1) it will make available liquidity resources at all times to its UK branch if needed;
- (2) it will make available to the appropriate regulator information in an appropriate format on firm-wide liquidity;
- (3) it will notify the appropriate regulator at the same time as it notifies the Home State regulator or third country competent authority of any issues relevant to the liquidity position of its UK branch or compliance with the rules to which it is subject in respect of its liquidity (including with the terms of its whole-firm liquidity modification);
- (4) its UK branch will continue to be fully integrated with the rest of the firm for liquidity risk management purposes; and
- (5) it will participate in the appropriate regulator's thematic supervisory work in relation to liquidity when requested to do so by the appropriate regulator.
Ongoing requirements
BIPRU 12.8.29
See Notes
The appropriate regulator also anticipates that a whole-firm liquidity modification would be made subject to a number of ongoing conditions and requirements. These are likely to include:
- (1) the appropriate regulator receiving annual confirmation from the Home State regulator or third country competent authority that it remains satisfied with the arrangements in respect of that firm for liquidity supervision and their operation;
- (2) an annual meeting with the Home State regulator or third country competent authority to discuss liquidity supervision of that firm;
- (3) the appropriate regulator receiving annual confirmation from the firm, approved by its governing body, that it remains in full compliance with the terms of its whole-firm liquidity modification; and
- (4) as at the first anniversary of the grant of the whole-firm liquidity modification and on each anniversary thereafter, the appropriate regulator receiving from the firm:
- (a) an appropriate account of the activities conducted by the UK branch over the previous year; and
- (b) a copy of the firm's latest business plan where this differs from that previously sent to the appropriate regulator after grant of its whole-firm liquidity modification.
BIPRU 12.8.30
See Notes
BIPRU 12.9
Individual liquidity guidance and regulatory intervention points
- 01/12/2009
Appropriate regulator assessment process
BIPRU 12.9.1
See Notes
BIPRU 12.9.2
See Notes
BIPRU 12.9.3
See Notes
BIPRU 12.9.4
See Notes
As part of the SLRP, the appropriate regulator will give a standard ILAS BIPRU firm individual liquidity guidance advising it of the amount and quality of liquidity resources which the appropriate regulator considers are appropriate, having regard to the liquidity risk profile of that firm. In giving individual liquidity guidance, the appropriate regulator will also advise the firm of what it considers to be a prudent funding profile for the firm. In giving the firm individual liquidity guidance as to its funding profile, the appropriate regulator will consider the extent to which the firm's liabilities are adequately matched by assets of appropriate maturities. In both cases, the appropriate regulator will have regard to the adequacy of a firm's systems and controls in relation to liquidity risk when judged against the standard described in the rules and guidance in BIPRU 12.3 and BIPRU 12.4. Individual liquidity guidance will therefore have two components:
BIPRU 12.9.5
See Notes
BIPRU 12.9.6
See Notes
BIPRU 12.9.7
See Notes
BIPRU 12.9.8
See Notes
BIPRU 12.9.9
See Notes
Additional guidance for branches
BIPRU 12.9.10
See Notes
Regulatory intervention points for ILAS BIPRU firms
BIPRU 12.9.11
See Notes
BIPRU 12.9.12
See Notes
BIPRU 12.9.12A
See Notes
BIPRU 12.9.13
See Notes
As soon as a firm becomes aware of the occurrence or expected occurrence of the events identified in BIPRU 12.9.14 R, it must immediately provide to the appropriate regulator:
- (1) notification in writing of the event;
- (2) an adequately reasoned explanation for the event; and
- (3) an indication of the management actions the firm has taken to date to address the event, including actions from its contingency funding plan.
BIPRU 12.9.14
See Notes
For the purpose of BIPRU 12.9.13 R, the events in question are:
- (1) in the case of a simplified ILAS BIPRU firm only, breach of the simplified buffer requirement unless this has been superseded by individual liquidity guidance that it has accepted;
- (2) in the case of a standard ILAS BIPRU firm or a simplified ILAS BIPRU firm, being a firm which in either case has accepted individual liquidity guidance given to it by the appropriate regulator:
BIPRU 12.9.15
See Notes
BIPRU 12.9.16
See Notes
BIPRU 12.9.17
See Notes
BIPRU 12.9.18
See Notes
For the purposes of BIPRU 12.9.17 R, a firm's liquidity remediation plan must:
- (1) be communicated in writing;
- (2) detail the firm's forward estimates of the evolution of the size of the firm's liquid assets buffer and of its funding profile;
- (3) in relation to any of the events identified in BIPRU 12.9.14 R that has occurred, or is expected to occur, detail the actions that the firm intends to take to remedy the event, or avoid the expected event, as the case may be, including information about:
- (a) the amount of funding that it is intended to raise;
- (b) the intended funding providers; and
- (c) the maturity profile of the intended funding;
- (4) identify clear timescales for achieving each of the actions that it details in accordance with BIPRU 12.9.18R (3); and
- (5) include an adequately reasoned assessment of the likelihood of the timely achievement of the actions that it details in accordance with BIPRU 12.9.18R (3).
BIPRU 12.9.19
See Notes
BIPRU 12.9.20
See Notes
BIPRU 12.9.21
See Notes
BIPRU 12.9.22
See Notes
BIPRU 12.9.23
See Notes
Monitoring requirement
BIPRU 12.9.24
See Notes
Mode of notification
BIPRU 12.9.25
See Notes
BIPRU 12.9.26
See Notes
BIPRU 12.9.27
See Notes
BIPRU 13
The calculation of counterparty risk exposure values for financial derivatives, securities financing transactions and long settlement transactions
BIPRU 13.1
Application and Purpose
- 01/01/2007
Application
BIPRU 13.1.1
See Notes
BIPRU 13.1.2
See Notes
- (1) BIPRU 13 applies to items in the non-trading book.
- (2) BIPRU 13 applies to trading book items for the purposes of BIPRU 14.
BIPRU 13.1.3
See Notes
Purpose
BIPRU 13.1.4
See Notes
BIPRU 13 implements:
- (1) Article 78(2) and (4);
- (2) point 3 of Part 1, and Parts 2, 3, 5, 6 and 7 of Annex III; and
- (3) Annex IV;
of the Banking Consolidation Directive.
BIPRU 13.1.5
See Notes
BIPRU 13.1.6
See Notes
BIPRU 13.2
Unusual Transactions
- 01/01/2007
BIPRU 13.2.1
See Notes
BIPRU 13.2.2
See Notes
If a firm in relation to an exposure covered by BIPRU 13:
- (1) has an exposure of a non-standard type; or
- (2) an exposure that is part of a non-standard arrangement; or
- (3) has an exposure that, taken together with other exposures (whether or not they are subject to BIPRU 13), gives rise to a non-standard counterparty credit risk; or
- (4) is subject to the rule in BIPRU 13.2.1 R;
it must notify the appropriate regulator as soon as practicable of that fact, the counterparty involved, the nature of the exposure or arrangement and the treatment of those exposures it has adopted for the purpose of the calculation of the credit risk capital requirement.
BIPRU 13.2.3
See Notes
BIPRU 13.2.4
See Notes
A firm must judge the question of what is non-standard for the purposes of BIPRU 13.2.2 R by reference to the standards:
BIPRU 13.2.5
See Notes
BIPRU 13.3
Calculation of exposure values for financial derivatives and long settlement transactions: General provisions
- 01/01/2007
Financial derivative instruments
BIPRU 13.3.1
See Notes
A firm must determine the exposure value of a financial derivative instrument in accordance with BIPRU 13, with the effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance with BIPRU 13.
[Note: BCD Article 78(2) first sentence]
BIPRU 13.3.2
See Notes
Subject to BIPRU 13.3, a firm must determine the exposure value for financial derivative instruments with the CCR mark to market method, the CCR standardised method or the CCR internal model method.
[Note: BCD Annex III, Part 2 point 1]
Definition of financial derivative instrument
BIPRU 13.3.3
See Notes
Each of the following is a financial derivative instrument:
- (1) an interest-rate contract, being:
- (a) a single-currency interest rate swap;
- (b) a basis-swap;
- (c) a forward rate agreement;
- (d) an interest-rate future;
- (e) a purchased interest-rate option; and
- (f) other contracts of similar nature.
- (2) a foreign currency contract or contract concerning gold, being:
- (a) a cross-currency interest-rate swap;
- (b) a forward foreign currency contract;
- (c) a currency future;
- (d) a currency option purchased;
- (e) other contracts of a similar nature; and
- (f) a contract concerning gold of a nature similar to (2)(a) to (e).
- (3) a contract of a nature similar to those in 1(a) to (e) and 2(a) to (d) concerning other reference items or indices, including as a minimum all instruments specified in points 4 to 7, 9 and 10 of Section C of Annex I to the MIFID not otherwise included in (1) or (2).
[Note: BCD Annex IV]
Long settlement transactions
BIPRU 13.3.4
See Notes
Long settlement transaction means a transaction where a counterparty undertakes to deliver a security, a commodity, or a foreign currency amount against cash, other financial instruments, or commodities, or vice versa, at a settlement or delivery date that is contractually specified as more than the lower of the market standard for this particular transaction and five business days after the date on which the firm enters into the transaction.
[Note: BCD Annex III Part 1 point 3]
BIPRU 13.3.5
See Notes
A firm must calculate the exposure value of a long settlement transaction in accordance with either:
- (1) BIPRU 13; or
- (2) the master netting agreement internal models approach, if it has a master netting agreement internal models approach waiver which permits it to apply that approach.
[Note: BCD Article 78(2) second sentence, in respect of long settlement transaction]
BIPRU 13.3.6
See Notes
A firm may determine exposures arising from long settlement transactions using any of the CCR mark to market method, the CCR standardised method and the CCR internal model method, regardless of the methods chosen for treating financial derivatives instruments and repurchase transactions, securities or commodities lending or borrowing transactions, and margin lending transactions. In calculating capital requirements for long settlement transactions, a firm that uses the IRB approach may apply the risk weights under the standardised approach on a permanent basis and irrespective of the materiality of such positions.
[Note: BCD Annex III Part 2 point 7]
BIPRU 13.3.7
See Notes
General netting
BIPRU 13.3.8
See Notes
Under the CCR mark to market method, the CCR standardised method and the CCR internal model method, a firm must determine the exposure value for a given counterparty as equal to the sum of the exposure values calculated for each netting set with that counterparty.
[Note: BCD Annex III Part 2 point 5]
BIPRU 13.3.9
See Notes
Combined use
BIPRU 13.3.10
See Notes
The combined use of the CCR mark to market method, the CCR standardised method and the CCR internal model method is not permitted. The combined use of the CCR mark to market method and the CCR standardised method is permitted where one of the methods is used for the cases set out in BIPRU 13.5.9 R to BIPRU 13.5.10 R.
[Note: BCD Annex III Part 2 point 1(part)]
BIPRU 13.3.11
See Notes
Exposure to a central counterparty
BIPRU 13.3.12
See Notes
Notwithstanding BIPRU 13.3.1 R and BIPRU 13.3.5 R, a firm may determine the exposure value of a credit risk exposure outstanding with a central counterparty in accordance with BIPRU 13.3.13 R, provided that the central counterparty's counterparty credit risk exposure with all participants in its arrangements are fully collateralised on a daily basis.
[Note: BCD Article 78(4) in respect of financial derivatives and long settlement transactions]
BIPRU 13.3.13
See Notes
A firm may attribute an exposure value of zero for CCR to derivative contracts and long settlement transactions, or to other exposures arising in respect of those contracts or transactions (but excluding an exposure arising from collateral held to mitigate losses in the event of the default of other participants in the central counterparty's arrangements) where they are outstanding with a central counterparty and have not been rejected by the central counterparty.
[Note: BCD Annex III Part 2 point 6 in respect of financial derivatives and long settlement transactions]
Exceptions
BIPRU 13.3.14
See Notes
When a firm purchases credit derivative protection against a non-trading book ,exposure or against a CCR exposure, it must compute its capital requirement for the hedged asset in accordance with:
- (1) BIPRU 5.7.16 R to BIPRU 5.7.25 R and BIPRU 4.10.49 R (4) to (6) (Unfunded credit protection: Valuation and calculation of risk-weighted exposure amounts and expected loss amounts); or
- (2) where a firm calculates risk weighted exposure amounts in accordance with the IRB approach:
- (a) BIPRU 4.4.79 R (Double default); or
- (b) BIPRU 4.10.40 R to BIPRU 4.10.48 R. (Unfunded credit protection: Minimum requirements for assessing the effect of guarantees and credit derivatives).
- (3) [deleted]
[Note: BCD Annex III Part 2 point 3 (part)]
BIPRU 13.3.15
See Notes
- (1) In the cases in BIPRU 13.3.14R, and where the option in the second sentence of BIPRU 14.2.10 R is not applied, the exposure value for CCR for these credit derivatives is set to zero.
- (2) However, a firm may choose consistently to include for the purposes of calculating capital requirements for counterparty credit risk all credit derivatives not included in the trading book and purchased as protection against a non-trading exposure or against a CCR exposure where the credit protection is recognised under the BCD.
[Note: BCD Annex III Part 2 point 3 (part)]
BIPRU 13.3.16
See Notes
BIPRU 13.4
CCR mark to market method
- 01/01/2007
General
BIPRU 13.4.1
See Notes
BIPRU 13.4.2
See Notes
BIPRU 13.4.3
See Notes
A firm must obtain a figure for potential future credit exposure by multiplying the notional principal amounts or underlying values by the percentages in the table in BIPRU 13.4.5 R.
[Note: BCD Annex III Part 3, Step (b) (part)]
BIPRU 13.4.4
See Notes
BIPRU 13.4.3 R does not apply in the case of single-currency "floating/floating" interest rate swaps.
[Note: BCD Annex III Part 3, Step (b) (part)]
Table: multiples to be applied to notional principal amounts or underlying values
BIPRU 13.4.5
See Notes
This table belongs to BIPRU 13.4.5 R
Residual maturity | Interest-rate contracts | Contracts concerning foreign currency rates and gold | Contracts concerning equities | Contracts concerning precious metals except gold | Contracts concerning commodities other than precious metals |
One year or less | 0% | 1% | 6% | 7% | 10% |
Over one year, not exceeding five years | 0,5% | 5% | 8% | 7% | 12% |
Over five years | 1.5% | 7.5% | 10% | 8% | 15% |
[Note: BCD Annex III Part 3, Table 1]
BIPRU 13.4.6
See Notes
A firm must treat a contract which does not fall within one of the five categories indicated in the table in BIPRU 13.4.5 R as a contract concerning commodities other than precious metals.
[Note: BCD Annex III Part 3, Table 1 footnote 25]
BIPRU 13.4.7
See Notes
For contracts with multiple exchanges of principal, a firm must multiply the percentages in the table in BIPRU 13.4.5 R by the number of remaining payments still to be made according to the contract.
[Note: BCD Annex III Part 3, Table 1 footnote 26]
BIPRU 13.4.8
See Notes
For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, a firm must treat the residual maturity as equal to the time until the next reset date.
[Note: BCD Annex III Part 3, Table 1 footnote 27 (part)]
BIPRU 13.4.9
See Notes
In the case of interest-rate contracts that meet the criteria in BIPRU 13.4.8 R and have a remaining maturity of over one year, a firm must apply a percentage no lower than 0.5%.
[Note: BCD Annex III Part 3, Table 1 footnote 27 (part)]
BIPRU 13.4.10
See Notes
Table: alternative multiples to be applied to notional principal amounts or underlying values
BIPRU 13.4.11
See Notes
This table belongs to BIPRU 13.4.10 R
Residual maturity | Precious metals (except gold) | Base metals | Agricultural products (softs) | Other, including energy products |
One year or less | 2% | 2,5% | 3% | 4% |
Over one year, not exceeding five years | 5% | 4% | 5% | 6% |
Over five years | 7.5% | 8% | 9% | 10% |
[Note: BCD Annex III Part 3, Table 2]
BIPRU 13.4.12
See Notes
A firm must calculate the exposure value as the sum of:
- (1) the current replacement cost calculated under BIPRU 13.4.2 R; and
- (2) the potential future credit exposure calculated under BIPRU 13.4.3 R.
