Prudential Regulation Authority Rulebook

6.1

This Chapter does not apply to a pure reinsurer.

6.2

For the purposes of Insurance Company – Capital Resources 13, a derivative or quasi-derivative is approved if:

1. (1) it is held for the purpose of efficient portfolio management or reduction of investment risk;
2. (2) it is covered; and
3. (3) it is effected or issued:
1. (a) on or under the rules of a regulated market; or
2. (b) off-market with an approved counterparty and, except for a forward transaction, on approved terms and is capable of valuation.

6.3

1. (1) For the purposes of 6.2, a derivative or quasi-derivative is held for the purpose of reducing investment risk if the derivative or quasi-derivative (either alone or together with other fully covered transactions) reduces any aspect of investment risk without significantly increasing any other aspect of that risk.
2. (2) For the purposes (1), an increase in risk from a derivative or quasi-derivative is significant unless:
1. (a) relative to any reduction in investment risk it is both small and reasonable; or
2. (b) the risk is remote.

6.4

For the purposes of 6.2(3)(b), a derivative or quasi-derivative is on approved terms only if the firm reasonably believes that it could, in all reasonably foreseeable circumstances and under normal market conditions, readily enter into a further transaction with the counterparty or a third party to close out the derivative or quasi-derivative at a price not less than the value attributed to it by the firm, taking into account any valuation adjustments or reserves established by the firm under Insurance Company – Overall Resources and Valuation 7.

6.5

For the purposes of 6.2(3)(b), a derivative or quasi-derivative is capable of valuation only if the firm:

1. (1) is able to value it with reasonable accuracy on a reliable basis in compliance with Insurance Company - Overall Resources and Valuation 3.1; and
2. (2) reasonably believes that it will be able to do so throughout the life of the transaction.

6.6

For the purposes of 6.2(1), a derivative or quasi-derivative is held for the purpose of efficient portfolio management if the firm reasonably believes the derivative or quasi-derivative (either alone or together with any other covered transactions) enables the firm to achieve its investment objectives by one of the following:

1. (1) generating additional capital or income in one of the ways described in 6.7; or
2. (2) reducing tax or investment cost in relation to admissible assets or linked assets; or
3. (3) acquiring or disposing of rights in relation to admissible assets or linked assets, or their equivalent, more efficiently or effectively.

6.7

The generation of additional capital or income falls within 6.6(1) where it arises from:

1. (1) taking advantage of pricing imperfections in relation to the acquisition and disposal (or disposal and acquisition) of rights in relation to assets the same as, or equivalent to, admissible assets or linked assets; or
2. (2) receiving a premium for selling a covered call option or its equivalent, the underlying of which is an admissible asset or linked assets, even if that additional capital or income is obtained at the expense of surrendering the chance of greater capital or income.