Large Exposures (CRR)

[Note: Refer to rule 3.3]

[Note: Refer to rule 1.1]

[Note: The definition of ‘exposures’ formerly contained in Article 389 of CRR is in rule 1.2]

1.

A firm must calculate the total exposures to a group of connected clients by adding together the exposures to individual clients in that group.

2.

A firm must calculate the overall exposures to individual clients by adding the exposures to the relevant individual client in the trading book and the exposures to the relevant individual client in the non-trading book.

3.

For exposures in the trading book, a firm may:

1. (a) offset its long positions and short positions in the same financial instruments issued by a given client, with the net position in each of the different instruments being calculated in accordance with the methods laid down in Chapter 2 of Title IV of Part Three of CRR;
2. (b) offset its long positions and short positions in different financial instruments issued by a given client, but only where the financial instrument underlying the short position is junior to the financial instrument underlying the long position or where the underlying instruments are of the same seniority.

For the purposes of points (a) and (b), financial instruments may be allocated into buckets on the basis of different degrees of seniority in order to determine the relative seniority of positions.

4.

A firm must calculate the exposure values of the derivative contracts listed in Annex II of CRR and of credit derivative contracts directly entered into with a client in accordance with one of the methods set out in Sections 3, 4 and 5 of the Counterparty Credit Risk (CRR) Part, as applicable. The exposure value for securities financing transactions must be calculated by a firm in accordance with the methods referred to in Section 4 of Chapter 4 of Title II of Part Three of CRR, as applicable. Exposures resulting from the transactions referred to in Articles 378, 379 and 380 of CRR must be calculated by a firm in the manner laid down in those Articles.

When calculating the exposure value for the contracts referred to in the first subparagraph, where those contracts are allocated to the trading book, a firm must also comply with the principles set out in Article 299 of CRR.

By way of derogation from the first subparagraph, a firm with permission to use the method referred to in Section 6 of Chapter 6 of Title II of Part Three of CRR may use that method for calculating the exposure value for securities financing transactions.

5.

A firm must add to the total exposure to a client the exposures arising from derivative contracts listed in Annex II of CRR and credit derivative contracts, where the contract was not directly entered into with that client but the underlying debt or equity instrument was issued by that client.

6.

The term exposures does not include any of the following:

2. (a) in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two business days following payment;
3. (b) 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 the earlier;
4. (c) 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;
5. (d) 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; and
6. (e) exposures deducted from Common Equity Tier 1 items or Additional Tier 1 items in accordance with Article 36 of the Own Funds and Eligible Liabilities (CRR) Part and Article 56 of CRR or any other deduction from those items that reduces the solvency ratio.

7.

To determine the overall exposure to a client or a group of connected clients, in respect of clients to which the firm has exposures through transactions referred to in points (m) and (o) of Article 112 of CRR or through other transactions where there is an exposure to underlying assets, a firm must assess its underlying exposures taking into account the economic substance of the structure of the transaction and the risks inherent in the structure of the transaction itself, in order to determine whether it constitutes an additional exposure.

8.

[Note: Rules for determining the overall exposure to a client or a group of connected clients corresponding to Delegated Regulation 2014/1187 are set out in Chapter 5 of this Part]

9.

[Deleted]

[Note: This rule corresponds to Article 390 of CRR as it applied immediately before revocation by the Treasury]

[Note: Article 391 is enacted in rule 1.3 of this Part]

[Note: Article 392 is enacted in the definition of large exposure in rule 1.2 of this Part]

[Deleted]

1.

A firm must report the following information to the PRA for each large exposure that it holds, including large exposures exempted from the application of Article 395(1):

1. (a) the identity of the client or the group of connected clients to which the firm has a large exposure;
2. (b) the exposure value before taking into account the effect of the credit risk mitigation, where applicable;
3. (c) where used, the type of funded or unfunded credit protection; and
4. (d) the exposure value, after taking into account the effect of the credit risk mitigation calculated for the purposes of Article 395(1), where applicable.

A firm that is subject to Chapter 3 of Title II of Part Three of CRR must report its 20 largest exposures to the PRA on a consolidated basis, excluding the exposures exempted from the application of Article 395(1).

A firm must also report to the PRA exposures of a value greater than or equal to GBP 260 million but less than 10% of the firm's Tier 1 capital on a consolidated basis.

2.