[Note: BCD Annex III Part 3, Step (c)]
BIPRU 13.4.13
See Notes
BIPRU 13.4.14
See Notes
Alternative approach
BIPRU 13.4.15
See Notes
A firm must ensure that the notional amount to be taken into account is an appropriate yardstick for the risk inherent in the contract. Where, for instance, the contract provides for a multiplication of cash flows, a firm must adjust the notional amount in order to take into account the effects of the multiplication on the risk structure of that contract.
[Note: BCD Annex III Part 2 point 8]
Netting: Contracts for novation
BIPRU 13.4.16
See Notes
The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be weighted. For the purposes of the CCR mark to market method, a firm may obtain:
- (1) in BIPRU 13.4.2 R, the current replacement cost; and
- (2) in BIPRU 13.4.3 R, the notional principal amounts or underlying values;
by taking account of the contract for novation.
[Note: BCD Annex III Part 7 point c(i)]
Netting: Other netting agreements
BIPRU 13.4.17
See Notes
In application of the CCR mark to market method:
- (1) in BIPRU 13.4.2 R a firm may obtain the current replacement cost for the contracts included in a netting agreement by taking account of the actual hypothetical net replacement cost which results from the agreement; in the case where netting leads to a net obligation for the firm calculating the net replacement cost, the current replacement cost is calculated as "0"; and
- (2) in BIPRU 13.4.3 R a firm may reduce the figure for potential future credit exposure for all contracts included in a netting agreement according to the following formula:
- PCEred = 0.4 * PCEgross + 0.6 * NGR * PCEgross,
- where:
- (a) PCEred = the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally valid bilateral netting agreement;
- (b) PCEgross =the sum of the figures for potential future credit exposure for all contracts with a given counterparty which are included in a legally valid bilateral netting agreement and are calculated by multiplying their notional principal amounts by the percentages set out in the table in BIPRU 13.4.5 R; and
- (c) NGR = "net-to-gross ratio": the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement with a given counterparty (numerator) and the gross replacement cost for all contracts included in a legally valid bilateral netting agreement with that counterparty (denominator).
[Note: BCD Annex III Part 7 point c(ii) (part)]
BIPRU 13.4.18
See Notes
For the calculation of the potential future credit exposure according to the formula in BIPRU 13.4.17 R perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts.
[Note: BCD Annex III Part 7 point c(ii) (part)]
BIPRU 13.4.19
See Notes
For the purposes of BIPRU 13.4.18 R a perfectly matching contract is a forward foreign currency contract or similar contract in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the same currency.
[Note: BCD Annex III Part 7 point c(ii) (part)]
BIPRU 13.5
CCR standardised method
- 01/01/2007
Scope
BIPRU 13.5.1
See Notes
A firm may use the CCR standardised method only for financial derivative instruments and long settlement transactions.
[Note: BCD Annex III Part 5 point 1 (part)]
Derivation of risk position: payment legs
BIPRU 13.5.2
See Notes
- (1) When a financial derivative instrument transaction with a linear risk profile stipulates the exchange of a financial instrument for a payment, the payment Part is referred to as the payment leg.
- (2) Transactions that stipulate the exchange of payment against payment consist of two payment legs.
- (3) The payment legs consist of the contractually agreed gross payments, including the notional amount of the transaction.
- (4) A firm may disregard the interest rate risk from payment legs with a remaining maturity of less than one year for the purposes of the calculations in BIPRU 13.5.
- (5) A firm may treat transactions that consist of two payment legs that are denominated in the same currency, such as interest rate swaps, as a single aggregate transaction. The treatment for payment legs applies to the aggregate transaction.
[Note: BCD Annex III Part 5 point 2]
Derivation of risk position: mapping
BIPRU 13.5.3
See Notes
- (1) Transactions with a linear risk profile with equities (including equity indices), gold, other precious metals or other commodities as the underlying financial instruments must be mapped to a risk position in the respective equity (or equity index) or commodity (including gold and other precious metals) and an interest rate risk position for the payment leg.
- (2) If the payment leg is denominated in a foreign currency, it must be additionally mapped to a risk position in the respective currency.
[Note: BCD Annex III Part 5 point 3]
BIPRU 13.5.4
See Notes
- (1) Transactions with a linear risk profile with a debt instrument as the underlying instrument must be mapped to an interest rate risk position for the debt instrument and another interest rate risk position for the payment leg.
- (2) Transactions with a linear risk profile that stipulate the exchange of payment against payment, including foreign exchange forwards, must be mapped to an interest rate risk position for each of the payment legs.
- (3) If the underlying debt instrument is denominated in a foreign currency, the debt instrument must be mapped to a risk position in that foreign currency.
- (4) If a payment leg is denominated in foreign currency, the payment leg must be again mapped to a risk position in that foreign currency.
- (5) The exposure value to be assigned to a foreign exchange basis swap transaction is zero.
[Note: BCD Annex III Part 5 point 4]
Derivation of risk position: calculating the size of the risk position
BIPRU 13.5.5
See Notes
BIPRU 13.5.6
See Notes
This table belongs to BIPRU 13.5.5 R.
Transaction or instrument | Calculation of size of risk position |
Transaction with linear risk profile except for debt instruments. | The effective notional value (market price multiplied by quantity) of the underlying financial instruments (including commodities) converted to the firm's domestic currency. |
Debt instruments and payment legs. | The effective notional value of the outstanding gross payments (including the notional amount) converted to the firm's base currency, multiplied by the modified duration of the debt instrument, or payment leg, respectively. |
Credit default swap | The notional value of the reference debt instrument multiplied by the remaining maturity of the credit default swap. |
Nth to default credit default swap | The effective notional value of the reference debt instrument, multiplied by the modified duration of the nth to default derivative with respect to a change in the credit spread of the reference debt instrument. |
Subject to BIPRU 13.5.9 R to BIPRU 13.5.10 R, financial derivative instrument with a non-linear risk profile, including options and swaptions except in the case of an underlying debt instrument. | Equal to the delta equivalent effective notional value of the financial instrument that underlies the transaction. |
Subject to BIPRU 13.5.9 R to BIPRU 13.5.10 R, financial derivative instrument with a non-linear risk profile, including options and swaptions, of which the underlying is a debt instrument or a payment leg. | Equal to the delta equivalent effective notional value of the financial instrument or payment leg multiplied by the modified duration of the debt instrument, or payment leg, respectively. |
[Note: BCD Annex III Part 5 points 5 to 9 and 15 (part)]
Derivation of risk position: effective notional value
BIPRU 13.5.7
See Notes
A firm may use the following formulae to determine the size and sign of a risk position:
- (1) for all instruments other than debt instruments:
- effective notional value, or delta equivalent
- notional value = pref((V)/(p))
- where:
- (a) Pref = price of the underlying instrument, expressed in the reference currency;
- (b) V = value of the financial instrument (in the case of an option this is the option price; in the case of a transaction with a linear risk profile this is the value of the underlying instrument itself);
- (c) p = price of the underlying instrument, expressed in the same currency as V;
- (2) for debt instruments and the payment legs of all transactions:
- effective notional value multiplied by the modified duration, or delta equivalent in notional value multiplied by the modified duration
- (V)/(r)
- where:
- (a) V = value of the financial instrument (in the case of an option this is the option price; in the case of a transaction with a linear risk profile this is the value of the underlying instrument itself or of the payment leg, respectively);
- (b) r = interest rate level.
- (3) If V is denominated in a currency other than the reference currency, the derivative must be converted into the reference currency by multiplication with the relevant exchange rate.
[Note: BCD Annex III Part 5 point 11]
Derivation of risk position: treatment of collateral
BIPRU 13.5.8
See Notes
For the determination of risk positions, a firm must treat collateral received from a counterparty like a claim on the counterparty under a derivative contract (long position) that is due today, while collateral posted must be treated as an obligation to the counterparty (short position) that is due today.
[Note: BCD Annex III Part 5 point 10]
Derivation of risk position: non-linear risks
BIPRU 13.5.9
See Notes
A firm must apply the CCR mark to market method to transactions with a non-linear risk profile or for payment legs and transactions with debt instruments as underlying if:
- (1) the firm does not have a CAD 1 model permission or a VaR model permission; or
- (2) where the firm does have a CAD 1 model permission or a VaR model permission but cannot determine the delta or the modified duration, respectively, with its CAD 1 model permission or VaR model permission.
[Note: BCD Annex III Part 5 point 19 (part)]
BIPRU 13.5.10
See Notes
A firm must not recognise netting for the purpose of applying the CCR mark to market method to an exposure treated under BIPRU 13.5.9 R (that is, the exposure value must be determined as if there were a netting set that comprises just the individual transaction).
[Note: BCD Annex III Part 5 point 19 (part)]
Hedging sets: assignment
BIPRU 13.5.11
See Notes
A firm must group the risk positions into hedging sets and, for each hedging set, compute the absolute value amount of the sum of the resulting risk positions. This sum is termed the net risk position and is represented by:
((i)(RPTij) - (l)(RPClj))
in the formulae set out in BIPRU 13.5.24 R.
[Note: BCD Annex III Part 5 point 12]
Hedging sets: description
BIPRU 13.5.12
See Notes
For interest rate risk positions from money deposits received from the counterparty as collateral, from payment leg and from underlying debt instruments, to which according to the table in BIPRU 7.2.44R a capital charge of 1.60% or less applies, there are six hedging sets for each currency, as set out in the table in BIPRU 13.5.13 R. Hedging sets are defined by a combination of the criteria maturity and referenced interest rates.
[Note: BCD Annex III Part 5 point 13]
Table: Hedging sets
BIPRU 13.5.13
See Notes
This table belongs to BIPRU 13.5.12 R:
Government referenced interest rates | Non-government referenced interest rates | |
Maturity | <= 1 year | <= 1 year |
Maturity | >1 <= 5 years | >1 <= 5 years |
Maturity | > 5 years | > 5 years |
[Note: BCD Annex III Part 5 Table 4]
BIPRU 13.5.14
See Notes
For interest rate risk positions from underlying debt instruments or payment legs for which the interest rate is linked to a reference interest rate that represents a general market interest level, the remaining maturity is the length of the time interval up to the next re-adjustment of the interest rate. In all other cases, it is the remaining life of the underlying debt instrument, or in the case of a payment leg the remaining life of the transaction.
[Note: BCD Annex III Part 5 point 14]
BIPRU 13.5.15
See Notes
There is one hedging set for each issuer of a reference debt instrument that underlies a credit default swap. Nth to default basket credit default swaps must be treated as follows:
- (1) the size of a risk position in a reference debt instrument in a basket underlying an nth to default credit default swap is the effective notional value of the reference debt instrument, multiplied by the modified duration of the nth to default derivative, with respect to a change in the credit spread of the reference debt instrument;
- (2) there is one hedging set for each reference debt instrument in a basket underlying a given nth to default credit default swap; risk positions from different nth to default credit default swaps must not be included in the same hedging set; and
- (3) the CCR multiplier applicable to each hedging set created for one of the reference debt instruments of an nth to default derivative is 0.3% for reference debt instruments that have a credit assessment from a recognised ECAI equivalent to credit quality step 1 to 3, and 0.6% for other debt instruments.
[Note: BCD Annex III Part 5 point 15]
BIPRU 13.5.16
See Notes
Underlying financial instruments other than debt instruments must be assigned by a firm to the same respective hedging sets only if they are identical or similar instruments. In all other cases a firm must assign them to separate hedging sets.
[Note: BCD Annex III Part 5 point 17 (part)]
BIPRU 13.5.17
See Notes
- (1) The similarity of instruments for the purposes of BIPRU 13.5.16 R is established in accordance with (2) to (5).
- (2) For equities, similar instruments are those of the same issuer. An equity index is treated as a separate issuer.
- (3) For precious metals, similar instruments are those of the same metal. A precious metal index is treated as a separate precious metal.
- (4) For electric power, similar instruments are those delivery rights and obligations that refer to the same peak or off-peak load time interval within any 24 hour interval.
- (5) For commodities, similar instruments are those of the same commodity. A commodity index is treated as a separate commodity.
[Note: BCD Annex III Part 5 point 17 (part)]
Hedging sets: collateral
BIPRU 13.5.18
See Notes
- (1) For interest rate risk positions from money deposits that are posted with a counterparty as collateral when that counterparty does not have debt obligations of low specific risk outstanding and from underlying debt instruments, to which according to the table in BIPRU 7.2.44 R a capital charge of more than 1.60% applies, there is one hedging set for each issuer.
- (2) When a payment leg emulates such a debt instrument, there is also one hedging set for each issuer of the reference debt instrument.
- (3) A firm may assign risk positions that arise from debt instruments of a certain issuer, or from reference debt instruments of the same issuer that are emulated by payment legs, or that underlie a credit default swap, to the same hedging set.
[Note: BCD Annex III Part 5 point 16]
BIPRU 13.5.19
See Notes
A firm that makes use of collateral to mitigate its CCR must have internal procedures to verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in BIPRU 5 modified, where relevant, by BIPRU 4.10.
[Note: BCD Annex III Part 5 point 21]
Hedging sets: netting
BIPRU 13.5.20
See Notes
A firm must have internal procedures to verify that, prior to including a transaction in a hedging set, the transaction is covered by a legally enforceable netting contract that meets the requirements set out in BIPRU 13.7.
[Note: BCD Annex III Part 5 point 20]
Credit conversion factors : Table
BIPRU 13.5.21
See Notes
A firm must apply the CCR multipliers for the different hedging set categories according to the Table in BIPRU 13.5.22 R.
[Note: BCD Annex III Part 5 point 18]
BIPRU 13.5.22
See Notes
This table belongs to BIPRU 13.5.21 R.
Hedging set categories | CCR Multiplier (CCRM) | |
(1) | Interest Rates | 0.2% |
(2) | Interest Rates for risk positions from a reference debt instrument that underlies a credit default swap and to which a capital charge of 1.60%, or less, applies under BIPRU 7.2.44 R. | 0.3% |
(3) | Interest Rates for risk positions from a debt instrument or reference debt instrument to which a capital charge of more than 1.60% applies under BIPRU 7.2.44 R. | 0.6% |
(4) | Exchange Rates | 2.5% |
(5) | Electric power | 4.0% |
(6) | Gold | 5.0% |
(7) | Equity | 7.0% |
(8) | Precious Metals (except gold) | 8.5% |
(9) | Other commodities (excluding precious metals and electricity power) | 10.0% |
(10) | Reference debt instruments of an nth to default derivative that have a credit assessment from a recognised ECAI equivalent to credit quality step 1 to 3 | 0.3% |
(11) | Reference debt instruments of an nth to default derivative that do not have a credit assessment from a recognised ECAI equivalent to credit quality step 1 to 3 | 0.6% |
(12) | Underlying instruments of financial derivative instrument that are not in any of the above categories. | 10.0% |
[Note: BCD Annex III Part 5 Table 5 and Part 5 point 15 (c)]
BIPRU 13.5.23
See Notes
Exposure value
BIPRU 13.5.24
See Notes
A firm must calculate the exposure value separately for each netting set.
[Note: BCD Annex III Part 5 point 1, second sentence]
BIPRU 13.5.25
See Notes
A firm must determine the exposure value net of collateral, as follows:
exposure value = *max(CMV-CMC;(j)((i)(RPTij)-(l)(RPClj))*CCRMj)
where:
CMV = current market value of the portfolio of transactions within the netting set with a counterparty gross of collateral.
That is, where:
CMV = (i)(CMVi)
where:
CMVi = the current market value of transaction i;
CMC = the current market value of the collateral assigned to the netting set.
