Large exposures requirements

Part

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Chapter

Large exposures requirements

Printed on: 15/05/2024

Rulebook at: 31/12/2010

BIPRU 10

Large exposures requirements

BIPRU 10.1

Application and Purpose

01/01/2007

Application

BIPRU 10.1.1

(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.

[Note: BCD Article 111(1) (part) and CAD Article 28(1)]

31/12/2010

Purpose

BIPRU 10.1.2

This chapter sets out rules and guidance for large exposures and the concentration risk capital component (the CNCOM), implementing the large exposures requirements of articles 66(3) (in part) and 106 to 117 and paragraph 7 of Annex V of the Banking Consolidation Directive and articles 28 to 32 and Annex VI of the Capital Adequacy Directive.

01/01/2007

BIPRU 10.1.3

A large exposure may be in the form of a loan to a single borrower, or it may arise across many transactions involving different types of financial instruments with several counterparties within the same group of companies. Where a firm's exposure to its counterparty is large, it risks a large loss should the counterparty default. Such a loss may be sufficient on its own to threaten the solvency of the firm.

01/01/2007

BIPRU 10.1.4

The purpose of this chapter is to ensure that a firm manages its exposure to counterparties within appropriate limits set in relation to its capital resources.

01/01/2007

BIPRU 10.1.5

This chapter only applies to a UCITS investment firm with respect to its designated investment business. For this purpose scheme management activity is excluded from designated investment business.

01/01/2007

BIPRU 10.2

Identification of exposures and recognition of credit risk mitigation

31/12/2010

BIPRU 10.2.1

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]

31/12/2010

BIPRU 10.2.2

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)]

31/12/2010

BIPRU 10.2.2A

The Committee of European Banking Supervisors (CEBS) has issued guidelines on the conditions applicable to the short-term exposures referred to in BIPRU 10.2.2 R (4) and (5) in order to be exempted from the large exposures limits in BIPRU 10.5 (Limits on exposures). These guidelines can be found at: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-Article-106(2)-(c)-and-(d)-of-D.aspx.

31/12/2010

BIPRU 10.2.3

An exposure does not include:

(1) a transaction entered into by a firm as trustee or agent without personal liability on the part of the firm;
(2) indemnities for lost share certificates; or
(3) (where the firm acts as lessor, mortgagee or owner of goods under a hire-purchase arrangement) contingent liabilities for injuries, damage or loss on the part of the counterparty to that arrangement in respect of the goods that are the subject of that arrangement.

01/01/2007

BIPRU 10.2.3A

(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).

31/12/2010

BIPRU 10.2.4

If a firm takes a credit risk charge against an exposure equal to the value of that exposure, this can count as a capital deduction for the purposes of BIPRU 10.2.2 R (1).

01/01/2007

Calculation of exposures

BIPRU 10.2.5

Subject to BIPRU 10.2.6 R and BIPRU 10.2.7 R, the value of a firm's exposures, whether in its non-trading book or its trading book, is the amount at risk calculated in line with GENPRU 1.3 (Valuation).

31/12/2010

BIPRU 10.2.6

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]

31/12/2010

BIPRU 10.2.7

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]

31/12/2010

BIPRU 10.2.8

A firm must not offset exposures in the non-trading book and trading book for the purpose of calculating exposures except to the extent permitted under the standardised approach or, if applicable, the IRB approach.

31/12/2010

Recognition of credit risk mitigation

BIPRU 10.2.9

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 FSA the gross value of its exposures.

[Note: BCD Articles 111(1) first paragraph (part) and 112(2)]

31/12/2010

BIPRU 10.2.10

For the purposes of this section, the use of own estimates for LGDs and conversion factors under the IRB approach for an IRB exposure class is referred to as the full IRB approach.

31/12/2010

The financial collateral simple method under the standardised approach

BIPRU 10.2.11

As indicated in BIPRU 5.4.15 R (The financial collateral simple method), the financial collateral simple method is available only to firms using the standardised approach and only in relation to exposures for which they adopt the standardised approach.

31/12/2010

BIPRU 10.2.12

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)]

31/12/2010

BIPRU 10.2.13

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.

31/12/2010

The financial collateral comprehensive method

BIPRU 10.2.14

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 or to connected counterparties as being the fully-adjusted value of the exposures to the counterparty or group of connected clients or connected counterparties 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]

31/12/2010

BIPRU 10.2.15

The rules setting out the calculation of the effects of credit risk mitigation under the financial collateral comprehensive method are set out in BIPRU 5.4.24 R to BIPRU 5.4.66 R.