In addition to the information referred to in paragraph 1 of this Article, a firm must report the following information to the PRA in relation to its 10 largest exposures to institutions on a consolidated basis, as well as its 10 largest exposures to shadow banking entities which carry out banking activities outside the regulated framework on a consolidated basis, including large exposures exempted from the application of Article 395(1):

1. (a) the identity of the client or the group of connected clients to which the firm has a large exposure;
2. (b) the exposure value before taking into account the effect of the credit risk mitigation, when applicable;
3. (c) where used, the type of funded or unfunded credit protection; and
4. (d) the exposure value after taking into account the effect of the credit risk mitigation calculated for the purpose of Article 395(1), where applicable.

3.

A firm must report the information referred to in paragraphs 1 and 2 to the PRA on at least a semi-annual basis.

4.

[Deleted]

[Note: This rule corresponds to Article 394 of CRR as it applied immediately before revocation by the Treasury]

1.

A firm must not incur an exposure, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to a client or group of connected clients the value of which exceeds 25% of its Tier 1 capital. Where that client is an institution or an investment firm or where a group of connected clients includes one or more institutions or investment firms, that value must not exceed 25% of the firm's Tier 1 capital or GBP 130 million, whichever is higher, provided that the sum of exposure values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to all connected clients that are not institutions does not exceed 25% of the firm's Tier 1 capital.

[Note: IFR 2019/2033 added ‘or an investment firm’ and ‘or investment firms’ to 1]

Where the amount of GBP 130 million is higher than 25% of the firm's Tier 1 capital, the value of the exposure, after having taken into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of this Part, must not exceed a reasonable limit in terms of the firm's Tier 1 capital. That limit must be determined by the firm in accordance with the policies and procedures referred to in Internal Capital Adequacy Assessment 6.1 required to address and control concentration risk. That limit must not exceed 100% of the firm's Tier 1 capital.

By way of derogation from the first subparagraph of this paragraph, a G-SII must not incur an exposure to another G-SII or to a non-UK G-SII, the value of which, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, exceeds 15% of its Tier 1 capital. A G-SII must comply with such limit no later than 12 months from the date on which it came to be identified as a G-SII. Where the G-SII has an exposure to another institution or group which comes to be identified as a G-SII or as a non-UK G-SII, it must comply with such limit no later than 12 months from the date on which that other institution or group came to be identified as a G-SII or as a non-UK G-SII.

1A.

[Deleted]

3.

Subject to Article 396, a firm must at all times comply with the relevant limit laid down in paragraph 1.

4.

Assets constituting claims and other exposures to third-country investment firms may be subject to the same treatment as set out in paragraph 1.

5.

The limits laid down in this Article may be exceeded for the exposures in the firm's trading book, provided that all the following conditions are met:

1. (a) the exposures in the non-trading book to the client or group of connected clients in question does not exceed the limit laid down in paragraph 1, this limit being calculated with reference to Tier 1 capital, so that the excess arises entirely in the trading book;
2. (b) the firm meets an additional own funds requirement in respect of the part of the exposures in excess of the limit laid down in paragraph 1 of this Article which is calculated in accordance with Articles 397 and 398;
3. (c) where 10 days or less have elapsed since the excess referred to in point (b) occurred, the trading-book exposures to the client or group of connected clients in question does not exceed 500% of the firm's Tier 1 capital; and
4. (d) any excesses that have persisted for more than 10 days do not, in aggregate, exceed 600% of the firm's Tier 1 capital.

Each time the limit has been exceeded, the firm must report to the PRA without delay the amount of the excess and the name of the client concerned and, where applicable, the name of the group of connected clients concerned.

6.

[Deleted]

[Note: This rule corresponds to Article 395 of CRR as it applied immediately before revocation by the Treasury]

1.

If, in an exceptional case, exposures exceed the limit set out in Article 395(1), the firm must report the value of the exposure without delay to the PRA which may, where the circumstances warrant it, allow the firm a limited period of time in which to comply with the limit.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

Where the amount of GBP 130 million referred to in Article 395(1) is applicable, the PRA may allow the 100% limit in terms of the firm's Tier 1 capital to be exceeded on a case-by-case basis.

[Note: This is a permission under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

Where, in the exceptional cases referred to in the first and second subparagraph of this paragraph, the PRA allows a firm to exceed the limit set out in Article 395(1) for a period longer than three months, the firm must present a satisfactory plan for a timely return to compliance with that limit and must carry out that plan within the period agreed with the PRA.

2.