That is, where:CMC = (l)(CMCl)
where
CMCl = the current market value of collateral l;
i = index designating transaction;
l = index designating collateral;
j = index designating hedging set category. These hedging sets correspond to risk factors for which risk positions of opposite sign can be offset to yield a net risk position on which the exposure measure is then based;
RPTij = risk position from transaction i with respect to hedging set j;
RPClj = risk position from collateral l with respect to hedging set j;
CCRMj = CCR Multiplier set out in the Table in BIPRU 13.5.22R with respect to the hedging set j;
= 1.4.
[Note: BCD Annex III Part 5 point 1 (part)]
BIPRU 13.5.26
See Notes
Collateral received from a counterparty has a positive sign; collateral posted to a counterparty has a negative sign.
[Note: BCD Annex III Part 5 point 1 (part)]
BIPRU 13.5.27
See Notes
A firm may only recognise collateral for this method if it is collateral that is eligible under BIPRU 5.4.8 R and BIPRU 14.2.12 G to BIPRU 14.2.13 R.
[Note: BCD Annex III Part 5 point 1 (part)]
BIPRU 13.5.28
See Notes
BIPRU 13.6
CCR internal model method
- 01/01/2007
Introduction
BIPRU 13.6.1
See Notes
BIPRU 13.6.2
See Notes
BIPRU 13.6.3
See Notes
BIPRU 13.6.4
See Notes
BIPRU 13.6.5
See Notes
- (1) A reference in the Handbook to a provision of the CCR internal model method, in relation to a firm:
- (a) excludes any provision of the CCR internal model method set out in the Handbook which is not applied to that firm by its CCR internal model method permission;
- (b) includes any additional provision contained in the CCR internal model method permission; and
- (c) takes into account any other amendments made to the provisions in the Handbook relating to the CCR internal model method made by the CCR internal model method permission.
- (2) To the extent that a firm's CCR internal model method permission does not allow it to use a particular approach in the Handbook relating to the CCR internal model method, the Handbook provision does not apply to the firm.
Scope
BIPRU 13.6.6
See Notes
A firm may determine the exposure value for:
using the CCR internal model method.
[Note: BCD Annex III Part 2 point 2]
BIPRU 13.6.7
See Notes
A firm may use the CCR internal model method to calculate the exposure value for:
- (1) the transactions in BIPRU 13.6.6 R (1); or
- (2) the transactions in BIPRU 13.6.6 R (2), (3) and (4); or
- (3) the transactions in BIPRU 13.6.6 R (1) to (4).
[Note: BCD Annex III Part 6 point 1 (part)]
BIPRU 13.6.8
See Notes
In each of BIPRU 13.6.7 R (1), (2) and (3), a firm may include long settlement transactions as well.
[Note: BCD Annex III Part 6 point 1 (part)]
Use of other models
BIPRU 13.6.9
See Notes
Point 2 of Part 6 of Annex III of the Banking Consolidation Directive provides that a firm using the CCR internal model method may use a type of model other than the type set out in BIPRU 13.6. If the appropriate regulator agrees to this the details of the model and the necessary calculations will be set out in the CCR internal model method permission, which will modify BIPRU 13.6 to the extent necessary. The appropriate regulator would not expect to agree to such a request unless the firm was able to satisfy the appropriate regulator that the method was at least as conservative as the method set out in BIPRU 13.6 and in particular that, for every counterparty, any method was more conservative than alpha multiplied by effective EPE calculated according to the equation in BIPRU 13.6.27 R.
[Note: BCD Annex III Part 6 point 2 (second sentence) and point 11]
Partial use
BIPRU 13.6.10
See Notes
For all financial derivative instruments and for long settlement transactions which are outside the scope of a firm's CCR internal model method permission, a firm must use the CCR mark to market method or the CCR standardised method.
[Note: BCD Annex III Part 6 point 3 first sentence]
BIPRU 13.6.11
See Notes
Under BIPRU 13.6.10 R, combined use of the CCR mark to market method and the CCR standardised method is only permitted where one of the methods is used for the cases set out in BIPRU 13.5.9 R to BIPRU 13.5.10 R.
[Note: BCD Annex III Part 6 point 3 second sentence]
BIPRU 13.6.12
See Notes
Notwithstanding BIPRU 13.3.10 R (Combined use), a firm may choose not to apply the CCR internal model method to exposures that are immaterial in size and risk.
[Note: BCD Annex III Part 6 point 1 third sentence]
BIPRU 13.6.13
See Notes
If permitted by its CCR internal model method permission, and subject to its terms, a firm may carry out the implementation of the CCR internal model method sequentially across different transaction types; and during this period the firm may use the CCR mark to market method or the CCR standardised method.
[Note: BCD Annex III Part 6 point 2]
BIPRU 13.6.14
See Notes
BIPRU 13.6.15
See Notes
BIPRU 13.6.16
See Notes
Use of CCR internal model method
BIPRU 13.6.17
See Notes
Subject to BIPRU 13.6.10 R to BIPRU 13.6.16 G, a firm that has a CCR internal model method permission must not use the CCR mark to market method or the CCR standardised method for transactions within the scope of the firm's CCR internal model method permission.
[Note: BCD Annex III Part 6 point 4 (part)]
BIPRU 13.6.18
See Notes
A firm which wishes to revert to the CCR mark to market method or the CCR standardised method will need to request the appropriate regulator to revoke or vary its CCR internal model method permission.
[Note: BCD Annex III Part 6 point 4 (part)]
BIPRU 13.6.19
See Notes
The appropriate regulator will not agree to a firm's request to revoke or vary its CCR internal model method permission except for demonstrated good cause.
[Note: BCD Annex III Part 6 point 4 (part)]
BIPRU 13.6.20
See Notes
If a firm ceases to comply with the requirements set out in BIPRU 13.6, it must either present to the appropriate regulator a plan for a timely return to compliance or demonstrate that the effect of non-compliance is immaterial.
[Note: BCD Annex III Part 6 point 4 (part)]
BIPRU 13.6.21
See Notes
If a firm ceases to comply with the requirements set out in BIPRU 13.6, the appropriate regulator may revoke the CCR internal model method permission or take other appropriate supervisory action.
[Note: BCD Annex III Part 6 point 4 (part)]
Exposure value
BIPRU 13.6.22
See Notes
- (1) A firm must measure the exposure value at the level of the netting set.
- (2) The model must specify the forecasting distribution for changes in the market value of the netting set attributable to changes in market variables, such as interest rates, foreign exchange rates.
- (3) The model must then compute the exposure value for the netting set at each future date given the changes in the market variables.
- (4) For margined counterparties, the model may also capture future collateral movements.
[Note: BCD Annex III Part 6 point 5]
BIPRU 13.6.23
See Notes
A firm may include eligible financial collateral as defined in BIPRU 5.4.8 R (Eligible collateral under financial collateral comprehensive method) and BIPRU 14.2.15 R to BIPRU 14.2.17 R in its forecasting distributions for changes in the market value of the netting set, if the quantitative, qualitative and data requirements for the CCR internal model method are met for the collateral.
[Note: BCD Annex III Part 6 point 6]
BIPRU 13.6.24
See Notes
A firm must calculate the exposure value as the product of alpha (), as set out in BIPRU 13.6.31 R, times effective EPE:
Exposure value = effective EPE
[Note: BCD Annex III Part 6 point 7 first part]
Effective EPE
BIPRU 13.6.25
See Notes
A firm must compute effective EPE by estimating expected exposure (EEt) as the average exposure at future date t, where the average is taken across possible future values of relevant market risk factors. The model estimates EE at a series of future dates t1, t2, t3, etc.
[Note: BCD Annex III Part 6 point 7 third part]
BIPRU 13.6.26
See Notes
A firm must compute effective EE recursively as:
Effective EEtk = max(effective EEtk-1; EEtk)
where:
the current date is denoted as t0 and Effective EEt0 equals current exposure.
[Note: BCD Annex III Part 6 point 8]
BIPRU 13.6.27
See Notes
For the purposes of BIPRU 13.6.25 R:
- (1) effective EPE is the average effective EE during the first year of future exposure;
- (2) if all contracts in the netting set mature within less than one year, effective EPE is the average of effective EE until all contracts in the netting set mature.
[Note: BCD Annex III Part 6 point 9, first part]
BIPRU 13.6.28
See Notes
A firm must compute effective EPE as a weighted average of effective EE:
Effective EPE = (k=1min(1 year;maturity))((Effective EEtk)*(tk))
where:
the weights ?tk = tk tk-1 allow for the case when future exposure is calculated at dates that are not equally spaced over time.
[Note: BCD Annex III Part 6 point 9, second part]
BIPRU 13.6.29
See Notes
A firm must calculate EE or peak exposure measures based on a distribution of exposures that accounts for the possible non-normality of the distribution of exposures.
[Note: BCD Annex III Part 6 point 10]
Alpha
BIPRU 13.6.31
See Notes
For the purposes of BIPRU 13.6.24 R, alpha () is 1.4 or any higher amount specified in the firm's CCR internal model method permission.
[Note: BCD Annex III Part 6 point 7 second part]
BIPRU 13.6.32
See Notes
BIPRU 13.6.33
See Notes
If a firm's CCR internal model method permission permits it, the firm may use its own estimates of, subject to a floor of 1.2, where must equal the ratio of internal capital from a full simulation of CCR exposure across counterparties (numerator) and internal capital based on EPE (denominator).
[Note: BCD Annex III Part 6 point 12 (part)]
BIPRU 13.6.34
See Notes
For the purposes of BIPRU 13.6.33 R:
- (1) in the denominator, EPE must be used as if it were a fixed outstanding amount;
- (2) a firm must be able to demonstrate that its internal estimates of capture in the numerator material sources of stochastic dependency of distribution of market values of transactions or of portfolios of transactions across counterparties;
- (3) internal estimates of must take account of the granularity of portfolios.
[Note: BCD Annex III Part 6 point 12 (part)]
BIPRU 13.6.35
See Notes
A firm must ensure that the numerator and denominator of are computed in a consistent fashion with respect to the modelling methodology, parameter specifications and portfolio composition. The approach used must be based on the firm's internal capital approach, be well-documented and be subject to independent validation. In addition, a firm must review their estimates on at least a quarterly basis, and more frequently when the composition of the portfolio varies over time. A firm must also assess the model risk.
[Note: BCD Annex III Part 6 point 13]
BIPRU 13.6.35A
See Notes
Where appropriate, volatilities and correlations of market risk factors used in the joint simulation of market risk and credit risk must be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an economic downturn.
[Note: BCD Annex III Part 6 point 14]
BIPRU 13.6.36
See Notes
Maturity adjustment
BIPRU 13.6.37
See Notes
Margin agreement
BIPRU 13.6.38
See Notes
If the netting set is subject to a margin agreement, a firm must use one of the following EPE measures:
- (1) effective EPE without taking into account the margin agreement;
- (2) the margin threshold, if positive, under the margin agreement plus an add-on that reflects the potential increase in exposure over the margin period of risk:
- (a) the add-on is computed as the expected increase in the netting set's exposure beginning from a current exposure of zero over the margin period of risk;
- (b) a floor of five business days for netting sets consisting only of repo-style transactions subject to daily remargining and daily mark-to-market, and ten business days for all other netting sets is imposed on the margin period of risk used for this purpose.
- (3) if the model captures the effects of margining when estimating EE, the model's EE measure may be used directly in the equation in BIPRU 13.6.28 R (Computation of effective EE), unless the firm's CCR internal model method permission does not apply this provision or does not permit that use.
[Note: BCD Annex III Part 6 point 15]
BIPRU 13.6.39
See Notes
Operational requirements: General
BIPRU 13.6.40
See Notes
A firm's EPE model must meet the operational requirements set out in BIPRU 13.6.41 R to BIPRU 13.6.66 R.
[Note: BCD Annex III Part 6 point 16]
Operational requirements: CCR control
BIPRU 13.6.41
See Notes
- (1) The firm must have a control unit that is responsible for the design and implementation of its CCR management system, including the initial and on-going validation of the model.
- (2) This unit must control input data integrity and produce and analyse reports on the output of the firm's risk measurement model, including an evaluation of the relationship between measures of risk exposure and credit and trading limits.
- (3) This unit must be:
- (a) independent from units responsible for originating, renewing or trading exposures and free from undue influence;
- (b) it must be adequately staffed; and
- (c) it must report directly to the senior management of the firm.
- (4) The work of this unit must be closely integrated into the day-to-day credit risk management process of the firm; its output must, accordingly, be an integral part of the process of planning, monitoring and controlling the firm's credit and overall risk profile.
[Note: BCD Annex III Part 6 point 17]
BIPRU 13.6.42
See Notes
[Note: BCD Annex III Part 6 point 18]
BIPRU 13.6.43
See Notes
- (1) A firm's risk management policies must take account of market risk, liquidity risk, and legal and operational risk that can be associated with CCR.
- (2) The firm must not undertake business with a counterparty without assessing its creditworthiness and must take due account of settlement and pre-settlement credit risk.
- (3) These risks must be managed as comprehensively as practicable at the counterparty level (aggregating CCR exposures with other credit exposures) and at the firm-wide level.
[Note: BCD Annex III Part 6 point 19]
BIPRU 13.6.44
See Notes
A firm's governing body and senior management must be actively involved in the CCR control process and must regard this as an essential aspect of the business to which significant resources need to be devoted. Senior management must be aware of the limitations and assumptions of the model used and the impact these can have on the reliability of the output. Senior management must also consider the uncertainties of the market environment and operational issues and be aware of how these are reflected in the model.
[Note: BCD Annex III Part 6 point 20]
BIPRU 13.6.45
See Notes
A firm must ensure that the daily reports prepared on its exposures to CCR are reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual credit managers or traders and reductions in the firm's overall CCR exposure.
[Note: BCD Annex III Part 6 point 21]
BIPRU 13.6.46
See Notes
- (1) A firm's CCR management system must be used in conjunction with internal credit and trading limits.
- (2) A firm must ensure that its credit and trading limits are related to its risk measurement model in a manner that is:
- (a) consistent over time; and
- (b) well understood by credit managers, traders and senior management.
[Note: BCD Annex III Part 6 point 22]
BIPRU 13.6.47
See Notes
- (1) A firm's measurement of CCR must include measuring daily and intra-day usage of credit lines.
- (2) The firm must measure current exposure gross and net of collateral.
- (3) At portfolio and counterparty level, the firm must calculate and monitor peak exposure or potential future exposure (PFE) at the confidence interval chosen by the firm.
- (4) The firm must take account of large or concentrated positions, including by groups of related counterparties, by industry, by market, etc.
[Note: BCD Annex III Part 6 point 23]
BIPRU 13.6.48
See Notes
- (1) A firm must have a routine and rigorous program of stress testing in place as a supplement to the CCR analysis based on the day-to-day output of the firm's risk measurement model.
- (2) The results of this stress testing must be reviewed periodically by senior management and must be reflected in the CCR policies and limits set by management and the governing body.
- (3) Where stress tests reveal particular vulnerability to a given set of circumstances, prompt steps must be taken to manage those risks appropriately.
[Note: BCD Annex III Part 6 point 24]
BIPRU 13.6.49
See Notes
- (1) A firm must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the CCR management system.
- (2) The firm's CCR management system must be well documented and must provide an explanation of the empirical techniques used to measure CCR.
[Note: BCD Annex III Part 6 point 25]
BIPRU 13.6.50
See Notes
A firm must conduct an independent review of the CCR management system regularly through its own internal auditing process. This review must include both the activities of the business units referred to in BIPRU 13.6.41 R and of the independent CCR control unit. A review of the overall CCR management process must take place at regular intervals and must specifically address, at a minimum:
- (1) the adequacy of the documentation of the CCR management system and process;
- (2) the organisation of the CCR control unit;
- (3) the integration of CCR measures into daily risk management;
- (4) the approval process for risk pricing models and valuation systems used by front and back-office personnel;
- (5) the validation of any significant change in the CCR measurement process;
- (6) the scope of CCR captured by the risk measurement model;
- (7) the integrity of the management information system;
- (8) the accuracy and completeness of CCR data;
- (9) the verification of the consistency, timeliness and reliability of data sources used to run models, including the independence of such data sources;
- (10) the accuracy and appropriateness of volatility and correlation assumptions;
- (11) the accuracy of valuation and risk transformation calculations; and
- (12) the verification of the model's accuracy through frequent back-testing.