31/12/2010

BIPRU 10.2.16

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]

31/12/2010

BIPRU 10.2.17

As indicated in BIPRU 5.4.16 R, a firm may be permitted to use both the financial collateral comprehensive method and the financial collateral simple method when such use is for the purposes of carrying out the sequential implementation of its IRB approach in accordance with BIPRU 4.2.17 R to BIPRU 4.2.19 R (Implementation of the internal ratings based approach) and in relation to an IRB exposure class or exposures which is exempt from the IRB approach in accordance with BIPRU 4.2.26 R (Combined use of methodologies), and such use is expressly permitted by the firm's IRB permission.

31/12/2010

BIPRU 10.2.18

A firm may only recognise collateral for the purpose of BIPRU 10.2.14R (Financial collateral comprehensive method) if the collateral 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) for the purposes of calculating risk weighted exposure amounts under the standardised approach or, if applicable, the IRB approach using the financial collateral comprehensive method. In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral comprehensive method.

31/12/2010

Firms using full IRB approach

BIPRU 10.2.19

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 or to connected counterparties for the purposes of BIPRU 10.5 (Limits on exposures) if:

(1) the firm is able to satisfy the FSA 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]

31/12/2010

BIPRU 10.2.20

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]

31/12/2010

BIPRU 10.2.21

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)]

31/12/2010

Stress testing of credit risk concentrations

BIPRU 10.2.22

(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 FSA 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)]

31/12/2010

BIPRU 10.2.23

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)]

31/12/2010

BIPRU 10.2.24

A firm should determine the frequency needed for the stress testing of its credit risk concentrations with emphasis on having sufficient frequency to maintain the currency of its capital calculations. In any case such testing should be carried out at least once a year.

31/12/2010

BIPRU 10.3

Identification of counterparties

01/01/2007

BIPRU 10.3.1

An individual counterparty may be a natural or legal person.

01/01/2007

BIPRU 10.3.2

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.

01/01/2007

Identification of counterparties for guaranteed and collateralised exposures

BIPRU 10.3.3

(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)]

31/12/2010

BIPRU 10.3.4

(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)]

31/12/2010

Groups of connected clients

BIPRU 10.3.5

The Glossary defines a group of connected clients.

01/01/2007

BIPRU 10.3.6

Relationships between individual counterparties which might be considered to constitute a single risk for the purposes of the definition of group of connected clients include:

(1) undertakings in the same group;
(2) companies whose ultimate owner (whether wholly or significantly) is the same individual or individuals, and which do not have a formal group structure;
(3) companies having common directors or management; and
(4) counterparties linked by cross guarantees

01/01/2007

BIPRU 10.3.7

The FSA would not regard the normal business relationships between companies which are competitors, and to which none of the relationships listed in BIPRU 10.3.6 G apply, as falling within the definition of group of connected clients.

01/01/2007

Connected counterparties

BIPRU 10.3.8

For the purposes of BIPRU 10, and in relation to a firm, a connected counterparty means another person ('P') to whom the firm has an exposure and who fulfils at least one of the following conditions:

(1) P is closely related to the firm; or
(2) P is an associate of the firm; or
(3) the same persons significantly influence the governing body of P and of the firm; or
(4) 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.

01/01/2007

BIPRU 10.3.8A

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: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-the-revised-large-exposures-reg.aspx- Part I.

31/12/2010

Exposures to counterparties, groups of connected clients and connected counterparties

BIPRU 10.3.9

A firm's total exposure to a counterparty must be calculated by summing its exposures to that counterparty, including both trading book exposures and non-trading book exposures.

01/01/2007

BIPRU 10.3.10

A firm's total exposure to a group of connected clients must be calculated by summing its exposures to the individual persons within that group of connected clients, including both trading book exposures and non-trading book exposures.

01/01/2007

BIPRU 10.3.11

A firm's total exposure to connected counterparties must be calculated by summing its exposures to all the firm's connected counterparties, including both trading book exposures and non-trading book exposures.

01/01/2007

Exposures to trustees

BIPRU 10.3.12

If a firm has an exposure to a person ('A') when A is acting on his own behalf, and also an exposure to A when A acts in his capacity as trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or a similar fund (a "fund), the firm may treat the latter exposure as if it was to the fund, unless such a treatment would be misleading.

31/12/2010

BIPRU 10.3.13

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 connected counterparty, whether the exposure arises from a transaction entered into on an arm's length basis.