Where compliance by a firm on an individual or sub-consolidated basis with the obligations imposed in this Part is waived under Article 7(1), or the provisions of Article 9 are applied in the case of parent institutions, measures must be taken to ensure the satisfactory allocation of risks within the group.

[Note: This rule corresponds to Article 396 of CRR as it applied immediately before revocation by the Treasury]

1.

A firm must calculate the excess referred to in Article 395(5)(b) by selecting those components of the total trading exposure to the client or group of connected clients in question which attract the highest specific-risk requirements in Part Three, Title IV, Chapter 2 of CRR and/or requirements in Article 299 of CRR and Part Three,Title V of CRR, the sum of which equals the amount of the excess referred to in point (a) of Article 395(5).

2.

Where the excess has not persisted for more than 10 days, the additional capital requirement shall be 200% of the requirements referred to in paragraph 1, on these components.

3.

As from 10 days after the excess has occurred, the components of the excess, selected in accordance with paragraph 1, shall be allocated to the appropriate line in Column 1 of Table 1 in ascending order of specific-risk requirements in Part Three, Title IV, Chapter 2 of CRR and/or requirements in Article 299 of CRR and Part Three, Title V of CRR. The additional own funds requirement shall be equal to the sum of the specific-risk requirements in Part Three, Title IV, Chapter 2 of CRR and/or the Article 299 of CRR and Part Three, Title V of CRR requirements on these components, multiplied by the corresponding factor in Column 2 of Table 1.

Table 1:

Column 1: Excess over the limits (on the basis of a percentage of Tier 1 capital)	Column 2: Factors
Up to 40%	200%
From 40% to 60%	300%
From 60% to 80%	400%
From 80% to 100%	500%
From 100% to 250%	600%
Over 250%	900%

[Note: This rule corresponds to Article 397 of CRR as it applied immediately before revocation by the Treasury]

A firm must not deliberately avoid the additional own funds requirements set out in Article 397 that it would otherwise incur, on exposures exceeding the limit laid down in Article 395(1) once those exposures have been maintained for more than 10 days, by means of temporarily transferring the exposures in question to another company, whether within the same group or not, and/or by undertaking artificial transactions to close out the exposure during the 10-day period and create a new exposure.

A firm must maintain systems which ensure that any transfer which has the effect referred to in the first subparagraph is immediately reported to the PRA.

[Note: This rule corresponds to Article 398 of CRR as it applied immediately before revocation by the Treasury]

1.

A firm must use a credit risk mitigation technique in the calculation of an exposure where it has used that technique to calculate capital requirements for credit risk in accordance with Title II of Part Three of CRR, provided that the credit risk mitigation technique meets the conditions set out in this Article.

For the purposes of Articles 400 to 403 the term ‘guarantee’ includes credit derivatives recognised under Chapter 4 of Title II of Part Three of CRR other than credit linked notes.

2.

Subject to paragraph 3 of this Article, the recognition of funded or unfunded credit protection in accordance with Articles 400 to 403 is only permitted if the eligibility requirements and other requirements set out in Part Three, Title II, Chapter 4 of CRR are met.

3.

Credit risk mitigation techniques which are available if a firm is permitted to use one of the IRB approaches must not be used to reduce exposure values for large exposure purposes.

4.

A firm must analyse, to the extent possible, its exposures to collateral issuers, providers of unfunded credit protection and underlying assets pursuant to Article 390(7) for possible concentrations and where appropriate take action and report any significant findings to the PRA.

[Note: This rule corresponds to Article 399 of CRR as it applied immediately before revocation by the Treasury]

1.

The following exposures shall be exempted from the application of Article 395(1):

1. (a) asset items constituting claims on central governments, central banks or public sector entities which, unsecured, would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR;
2. (b) asset items constituting claims on international organisations or multilateral development banks which, unsecured, would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR;
3. (c) asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations, multilateral development banks or public sector entities, where unsecured claims on the entity providing the guarantee would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR;
4. (d) 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 be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR;
5. (e) asset items constituting claims on regional governments or local authorities of the United Kingdom where those claims would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR and other exposures to or guaranteed by those regional governments or local authorities, claims on which would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR;
6. (f) exposures to counterparties referred to in Article 113(6) or (7) of CRR if they would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 of CRR. Exposures that do not meet those criteria, whether or not exempted from Article 395(1) must be treated as exposures to a third party;
7. (g) asset items and other exposures secured by collateral in the form of cash deposits placed with the lending institution or with an institution which is the parent undertaking or a subsidiary of the lending institution;
8. (h) asset items and other exposures secured by collateral in the form of certificates of deposit issued by the lending institution or by an institution which is the parent undertaking or a subsidiary of the lending institution and lodged with either of them;
9. (i) exposures arising from undrawn credit facilities that are classified as low-risk off-balance sheet items in Annex I of CRR and provided that an agreement has been concluded with the client 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 applicable under Article 395(1) to be exceeded;
10. (j) clearing members' trade exposures and default fund contributions to qualifying central counterparties; and
11. (k) [deleted]
12. (l) clients' trade exposures referred to in Article 305(2) or (3) of the Counterparty Credit Risk (CRR) Part.