[Note: BCD Annex III Part 6 point 26]
Operational requirements: Use test
BIPRU 13.6.51
See Notes
The distribution of exposures generated by the model used to calculate effective EPE must be closely integrated into the day-to-day CCR management process of the firm. The model's output must accordingly play an essential role in the credit approval, CCR management, internal capital allocation, and corporate governance of the firm.
[Note: BCD Annex III Part 6 point 27]
BIPRU 13.6.52
See Notes
A firm must have a track record in the use of models that generate a distribution of exposures to CCR. Thus, the firm must be able to demonstrate that it has been using a model to calculate the distribution of exposures upon which the EPE calculation is based that meets, broadly, the minimum requirements set out in BIPRU 13.6 for at least one year prior to the date of its CCR internal model method permission.
[Note: BCD Annex III Part 6 point 28]
BIPRU 13.6.53
See Notes
- (1) A firm must ensure that the model used to generate a distribution of exposures to CCR is part of a CCR management framework that includes the identification, measurement, management, approval and internal reporting of CCR. This framework must include the measurement of usage of credit lines (aggregating CCR exposures with other credit exposures) and internal capital allocation.
- (2) In addition to EPE, a firm must measure and manage current exposures.
- (3) Where appropriate, the firm must measure current exposure gross and net of collateral.
- (4) The use test is satisfied if a firm uses other CCR measures, such as peak exposure or PFE (see BIPRU 13.6.47 R), based on the distribution of exposures generated by the same model to compute EPE.
[Note: BCD Annex III Part 6 point 29]
BIPRU 13.6.54
See Notes
A firm must have the systems capability to estimate EE daily if necessary, unless it is able to demonstrate to the appropriate regulator that its exposures to CCR warrant less frequent calculation. The firm must compute EE along a time profile of forecasting horizons that adequately reflects the time structure of future cash flows and maturity of the contracts and in a manner that is consistent with the materiality and composition of the exposures.
[Note: BCD Annex III Part 6 point 30]
BIPRU 13.6.55
See Notes
- (1) Exposure must be measured, monitored and controlled over the life of all contracts in the netting set (not just to the one year horizon).
- (2) A firm must have procedures in place to identify and control the risks for counterparties where the exposure rises beyond the one-year horizon.
- (3) A firm must input the forecast increase in exposure into the firm's internal capital model.
[Note: BCD Annex III Part 6 point 31]
Operational requirements: Stress testing
BIPRU 13.6.56
See Notes
- (1) A firm must have in place sound stress testing processes for use in the assessment of capital adequacy for CCR.
- (2) These stress measures must be compared with the measure of EPE and considered by the firm as part of the process set out in GENPRU 1.2.42 R.
- (3) Stress testing must also involve identifying possible events or future changes in economic conditions that could have unfavourable effects on a firm's credit exposures and an assessment of the firm's ability to withstand such changes.
[Note: BCD Annex III Part 6 point 32]
BIPRU 13.6.57
See Notes
- (1) A firm must stress test its CCR exposures, including jointly stressing market risk and credit risk factors.
- (2) In its stress tests of CCR, a firm must consider concentration risk (to a single counterparty or groups of counterparties), correlation risk across market risk and credit risk, and the risk that liquidating the counterparty's positions could move the market.
- (3) In its stress tests a firm must also consider the impact on its own positions of such market moves and integrate that impact in its assessment of CCR.
[Note: BCD Annex III Part 6 point 33]
Operational requirements: Wrong-way risk
BIPRU 13.6.58
See Notes
A firm must give due consideration to exposures that give rise to a significant degree of general wrong-way risk.
[Note: BCD Annex III Part 6 point 34]
BIPRU 13.6.59
See Notes
A firm must have procedures in place to identify, monitor and control cases of specific wrong-way risk, beginning at the inception of a transaction and continuing through the life of the transaction.
[Note: BCD Annex III Part 6 point 35]
Operational requirements: Integrity of modelling process
BIPRU 13.6.60
See Notes
A firm must ensure that:
- (1) the model reflects transaction terms and specifications in a timely, complete, and conservative fashion;
- (2) such terms include at least:
- (a) contract notional amounts;
- (b) maturity;
- (c) reference assets;
- (d) margining arrangements; and
- (e) netting arrangements;
- (3) the terms and specifications are maintained in a database that is subject to formal and periodic audit;
- (4) the process for recognising netting arrangements requires:
- (a) signoff by legal staff to verify the legal enforceability of netting and
- (b) input into the database by an independent unit;
- (5) the transmission of transaction terms and specifications data to the model is also subject to internal audit; and
- (6) formal reconciliation processes are in place between the model and source data systems to verify on an ongoing basis that transaction terms and specifications are being reflected in EPE correctly or at least conservatively.
[Note: BCD Annex III Part 6 point 36]
BIPRU 13.6.61
See Notes
A firm must ensure that:
- (1) the model employs current market data to compute current exposures;
- (2) when using historical data to estimate volatility and correlations, at least three years of historical data are used and updated quarterly or more frequently if market conditions warrant;
- (3) the data covers a full range of economic conditions, such as a full business cycle;
- (4) a unit independent from the business unit validates the price supplied by the business unit;
- (5) the data is acquired independently of the lines of business, fed into the model in a timely and complete fashion, and maintained in a database subject to formal and periodic audit;
- (6) it has a well-developed data integrity process to clean the data of erroneous and/or anomalous observations; and
- (7) to the extent that the model relies on proxy market data, including for new products where three years of historical data may not be available, internal policies identify suitable proxies and the firm demonstrates empirically that the proxy provides a conservative representation of the underlying risk under adverse market conditions.
[Note: BCD Annex III Part 6 point 37]
BIPRU 13.6.62
See Notes
BIPRU 13.6.63
See Notes
A firm must ensure that the model is subject to a validation process which:
- (1) is clearly articulated in firms' policies and procedures;
- (2) specifies the kind of testing needed to ensure model integrity
- (3) identifies conditions under which assumptions are violated and may result in an understatement of EPE; and
- (4) includes a review of the comprehensiveness of the model.
[Note: BCD Annex III Part 6 point 38]
BIPRU 13.6.64
See Notes
A firm must monitor the appropriate risks and have processes in place to adjust its estimation of EPE when those risks become significant. This includes the following:
- (1) the firm must identify and manage its exposures to specific wrong-way risk;
- (2) for exposures with a rising risk profile after one year, the firm must compare on a regular basis the estimate of EPE over one year with EPE over the life of the exposure; and
- (3) for exposures with a residual maturity below one year, the firm must compare on a regular basis the replacement cost (current exposure) and the realised exposure profile, and/or store data that would allow such a comparison.
[Note: BCD Annex III Part 6 point 39]
BIPRU 13.6.65
See Notes
A firm must have internal procedures to verify that, prior to including a transaction in a netting set, the transaction is covered by a legally enforceable netting contract that meets the requirements set out in BIPRU 13.7.
[Note: BCD Annex III Part 6 point 40]
BIPRU 13.6.66
See Notes
A firm that makes use of collateral to mitigate its CCR must have internal procedures to verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in BIPRU 5 as modified, where relevant, by BIPRU 4.10.
[Note: BCD Annex III Part 6 point 41]
Validation requirements
BIPRU 13.6.67
See Notes
- (1) A firm's CCR internal model method model must meet the validation requirements in (2) to (8).
- (2) The qualitative validation requirements set out in BIPRU 7.10 must be met.
- (3) Interest rates, foreign currency rates, equity prices, commodities, and other market risk factors must be forecast over long time horizons for measuring CCR exposure. The performance of the forecasting model for market risk factors must be validated over a long time horizon.
- (4) The pricing models used to calculate CCR exposure for a given scenario of future shocks to market risk factors must be tested as part of the CCR internal model method model validation process. Pricing models for options must account for the nonlinearity of option value with respect to market risk factors.
- (5) The CCR internal model method model must capture transaction-specific information in order to aggregate exposures at the level of the netting set. A firm must verify that transactions are assigned to the appropriate netting set within the model.
- (6) The CCR internal model method model must also include transaction-specific information to capture the effects of margining. It must take into account both the current amount of margin and margin that would be passed between counterparties in the future. Such a model must account for the nature of margin agreements (unilateral or bilateral), the frequency of margin calls, the margin period of risk, the minimum threshold of unmargined exposure the firm is willing to accept, and the minimum transfer amount. Such a model must either model the mark-to-market change in the value of collateral posted or apply the rules set out in BIPRU 5 as modified, where relevant, by BIPRU 4.10.
- (7) Static, historical backtesting on representative counterparty portfolios must be part of the CCR internal model method model validation process. At regular intervals, a firm must conduct such backtesting on a number of representative counterparty portfolios (actual or hypothetical). These representative portfolios must be chosen based on their sensitivity to the material risk factors and correlations to which the firm is exposed.
- (8) If backtesting indicates that the CCR internal model method model is not sufficiently accurate, a firm must increase the credit risk capital component and, where BIPRU 13 is applied for the purposes of BIPRU 14, the counterparty risk capital component by an amount which is conservatively estimated to compensate for the inaccuracy of the model.
[Note: BCD Annex III Part 6 point 42 (part)]
BIPRU 13.6.68
See Notes
If backtesting indicates that the CCR internal model method model is not sufficiently accurate, the appropriate regulator may revoke a firm's CCR internal model method permission or take appropriate measures to ensure that the model is improved promptly. Measures taken by the appropriate regulator may include the use of its own-initiative power to require the firm to hold more capital resources.
[Note: BCD Annex III Part 6 point 42 (part)]
BIPRU 13.7
Contractual netting
- 01/01/2007
Scope
BIPRU 13.7.1
See Notes
BIPRU 13.7 applies for the purpose of:
- (1) the CCR mark to market method;
- (2) the CCR standardised method;
- (3) if the firm has a CCR internal model method permission, the CCR internal model method.
Types of netting recognised
BIPRU 13.7.2
See Notes
For the purpose of BIPRU 13.7:
- (1) counterparty means any entity (including natural persons) that has the power to conclude a contractual netting agreement; and
- (2) contractual cross product netting agreement means a written bilateral agreement between a firm and a counterparty which creates a single legal obligation covering all included bilateral master agreements and transactions belonging to different product categories.
[Note: BCD Annex III Part 7 point (a) (part)]
BIPRU 13.7.3
See Notes
Contractual cross product netting agreements do not cover netting other than on a bilateral basis.
[Note: BCD Annex III Part 7 point (a) (part)]
BIPRU 13.7.4
See Notes
For the purposes of cross product netting, the following are considered different product categories:
- (1) repurchase transactions, reverse repurchase transactions, securities or commodities lending or borrowing transactions;
- (2) margin lending transactions; and
- (3) financial derivative instruments.
[Note: BCD Annex III Part 7 point (a) (part)]
BIPRU 13.7.5
See Notes
A firm may recognise as risk-reducing the following types of contractual netting:
- (1) bilateral contracts for novation between a firm and its counterparty under which mutual claims and obligations are automatically amalgamated in such a way that this novation fixes one single net amount each time novation applies and thus creates a legally binding, single new contract extinguishing former contracts;
- (2) other bilateral agreements between a firm and its counterparty; and
- (3) a firm that has a CCR internal model method permission may recognise Contractual cross product netting agreements for transactions falling within the scope of its CCR internal model method permission; netting across transactions entered by members of a group is not recognised for the purposes of calculating capital requirements.
[Note: BCD Annex III Part 7 point (a) (part)]
Conditions for recognition
BIPRU 13.7.6
See Notes
A firm may treat contractual netting as risk-reducing only under the following conditions:
- (1) the firm must have a contractual netting agreement with its counterparty which creates a single legal obligation, covering all included transactions, such that, in the event of a counterparty's failure to perform owing to default, bankruptcy, liquidation or any other similar circumstance, the firm would have a claim to receive or an obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions;
- (2) the firm must be in a position to provide to the appropriate regulator, if requested, written and reasoned legal opinions to the effect that, in the event of a legal challenge, the relevant courts and administrative authorities would, in the cases described under (1), find that the firm's claims and obligations would be limited to the net sum, as described in (1), under:
- (a) the law of the jurisdiction in which the counterparty is incorporated and, if a foreign branch of an undertaking is involved, also under the law of the jurisdiction in which the branch is located;
- (b) the law that governs the individual transactions included; and
- (c) the law that governs any contract or agreement necessary to effect the contractual netting;
- (3) the firm must have procedures in place to ensure that the legal validity of its contractual netting is kept under review in the light of possible changes in the relevant laws;
- (4) the firm must maintain all required documentation in its files;
- (5) the effects of netting must be factored into the firm's measurement of each counterparty's aggregate credit risk exposure and the firm must manage its CCR on such a basis; and
- (6) the firm must aggregate credit risk to each counterparty to arrive at a single legal exposure across transactions; this aggregation must be factored into credit limit purposes and internal capital purposes.
[Note: BCD Annex III Part 7 point (b) (part)]
BIPRU 13.7.7
See Notes
If any of the competent authorities concerned is not satisfied that the contractual netting is legally valid under the law of each of the relevant jusrisdictions, the firm must not treat the contractual netting agreement as risk-reducing.
[Note: BCD Annex III Part 7 point (b) (part)]
BIPRU 13.7.8
See Notes
A legal opinion required under BIPRU 13.7.6 R (2) may be in the form of a reasoned legal opinion drawn up by type of contractual netting.
[Note: BCD Annex III Part 7 point (b) (part)]
BIPRU 13.7.9
See Notes
A firm must not recognise as risk-reducing any contract containing a provision which permits a non-defaulting counterparty to make limited payments only, or no payments at all, to the estate of the defaulter, even if the defaulter is a net creditor (a "walkaway" clause).
[Note: BCD Annex III Part 7 point (b) (part)]
BIPRU 13.7.10
See Notes
In addition to the requirements in BIPRU 13.7.2 R to BIPRU 13.7.9 R, for contractual cross product netting agreements the following criteria must be met:
- (1) the net sum referred to in BIPRU 13.7.6 R (1) must be the net sum of the positive and negative close out values of any included individual bilateral master agreement and of the positive and negative mark-to-market value of the individual transactions (the Cross-Product Net Amount);
- (2) the written and reasoned legal opinions referred to in BIPRU 13.7.6 R (2) must address the validity and enforceability of the entire contractual cross product netting agreement under its terms and the impact of the netting arrangement on the material provisions of any included individual bilateral master agreement; a legal opinion must be generally recognised as such by the legal community in the United Kingdom or a memorandum of law that addresses all relevant issues in a reasoned manner;
- (3) the firm must have procedures in place under BIPRU 13.7.6 R (3) to verify that any transaction which is to be included in a netting set is covered by a legal opinion; and
- (4) taking into account the contractual cross product netting agreement, the firm must continue to comply with the requirements for the recognition of bilateral netting and the requirements of BIPRU 4.10 and BIPRU 5 for the recognition of credit risk mitigation, as applicable, with respect to each included individual bilateral master agreement and transaction.
[Note: BCD Annex III Part 7 point (b) (part)]
Effects of recognition
BIPRU 13.7.11
See Notes
For the purposes of the CCR mark to market method, the CCR standardised method and the CCR internal model method a firm must recognise netting as set out in BIPRU 13.3 and BIPRU 13.6.
[Note: BCD Annex III Part 7 point (b) (part)]
BIPRU 13.8
Securities financing transactions
- 01/01/2007
Purpose
BIPRU 13.8.1
See Notes
Calculation of exposure value for SFTs
BIPRU 13.8.2
See Notes
Subject to BIPRU 13.8.3 R, in respect of a securities financing transaction, if a firm:
- (1) has a CCR internal model method permission which covers the transaction; or
- (2) has a master netting agreement internal models approach permission which covers the transaction;
then the firm must use the CCR internal model method approach or the master netting agreement internal models approach, as applicable, to calculate the exposure value for that transaction unless an exception in BIPRU 13 or BIPRU 5 allows the firm to use another method.