31/12/2010

BIPRU 10.3.14

In deciding whether a transaction is at arm's length for the purposes of BIPRU 10.3.8 R (4) and, BIPRU 10.3.13 G (4), 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.

01/01/2007

Exposures to underlying assets

BIPRU 10.3.15

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)]

31/12/2010

BIPRU 10.3.16

The Committee of European Banking Supervisors (CEBS) has issued guidelines in relation to the treatment for large exposures purposes of schemes with exposures to underlying assets. These guidelines can be found at: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-the-revised-large-exposures-reg.aspx - Part II.

31/12/2010

BIPRU 10.4

Measurement of exposures to counterparties and issuers

01/01/2007

BIPRU 10.5

Limits on exposures

31/12/2010

Definition of large exposure

BIPRU 10.5.1

A large exposure of a firm means its total exposure to a counterparty, connected counterparties 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]

31/12/2010

Definition of capital resources

BIPRU 10.5.2

A firm must calculate its capital resources for the purposes of this chapter in accordance with GENPRU 2.2 (Capital resources) and BIPRU 10.5.3 R to BIPRU 10.5.5 R.

01/01/2007

BIPRU 10.5.3

Subject to BIPRU 10.5.4 R, for the purposes of this chapter, a firm's capital resources mean capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions).

01/01/2007

BIPRU 10.5.4

For the purposes of monitoring against the trading book limits and charge regime, as set out in BIPRU 10.10A.2 R to BIPRU 10.10A.11R (Intra-group exposures: Trading book limits), and calculating a firm's CNCOM, a firm's capital resources may include tier three capital resources, in which case a firm's capital resources mean capital resources calculated at stage (T) of the capital resources table (Total capital after deductions).

31/12/2010

BIPRU 10.5.5

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)]

31/12/2010

Large exposure limits

BIPRU 10.5.6

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; or
(3) its connected counterparties.

[Note: BCD Article 111(1) first paragraph]

31/12/2010

BIPRU 10.5.7

If a connected counterparty is also a member of a group of connected clients the limit in BIPRU 10.5.6 R covers the aggregate of the total amount of the firm's exposures to its connected counterparties and of the total amount of its exposures to that group of connected clients.

01/01/2007

BIPRU 10.5.8

A firm must not incur large exposures which in total exceed 800% of its capital resources (as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R).

01/01/2007

BIPRU 10.5.9

If a firm exceeds (or is aware that it will exceed) the limits in BIPRU 10.5.6 R or BIPRU 10.5.8 R it must notify the FSA without delay.

01/01/2007

BIPRU 10.5.10

A report under BIPRU 10.5.9 R should be made in exceptional circumstances only. A firm which makes such a report should also provide the FSA with an explanation as to how the limits came to be exceeded, and a plan of action for bringing its exposures within the limits. The FSA may, where the circumstances warrant it, allow a firm a limited period of time in which to comply with the limits.

01/01/2007

BIPRU 10.5.11

Exposures in a firm's trading book are exempt from the 25% and 800% limits in BIPRU 10.5.6 R and BIPRU 10.5.8 R if:

(1) the total amount of the exposures on the firm's non-trading book to the same counterparty or group of connected clients or to its connected counterparties does not exceed the limits laid down in those rules, calculated with reference to the definition of capital resources 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.

01/01/2007

BIPRU 10.5.12

If a trading book concentration risk excess with respect to a counterparty or group of connected clients or to its connected counterparties has existed for 10 business days or less, the firm must ensure that the total amount of its trading book exposures to that counterparty or group of connected clients or to its connected counterparties does not exceed 500% of the firm's capital resources.

01/01/2007

BIPRU 10.5.13

A firm must ensure that the total amount of its trading book concentration risk excesses that have persisted for more than 10 business days does not exceed 600% of its capital resources.

01/01/2007

BIPRU 10.5.14

Within 30 business days of the end of each third Month, a firm must notify the FSA of all cases of trading book concentration risk excesses in that three Month period, giving the amount of the excess and the name of the counterparty.

01/01/2007

BIPRU 10.5.15

A trading book concentration risk excess is defined in BIPRU 10.5.20 R.

01/01/2007

BIPRU 10.5.16

A firm's CNCOM should be calculated as part of its credit risk capital requirement (CRCR) in accordance with GENPRU 2.1 (Calculation of capital resources requirements).

01/01/2007

BIPRU 10.5.17

A firm's CNCOM is the sum of its individual counterparty CNCOMs.

