Market Risk: General Provisions (CRR)

1.

An institution shall calculate the own funds requirements for market risk of all trading book positions and in relation to non-trading book positions that are subject to foreign exchange risk or commodity risk in accordance with the following approaches:

1. (a) the advanced standardised approach set out in the Market Risk: Advanced Standardised Approach (CRR) Part;
2. (b) the simplified standardised approach referred to in paragraph 2, if it meets the conditions set out in Article 325a; or
3. (c)  (i) during the IMA transitional period, the internal model approach set out in the Market Risk: Internal Model Approach (CRR) Part 4.2 where the institution has an IMA transitional permission; or
   1. (ii) after the end of the IMA transitional period, the internal model approach set out in the Market Risk: Internal Model Approach (CRR) Part 1.1, subject to the prior permission of the PRA in accordance with Market Risk: Internal Model Approach (CRR) Part Article 325az.

   By way of derogation from the first subparagraph, an institution shall not calculate own funds requirements for foreign exchange risk for trading book positions and non-trading book positions that are subject to foreign exchange risk where those positions are deducted from the institution’s own funds. The institution shall document its use of the derogation set out in this subparagraph, including its impact and materiality, and make the information available, upon request, to the PRA.

2.

The own funds requirements for market risk calculated in accordance with the simplified standardised approach referred to in point (b) of paragraph 1 shall mean the sum of the following own funds requirements, as applicable:

1. (a) the own funds requirements for position risk referred to in the Market Risk: Simplified Standardised Approach (CRR) Part, multiplied by:
1. (i) 1.3 for own funds requirements relating to general and specific risk of positions in debt instruments as calculated in accordance with Market Risk: Simplified Standardised Approach (CRR) Part Articles 334 to 340;
2. (ii) 3.5 for own funds requirements relating to the general and specific risks of positions in equity instruments, as calculated in accordance with Market Risk: Simplified Standardised Approach (CRR) Part Articles 341 to 344, 346 and 347; and
3. (iii) 3.5 for own funds requirements calculated in accordance with Market Risk: Simplified Standardised Approach (CRR) Part Article 348 for CIUs;
2. (b) the own funds requirements for foreign exchange risk referred to in Market Risk: Simplified Standardised Approach (CRR) Part Articles 351 to 354, multiplied by 1.2; and
3. (c) the own funds requirements for commodity risk referred to in Market Risk: Simplified Standardised Approach (CRR) Part Articles 355 to 361, multiplied by 1.9.

3.

[Note: Provision left blank]

4.

An institution may use in combination the approaches set out in points (a) and (c)(i) or (ii) of paragraph 1 on a permanent basis within a group.

5.

An institution shall not use the approach set out in point (c)(ii) of paragraph 1 for instruments in their trading book that are securitisation positions or positions included in the ACTP as set out in paragraphs 6, 7 and 8.

6.

An institution shall include securitisation positions and nth-to-default credit derivatives that meet all the following criteria in the ACTP:

1. (a) the positions are neither re-securitisation positions, nor options on a securitisation tranche, nor any other derivatives of securitisation exposures that do not provide a pro-rata share in the proceeds of a securitisation tranche; and
2. (b) all their underlying instruments are:
1. (i) single-name instruments, including single-name credit derivatives, for which a liquid two-way market exists; and
2. (ii) commonly-traded indices based on the instruments referred to in point (i).

A two-way market is considered to exist where there are independent bona fide offers to buy and sell, so that a price that is reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time conforming to trade custom.

7.

An institution shall not include positions with any of the following underlying instruments in the ACTP:

1. (a) underlying instruments that are assigned to the exposure classes referred to in point (h) or (i) of paragraph 1 of Credit Risk: Standardised Approach (CRR) Part Article 112; and/or
2. (b) a claim on a special purpose entity, collateralised, directly or indirectly, by a position that, in accordance with paragraph 6, would itself not be eligible for inclusion in the ACTP.

8.

An institution may include in the ACTP positions that are neither securitisation positions nor nth-to-default credit derivatives but that hedge other positions in that portfolio, provided that a liquid two-way market as described in paragraph 6 exists for the instrument or its underlying instruments.

9.

Any risk positions which an institution uses to hedge against the adverse effect of foreign exchange rates on any of its capital ratios in accordance with Required Level of Own Funds (CRR) Part Article 92 may be excluded by an institution from the calculation of own funds requirements for foreign exchange risk set out in paragraph 1, with the prior permission of the PRA to the extent and subject to any modifications set out in the permission if, on applying for such permission, an institution is able to demonstrate to the satisfaction of the PRA:

1. (a) the risk positions are deliberately taken or maintained for the purpose of hedging partially or totally against the potential that changes in foreign exchange rates could have an adverse effect on its capital ratios;
2. (b) the risk positions are of a non-dealing or structural nature;
3. (c) the amount of the risk position excluded is limited to the amount that neutralises the sensitivity of the capital ratio to movements in foreign exchange rates;
4. (d) the risk positions are excluded from the calculation of own funds requirements for at least six months;
5. (e) the risk positions excluded are established and managed in accordance with a clear risk management policy that the PRA has approved;
6. (f) the risk positions excluded are documented and can be made available for the PRA; and
7. (g) trading books and non-trading books containing the risk positions excluded are segregated from all other trading activities. 