[Note: BCD Article 78(2), second sentence, in respect of SFTs]
BIPRU 13.8.3
See Notes
BIPRU 13.8.4
See Notes
Where BIPRU 13.8.2 R does not apply, a firm must use one of the following approaches to determine the exposure value of a securities financing transaction, as appropriate:
- (1) if the transaction is covered by a master netting agreement which satisfies the requirements for recognition set out in BIPRU 5.6.1 R to BIPRU 5.6.3 R, a firm may calculate the exposure value under the master netting agreement method set out in BIPRU 5.6.5 R to BIPRU 5.6.11 R (Calculation of the fully adjusted exposure value: the supervisory volatility adjustments approach and the own estimates of volatility adjustments approach);
- (2) otherwise, a firm must calculate the exposure value of the transaction as its on-balance sheet value.
BIPRU 13.8.5
See Notes
BIPRU 13.8.6
See Notes
If a firm calculates the exposure value of a securities financing transaction as its on-balance sheet value, in accordance with BIPRU 13.8.4 R (2), it may recognise the effects of financial collateral in the same way as for its other exposures, for example by using either the financial collateral simple method or the financial collateral comprehensive method. However firms should note that the financial collateral simple method is not available:
- (1) to a firm using the IRB approach (BIPRU 5.4.16 R); or
- (2) for securities financing transactions in the trading book (BIPRU 14.2.11 R).
Exposure to a central counterparty
BIPRU 13.8.7
See Notes
Notwithstanding BIPRU 13.8.2 R, a firm must determine the exposure value of a credit risk exposure outstanding with a central counterparty in accordance with BIPRU 13.8.8 R, provided that the central counterparty's counterparty credit risk exposures with all participants in its arrangements are fully collateralised on a daily basis.
BIPRU 13.8.8
See Notes
A firm may attribute an exposure value of zero for CCR to a securities financing transaction or to any other exposures in respect of that transaction (but excluding an exposure arising from collateral held to mitigate losses in the event of the default of other participants in the central counterparty's arrangements) which is outstanding with a central counterparty and has not been rejected by the central counterparty.
BIPRU 13 Annex 1
- 01/01/2007
See Notes
Interest rate risk hedging sets | FX risk hedging sets | Equity risk | ||||||||||||
i | Trans-action type | Effective notional | Modified duration | CMV | USD non-gov M<1 | USD non-gov M>5 | EUR non-gov M<1 | EUR non-gov M>5 | JPY non-gov M>5 | EUR/USD | JPY/USD | DAX | ||
$ million | years | $ million | effective notional x modified | effective notional x modified duration | effective notional x modified duration | effective notional x modified duration | effective notional x modified duration | effective notional (+ = long, - = short) | effective notional (+ = long, - = short) | effective notional (+ = long, - = short) | ||||
1 | USD | IR swap | receiver leg | 80 | 8 | -6 | 640 | |||||||
1 | USD | IR swap | payer leg | 80 | -0.25 | -20 | ||||||||
2 | USD | IR swap | receiver leg | 300 | 0.125 | 37.5 | ||||||||
2 | USD | IR swap | payer leg | 300 | -6 | 2 | -1800 | |||||||
3 | EUR | FX swap | receiver leg | 100 | 15 | 0 | 1500 | 100 | ||||||
3 | USD | FX swap | payer leg | 100 | -0.125 | -12.5 | ||||||||
4 | EUR | cross ccy swap | receiver leg | 60 | 7 | 1 | 420 | 60 | ||||||
4 | JPY | cross ccy swap | payer leg | 60 | -7 | -420 | -60 | |||||||
5 | DAX | Total return swap in EUR | receiver leg | 150 | 0.125 | 4 | 18.75 | 150 | ||||||
5 | DAX | Total return swap in EUR | payer leg | 150 | not applicable | -150 | ||||||||
Sum of risk positions RPTij by hedging setj | 5 | -1160 | 18.75 | 1920 | -420 | 310 | -60 | -150 | ||||||
Absolute amount |sum of RPTij| of risk positions by hedging setj | 5 | 1160 | 18.75 | 1920 | 420 | 310 | 60 | 150 | ||||||
Credit conversion factors CCFj by hedging setj | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 2.50% | 2.50% | 7% | ||||||
CCFj x |sum of RPTij|: CCF-weighted absolute amounts of risk positions by hedging set | 0.0100 | 2.3200 | 0.0375 | 3.8400 | 0.8400 | 7.7500 | 1.5000 | 10.5000 |
Sum of (CCFj x |sum of RPTij|) | 26.7975 |
CMV: sum of current market values CMVi of the transactions | 1.000 |
Max(CMV, sum of (CCFj x |sum of RPTij)) | 26.7975 |
Beta: | 1.4000 |
EAD | 37.5165 |
BIPRU 14
Capital requirements for settlement and counterparty risk
BIPRU 14.1
Application and purpose
- 01/01/2007
Application
BIPRU 14.1.1
See Notes
BIPRU 14.1.2
See Notes
- (1) BIPRU 14.2 deals with the calculation of the capital requirement for CCR for trading book positions arising from financial derivative instruments, securities financing transactions and long settlement transactions. The approaches used to calculate exposure values and risk weighted exposure amounts for these positions are largely based on the approaches applicable to non-trading book positions (BIPRU 3, BIPRU 4, BIPRU 5 and BIPRU 13). However, there are some treatments that are specific to the trading book. These are set out in BIPRU 14.2.
- (2) The calculation of the capital requirement for CCR for trading book positions is the first element of the counterparty risk capital component in BIPRU 14.2.1 R. The second element of the counterparty risk capital component is for unsettled transactions in both the trading book and the non-trading book. It is calculated under BIPRU 14.3.
- (3) BIPRU 14.4 sets out the treatment for free deliveries.
Purpose
BIPRU 14.1.3
See Notes
BIPRU 14 implements:
- (1) Article 3(1)(h), Article 17(1), and Article 40; and
- (2) Annex II;
of the Capital Adequacy Directive.
BIPRU 14.2
Calculation of the capital requirement for CCR
- 01/01/2007
Calculation of the counterparty risk capital component
BIPRU 14.2.1
See Notes
A firm must calculate the counterparty risk capital component as the sum of:
- (1) the capital requirement calculated under BIPRU 14.2.13 R; and
- (2) the amount calculated under BIPRU 14.3.
BIPRU 14.2.2
See Notes
A firm must hold capital calculated in accordance with BIPRU 14.2.13 R against the CCR arising from exposures arising in the trading book due to the following:
- (1) free deliveries (where BIPRU 14.4 requires it to be treated as an exposure);
- (2) financial derivative instruments and credit derivatives;
- (3) repurchase agreements, reverse repurchase agreements, securities or commodities lending or borrowing transaction based on securities or commodities included in the trading book;
- (4) margin lending transactions based on securities or commodities; and
- (5) long settlement transactions.
[Note: CAD Annex II point 5]
Credit derivatives
BIPRU 14.2.3
See Notes
For the purposes of the calculation of the counterparty risk capital component, a financial derivative instrument means:
- (1) an item falling within BIPRU 13.3.3 R other than an item to which an exposure value of zero is attributed under BIPRU 13.3.13 R or BIPRU 13.8.8 R (Exposure to a central counterparty); and
- (2) a credit derivative.
[Note: CAD Article 3(1)(h) and Annex II point 7 first sentence]
BIPRU 14.2.4
See Notes
BIPRU 14.2.5
See Notes
In the case of total return swap credit derivatives and credit default swap credit derivatives, a firm must obtain a figure for potential future credit exposure by multiplying the nominal amount of the instrument by the following percentages:
- (1) 5% where the reference obligation is one that if it gave rise to a direct exposure of the firm would be a qualifying debt security for the purposes of BIPRU 7.2;
- (2) 10 % where the reference obligation is one that if it gave rise to a direct exposure of the firm would not be a qualifying debt security for the purposes of BIPRU 7.2.
[Note: CAD Annex II point 7 (part)]
BIPRU 14.2.6
See Notes
In the case of a credit default swap, a firm the exposure of which arising from the swap represents a long position in the underlying may use a figure of 0% for potential future credit exposure, unless the credit default swap is subject to closeout upon the insolvency of the entity the exposure of which arising from the swap represents a short position in the underlying, even though the underlying has not defaulted, in which case the potential for future credit exposure of the firm must be limited to the amount of premia which are not yet paid by the entity to the firm.
[Note: CAD Annex II point 7]
BIPRU 14.2.7
See Notes
BIPRU 14.2.8
See Notes
BIPRU 14.2.9
See Notes
BIPRU 14.2.10
See Notes
Where a credit derivative included in the trading book forms part of an internal hedge and the credit protection is recognised under the BCD, there is deemed to be no counterparty risk arising from the position in the credit derivative. Alternatively, a firm may consistently include for the purposes of calculating capital requirements for counterparty credit risk all credit derivatives included in the trading book forming part of internal hedges or purchased as protection against CCR exposure where the credit protection is recognised under the BCD.
[Note: CAD Annex II point 11]
Calculation
BIPRU 14.2.11
See Notes
Subject to BIPRU 14.2.3 R to BIPRU 14.2.5 R and BIPRU 14.2.14 R to BIPRU 14.2.17 R, a firm must calculate exposure values and risk weighted exposure amounts for the exposures falling under BIPRU 14.2.2 R (1) to BIPRU 14.2.2R (5) in accordance with:
- (1) the standardised approach to credit risk; or
- (2) if the firm has an IRB permission, the IRB approach in accordance with the terms of the firm's IRB permission.
[Note: CAD Annex II point 6]
BIPRU 14.2.12
See Notes
BIPRU 14.2.13
See Notes
A firm must calculate the capital requirement for the purposes of BIPRU 14.2.2 R as 8% of the total risk weighted exposure amounts.
[Note: CAD Annex II point 12]
Collateral
BIPRU 14.2.14
See Notes
For the purposes of BIPRU 14.2.11 R, in calculating risk weighted exposure amounts a firm must not use the financial collateral simple method for the recognition of the effects of financial collateral.
[Note: CAD Annex II point 8]
BIPRU 14.2.15
See Notes
For the purposes of BIPRU 14.2.11 R:
- (1) in the case of repurchase transactions and securities or commodities lending or borrowing transactions booked in the trading book, all CRD financial instruments and commodities that are eligible to be included in the trading book may be recognised as eligible collateral;
- (2) for exposures due to financial derivative instruments and long settlement transactions booked in the trading book, commodities that are eligible to be included in the trading book may also be recognised as eligible collateral;
- (3) for the purposes of calculating volatility adjustments where such CAD financial instruments or commodities which are not eligible under BIPRU 5 and BIPRU 4.10 are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such a transaction, and the firm is using the supervisory volatility adjustments approach, such instruments and commodities must be treated in the same way as non-main index equities listed on a recognised investment exchange or a designated investment exchange.
[Note: CAD Annex II point 9 (part)]
BIPRU 14.2.16
See Notes
- (1) Where a firm is using the own estimates of volatility adjustments approach in respect of CAD financial instruments or commodities which are not eligible under BIPRU 5 and BIPRU 4.10 it must calculate volatility adjustments for each individual item.
- (2) Where a firm is using the master netting agreement internal models approach set out in BIPRU 5, it may also apply this approach in the trading book.
[Note: CAD Annex II point 9 (part)]
BIPRU 14.2.17
See Notes
For the purposes of BIPRU 14.2.11 R, in relation to the recognition of master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions netting across positions in the trading book and the non-trading book may only be recognised when the netted transactions fulfil the following conditions:
- (1) all transactions are marked to market daily;
- (2) any items borrowed, purchased or received under the transactions may be recognised as eligible financial collateral under BIPRU 5 and BIPRU 4.10 without the application of BIPRU 14.2.14 R to BIPRU 14.2.15 R.
[Note: CAD Annex II point 9 (part)]
Treatment of expected loss amounts under the IRB approach
BIPRU 14.2.18
See Notes
Where a firm calculates risk weighted exposure amounts for the purposes of BIPRU 14 in accordance with the IRB approach, then for the purposes of the calculation provided for in BIPRU 4.3.8 R, the following will apply:
- (1) value adjustments made to take account of the credit quality of the counterparty may be included in the sum of value adjustments and provisions made for the exposures indicated in BIPRU 14; and
- (2) unless the firm's IRB permission does not permit it, if the credit risk of the counterparty is adequately taken into account in the valuation of a position included in the trading book the expected loss amount for the counterparty risk exposure must be zero.
[Note: CAD Article 17(1)]
Exposures to recognised third-country investment firms, recognised clearing houses and designated investment exchanges
BIPRU 14.2.20
See Notes
For the purposes of the calculation of the counterparty risk capital component, without prejudice to BIPRU 13.3.13 R and BIPRU 13.8.8 R (Exposure to a central counterparty) exposures to recognised third-country investment firms and exposures incurred to recognised clearing houses and designated investment exchanges must be treated as exposures to institutions.
[Note: CAD Article 40]
Netting of trading book exposures against non-trading book exposures
BIPRU 14.2.21
See Notes
BIPRU 14.2.22
See Notes
Where a firm carries out netting under BIPRU 14.2.21 R, it must allocate the net exposure to:
- (1) the trading book for the purposes of the calculation under BIPRU 14.2.11 R, if the gross trading book exposures exceed gross non-trading book exposures; and
- (2) the non-trading book for the purposes of BIPRU 13, if the gross non-trading book exposures exceed gross trading book exposures.
BIPRU 14.2.23
See Notes
BIPRU 14.2.24
See Notes
BIPRU 14.3
Unsettled transactions
- 01/01/2007
Scope
BIPRU 14.3.1
See Notes
BIPRU 14.3.2
See Notes
Calculation
BIPRU 14.3.3
See Notes
In the case of transactions in which debt instruments, equities, foreign currencies and commodities (excluding repurchase agreements and reverse repurchase agreements and securities or commodities lending and securities or commodities borrowing) are unsettled after their due delivery dates, a firm must calculate the price difference to which it is exposed, being the difference between the agreed settlement price for the debt instrument, equity, foreign currency or commodity in question and its current market value, where the difference could involve a loss for the firm.
[Note: CAD Annex II point 1 (part)]
BIPRU 14.3.4
See Notes
A firm must multiply the price difference calculated under BIPRU 14.3.3 R by the appropriate factor in column A of the Table in BIPRU 14.3.4 R in order to calculate its capital requirement for the purposes of BIPRU 14.3.
[Note: CAD Annex II point 1 (part)]
Table: Factors for the multiplication of price differences
BIPRU 14.3.5
See Notes
This table belongs to BIPRU 14.3.4 R
Number of working days after due settlement date | Column A (%) |
5 - 15 | 8 |
16 - 30 | 50 |
31 - 45 | 75 |
46 or more | 100 |
[Note: CAD Annex II Table 1]
BIPRU 14.3.5
See Notes
In cases of a system wide failure of a settlement or clearing system, a firm should refer to the emergency provisions in GEN 1.3. Where the requirements of GEN 1.3.2 R are met, until the situation is rectified failure of a counterparty to settle a trade will not be deemed a default for purposes of credit risk.
[Note: CAD Annex II point 4]
BIPRU 14.4
Free deliveries
- 01/01/2007
Scope
BIPRU 14.4.1
See Notes
BIPRU 14.4.2
See Notes
A firm must hold capital resources with respect to a free delivery, as set out in the Table in BIPRU 14.4.3 R, if:
- (1) it has paid for securities, foreign currencies or commodities before receiving them or it has delivered securities foreign currencies or commodities before receiving payment for them; and
- (2) in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.
[Note: CAD Annex II point 2]
Exposure
BIPRU 14.4.3
See Notes
Table: Capital treatment for free deliveries
This table belongs to BIPRU 14.4.2 R.