01/01/2007

BIPRU 10.5.18

An individual counterparty CNCOMs is the amount a firm must calculate in accordance with BIPRU 10.5.20 R with respect to its exposures to a particular counterparty or a group of connected clients or to its connected counterparties.

01/01/2007

BIPRU 10.5.19

A CNCOM calculation on a trading book exposure is in addition to, and not instead of, any capital requirement arising under the market risk capital requirement or counterparty risk capital component.

01/01/2007

BIPRU 10.5.20

A firm must calculate its individual counterparty CNCOM for its exposures to a counterparty or group of connected clients or to its connected counterparties 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 and deduct those parts of the total exposure which are in the non-trading book;
(3) if the non-trading book exposures deducted in (2) equal 25% of the firm's capital resources, steps (4), (5) and (6) do not apply and if so the trading book concentration risk excess means, with respect to a counterparty, a group of connected clients or its connected counterparties, all trading book exposures to that counterparty or group of connected clients or to its connected counterparties;
(4) if the total amount of the non-trading book exposures deducted in (2) is less than 25% of the firm's capital resources, a firm must allocate (in the order set out in (6)) trading book exposures to the unutilised portion of the 25% limit to that counterparty or counterparties or to its connected counterparties;
(5) no further trading book exposures can be allocated once the 25% limit has been reached; the remaining trading book exposures constitute the trading book concentration risk excess with respect to that counterparty or group of connected clients or to its connected counterparties;
(6) for the purposes of (4), a firm must allocate first the individual trading book exposures 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 allocate 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) x 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) x appropriate percentage in BIPRU 10.5.21 R.

01/01/2007

BIPRU 10.5.21

The appropriate percentage referred to in BIPRU 10.5.20 R (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 10.5.22 R;
(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 10.5.20 R (6); and
(5) for the purposes of (4), those exposures with the lowest capital requirements (as referred to in BIPRU 10.5.20 R (6)) must be assigned first and those with the highest last.

01/01/2007

BIPRU 10.5.22

This table belongs to BIPRU 10.5.21 R

Excess exposure (as a percentage of the firm's capital resources)

Percentage

0% 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%

01/01/2007

BIPRU 10.5.23

The table in BIPRU 10.5.24 G sets out an example of a CNCOM calculation.

01/01/2007

BIPRU 10.5.24

This table belongs to BIPRU 10.5.23 G

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

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

4.00

Equity (net)

130

(5)

The 'headroom' between the non-securities exposure and 25% of the amended capital resources is calculated.

25% of amended capital base (1100)

275

Non-trading book exposure

200

Headroom

(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 counterparty exposure and 75 securities 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 counterparty exposure and 75 securities 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
Proportion of Capital Base= 16.8%
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

06/04/2007

BIPRU 10.6

Exemptions

01/01/2007

General exemptions

BIPRU 10.6.1

This section only applies to exposures, whether in the trading book or non-trading book, to counterparties which are not connected counterparties.

31/12/2010

BIPRU 10.6.2

(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.

31/12/2010

BIPRU 10.6.3

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)]

31/12/2010

BIPRU 10.6.4

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]

31/12/2010

BIPRU 10.6.5

A firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a counterparty or to a group of connected clients if the following conditions are met:

(1) the parent undertaking of the firm guarantees that exposure;
(2) the total exposure to that counterparty or group of connected clients does not exceed 100% of the firm's capital resources;
(3) the total amount of the firm's exposures to connected counterparties does not exceed 200% of the firm's capital resources (any exposure treated as exempt under this rule or under BIPRU 10.6.7 R must be treated as being to the parent undertaking for the purpose of this paragraph (3) and included in the calculation of the limit in this paragraph (3));
(4) the firm complies with whichever of SYSC 3.1.1 R (Systems and controls) and SYSC 4.1.1 R (General organisational requirements) applies to it; and
(5) both the firm and the parent undertaking of the firm satisfy BIPRU 3.2.27 R (Consolidation condition relating to zero risk weights for intra-group exposures).

01/01/2007

BIPRU 10.6.6

For the purposes of BIPRU 10.6.5 R, BIPRU 10.3.3 R (3) to (6) (Provisions relating to the treatment of guaranteed exposures) apply.