An institution that has been granted the permission set out in the first sub-paragraph shall comply with the requirements set out in that first sub-paragraph.

[Note: This is a permission created under sections 144G(2) and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

9A.

In its calculation of own funds requirements for foreign exchange risk under paragraph 1, an institution shall not include any item which meets all of the following conditions:

1. (a) the item is not measured at fair value; and
2. (b) the item’s accounting value is not updated at each of the institution’s reporting dates to reflect the changes in the exchange rate between the foreign currency and the reporting currency of the institution recognising the item in its financial statement.

10.

An institution shall not use the approach set out in point (c)(ii) of paragraph 1 of Article 325 for CIUs in their trading book that cannot be looked through.

[Note: Paragraphs 1(a) to (c), 2 to 5 and 7 to 8 of this rule correspond to Article 325(1) to (5) and (7) to (8) of CRR, paragraph 6 of this rule corresponds to Article 325(6) and 338(1) of CRR, and paragraph 9 of this rule corresponds to Article 352(2) of CRR, in each case as the provision of CRR applied immediately before revocation by the Treasury]

1.

Where calculating the own funds requirement for non-trading book positions subject to foreign exchange risk under the sensitivities-based method in accordance with Market Risk: Advanced Standardised Approach (CRR) Part Articles 325d to 325j, with the exception of those positions subject to commodity risk as detailed in paragraph 5, an institution shall use the last available accounting value of a non-trading book position that is subject to foreign exchange risk as a basis.

2.

By way of derogation from paragraph 1, an institution may use the last available fair value of a non-trading book position that is subject to foreign exchange risk, provided that the fair value of all non-trading book positions is calculated at least on a quarterly basis. Where an institution applies this paragraph, it shall apply it consistently to all non-trading book positions subject to foreign exchange risk.

3.

An institution shall update the last available value that is used as a basis for computing the own funds for foreign exchange risk in accordance with paragraphs 1 and 2 at least on a monthly basis in order to reflect changes in the value of the foreign exchange risk factors.

4.

Where an institution computes the own funds requirements for market risk on a consolidated basis, that institution shall identify the currency of denomination of an item as the reporting currency of any institution which recognises that item in its individual financial statement, where all of the following conditions are met:

1. (a) the item is not measured at fair value;
2. (b) the item is subject to the risk of impairment due to foreign exchange risk;
3. (c) the institution’s reporting currency or base currency differs from the reporting currency of the institution that recognises the item in its individual financial statement; and
4. (d) the item’s accounting value is not updated at each reporting date to reflect the changes in the exchange rate between the foreign currency and the reporting currency of the institution recognising the item in its individual financial statement.

5.

Where calculating the own funds requirement for non-trading book positions subject to commodity risk under the sensitivities-based method in accordance with  Market Risk: Advanced Standardised Approach (CRR) Part Articles 325d to 325j, an institution shall use the latest available fair value of those positions as a basis. An institution shall fair value those positions at least on a monthly basis.

6.

Where calculating the own funds requirements for non-trading book positions subject to foreign exchange risk and not to commodity risk assigned to trading desks in accordance with the internal model approach as set out in Market Risk: Internal Model Approach (CRR) Part 1.1, an institution shall use the last available accounting value of a non-trading book position that is subject to foreign exchange risk as a basis.

7.

By way of derogation from paragraph 6, an institution may use the last available fair value of a non-trading book position as referred to in paragraph 6 as a basis for calculating the own funds requirements, provided that the fair value of all non-trading book positions is calculated at least on a quarterly basis. Where an institution applies this paragraph, it shall apply it consistently to all non-trading book positions referred to in paragraph 6.

8.

An institution shall update the last available value that is used as a basis for computing the own funds for foreign exchange risk in accordance with paragraphs 6 and 7 on a daily basis in order to reflect changes in the value of the foreign exchange risk factors.

9.

By way of derogation from paragraph 8, when updating the last available value of a non-trading book position on a daily basis, an institution shall reflect changes in the value of all risk factors for a position for which it used the derogation referred to in paragraph 15.

10.

For the purposes of calculating the expected shortfall risk measure referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bb and the stress scenario risk measure referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bk in relation to non-trading book positions subject to foreign exchange risk and not to commodity risk, an institution shall apply scenarios of future shock only to risk factors that belong to the foreign exchange broad risk factor category.

11.