Transaction Type | Up to first contractual payment leg or delivery leg | From first contractual payment leg or delivery leg up to four days after second contractual payment leg or delivery leg | From 5 business days post second contractual payment leg or delivery leg until extinction of the transaction |
Free delivery | No capital charge in the trading book | Treat as an exposure | Deduct value transferred plus current positive exposure from capital resources |
[Note: CAD Annex II Table 2]
BIPRU 14.4.4
See Notes
- (1) In the case of the non-trading book, a firm must treat an exposure falling into columns 2 and 3 of the table in BIPRU 14.4.3 R in accordance with the relevant provisions of the standardised approach to credit risk or the IRB approach, as the case may be.
- (2) In the case of the trading book, a firm must apply the treatment set out in BIPRU 14.4.5 R.
[Note: CAD Annex II point 3 (part)]
BIPRU 14.4.5
See Notes
- (1) In applying a risk weight to free delivery exposures treated according to column 3 of the table in BIPRU 14.4.3 R, a firm using the IRB approach may assign PD to counterparties, for which they have no other non-trading book exposure, on the basis of the counterparty's external rating.
- (2) A firm using own estimates of LGDs may apply the LGD set out in BIPRU 4.4.34 R to BIPRU 4.4.35 RBIPRU 4.4.35 R (IRB foundation approach: LGDs) to free delivery exposures treated according to column 3 of the table in BIPRU 14.4.3 R, provided that it applies it to all such exposures.
- (3) Alternatively, a firm using the IRB approach may apply the risk weights, as set out in the standardised approach to credit risk provided that it applies them to all such exposures or may apply a 100% risk weight to all such exposures.
[Note: CAD Annex II point 3 (part)]
BIPRU 14.4.6
See Notes
BIPRU 14.4.7
See Notes
In cases of a system wide failure of a settlement or clearing system, a firm should refer to the emergency provisions in GEN 1.3. Where the requirements of GEN 1.3.2 R are met, until the situation is rectified failure of a counterparty to settle a trade will not be deemed a default for purposes of credit risk.
[Note: CAD Annex II point 4]
Transitional Provisions and Schedules
BIPRU TP 1
Applicable chapter of IPRU and other general provisions
TP 1 | Applicable chapter of IPRU and other general provisions | |||
Application | ||||
1.1 | R | BIPRU TP 1 applies to: | ||
(1) | a BIPRU firm; and | |||
(2) | any firm to which BIPRU 8 (Group risk - consolidation) applies. | |||
Version of IPRU to be used | ||||
1.2 | R | Any reference in BIPRU TP to IPRU is to the version in force on 31 December 2006. | ||
Categorisation of BIPRU investment firms | ||||
1.3 | R | For the purposes of BIPRU TP the definitions of securities and futures firm, investment management firm and personal investment firm are amended as follows: | ||
(1) | if a firm fell into one of those categories on 31 December 2006 it remains in that category unless changed under (2); | |||
(2) | if a firm has got a permission that includes a requirement that it comply with the provisions of BIPRU TP applicable to one of those categories, that firm falls into that category; and | |||
(3) | a BIPRU investment firm that is not an investment management firm, UCITS investment firm or a personal investment firm is a securities and futures firm. | |||
Applicable part of IPRU on a solo basis | ||||
1.4 | R | (1) | This rule identifies which part of IPRU applies where BIPRU TP applies IPRU to a firm on a solo basis. | |
(2) | IPRU(BANK) applies to a bank. | |||
(3) | IPRU(BSOC) applies to a building society. | |||
(4) | IPRU(INV) applies to a BIPRU investment firm as follows: | |||
(a) | Chapter 5 applies to an investment management firm; | |||
(b) | Chapter 7 applies to a UCITS investment firm; | |||
(c) | Chapter 10 applies to a securities and futures firm; and | |||
(d) | Chapter 13 applies to a personal investment firm. | |||
General provisions about consolidation | ||||
1.5 | R | Each provision of BIPRU TP that applies on a solo basis also applies for the purposes of BIPRU 8 (Group risk - consolidation). This is subject to the provisions of BIPRU TP concerned. | ||
1.6 | G | Many sections of BIPRU TP deal specifically with when and how they apply on a consolidated basis. However BIPRU TP will still apply for consolidation purposes even where this is not the case. BIPRU TP 1.5R does not apply to BIPRU TP 2.1 (Solo consolidation) as solo consolidation is a concept that only applies to solo requirements. | ||
Classification of groups for certain consolidation rules | ||||
1.7 | R | (1) | This rule sets out how to classify a UK consolidation group or non-EEA sub-group ("group") to which consolidated requirements are applied under certain parts of BIPRU TP. | |
(2) | If the answer to the question at stage 1 of the decision tree in BIPRU 8 Annex 5R (Decision tree for identifying the consolidated capital resources requirement of a UK consolidation group or a non-EEA sub-group) with respect to the group is Yes and there is a building society in the group, the group is referred to in BIPRU TP as a building society group. | |||
(3) | If a non-EEA sub-group is part of a UK consolidation group that is a building society group then the non-EEA sub-group is also a building society group. However a firm may use (2) for the purposes of calculating the consolidated capital resources of the non-EEA sub-group where capital resources are calculated under IPRU. | |||
(4) | If the answer to the question at stage 1 of the decision tree in BIPRU 8 Annex 2R with respect to the group is Yes and the group is not a building society group, the group is referred to in BIPRU TP as a banking group. | |||
(5) | In any other case the group is referred to in BIPRU TP as an investment services group. |
- 01/04/2013
- Past version of BIPRU TP 1 before 01/04/2013
BIPRU TP 2
Capital floors for a firm using the IRB or AMA approaches
Application | |||
2.1 | R | Subject to BIPRU TP 2.2R, this section applies to a BIPRU firm that applies the IRB approach or the advanced measurement approach. | |
2.2 | R | BIPRU TP 2.30R to BIPRU TP 2.34G apply to any firm to which BIPRU 8 (Group risk - consolidation) applies and which applies the IRB approach or the advanced measurement approach on a consolidated basis. | |
Purpose | |||
2.3 | G | This section in part implements Articles 152(1) - (7) of the Banking Consolidation Directive and Article 43 of the Capital Adequacy Directive. | |
2.4 | G | The purpose of this section is to limit the amount of capital reduction arising from the implementation of the Banking Consolidation Directive and the Capital Adequacy Directive compared with the requirements arising from the previous versions of those Directives. As such it is effectively a comparison of the capital resource requirements arising from BIPRU with those arising from the appropriate IPRU sourcebook that would have applied as at 31 December 2006. However the effect of changes to the market risk requirements is removed by requiring BIPRU 7 (Market risk) to be used for both sides of the comparison. | |
How to apply the capital floors | |||
2.5 | G | This section does not require a firm to continue to have capital resources equal to a fixed percentage of the capital requirement that applied to it as at 31 December 2006. Instead a firm should apply the requirements in this section to its business as it changes over time. So for example if a firm is calculating its capital requirements as at 31 December 2008 it will have two calculations. The first is carried out under BIPRU and GENPRU. The second is carried out under IPRU and this section. Both sets of requirements are applied to the firm's figures as at 31 December 2008. | |
2.6 | G | The Directive provisions on which this section is based are written as a floor on a firm's capital resources requirement. This section however is written as a second capital resources requirement that sits beside the general capital resources requirements of BIPRU and GENPRU. The reason for this is that a firm should meet the general capital resources requirements of BIPRU and GENPRU using capital resources calculated under GENPRU 2.2 (Capital resources). On the other hand a firm should meet the capital resources requirements of this section (which are based on IPRU) using the relevant IPRU definition. In practice the two sets of definitions of capital resources are similar apart from the provisions about expected loss. Therefore as shown by the example in BIPRU TP 2.12G and BIPRU TP 2.13G, in practice a firm is subject to a single capital resources requirement. | |
2.7 | G | BIPRU TP 9 explains how the general principle in this section is applied to a personal investment firm. | |
Capital floors: solo | |||
2.8 | R | A firm calculating risk weighted exposure amounts in accordance with the IRB approach must during the following twelve-month periods after 31 December 2006 provide capital resources that equal or exceed the following amounts: | |
(1) | for the first twelve-month period, 95%; | ||
(2) | for the second twelve-month period, 90%; and | ||
(3) | for the third and each subsequent twelve-month period, 80%; | ||
of the solo capital resources requirement that applies to the firm under whichever part of IPRU applies under BIPRU TP 1.4R. | |||
2.9 | R | A firm using the advanced measurement approach must, during each of the second, third and subsequent twelve-month periods after 31 December 2006, provide capital resources which are at all times more than or equal to the amounts indicated in BIPRU TP 2.8R(2) and BIPRU TP 2.8R(3). | |
Capital resources: solo | |||
2.10 | R | A firm must calculate its capital resources in accordance with whichever part of IPRU applies under BIPRU TP 1.4R. | |
2.11 | R | Compliance with the requirements of this section must be on the basis of amounts of capital resources fully adjusted to reflect differences in the calculation of capital resources under IPRU and the calculation of capital resources under GENPRU and BIPRU deriving from the separate treatments of expected loss and unexpected loss under the IRB approach. | |
Waiver from IPRU capital resources requirement | |||
2.11A | G | Article 152(5d) and (5e) of the Banking Consolidation Directive allows the appropriate regulator to waive the capital floor calculation based on the IPRU capital resources requirement in BIPRU TP 2.8R(3), or BIPRU TP 2.8R(3) as applied in BIPRU TP 2.9R, on a case-by-case basis only if a firm started to use the IRB approach or the advanced measurement approach on or after 1 January 2010. The appropriate regulator will consider an application for such a waiver in the light of the criteria in section 138A of the Act (Modification or waiver of rules). | |
2.11B | R | If a firm has a waiver referred to in BIPRU TP 2.11AG, it must provide capital resources that equal or exceed 80% of the capital resources requirement that the firm would be required to provide under the relevant sections of BIPRU applicable to it immediately before it started to use the IRB approach or the advanced measurement approach as those sections were in force on 31 December 2010. | |
Explanation of the calculation | |||
2.12 | G | The following provides an illustrative example of the application of this section to a bank in a period in which BIPRU TP 2.8R(1) applies (i.e. the 95% requirement). Say that under IPRU(BANK) the firm's capital resources requirement would be £8.00mn and this would be met in part by general/collective provisions of £0.5mn. This establishes the capital resources requirement under this section at 95% times (£8.0mn less £0.5mn), which equals £7.125mn. | |
2.13 | G | Say that in the absence of this section, the Pillar 1 capital resources requirement of the firm in BIPRU TP 2.12G would be £6.4m, and the sum of value adjustments and provisions are £0.25mn less than expected losses. For the purposes of the expected loss calculation, if the result is negative (i.e. value adjustments and provisions are less than expected losses) that amount is deducted from capital resources (which is equivalent to an increase in the capital resources requirement). If the result is positive it is added to capital resources (which is equivalent to a decrease in the capital resources requirement). In this example the result is negative. As the sum of these two amounts (£6.65mn) is still less than the IPRU capital resources requirement of £7.125mn, the effect of this section is that the firm is subject to the (higher) IPRU requirement. If the sum of the BIPRU requirements had been greater than £7.125mn, then the firm would not have been subject to the capital resources requirement in this section. | |
Adjustments to the calculation of capital resources | |||
2.14 | R | A firm may treat any capital instrument that complies with the requirements of GENPRU 2.2 (Capital resources) as complying with the corresponding requirements of IPRU. | |
2.15 | G | An example of BIPRU TP 2.14R is that a firm may treat subordinated debt with a term of five years or over that qualifies as lower tier two capital for the purposes of GENPRU as complying with the corresponding provisions for five year subordinated debt under IPRU. | |
Market risk | |||
2.16 | R | A firm must substitute the requirements in BIPRU for the calculation of the market risk capital requirement (excluding those provisions to the extent that they would involve using the IRB approach) for the corresponding provisions of IPRU. | |
2.17 | G | BIPRU TP 4 to BIPRU TP 9 (Pre CRD capital requirements applying on a solo basis during 2007) explain which parts of IPRU correspond to the market risk capital requirement. | |
CAD 1 model and VaR model | |||
2.18 | R | If a firm has a CAD 1 permission or a VaR model permission it must also use it for the purposes of the capital floor calculations in this section. | |
2.19 | G | In applying BIPRU TP 2.18R, a firm should not adjust the CAD 1 permission approach or VaR model approach (including the scope of the CAD 1 permission or VaR model permission) so that it is consistent with Directive 93/6 (the Capital Adequacy Directive) as it stood on 31 December 2006. | |
Individual capital guidance | |||
2.20 | R | The IPRU capital resources requirement does not include any individual capital ratio notified to a bank under Chapter CO of IPRU(BANK) or any similar notification by the appropriate regulator to any other firm. | |
2.21 | G | Any further capital resource requirements that a firm is required to meet under GENPRU 1.2 (Adequacy of financial resources) (i.e. Pillar 2) should not be taken into account. | |
How to apply IPRU | |||
2.22 | R | If the part of IPRU that applies to a firm applies different calculations to different types of firm the firm must use the calculations that it would have to use under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007). | |
2.23 | R | If the part of IPRU that applies to a firm gives the firm a choice between methods of calculating capital resources or capital resources requirements it must exercise that choice consistently with the corresponding choices it makes in calculating capital resources or capital resources requirement under GENPRU and BIPRU. | |
2.24 | G | BIPRU TP 4 to BIPRU TP 9 (Pre CRD capital requirements applying on a solo basis during 2007) explain how concepts in IPRU and GENPRU map onto the ones in IPRU. This will enable a firm to decide which calculations it should use for the purposes of BIPRU TP 2.22R and BIPRU TP 2.23R. | |
2.25 | G | An example of the effect of BIPRU TP 2.22R and BIPRU TP 2.23R is that a securities and futures firm that calculates its capital resources under GENPRU 2 Annex 4 R (Capital resources table for a BIPRU investment firm deducting material holdings) should calculate its capital resources under IPRU using table 10-62(2)A of chapter 10 of IPRU(INV). | |
2.26 | R | For the purpose of calculating the part of the IPRU capital resources requirement that corresponds to the concentration risk capital component a firm may identify the trading book exposures on which that requirement is based using BIPRU 10 (Large exposures requirements) except to the extent that BIPRU 10 involves the IRB approach. | |
2.27 | G | The concentration risk capital component is the capital requirement for a firm that chooses to have trading book exposures that exceed the large exposure limits for the non-trading book. In most cases IPRU has a similar capital requirement. The purpose of BIPRU TP 2.26R is to allow a firm to calculate the amount of the excess trading book exposures for which it calculates the additional capital charge using BIPRU 10 (Large exposures requirements) in order to avoid having to apply the IPRU large exposure requirements for this purpose only. | |
2.28 | R | The calculations under this section do not take into account the base capital resources requirement or the part of the IPRU solo capital resources requirement that corresponds to the base capital resources requirement. | |
Solo consolidation | |||
2.29 | R | If a firm has a solo consolidation waiver it also applies for the purpose of this section in place of any corresponding provision of IPRU. | |
Capital floors: consolidation | |||
2.30 | R | If a firm calculates risk weighted exposure amounts on a consolidated basis in accordance with the IRB approach or uses the advanced measurement approach on a consolidated basis, BIPRU TP 2.8R to BIPRU TP 2.27G apply on a consolidated basis in accordance with BIPRU TP 2.30R to BIPRU TP 2.31R. | |