01/01/2007

BIPRU 10.6.7

A firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a counterparty which is not a connected counterparty if the following conditions are met:

(1) the exposure is subject to a legally binding agreement by the parent undertaking of the firm that it will promptly on demand by the firm increase the firm's capital resources by:

(a) an amount that is sufficient to reverse completely the effect of any loss the firm may sustain in connection with that exposure; or
(b) the amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 and any other requirements relating to capital resources or concentration risk imposed on the firm by or under the regulatory system;

(2) the firm notifies the FSA in writing of its intention to enter into the agreement and of its terms at least one Month before the firm enters into it; and
(3) the conditions in BIPRU 10.3.3 R (6) (Compliance with minimum credit risk mitigation requirements) and BIPRU 10.6.5 R (2) to (5) are met.

01/01/2007

BIPRU 10.6.8

(1) 'Top slicing' involves systematically collateralising only part of an exposure to bring it within the limits in BIPRU 10.5 (Limits on exposures and large exposures).
(2) The practice of top-slicing can give rise to concerns and will be subject to review by the FSA when carrying out the SREP.

01/01/2007

BIPRU 10.6.9

A firm which uses the financial collateral simple method under the standardised approach may treat the following exposures as exempt from the limits described in BIPRU 10.5 (Limits on exposures and large exposures):

(1) asset items and other exposures secured by collateral in the form of debt securities issued by central governments, central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities, which securities constitute claims on their issuer which would receive a 0% risk weight under the standardised approach;
(2) 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;
(3) 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
(4) exposures secured by collateral in the form of securities other than those referred to in (1).

06/04/2007

BIPRU 10.6.10

Cash received under a credit linked note issued by the firm and loans and deposits of a counterparty to or with the firm which are subject to an on-balance sheet netting agreement recognised under BIPRU 5 (Credit risk mitigation) must be treated as falling under BIPRU 10.6.9 R (2).

01/01/2007

BIPRU 10.6.11

For the purposes of BIPRU 10.6.9 R (4), the securities used as collateral must be valued at market price, have a value that exceeds the exposures guaranteed, and be either traded or effectively negotiable and regularly quoted on a recognised investment exchange or a designated investment exchange. The excess value required must be 100%. It must, however, be 150% in the case of shares and 50% in the case of debt securities issued by institutions, EEA States' regional governments or local authorities other than those referred to in BIPRU 10.6.9 R (1), and in the case of debt securities issued by multilateral development banks other than those receiving a 0% risk weight under the standardised approach. Where there is a mismatch between the maturity of the exposure and the maturity of the credit protection, the collateral must not be recognised. Where the issuer of securities used as collateral is an institution, such collateral may not constitute the institution's capital resources.

01/01/2007

BIPRU 10.6.12

A firm may only recognise collateral for the purpose of BIPRU 10.6.9 R 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 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.

01/01/2007

BIPRU 10.6.13

As indicated in BIPRU 5 (Credit risk mitigation), the financial collateral simple method will be available only to firms using the standardised approach and only in relation to exposures for which they adopt the standardised approach.

01/01/2007

BIPRU 10.6.14

A firm which uses the financial collateral comprehensive method under the standardised approach or the IRB approach (but not the advanced IRB approach) may calculate the value of its exposures to a counterparty or to a group of connected clients or to connected counterparties 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.

06/04/2007

BIPRU 10.6.15

Where BIPRU 10.6.14 R applies, BIPRU 10.6.9 R does not apply.

01/01/2007

BIPRU 10.6.16

A firm may only recognise collateral for the purpose of BIPRU 10.6.14 R if the collateral 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) for the purposes of calculating risk weighted exposure amounts under the standardised approach or, if applicable, the IRB approach using the financial collateral comprehensive method. In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral comprehensive method.

01/01/2007

BIPRU 10.6.17

A firm that uses own estimates of LGDs and conversion factors under the IRB approach for an IRB exposure class may recognise the effects described in (1) in calculating the value of its exposures to a counterparty or to a group of connected clients or to connected counterparties for the purposes of BIPRU 10.5 (Limits on exposures and large exposures) if:

(1) the firm is able to satisfy the FSA 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.

06/04/2007

BIPRU 10.6.18

BIPRU 10.6.17 R (3) means that a firm with an IRB permission may not use the approach in BIPRU 10.6.17 R unless its IRB permission expressly says that it may do so.

01/01/2007

BIPRU 10.6.19

If a firm that uses own estimates of LGDs and conversion factors under the IRB approach 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. In particular, this approach must be adopted for all exposures the nominal value of which would be a large exposure. A firm may only use one of BIPRU 10.6.14 R and BIPRU 10.6.17 R. A firm must be able to satisfy the FSA that it is complying with this rule.