Where calculating the own funds requirements for non-trading book positions subject either to commodity risk or both to commodity and foreign exchange risk assigned to trading desks in accordance with the internal model approach as set out in Market Risk: Internal Model Approach (CRR) Part 1.1, an institution shall use the last available fair value of those positions. An institution shall fair value those positions on a daily basis.

12.

In relation to non-trading book positions subject to commodity risk and not to foreign exchange risk, an institution shall apply scenarios of future shock, for the purposes of calculating the expected shortfall risk measure referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bb or the stress scenario risk measure referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bk, only to risk factors that belong to the commodity broad risk factor category.

13.

In relation to non-trading book positions subject to commodity risk and foreign exchange risk, an institution shall apply scenarios of future shock for the purpose of calculating the expected shortfall risk measure referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bb or the stress scenario risk measure referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bk, only to risk factors that belong to the commodity or foreign exchange broad risk factor category.

14.

By way of derogation from paragraphs 9 to 14 of Market Risk: Internal Model Approach (CRR) Part Article 325bf, an institution computing the hypothetical and the actual changes in the portfolio’s value referred to in Market Risk: Internal Model Approach (CRR) Part Articles 325bf and 325bg in relation to a non-trading book position which is subject to foreign exchange risk and not to commodity risk shall calculate the value of that non-trading book position at the end of the day following the computation of the value-at-risk number referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bf using the value of that non-trading book position at the end of the previous day and updating its component reflecting the foreign exchange risk.

15.

Where the value of a non-trading book position does not change linearly with movements in an exchange rate to which it is subject, an institution may, in derogation from paragraph 14, calculate the value of that non-trading book position at the end of the day following the computation of the value-at-risk number by using the value of that non-trading book position at the end of the previous day and updating all the components the institution uses to value that non-trading book position, including those components not pertaining to the foreign exchange risk broad risk factor category.

An institution shall apply the first sub-paragraph consistently to all positions in the trading desk that do not change linearly with movements in an exchange rate to which they are subject.

16.

By way of derogation from paragraphs 9 to 14 of Market Risk: Internal Model Approach (CRR) Part Article 325bf, an institution computing the hypothetical and the actual changes in the portfolio’s value referred to in Market Risk: Internal Model Approach (CRR) Part Articles 325bf and 325bg in relation to a non-trading book position which is subject to commodity risk shall calculate the value of that non-trading book position at the end of the day following the computation of the value-at-risk number referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bf in accordance with either of the following, provided that they use it consistently for all non-trading book positions subject to commodity risk in the trading desk:

1. (a) an institution shall use the value of that non-trading book position at the end of the previous day and update only the components reflecting the foreign exchange and commodity risk; or
2. (b) an institution shall use the value of that non-trading book position at the end of the previous day and update all the components the institution uses to value that non-trading book position, including those not pertaining to the foreign exchange or commodity risk broad risk factor categories.

17.

An institution shall apply paragraphs 14 to 16 only to non-trading book positions that are included both in the portfolio on the day of the computation of the Value-At-Risk number referred to in Market Risk: Internal Model Approach (CRR) Part Article 325bf, and in the portfolio on the day following the computation of that Value-At-Risk number.

1.

An institution shall be eligible to use the approach set out in point (b) of paragraph 1 of Article 325 to calculate the own funds requirements for market risk of all trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk, provided that the size of the institution's on- and off-balance-sheet business that is subject to market risk is equal to or less than each of the following thresholds, on the basis of an assessment carried out on a monthly basis using data as of the last day of the month:

1. (a) 10% of the institution’s total assets; and
2. (b) GBP 440 million.

2.

An institution shall calculate the size of its on- and off-balance-sheet business that is subject to market risk using data as of the last day of each month in accordance with the following requirements:

1. (a) all the positions assigned to the trading book shall be included, except credit derivatives that are recognised as internal hedges against non-trading book credit risk exposures and the credit derivative transactions that perfectly offset the market risk of the internal hedges as referred to in paragraph 3 of Trading Book (CRR) Part Article 106;
2. (b) all non-trading book positions that are subject to foreign exchange risk or commodity risk shall be included;
3. (c) all positions shall be valued at their market values on that date, except for:
1. (i) positions referred to in point (b);
2. (ii) where the market value of a trading book position is not available on a given date, an institution shall take a fair value for the trading book position on that date;
3. (iii) where the fair value and market value of a trading book position are not available on a given date, an institution shall take the most recent market value or fair value for that position;
4. (d) all non-trading book positions that are subject to foreign exchange risk shall be considered as an overall net foreign exchange position and valued in accordance with Market Risk: Simplified Standardised Approach (CRR) Part Article 352;
5. (e) all the non-trading book positions that are subject to commodity risk shall be valued in accordance with Market Risk: Simplified Standardised Approach (CRR) Part Articles 357 and 358;
6. (f) the absolute value of long positions shall be added to the absolute value of short positions.