1A.

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 Part Three, Title II, Chapter 4 of CRR must be treated as falling under point (g) of paragraph 1 of this Article.

2.

A firm may with the prior permission of the PRA treat as fully or partially exempt from the application of Article 395(1) the following types of exposures:

1. (a) [Deleted]
2. (b) [Deleted]
3. (c) exposures incurred by a firm, including through participations or other kinds of holdings, to its parent undertaking, to other subsidiaries of that parent undertaking, or to its own subsidiaries and qualifying holdings, in so far as those undertakings are covered by the supervision on a consolidated basis to which the firm itself is subject, in accordance with CRR, United Kingdom enactments and rules which implemented Directive 2002/87/EC or with equivalent standards in force in a third country; exposures that do not meet those criteria, whether or not exempted from Article 395(1), must be treated as exposures to a third party;

[Note: ‘NCLEG trading book permissions’ and ‘NCLEG non-trading book permissions’ (as defined in rule 1.2 of the Large Exposures Part) are granted by the PRA under this subparagraph]

1. (d) [Deleted]
2. (e) [Deleted]
3. (f) [Deleted]
4. (g) asset items constituting claims on central banks in the form of required minimum reserves held at those central banks which are denominated in their national currencies; and
5. (h) asset items constituting claims on central governments in the form of statutory liquidity requirements held in government securities which are denominated and funded in their national currencies provided that the credit assessment of those central governments assigned by a nominated ECAI is investment grade.

[Note: ‘Sovereign large exposures permissions’ (as defined in rule 1.2 of the Large Exposures Part) are granted by the PRA under subparagraphs (g) and (h)]

1. (i) [Deleted]
2. (j) [Deleted]
3. (k) [Deleted]

[Note: Article 400(2) permissions are granted under sections 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

3.

[Deleted]

4.

A firm must not simultaneously apply more than one exemption set out in paragraphs 1 and 2 to the same exposure.

[Note: This rule corresponds to Article 400 of CRR as it applied immediately before revocation by the Treasury]

1.

For calculating the value of exposures for the purposes of Article 395(1), a firm may use the fully adjusted exposure value (E*) as calculated under Chapter 4 of Title II of Part Three of CRR taking into account the credit risk mitigation, volatility adjustments, and any maturity mismatch referred to in that Chapter.

2.

With the exception of a firm using the Financial Collateral Simple Method, for the purposes of the first paragraph, a firm must use the Financial Collateral Comprehensive Method, regardless of the method used for calculating the own funds requirements for credit risk.

By way of derogation from paragraph 1, a firm with permission to use the methods referred to in Section 4 of Chapter 4 of Title II of Part Three of CRR and Section 6 of Chapter 6 of Title II of Part Three of CRR, may use those methods for calculating the exposure value of securities financing transactions.

3.

In calculating the value of exposures for the purposes of Article 395(1), a firm must conduct periodic stress tests of its credit-risk concentrations, including in relation to the realisable value of any collateral taken.

These periodic stress tests referred to in the first subparagraph must address risks arising from potential changes in market conditions that could adversely impact the firm's adequacy of own funds and risks arising from the realisation of collateral in stressed situations.

The stress tests carried out must be adequate and appropriate for the assessment of those risks.

A firm's strategy to address concentration risk must include the following:

1. (a) policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures; and
2. (b) policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, in particular from large indirect credit exposures, for example to a single issuer of securities taken as collateral.

4.

Where a firm reduces an exposure to a client using an eligible credit risk mitigation technique in accordance with Article 399(1), and Article 403 applies, the firm, in the manner set out in Article 403, must treat the part of the exposure by which the exposure to the client has been reduced as having been incurred for the protection provider rather than for the client.

[Note: This rule corresponds to Article 401 of CRR as it applied immediately before revocation by the Treasury]

1.

[Deleted]

2.

[Deleted]

3.