01/01/2007

BIPRU 10.6.20

A firm to which BIPRU 10.6.17 R applies must still report to the FSA the gross value of its exposures.

01/01/2007

BIPRU 10.6.21

If a firm relies on BIPRU 10.6.17 R the recognition of credit protection is subject to the relevant requirements of the IRB approach.

01/01/2007

BIPRU 10.6.22

A firm which calculates the value of its exposures in accordance with BIPRU 10.6.17 R must conduct periodic stress tests of its credit risk concentrations including in relation to the realisable value of any collateral taken.

01/01/2007

BIPRU 10.6.23

The stress tests required by BIPRU 10.6.22 R must address:

(1) risks arising from potential changes in market conditions that could adversely impact the firm's adequacy of capital resources; and
(2) risks arising from the realisation of collateral in stressed situations.

01/01/2007

BIPRU 10.6.24

A firm must be able to satisfy the FSA that the stress tests that the firm carries out in accordance with BIPRU 10.6.22 R are adequate and appropriate for the assessment of such risks.

01/01/2007

BIPRU 10.6.25

In the event that a stress test carried out in accordance with BIPRU 10.6.22 R indicates a lower realisable value of collateral taken than would be permitted to be taken into account under BIPRU 10.6.17 R to BIPRU 10.6.21 R 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 and large exposures) is the lower value.

01/01/2007

BIPRU 10.6.26

A firm to which BIPRU 10.6.22 R applies must include in its strategy to address concentration risk:

(1) policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures;
(2) policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account under BIPRU 10.6.17 R to BIPRU 10.6.21 R; and
(3) 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).

01/01/2007

BIPRU 10.6.27

01/01/2007

BIPRU 10.6.28

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]

31/12/2010

BIPRU 10.6.29

For the purposes of BIPRU 10.6.3R (12), a 50% risk weight is not allowed under the standardised approach for commercial property based in the UK.

31/12/2010

BIPRU 10.6.30

For the purposes of BIPRU 10.6.3R (14) (Cash deposits) and BIPRU 10.6.3R (15) (Certificates of deposit), a firm may only treat the asset items or other exposures as secured if the collateral 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) for the purposes calculating a firm's exposure.

31/12/2010

BIPRU 10.6.31

In relation to BIPRU 10.6.3R (14) (Cash deposits) and BIPRU 10.6.3R (15) (Certificates of deposit), the collateral may in some cases give rise to an exposure between the lending firm and the credit institution. Where this is the case, the exposure is considered to be an intra-group exposure. A firm may apply BIPRU 10.8A (Intra-group exposures: core UK group) or BIPRU 10.9A (Intra-group exposures: non-core large exposures group), as appropriate.

31/12/2010

Institutional exemption

BIPRU 10.6.32

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]

31/12/2010

BIPRU 10.6.33

Article 111(4) of the Banking Consolidation Directive allows the FSA to waive the 100% limit on a case-by-case basis in exceptional circumstances. The FSA will consider an application for such a waiver in the light of the criteria in section 148 of the Act (Modification or waiver of rules).

31/12/2010

Sovereign large exposure waiver

BIPRU 10.6.34

BIPRU 10.6.35R to BIPRU 10.6.37G apply to a BIPRU firm if it has a sovereign large exposure waiver.

31/12/2010

BIPRU 10.6.35

A firm that has a sovereign large exposure waiver must exempt from the limits described in BIPRU 10.5 (Limits on exposures) the exposures as specified in the sovereign large exposure waiver. It must do so to the extent specified in that waiver.

31/12/2010

BIPRU 10.6.36

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)]

31/12/2010

BIPRU 10.6.37

As part of the process of applying for a sovereign large exposure waiver, a firm should agree with the FSA the amount of the exposures that may be exempted. In general, the FSA will expect the likelihood of the firm's liabilities (that fund the particular exempt exposure) falling alongside a fall in that exposure in an event of default to form one of the key considerations in discussions with the firm regarding the total amount of such exempt exposures. For this purpose, the FSA will expect the firm to demonstrate that, taking into account the aggregate of all exposures exempted under other sovereign large exposure waivers granted to the firm, the criteria in section 148 of the Act (Modification or waiver of rules) are satisfied in relation to the sovereign large exposure waiver under consideration.

31/12/2010

BIPRU 10.7

Treasury concession and intra-group securities financing transactions

01/01/2007

BIPRU 10.8

UK integrated groups

01/01/2007

BIPRU 10.8A

Intra-group exposures: core UK group

31/12/2010

Application

BIPRU 10.8A.1

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.