2.31 | R | A firm must calculate the consolidation requirements under BIPRU TP 2.30R for the group in question (the group in question is specified in BIPRU TP 2.32R) in accordance with the following: | |
(1) | if the group is a banking group as defined in BIPRU TP 1.7R (Classification of groups for certain consolidation rules), the consolidation provisions of IPRU(BANK) apply; | ||
(2) | if the group is a building society group as defined in BIPRU TP 1.7R, the consolidation provisions of IPRU(BSOC) apply; and | ||
(3) | if the group is an investment firm group as defined in BIPRU TP 1.7R, chapter 14 of IPRU(INV) applies. | ||
2.32 | R | The scope of the consolidation under BIPRU TP 2.30R and any exemption from consolidation is determined in accordance with BIPRU 8 (Group risk - consolidation) rather than IPRU. In particular, the following adjustments apply: | |
(1) | if a firm is a member of a UK consolidation group and applies the IRB approach or the AMA with respect to that UK consolidation group, BIPRU TP 2.30R applies with respect to that UK consolidation group; and | ||
(2) | if a firm is a member of a non-EEA sub-group and applies the IRB approach or the AMA with respect to that non-EEA sub-group, BIPRU TP 2.30R applies with respect to that non-EEA sub-group. | ||
2.33 | G | If for example the consolidation rules that apply for the purposes of this section are those in chapter 14 of IPRU(INV) (Consolidated supervision of investment firms) then IPRU(INV) 14.1 (Application) and 14.2 (Scope of consolidation) do not apply. BIPRU 8.2 (Scope and basic consolidation requirements for UK consolidation groups), BIPRU 8.3 (Scope and basic consolidation requirements for non-EEA sub-groups), BIPRU 8.4 (CAD Article 22 groups and investment firm consolidation waiver) and BIPRU 8.5 (Basis of consolidation) apply instead. | |
Capital floors: waiver from consolidation | |||
2.34 | G | If a firm has an investment firm consolidation waiver and it is applying the IRB approach or the AMA, the waiver will explain how the investment firm consolidation waiver applies for the purpose of this section. |
- 01/04/2013
- Past version of BIPRU TP 2 before 01/04/2013
BIPRU TP 11
IRB transitionals
Application | ||
11.1 | R | BIPRU TP 11 applies to a BIPRU firm that uses the IRB approach. |
Purpose | ||
11.2 | G | BIPRU TP 11 implements Articles 154(2), (3) and (5) of the Banking Consolidation Directive and (in part) Article 17 of the Capital Adequacy Directive. |
Residential properties | ||
11.6 | R | In accordance with Article 154(5) of the Banking Consolidation Directive, until 31 December 2012, the exposure-weighted average LGD for all retail exposures secured by residential properties and not benefiting from guarantees from central governments must not be lower than 10%. |
Expected loss | ||
11.7 | R | BIPRU TP 11.3R to BIPRU TP 11.6R also apply for the purpose of BIPRU 14.2.18 R and BIPRU 14.2.19 R (Treatment of expected loss amounts under the IRB approach) and GENPRU 2.2.193 R (Upper tier two capital: Surplus provisions). |
BIPRU TP 13
Other operational risk transitionals
Application | ||
13.1 | R | BIPRU TP 13 applies to a BIPRU firm. |
Purpose | ||
13.2 | G | BIPRU TP 13 implements Articles 155 of the Banking Consolidation Directive and Article 44 of the Capital Adequacy Directive. |
Relevant indicator | ||
13.3 | R | Until 31 December 2012, a percentage of 15% applies to the business line "Trading and Sales" of a firm whose relevant indicator (as referred to in BIPRU 6.4.6 R) for the business line "Trading and Sales" represents at least 50% of the total of the relevant indicators for all of the firm's business lines in accordance with BIPRU 6.4.6 R to BIPRU 6.4.16 G (Calculating the ORCR under the standardised approach to operational risk). |
Reduced operational risk charge in 2007 | ||
13.4 | G | [deleted] |
Systems and controls in 2007 | ||
13.5 | R | [deleted] |
BIPRU TP 20
Standardised credit risk transitionals
Application | |||
20.1 | R | This section applies to a BIPRU firm. | |
Days past due | |||
20.2 | R | [deleted] | |
20.3 | R | [deleted] | |
20.4 | G | [deleted] | |
Central government exposures | |||
20.5 | R | Until 31 December 2015, a 0% risk weight applies to exposures to the central government of the United Kingdom and of the Bank of England denominated and funded in the currency of another EEA State. | |
20.6 | R | If the CRD implementation measures of another EEA State apply a 0% risk weight to exposures to its central government or central bank denominated and funded in the domestic currency of another EEA State a firm must risk weight such exposures in the same manner. | |
20.7 | R | BIPRU TP 20.6R applies until 31 December 2015 or any earlier date on which the relevant CRD implementation measure ceases to apply. | |
20.8 | G | BIPRU TP 20.5R to BIPRU TP 20.7R implements (in part) Article 153 of the Banking Consolidation Directive. |
BIPRU TP 21
Close substitutes for commodities
Application | ||
21.1 | R | This section applies to a BIPRU firm that on 31 December 2006 was applying the approach referred to in the first column of the table in BIPRU TP 21.3R with respect to particular grades or brands of the same commodity-class. |
Commodities: close substitutes | ||
21.2 | R | A notice given under the IPRU provision in the second column of the table in BIPRU TP 21.3R is treated as having been given under BIPRU 7.4.23 R (Notice to the appropriate regulator about treatment of different grades or brands of the same commodity) for the purposes of BIPRU 7.4.22 R (Treatment of different grades or brands of the same commodity) with respect to the commodity grades or brands referred to in BIPRU TP 21.1R. |
21.3 | R | Table: Commodity treatments under IPRU This table belongs to BIPRU TP 21.2R |
IPRU provisions setting out commodity approach | IPRU provisions under which notice given |
Paragraph 22(2) of appendix 6 of chapter 10 of IPRU(INV) | Paragraph 23 of appendix 6 of chapter 10 of IPRU(INV) |
Paragraph 22(2) of chapter CM of IPRU(BANK) | Paragraph 23 of chapter CM of IPRU(BANK) |
Explanation | ||
21.3 | G | BIPRU 7.4.22 R (1)(b) says that a firm should treat positions in different grades or brands of the same commodity-class as different commodities unless they are close substitutes and have price movements which have exhibited a stable correlation coefficient of at least 0.9 over the last 12 months. BIPRU 7.4.23 R says that a firm should notify the appropriate regulator in writing at least 20 business days prior to the date the firm starts relying on this treatment. The purpose of this section is to allow a notice given under the corresponding provisions of chapter 10 of IPRU(INV) or IPRU(BANK) to continue to have effect without the firm having to serve a new notice under BIPRU 7.4.23 R. |
BIPRU TP 22
Solo consolidation
Application | |||
22.1 | R | This section applies to a BIPRU firm that: | |
(1) | is a bank or building society; and | ||
(2) | on 31 December 2006, was, in accordance with the provision of IPRU referred to in BIPRU TP 22.2R and in accordance with a concession (as defined in BIPRU TP 22.8R), solo-consolidating a subsidiary undertaking. | ||
22.2 | R | The provisions of IPRU referred to in BIPRU TP 22.1R are: | |
(1) | (in the case of a bank) section 9 of chapter CS of IPRU(BANK); and | ||
(2) | (in the case of a building society) section 1.11 of chapter 1 of volume 1 of IPRU(BSOC). | ||
Deemed solo consolidation waiver | |||
22.3 | R | A concession referred to in BIPRU TP 22.1R is treated as a solo consolidation waiver with respect to the subsidiary undertaking to which it relates if the firm notifies the FSA that the firm wishes to apply the treatment in BIPRU 2.1 (Solo consolidation) to that subsidiary undertaking. | |
Notice to the FSA | |||
22.4 | R | The following requirements apply to a notice under BIPRU TP 22.3R: | |
(1) | the firm must give the FSA the notice on or after 1 June 2006 and on or before 29 December 2006; | ||
(2) | the notice must contain details of the concession concerned; | ||
(3) | the notice must give the name of the subsidiary undertaking concerned and say where it is incorporated and has its head office; and | ||
(4) | the notice must say whether that subsidiary undertaking is a body corporate and state the legal form of that subsidiary undertaking. | ||
Limitations | |||
22.5 | R | Any condition, limitation or requirement to which a concession referred to in BIPRU TP 22.1R is subject continues to apply to the extent that it is compatible with BIPRU. In particular, if the concession was only for the purpose of large exposures it only has effect for the purposes of BIPRU 10 (Concentration risk) and if it was only for the purposes of capital adequacy it only has effect for the purposes of GENPRU 2.1.13 R (Obligation to hold capital resources equal to or greater than the capital resources requirement) or GENPRU 2.1.60 R (Calculation of base capital resources requirement for banks authorised before 1993). | |
Obligation to meet other qualifying conditions | |||
22.6 | R | A firm with a deemed solo consolidation waiver under BIPRU TP 22.3R may not apply the treatment in BIPRU 2.1 (Solo consolidation) to the subsidiary undertaking concerned unless the conditions in BIPRU 2.1.20 R to BIPRU 2.1.24 R (Solo consolidation - Minimum standards) are met with respect to that subsidiary undertaking. | |
Notification of relevance etc of concession | |||
22.7 | R | A firm which has the benefit of a concession that has effect under BIPRU TP 22.3R must notify the PRA immediately if it becomes aware of any matter which is material to the relevance or appropriateness of the concession. | |
Meaning of concession | |||
22.8 | R | A concession means for the purposes of BIPRU TP 22: | |
(1) | a consent or approval which was given by the FSA under the provisions of IPRU(BANK) or IPRU(BSOC) referred to in BIPRU TP 22.2R; and | ||
(2) | a concession also means for the purposes of BIPRU TP 22 a written concession as defined in SUP TP 1.4 (Grandfathering of concessions which were granted by the FSA's predecessor regulators: rules in the Handbook) or SUP TP 1.2.6A (Grandfathering of concessions which were granted by the FSA's predecessor regulators: guidance in the Handbook) that had effect for the purposes of the provisions of IPRU(BANK) or IPRU(BSOC) referred to in BIPRU TP 22.2R. | ||
22.9 | G | BIPRU TP 22.8R(2) provides a mechanism for keeping in effect solo consolidation concessions granted by the Bank of England and the Building Societies Commission. |
BIPRU TP 25
Exclusions from consolidation
Application | |||
25.1 | R | This section applies to a firm to which BIPRU 8 (Group risk - consolidation) applies. | |
Duration of transitional | |||
25.2 | R | This section applies until 1 January 2008. However BIPRU TP 25.8R continues in force until it is revoked. | |
Transitional rule | |||
25.3 | R | [deleted] | |
25.4 | R | [deleted] | |
Limitations | |||
25.5 | R | [deleted] | |
Obligation to meet other qualifying conditions | |||
25.6 | R | [deleted] | |
Notification of relevance etc of concession | |||
25.7 | R | [deleted] | |
Small balance sheet size exclusion | |||
25.8 | R | If a firm excluded a member of its UK consolidation group or non-EEA sub-group from the firm's UK consolidation group in accordance with: | |
(1) | bullet point two of paragraph 6 of section 4 of Chapter CS of IPRU(BANK) (exclusion from consolidation where combined balance sheet is below certain thresholds); | ||
(2) | IPRU(INV) 14.2.5R(1) (exclusion from consolidation where combined balance sheet is below certain thresholds); or | ||
(3) | a written consent or approval by the appropriate regulator under IPRU(BSOC) on the ground set out in indent two of Article 52(3) of the Directive 2000/12 (the previous version of the Banking Consolidation Directive) (exclusion from consolidation where combined balance sheet is below certain thresholds); | ||
the firm need not notify the appropriate regulator under BIPRU 8.5.9 R (exclusion from consolidation where combined balance sheet is below certain thresholds) as long as it has notified the appropriate regulator of its intention to take advantage of this rule and that notice complies with BIPRU TP 25.4R. |
BIPRU TP 30
Liquidity floor for certain banks
Application | |||
30.1 | R | BIPRU TP 30 applies to a firm which as at 1 December 2009 is a standard ILAS BIPRU firm and which as at 30 November 2009 calculated its liquidity resources in accordance with Chapter LM of IPRU(BANK). | |
Duration of transitional provisions | |||
30.2 | R | BIPRU TP 30 applies: | |
(1) | in the case of an incoming EEA firm or a third country BIPRU firm, from 1 November 2010 until the earlier of the date on which the firm receives individual liquidity guidance from the PRA and 31 December 2012; and | ||
(2) | in the case of any other firm, from 1 October 2010 until the earlier of the date on which the firm receives individual liquidity guidance from the PRA and 31 December 2012. | ||
Transitional provisions | |||
30.3 | R | A standard ILAS BIPRU firm falling into BIPRU TP 30.1 must ensure that at all times between 1 October 2010 or 1 November 2010 (as relevant) and the expiry of BIPRU TP 30 it maintains liquidity resources which are no less in amount than the higher of: | |
(1) | the amount it assesses as adequate in its ILAA; and | ||
(2) | the amount that it would have maintained during that period had it calculated its liquidity resources solely in accordance with Chapter LM of IPRU(BANK) in the form in which it appeared on 30 September 2010 or 31 October 2010 (as relevant). | ||
30.4 | R | (1) | For the purpose of BIPRU 12.9.14 R(Regulatory intervention points for ILAS BIPRU firms) and for the duration of BIPRU TP 30, there is added one further event which is to constitute a regulatory intervention point for a standard ILAS BIPRU firm. |
(2) | The further event to which (1) refers is the amount of the firm's liquid assets falling below, or being expected to fall below, the level required in BIPRU TP 30.3. | ||
30.5 | G | (1) | BIPRU TP 30.3 R deals with the overall amount of liquidity resources a firm is required to hold. It does not specify the proportion of those liquidity resources that a firm must hold in a liquid assets buffer that meets the liquid asset buffer requirements (BIPRU 12.2.8 R (1) and BIPRU 12.7). |
(2) | The PRA recognises that it may take time for a firm to build a buffer which is of a sufficient size and quality and that the transition from the PRA's liquidity regime in force immediately prior to the BIPRU 12 regime is likely to be a gradual one (see BIPRU 12.2.10 G). | ||
(3) | In carrying out its ILAA, a firm must record the evidence which supports its assessment of the adequacy of its liquid assets buffer (see BIPRU 12.5.13 R (3)). While a firm is building up its liquid assets buffer, its assessment of the adequacy of that buffer should include an analysis of its ability to satisfy its liquidity needs with liquidity resources that are not eligible to be included in the liquid assets buffer. |
BIPRU TP 33
Intra-group exposures: Transitional provisions for core UK group and large exposures
Application | ||||
33.1 | R | (1) | This section applies to a BIPRU firm that on 30 December 2010 was applying any of the exemptions under the following provisions in the version in force on that date: | |
(a) | BIPRU 3.2.25 R (Zero risk-weighting for intra-group exposures); | |||
(b) | BIPRU 10.6.5 R to BIPRU 10.6.7 R (Parental guarantees and capital maintenance arrangements); | |||
(c) | BIPRU 10.7 (Treasury concession and intra-group securities financing transactions); | |||
(d) | BIPRU 10.8 (UK integrated group); or | |||
(e) | BIPRU 10.9 (Wider integrated group), if it has a wider integrated group waiver that expires after 31 December 2010. | |||
(2) | In order to continue applying any of the exemptions in (1), a firm must be able on an ongoing basis to demonstrate to the appropriate regulator that it continues to comply fully with the provisions applicable to that exemption. | |||
Duration of transitional | ||||
33.2 | R | This section applies until 31 December 2012. | ||
Zero risk-weighting for intra-group exposures | ||||
33.3 | R | A firm may assign a risk weight of 0% to exposures that are eligible for that treatment under the criteria in BIPRU 3.2.25 R in the version in force on 30 December 2010. | ||
Exemptions from large exposures limits for intra-group exposures | ||||
33.4 | R | A firm may, to the extent permitted by this section, treat an exposure to a concentration risk group counterparty as exempt or partially exempt in accordance with BIPRU 10 (Concentration risk requirements) in the version in force on 30 December 2010. | ||
33.5 | G | The term concentration risk group counterparty broadly covers group members if they and the firm are subject to consolidated supervision by the appropriate regulator , another EEA competent authority or certain non-EEA regulators. The full definition can be found in the Glossary in the version in force on 30 December 2010. | ||
33.6 | G | If the context requires, BIPRU 8.9 (Consolidated concentration risk requirements) as it was in force on 30 December 2010 continues to apply to a firm that applies BIPRU TP 33.4 R. | ||
Effect of this section on intra-group exemptions in BIPRU 10 | ||||