3.

An institution shall immediately notify the PRA when they:

1. (a) are both eligible to calculate and elect to calculate; or
2. (b) cease being eligible to calculate,

their own funds requirements for market risk in accordance with this Article.

4.

An institution that no longer meets one or more of the conditions set out in paragraph 1 shall immediately notify the PRA thereof.

5.

An institution shall cease to be eligible to use the simplified standardised approach referred to in point (b) of paragraph 1 of Article 325 to calculate the own funds requirements for market risk of all trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk on the date falling three months after the occurrence of either of the following cases:

1. (a) the institution does not meet the condition set out in point (a) or (b) of paragraph 1 for three consecutive months; or
2. (b) the institution does not meet the condition set out in point (a) or (b) of paragraph 1 during more than 6 out of the last 12 months.

6.

Where an institution ceases to be eligible to use the approach set out in point (b) of paragraph 1 of Article 325 to calculate the own funds requirements for market risk of all trading book positions and non-trading book positions that are subject to foreign exchange risk or commodity risk in accordance with paragraph 5, the institution must notify the PRA that all the conditions set out in paragraph 1 have been met for an uninterrupted 12-month period prior to recommencing use of that approach.

7.

An institution shall not enter into, buy or sell a position only for the purpose of complying with any of the conditions set out in paragraph 1 during the monthly assessment.

8.

An institution that is eligible for the treatment set out in Trading Book (CRR) Part Article 94 shall be eligible use the approach set out in point (b) of paragraph 1 of Article 325 to calculate the own funds requirements for market risk of non-trading book positions that are subject to foreign exchange risk or commodity risk.

[Note: This rule corresponds to Article 325a of CRR as it applied immediately before revocation by the Treasury]

1.

Where an institution has a position in a financial instrument for which no treatment has been specified in CRR or CRR rules, it must calculate its own funds requirement for that position by applying the most appropriate rules relating to positions that are specified in CRR or CRR rules, if doing so is prudent and appropriate, and if the position is sufficiently similar to those covered by the relevant rules.

2.

An institution must document its policies and procedures for calculating own funds for such positions in its trading book policy statement.

3.

If there are no appropriate treatments the institution must calculate an own funds requirement of an appropriate percentage of the current value of the position. An appropriate percentage is either 100%, or a percentage that takes into account the characteristics of the position.

4.

For the purposes of paragraph 2, trading book policy statement means the statement of policies and procedures relating to the trading book.

1.

Subject to paragraph 2, and only for the purpose of calculating net positions and own funds requirements for market risk on a consolidated basis, institutions may use positions in one institution or undertaking to offset positions in another institution or undertaking.

2.

An institution may only apply paragraph 1 with the prior permission of the PRA to the extent and subject to any modifications set out in the permission if, on applying for such permission, it is able to demonstrate to the satisfaction of the PRA:

1. (a) there is a satisfactory allocation of own funds within the group; and
2. (b) the regulatory, legal or contractual framework in which the institution operates guarantees mutual financial support within the group.

An institution that has been granted the permission set out in the first sub-paragraph shall comply with the requirements set out in that first sub-paragraph.

[Note: This is a permission created under sections 144G(2) and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

3.

Where there are undertakings located in third countries, all the following conditions shall be met in addition to those set out in paragraph 2:

1. (a) such undertakings have been authorised in a third country and either satisfy the definition of a credit institution or are third country investment firms;
2. (b) on an individual basis, such undertakings comply with own funds requirements equivalent to those laid down in CRR and CRR rules; and
3. (c) no regulations exist in the third countries in question which might significantly affect the transfer of funds within the group.

4.

Where the PRA has granted the permission in paragraph 2, an institution shall calculate the own funds requirements for market risk on a consolidated basis for all institutions and undertakings which have been granted such permission as the sum of:

1. (a) the own funds requirements for market risk for all the positions that have been allocated to a dedicated general interest rate internal hedge portfolio in accordance with paragraph 9 of Trading Book (CRR) Part Article 106; and
2. (b) the own funds requirements for market risk for all the positions that have not been allocated to a dedicated general interest rate internal hedge portfolio in accordance with paragraph 9 of Trading Book (CRR) Part Article 106.

5.

Where the PRA has not granted the permission in paragraph 2 for all institutions or undertakings in a group, an institution shall calculate the own funds requirements for market risk for that group as the sum of:

1. (a) the own funds requirements calculated in accordance with paragraph 4 above; and
2. (b) the sum of own funds requirements for each institution or undertaking that has not been granted the permission in paragraph 2, each calculated on an individual basis and in accordance with points (a) and (b) of paragraph 4.

[Note: This rule corresponds to Article 325b of CRR as it applied immediately before revocation by the Treasury]