31/12/2010

Definition of core UK group

BIPRU 10.8A.2

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.

31/12/2010

BIPRU 10.8A.3

In relation to BIPRU 10.8A.2R (3), 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 that same core UK group.

31/12/2010

BIPRU 10.8A.4

If a core concentration risk group 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 FSA for a waiver of BIPRU 10.8A.2R (5) if it can demonstrate fully to the FSA that the counterparty's centre of main interests is situated in the United Kingdom within the meaning of that Regulation.

31/12/2010

Minimum standards

BIPRU 10.8A.5

(1) For the purpose of BIPRU 10.8A.2R (6), a firm must be able to demonstrate fully to the FSA 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.

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BIPRU 10.8A.6

The FSA 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.

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BIPRU 10.8A.7

(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.

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Exemption for a core UK group

BIPRU 10.8A.8

If this section applies, exposures between members of the core UK group are exempt from the limits described in BIPRU 10.5 (Limits on exposures).

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BIPRU 10.8A.9

The FSA will expect a firm to which this section applies not to use any member of its core UK group which is not a firm to route lending or to have exposures to any third party in excess of the limits in BIPRU 10.5 (Limits on exposures).

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Calculation of capital resources for a core UK group

BIPRU 10.8A.10

For the purposes of this section, a firm must calculate the capital resources of the core UK group in accordance with GENPRU 3 Annex 1 R Part 2 (Method 2 of Annex 1 of the Financial Groups Directive (Deduction and aggregation Method)) and apply the limits set out in this section to those capital resources rather than the capital resources of the firm. For these purposes the definition of solo capital resources is adjusted so that the rules on which the calculation for each member of the core UK group is based are the ones that would apply under the procedure in BIPRU 8.6.6 R to BIPRU 8.6.9 R (Consolidated capital resources).

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BIPRU 10.8A.11

The calculation of capital resources under GENPRU 3 Annex 1 R Part 2 (Method 2 of Annex 1 of the Financial Groups Directive (Deduction and aggregation Method) is based on the solo capital resources of members of a financial conglomerate. The definition of solo capital resources depends on what type of undertakings the financial conglomerate contains. For example, if a financial conglomerate contains a bank the solo capital resources calculation for every group member in the banking sector and the investment services sector is based on the capital resources calculation for banks. The purpose of BIPRU 10.8A.10R is to apply the corresponding procedure that applies under BIPRU 8.6 (Calculation of capital resources on a consolidated basis for BIPRU firms).

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Notification

BIPRU 10.8A.12

A firm must immediately notify the FSA in writing it if becomes aware that any exposure that it has treated as exempt under this section or any counterparty that it has been treating as a member of its core UK group has ceased to meet the conditions for application of the treatment in this section.

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BIPRU 10.9

Wider Integrated Group

01/01/2007

BIPRU 10.9A

Intra-group exposures: non-core large exposures group

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Application

BIPRU 10.9A.1

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.

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BIPRU 10.9A.2

A firm must treat the exposures to its connected counterparties that are not members of its non-core large exposures group as exposures to a single undertaking and must ensure that the total amount of its exposures to such connected counterparties does not exceed the 25% limit in BIPRU 10.5.6 R (Large exposure limit) and, if applicable, the trading book limits in BIPRU 10.10A (Connected counterparties: trading book limits).

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Definition of non-core large exposures group

BIPRU 10.9A.3

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).

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Definition of non-core concentration risk group counterparty

BIPRU 10.9A.4

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 FSA 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.

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Revised large exposure limits for a non-core large exposures group

BIPRU 10.9A.5

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.

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BIPRU 10.9A.6

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).

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Non-trading book backstop limit for a non-core large exposures group

BIPRU 10.9A.7

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.

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Concentrated exposures in a non-core large exposures group

BIPRU 10.9A.8

(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 FSA 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 FSA under (2) that it intends to do so.

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Calculation of capital resources for a core UK group

BIPRU 10.9A.9

BIPRU 10.8A.10R (Calculation of capital resources for a core UK group) applies for the purposes of this section in the same way that it applies for the purposes of BIPRU 10.8A (Intra-group exposures: core UK group).

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Exemption for intra-group exposures on a solo basis

BIPRU 10.9A.10

If this section applies to a firm, then subject to BIPRU 10.10A.12 (Core UK group and non-core large exposures group: treatment of the trading book concentration risk excess), it may, on a solo basis, treat an exposure to a member of its non-core large exposures group as exempt from the limits in BIPRU 10.5 (Limits on exposures).