A firm may treat an exposure to a counterparty that results from a reverse repurchase agreement under which the firm has purchased from the counterparty non-accessory independent mortgage liens on immovable property of third parties as a number of individual exposures to each of those third parties, provided that all of the following conditions are met:

1. (a) the counterparty is an institution or an investment firm;
2. (b) the exposure is fully secured by liens on the immovable property of those third parties that have been purchased by the firm and the firm is able to exercise those liens;
3. (c) the firm has ensured that the requirements in Article 208 and Article 229(1) of CRR are met;
4. (d) the firm becomes beneficiary of the claims that the counterparty has against the third parties in the event of default, insolvency or liquidation of the counterparty; and
5. (e) the firm reports to the PRA in accordance with Article 394 the total amount of exposures to each other institution or investment firm that are treated in accordance with this paragraph.

For these purposes, the firm must assume that it has an exposure to each of those third parties for the amount of the claim that the counterparty has on the third party instead of the corresponding amount of the exposure to the counterparty. The remainder of the exposure to the counterparty, if any, shall continue to be treated as an exposure to the counterparty.

[Note: This rule corresponds to Article 402 of CRR as it applied immediately before revocation by the Treasury]

1.

Where an exposure to a client is guaranteed by a third party or is secured by collateral issued by a third party, a firm may:

1. (a) treat the portion of the exposure which is guaranteed as an exposure to the guarantor rather than to the client, provided that the unsecured exposure to the guarantor would be assigned a risk weight that is equal to or lower than the risk weight of the unsecured exposure to the client under Chapter 2 of Title II of Part Three of CRR;
2. (b) treat the portion of the exposure collateralised by the market value of recognised collateral as exposure to the third party rather than to the client, provided that the exposure is secured by collateral and provided that the collateralised portion of the exposure would be assigned a risk weight that is equal to or lower than the risk weight of the unsecured exposure to the client under Chapter 2 of Title II of Part Three of CRR.

The approach referred to in point (b) of the first subparagraph must not be used by a firm where there is a mismatch between the maturity of the exposure and the maturity of the protection.

For the purpose of this Part, a firm may use both the Financial Collateral Comprehensive Method and the treatment set out in point (b) of the first subparagraph of this paragraph only where it is permitted to use both the Financial Collateral Comprehensive Method and the Financial Collateral Simple Method for the purposes of Article 92 of CRR.

2.

Where a firm applies point (a) of paragraph 1, the firm:

1. (a) where the guarantee is denominated in a currency different from that in which the exposure is denominated, must calculate the amount of the exposure that is deemed to be covered in accordance with the provisions on the treatment of currency mismatch for unfunded credit protection set out in Part Three of CRR;
2. (b) must treat any mismatch between the maturity of the exposure and the maturity of the protection in accordance with the provisions on the treatment of maturity mismatch set out in Chapter 4 of Title II of Part Three of CRR; and
3. (c) may recognise partial coverage in accordance with the treatment set out in Chapter 4 of Title II of Part Three of CRR.

3.

For the purposes of point (b) of paragraph 1, a firm may replace the amount in point (a) of this paragraph with the amount in point (b) of this paragraph, provided that the conditions set out in points (c), (d) and (e) of this paragraph are met:

1. (a) the total amount of the firm's exposure to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent;
2. (b) the full amount of the limits that the firm has instructed the tri-party agent referred to in point (a) to apply to the securities issued by the collateral issuer referred to in that point;
3. (c) the firm has verified that the tri-party agent has in place appropriate safeguards to prevent breaches of the limits referred to in point (b);
4. (d) the PRA has not, in a requirement imposed under FSMA, prohibited such replacement;
5. (e) the sum of the amount of the limit referred to in point (b) of this paragraph and any other exposures of the firm to the collateral issuer does not exceed the limit set out in Article 395(1).

[Note: This rule corresponds to Article 403 of CRR as it applied immediately before revocation by the Treasury]

A firm must use the conditions and methodologies specified in this Chapter 5 to determine the overall exposure of a firm to a client or group of connected clients in respect of exposures through transactions with underlying assets and the conditions under which the structure of transactions with underlying assets does not constitute an additional exposure.

[Note: This rule corresponds to Article 1 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury]

[Note: The definitions formerly found at Article 2 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury can be found at rule 1.4 of this Part]

1.

A firm must determine the contribution to the overall exposure to a certain client or group of connected clients that results from a certain transaction in accordance with the methodology set out in Articles 4, 5 and 6.