33.7 | R | If a firm applies this section, BIPRU 10.8A (Intra-group exposures: core UK group) to BIPRU 10.9A (Intra-group exposures: exposures outside of the core UK group) do not apply. | ||
33.8 | G | The effect of BIPRU TP 33.7 is that a firm should not apply BIPRU 10.8A (Intra-group exposures: core UK group) to BIPRU 10.9A (Intra-group exposures: exposures outside the core UK group) to some exposures to core concentration risk group counterparties or non-core concentration risk group counterparties and this section to others. The purpose of BIPRU TP 33.7 R is that a firm should choose between treating intra-group exposures under BIPRU 10.8A (Intra-group exposures: core UK group) to BIPRU 10.9A (Intra-group exposures: exposures outside the core UK group) and treating them under this section but that it should not mix the approaches. | ||
Notice to the appropriate regulator | ||||
33.9 | R | A firm may only apply the treatment in BIPRU TP 33.3 R or BIPRU TP 33.4 R if the firm has notified the appropriate regulator in writing that it intends to apply the relevant rule to the particular counterparty or concentration risk group counterparty respectively. | ||
33.10 | R | The notice in BIPRU TP 33.9 R must comply with the following requirements: | ||
(1) | the appropriate regulator was notified on or before 31 December 2010; | |||
(2) | the notice must give the following: | |||
(a) | in the case of the treatment in BIPRU TP 33.3 R: | |||
(i) the name of the counterparty concerned; and | ||||
(ii) details of the firm's initial plans on how and when it will ensure that exposures that will not be within its core UK group are treated in accordance with the relevant rules in BIPRU 3; | ||||
(b) | in the case of the treatment in BIPRU TP 33.4 R: | |||
(i) the name of the concentration risk group counterparty concerned and the intra-group exemption or exemptions that apply to it; and | ||||
(ii) details of the firm's initial plans on how and when it intends to comply with the large exposures limits that apply to a core UK group or non-core large exposures group. |
BIPRU Sch 1
Record keeping requirements
- 01/01/2007
See Notes
1 The aim of the guidance in the following table is to give the reader a quick overall view of the relevant record keeping requirements. |
2 It is not a complete statement of those requirements and should not be relied on as if it were. |
3 Table |
Handbook reference |
Subject of Record | Contents of Record | When record must be made | Retention Period |
BIPRU 2.2.5 G | Firm's ICAAP | (1) The results of the ICAAP (2) An explanation of the processes used (3) How the process is used internally and for what purpose (4) Internal governance (5) The main sources of risk to which the firm is exposed (6) How the firm is managing each of those risks (7) Details of stress and scenario testing that has been conducted (8) The rationale behind the chosen scenarios (9) The results of those scenario tests |
Annually | Not specified |
BIPRU 5.2.3 R, BIPRU 5.4.11 R (2), BIPRU 9.5.1 R (5) |
Legal opinions confirming enforceability | A record of the legal review showing enforceability of credit protection arrangements in all relevant jurisdictions | Not specified, but before risk mitigant is recognised | Review conducted as necessary |
BIPRU 5.2.9 R | Risk management processes | Documented risk management processes to control the risks that firm may be exposed to as a result of carrying out credit risk mitigation | Not specified, but before risk mitigant is recognised | Not specified |
BIPRU 5.4.12 R | Collateral procedures | (1) A clear and robust procedure for the liquidation of collateral (2) Documented policies covering the types and amounts of collateral accepted |
Not specified, but before collateral is recognised | Not specified |
BIPRU 5.4.59 R, BIPRU 5.4.60 R |
Volatility adjustments for financial collateral | (1) Documentation of a system estimating volatility adjustments and the integration of the volatility adjustments in its risk management process (2) Review of system estimating volatility adjustments |
Not specified, but before own estimates of volatility adjustments approach is used for capital purposes | Not specified |
BIPRU 5.7.8 R | System to manage concentration of risk arising from guarantees and credit derivatives | Documentation of a system to manage potential concentration risk arising from unfunded credit protection and how this interacts with its management of its overall risk profile | Not specified, but before unfunded credit protection is recognised | Not specified |
BIPRU 7.10.53 R, BIPRU 7.10.54 G |
Material risks not captured in the firm's VaR model | Documented risks not captured in the VaR model and creation of a prudent incremental PRR charge for the risk not captured | Not specified | Not specified |
BIPRU 9.4.3 R | Legal opinions for securitised exposures | A record of the legal opinions confirming that the securitised exposures have been put beyond the reach of the originator | Not specified, but before securitised exposures are excluded from capital calculation | Review conducted as necessary |
BIPRU 9.13.12 R (1) | Capital plan in case of early amortisation | For controlled amortisation, the capital/liquidity plan to ensure that sufficient capital and liquidity are available in the event of early amortisation | Not specified | Not specified |
BIPRU 9.13.21 R | Capital plan in case of either scheduled or early amortisation | The capital plan to address the capital implications of both scheduled and early amortisation | Not specified | Not specified |
BIPRU 12.3.8 R (1) | A firm's liquidity risk tolerance | An appropriately documented account of the firm's liquidity risk tolerance | Not specified | Not specified |
BIPRU 12.4.13 R | A firm's contingency funding plan | Formal documentation of the contingency funding plan | Not specified | Not specified |
BIPRU 12.5.4 R (2) | An ILAS BIPRU firm's ILAA | A written record of the firm's ILAA | Not specified | Not specified |
BIPRU 12.5.13 R (2) | ILAA methodology | Evidence supporting the behavioural assumptions that an ILAS BIPRU firm makes in carrying out its BIPRU 12.5.6 R stress tests for the purpose of its ILAA | Not specified | Not specified |
BIPRU 12.5.13 R (3) | ILAA methodology | Evidence supporting an ILAS BIPRU firm's assessment of the adequacy of its liquidity buffer for the purpose of its ILAA | Not specified | Not specified |
BIPRU 12.6.13 R | The simplified ILAS waiver application | A written policy statement assessing the likelihood of withdrawal of retail deposits in the circumstances described in BIPRU 12.6.11 R (2)(a) | Not specified | Not specified |
BIPRU 12.6.21 R | A simplified ILAS BIPRU firm's ILSA | A written record of the firm's ILSA | Not specified | Not specified |
BIPRU 12.7.11 R | Periodic realisation of assets | A written policy setting out the firm's approach to periodic realisation of its assets | Not specified | Not specified |
BIPRU 13.6.48 R | Operation of CCR management system | Documented set of internal policies, controls and procedures concerning the operation of the CCR management system | Prior to application for CCR internal model method permission | Continuous |
BIPRU 13.7.6 R (2) | Legal opinion regarding netting agreements | A record of legal opinions that, in the event of a legal challenge, relevant courts and administrative authorities would find that the firm's claims and obligations would be limited to the net sum in BIPRU 13.7.6 R (1) | On entering into a transaction and making use of netting agreements | While transaction held |
BIPRU Sch 2
Notification and reporting requirements
- 01/01/2007
See Notes
1 The aim of the guidance in the following table is to give the reader a quick overall view of the relevant notification requirements. |
2 It is not a complete statement of those requirements and should not be relied on as if it were. |
3 Table |
Handbook reference | Matter to be notified | Contents of notification | Trigger event | Time allowed |
BIPRU 1.2.30 R | Adoption of or significant change to a trading book policy statement | Copy of the trading book policy statement | Adoption of or significant change to a trading book policy statement | Immediately |
BIPRU 3.2.35 R (5) | Fact of exposure or firm ceasing to meet the conditions in BIPRU 3.2.25 R | (5): Fact of exposure or firm ceasing to meet the conditions in BIPRU 3.2.25 R |
(5): Ceasing to meet conditions |
(5): First report date after the obligation to notify becomes due |
BIPRU 7.2.48B R | Total sum of a firm's weighted net long and net short securitisation and resecuritisation positions, broken down by types of underlying assets | Total sum of a firm's weighted net long and net short securitisation and resecuritisation positions, broken down by types of underlying assets | Periodically as set out in SUP 16.12 | In accordance with SUP 16.12 |
BIPRU 7.4.23 R | Intention to rely on approach in BIPRU 7.4.22 R (1)(b) | Fact of intention and details on which commodities the firm intends to treat as same commodity-class and justification | Intention to rely | At least 20 business days prior to the date the firm starts relying on BIPRU 7.4.23 R |
BIPRU 7.5.4 R | Intention to use an exclusion under BIPRU 7.5.4 R (1) | Fact of intention and the terms on which the relevant item will be excluded from the firm's foreign currency PRR calculation | Intention to use | Before use of the exclusion |
BIPRU 7.10.55ZA R | Material shortfall in the amount of capital required under the all price risk measure identified as a result of performing the stress tests under BIPRU 7.10.55Z R | Information about the stress tests and the material shortfall in capital | Existence of a material shortfall in capital | No later than two business days after the business day on which the material shortfall occurred |
BIPRU 7.10.104 R | Occurrence of backtesting exception | Fact of backtesting exception | Backtesting exception | Orally within 2 business days, and written account of all backtesting exceptions that Month, within 5 business days after the Month |
BIPRU 7.10.129 R | Operation of the VaR model, systems and controls relating to it and changes to the VaR model and those systems and controls | Documentation specified in the VaR model waiver/VaR model permission | appropriate regulator specified requirements | No later than number of business days after the end of each quarter specified in the VaR model permission |
BIPRU 7.10.130 R | Details of significant planned changes to the VaR model | Information about the nature of the change and an estimate of the impact on VaR numbers and the incremental risk charge | Intention to change | Prior to any changes being implemented |
BIPRU 8.4.18 R(2) | Serious risk that could undermine the financial stability of the CAD Article 22 group | Fact of serious risk to group financial stability | Events/ activities leading to serious risk to group financial stability |
As soon as the firm becomes aware of that risk |
BIPRU 8.4.18 R (3) | Consolidated capital resources and consolidated capital resources requirement of the CAD Article 22 group as set out in the investment firm consolidation waiver | Amount of CAD Article 22 group consolidated capital resources and consolidated capital resources requirement | Periodically as set out in the investment firm consolidation waiver | Not specified |
BIPRU 8.4.18 R (4) | Large exposures risks of the CAD Article 22 group including undertakings not located in a member State | Large exposures risks of the CAD Article 22 group including undertakings not located in a member State | Periodically as set out in the investment firm consolidation waiver | Not specified |
BIPRU 8.5.9 R | Intention to exclude an undertaking from consolidation | Fact of intention and details of undertaking to be excluded | Intention to exclude | In accordance with SUP 15.7 |
BIPRU 8.6.1B R | Intention of a group undertaking to issue a capital instrument for inclusion in capital resources or consolidated capital resources | Fact of intention and details of intended amount, issue date, type of investor, stage of capital, features of instrument and confirmation of compliance with rules | Intention to issue | As soon as proposed issue becomes known to firm |
BIPRU 8.6.1C R | Proposed changes to details of the issue of a capital instrument notified under BIPRU 8.6.1B R | Proposed change and all information required under BIPRU 8.6.1B R (1) to BIPRU 8.6.1B R (4) | Intention to change any details of the issue previously notified to the appropriate regulator | As soon as the changes are proposed |
BIPRU 8.6.1D R | Proposed establishment of a debt securities program by a group undertaking | All information required under BIPRU 8.6.1B R (1) to BIPRU 8.6.1B R (4) | Intention to establish | As soon as proposed establishment becomes known to firm |
BIPRU 8.6.1F R | Issue of capital instruments by a group undertaking under BIPRU 8.6.1E R | All information required under BIPRU 8.6.1B R (1) to BIPRU 8.6.1B R (3) and confirmation no changes have been made to the terms of the instrument from a previous similar issue | Intention to issue | No later than the date of issue |
BIPRU 8.7.16 R | (1) The choice of consolidation technique in BIPRU 8.7.13 R it applies for which consolidated requirement component: and (2) to which members of the relevant group it is applying the different methods in BIPRU 8.7.13 R |
(1) The choice of consolidation technique in BIPRU 8.7.13 R to be applied for each consolidated requirement component (2) the members of the relevant group to which it is applying the different methods in BIPRU 8.7.13 R |
See SUP 16 | See SUP 16 |
BIPRU 9.6.2 R | Provision of implicit support to a securitisation | (1) Provision of non-contractual support, and (2) The regulatory capital impact of providing implicit support |
Provision of implicit support | Not specified |
BIPRU 10.8A.12 R | Exposure being treated as exempt under BIPRU 10.8A (Core UK group) ceases to meet the conditions for application of the treatment | Fact or expectation of any exposure to which it has applied the treatment ceases to meet the conditions for application of the treatment | Awareness of situation | Immediately |
BIPRU 10.9A.8 R (2) | Intention to use BIPRU 10.9A.8 R (1) to concentrate an exposure to a particular member of the non-core large exposures group that exceeds 25% of the capital resources of the firm's core UK group | Fact of intention and the information in BIPRU 10.9A.8 R (3) | Intention to use BIPRU 10.9A.8 R (1) | Not specified |
BIPRU 10.9A.12 R | Exposure being treated as exempt under BIPRU 10.9A (Intra-group exposures: exposures outside the core UK group) ceases to meet the conditions for application of the treatment | Fact or expectation of any exposure to which it has applied the treatment ceases to meet the conditions for application of the treatment | Awareness of situation | Immediately |
BIPRU 10.12.6 R | Artificial transfer, transaction or arrangement. | Fact of entry into a transfer, transaction or arrangement of the type mentioned in BIPRU 10.12.5 R | Entry into an artificial transfer, transaction or arrangement | Not specified |
BIPRU 12.4.9 R | Results of the BIPRU 12.4 stress tests | The results referred to in column (2) | The carrying out of the BIPRU 12.4 stress tests | To be reported in a timely manner |
BIPRU 12.6.13 R (2) | A simplified ILAS BIPRU firm's policy statement prepared in accordance with BIPRU 12.6.13 R | The policy statement referred to in column (2) | The firm's decision to apply for a simplified ILAS waiver | Prior to the firm's application for a simplified ILAS waiver |
BIPRU 12.9.13 R | The occurrence of any of the events identified in BIPRU 12.9.14 R | Fact of occurrence and adequately reasoned explanation for the deviation | The occurrence of any of the events identified in BIPRU 12.9.14 R | As soon as the firm becomes aware of the event in question |
BIPRU 12.9.18 R | A firm's liquidity remediation plan | The matters identified in BIPRU 12.9.18 R | The occurrence of any of the events identified in BIPRU 12.9.14 R | Within two days of the notification made under BIPRU 12.9.13 R |
BIPRU 13.2.2 R | Counterparty risk exposure of non-standard type | Fact of exposure, counterparty involved, nature of the exposure and capital treatment adopted | Entry into non-standard exposure | Immediately |
BIPRU 13.6.20 R | Cessation to comply with requirements set out in BIPRU 13.6 for CCR internal model method permission | Plan for timely return to compliance or demonstration that the effect of non-compliance is immaterial | Ceasing to comply with requirements | Immediately |
BIPRU Sch 3
Fees and other requirement payments
- 01/01/2007
See Notes
BIPRU Sch 6
Rules than can be waived
- 01/01/2007
See Notes
The rules in BIPRU may be waived by the appropriate regulator under section 138A of the Act (Modification or waiver of rules). However, if the rules incorporate requirements laid down in European directives, it will not be possible for the appropriate regulator to grant a waiver that would be incompatible with the United Kingdom's responsibilities under those directives. It therefore follows that if a rule in BIPRU contains provisions which derive partly from a directive, and partly not, the appropriate regulator will be able to consider a waiver of the latter requirements only, unless the directive provisions are optional rather than mandatory. |