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BIPRU 10.9A.11

The purpose of BIPRU 10.9A.10R is to reflect the fact that the limits in BIPRU 10.5 (Limits on exposures), so far as they apply to a member of a firm's non-core large exposures group, are calculated on a consolidated basis with respect to a firm's core UK group. It is therefore necessary to switch them off on a purely solo basis.

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Notification

BIPRU 10.9A.12

A firm must immediately notify the FSA in writing it if becomes aware that any exposure that it has treated as exempt under this section or any counterparty that it has been treating as a member of its non-core large exposures group has ceased to meet the conditions for application of the treatment in this section.

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BIPRU 10.10

Treatment of the trading book concentration risk excess under the integrated groups regime

01/01/2007

BIPRU 10.10A

Connected counterparties: trading book limits

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Application

BIPRU 10.10A.1

This section only applies to exposures in a firm's trading book to its connected counterparties.

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Trading book limits

BIPRU 10.10A.2

Exposures in a firm's trading book to its connected counterparties 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 its connected counterparties 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.

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BIPRU 10.10A.3

A firm must ensure that the total amount of its trading book exposures to its connected counterparties does not exceed 500% of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions).

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How to calculate the concentration risk capital component

BIPRU 10.10A.4

A firm's CNCOM should be calculated as part of its credit risk capital requirement (CRCR) in accordance with GENPRU 2.1 (Calculation of capital resources requirements).

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BIPRU 10.10A.5

A firm's CNCOM is the sum of its individual counterparty CNCOMS.

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BIPRU 10.10A.6

An individual counterparty CNCOM is the amount a firm must calculate in accordance with BIPRU 10.10A.8R with respect to its exposures to its connected counterparties.

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BIPRU 10.10A.7

A CNCOM calculation on a trading book exposure is in addition to, and not instead of, any capital requirement arising under the market risk capital requirement or counterparty risk capital component.

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BIPRU 10.10A.8

A firm must calculate its individual counterparty CNCOM for its exposures to its connected counterparties 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 connected counterparties 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 connected counterparties ;
(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.

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BIPRU 10.10A.9

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.

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Percentages applicable under BIPRU 10.10A.9R

BIPRU 10.10A.10

This table belongs to BIPRU 10.10A.9 R

Excess exposure (as a percentage of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions))

Percentage

25% 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%

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How CNCOM applies to the non-core large exposures group

BIPRU 10.10A.11

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%.

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Core UK group and non-core large exposures group: treatment of the trading book concentration risk excess

BIPRU 10.10A.12

(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).

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Examples

BIPRU 10.10A.13

(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.

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Example of a CNCOM calculation (all numbers 000s)

BIPRU 10.10A.14

This table belongs to BIPRU 10.10A.13G (1)

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

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

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

(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

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BIPRU 10.11

Notification procedures for BIPRU 10.7 to BIPRU 10.10

01/01/2007

BIPRU 10.12

Systems and controls and general

01/01/2007

Systems and controls

BIPRU 10.12.1

A firm must have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying and recording all large exposures and subsequent changes to them, and for that of monitoring those large exposures in the light of the firm's own exposure policies.

01/01/2007

BIPRU 10.12.2

A firm must take reasonable care to establish and maintain adequate systems and controls to identify, monitor, and control exposures to a parent undertaking of the firm, a subsidiary undertaking of the firm, or a subsidiary undertaking of the firm's parent undertaking.

01/01/2007

Concentration risk policies

BIPRU 10.12.3

A firm must be able to demonstrate to the FSA 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.

01/01/2007

Reporting

BIPRU 10.12.4

Other than in relation to repurchase transactions or securities or commodities lending or borrowing transactions, exposures must be reported on a gross basis, not including the recognition of credit risk mitigation.

01/01/2007

Artificial transactions

BIPRU 10.12.5

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:

(1) temporarily transfer the exposures in question to another person (whether in the same group or not); or
(2) undertake artificial transactions to close out the exposure during the ten business day period and create a new exposure.

01/01/2007

BIPRU 10.12.6

A firm must notify the FSA if it enters into a transfer, transaction or arrangement of the type mentioned in BIPRU 10.12.5 R.

01/01/2007

BIPRU 10 Annex 1

Treatment of exposures under the integrated groups regime for concentration risk

01/01/2007

BIPRU 10 Annex 2

Examples of treatment of intra-group exposures under BIPRU 10

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