The firm must determine separately for each of the underlying assets its exposure to this underlying asset in accordance with Article 5.

2.

A firm must assess whether a certain transaction constitutes an additional exposure in accordance with Article 7.

[Note: This rule corresponds to Article 3 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury]

1.

When assessing the underlying exposures of a transaction (transaction A) which itself has an underlying exposure to another transaction (transaction B) for the purpose of Articles 5 and 6, a firm must treat the exposure to transaction B as replaced with the exposures underlying transaction B.

2.

Paragraph 1 applies as long as the underlying exposures are exposures to transactions with underlying assets.

[Note: This rule corresponds to Article 4 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury]

1.

The exposure of a firm to an underlying asset of a transaction is the lower of the following:

1. (a) the exposure value of the exposure arising from the underlying asset;
2. (b) the total exposure value of the firm’s exposures to the underlying asset resulting from all exposures of the firm to the transaction.

2.

For each exposure of a firm to a transaction, the exposure value of the resulting exposure to an underlying asset shall be determined as follows:

1. (a) if the exposures of all investors in this transaction rank pari passu, the exposure value of the resulting exposure to an underlying asset shall be the pro rata ratio for the firm's exposure to the transaction multiplied by the exposure value of the exposure formed by the underlying asset;
2. (b) in cases other than those referred to in point (a) the exposure value of the resulting exposure to an underlying asset shall be the pro rata ratio for the firm's exposure to the transaction multiplied by the lower of:
1. (i) the exposure value of the exposure formed by the underlying asset;
2. (ii) the total exposure value of the firm's exposure to the transaction together with all other exposures to this transaction that rank pari passu with the firm's exposure.

3.

The pro rata ratio for a firm's exposure to a transaction shall be the exposure value of the firm's exposure divided by the total exposure value of the firm's exposure together with all other exposures to this transaction that rank pari passu with the firm's exposure.

[Note: This rule corresponds to Article 5 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury]

1.

For each credit risk exposure for which the obligor is identified, a firm must include the exposure value of its exposure to the relevant underlying asset when calculating the overall exposure to this obligor as an individual client or to the group of connected clients to which this obligor belongs.

2.

If a firm has not identified the obligor of an underlying credit risk exposure, or where a firm is unable to confirm that an underlying exposure is not a credit risk exposure, the firm must assign this exposure as follows:

1. (a) where the exposure value does not exceed 0.25% of the firm’s Tier 1 capital, it must assign this exposure to the transaction as a separate client;
2. (b) where the exposure value is equal to or exceeds 0.25% of the firm’s Tier 1 capital and the firm can ensure, by means of the transaction's mandate, that the underlying exposures of the transaction are not connected with any other exposures in its portfolio, including underlying exposures from other transactions, it must assign this exposure to the transaction as a separate client;
3. (c) in cases other than those referred to in points (a) and (b), it must assign this exposure to the unknown client.

3.

If a firm is not able to distinguish the underlying exposures of a transaction, the firm must assign the total exposure value of its exposures to the transaction as follows:

1. (a) where this total exposure value does not exceed 0.25% of the firm’s Tier 1 capital, it must assign this total exposure value to the transaction as a separate client;
2. (b) in cases other than those referred to in point (a), it must assign this total exposure value to the unknown client.

4.

For the purposes of paragraphs 1 and 2, a firm must regularly, and at least on a monthly basis, monitor such transactions for possible changes in the composition and the relative share of the underlying exposures.

[Note: This rule corresponds to Article 6 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury]

1.

The structure of a transaction does not constitute an additional exposure if the transaction meets both of the following conditions:

1. (a) the legal and operational structure of the transaction is designed to prevent the manager of the transaction or a third party from redirecting any cash flows which result from the transaction to persons who are not otherwise entitled under the terms of the transaction to receive these cash flows; and
2. (b) neither the issuer nor any other person can be required, under the transaction, to make a payment to the firm in addition to, or as an advance payment of, the cash flows from the underlying assets.

2.

The condition in point (a) of paragraph 1 is met where the transaction is one of the following:

1. (a) a UK UCITS (as defined in section 237 of FSMA); or
2. (b) an undertaking established in a third country that carries out activities similar to those carried out by a UCITS and which is subject to supervision pursuant to legislation of a third country which applies supervisory and regulatory requirements which are at least equivalent to those applied in the UK to UK UCITS.

[Note: This rule corresponds to Article 7 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury]

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