Market Risk: Simplified Standardised Approach (CRR)

1.

An institution's own funds requirement for position risk shall be the sum of the own funds requirements for the general and specific risk of its positions in debt and equity instruments. Securitisation positions in the trading book shall be treated as debt instruments.

[Note: This rule corresponds to Article 326 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall calculate its net position in instruments on the basis that the absolute value of the excess of an institution's long (short) positions over its short (long) positions in the same equity, debt and convertible issues and identical financial futures, options, warrants and covered warrants shall be its net position in each of those different instruments. In calculating the net position, an institution shall treat positions in derivative instruments as laid down in Articles 328 to 330. An institution shall disregard its holdings of its own debt instruments in calculating specific risk capital requirements under Article 336.

2.

An institution shall not net between a convertible bond and an offsetting position in the instrument underlying it, unless the institution:

1. (a) treats the convertible bond as a position in the equity into which it converts; and
2. (b) adjusts its own funds requirement for the general and specific risk in its equity instruments by making:
   1. (i) an addition equal to the current value of any loss which the institution would make if it did convert to equity; or
   2. (ii) a deduction equal to the current value of any profit which the institution would make if it did convert to equity (subject to a maximum deduction equal to the own funds requirements on the notional position underlying the convertible bond).

3.

An institution shall convert all net positions, irrespective of their signs, on a daily basis into the institution's reporting currency at the prevailing spot exchange rate before their aggregation.

[Note: This rule corresponds to Article 327 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall treat interest rate futures, FRAs and forward commitments to buy or sell debt instruments as combinations of long and short positions. Thus an institution shall treat a long interest rate futures position as a combination of a borrowing maturing on the delivery date of the futures contract and a holding of an asset with maturity date equal to that of the instrument or notional position underlying the futures contract in question. Similarly an institution shall treat a sold FRA as a long position with a maturity date equal to the settlement date plus the contract period, and a short position with maturity equal to the settlement date. Both the borrowing and the asset holding shall be included in the first category set out in Table 1 in Article 336 in order to calculate the own funds requirement for specific risk for interest rate futures and FRAs. A forward commitment to buy a debt instrument shall be treated as a combination of a borrowing maturing on the delivery date and a long (spot) position in the debt instrument itself. The borrowing shall be included in the first category set out in Table 1 in Article 336 for purposes of specific risk, and the debt instrument under whichever column is appropriate for it in the same table.

2.

For the purposes of this Article, ‘long position’ means a position in which an institution has fixed the interest rate it will receive at some time in the future, and ‘short position’ means a position in which it has fixed the interest rate it will pay at some time in the future.

[Note: This rule corresponds to Article 328 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall treat options and warrants on interest rates, debt instruments, equities, equity indices, financial futures, swaps and foreign currencies as if they were positions equal in value to the amount of the underlying instrument to which the option refers, multiplied by its delta for the purposes of Articles 326 to 350. The institution may net off the latter positions against any offsetting positions in the identical underlying securities or derivatives. The institution shall use the delta of the exchange concerned.

For OTC-options, or where the delta is not available from the exchange concerned, an institution may with the prior permission of the PRA calculate the delta itself using a model 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 that it is using an appropriate model which estimates the rate of change of the option's or warrant's value with respect to small changes in the market price of the underlying.

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

2.

An institution shall adequately reflect other risks, apart from the delta risk, associated with options in the own funds requirements in accordance with Article 352a.

3.

[Note: Provision left blank]

[Note: Paragraphs 1 and 2 of this rule correspond to paragraphs 1 and 2 of Article 329 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall treat swaps for interest rate risk purposes on the same basis as on-balance-sheet instruments. Therefore, an institution shall treat an interest rate swap under which an institution receives floating-rate interest and pays fixed-rate interest as equivalent to a long position in a floating-rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed-rate instrument with the same maturity as the swap itself.

[Note: This rule corresponds to Article 330 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution which marks to market and manages the interest rate risk on the derivative instruments covered in Articles 328 to 330 on a discounted-cash-flow basis may with the prior permission of the PRA use sensitivity models to calculate the positions referred to in those Articles and may use them for any bond which is amortised over its residual life rather than via one final repayment of principal 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 that the models it uses:

1. (a) generate positions which have the same sensitivity to interest rate changes as the underlying cash-flows; and
2. (b) assesses sensitivity with reference to independent movements in sample rates across the yield curve, with at least one sensitivity point in each of the maturity bands set out in Table 2 in Article 339.

An institution that has been permitted to use sensitivity models as set out in the first sub-paragraph shall:

1. (i) include the positions in the calculation of own funds requirements for general risk of debt instruments; and
2. (ii) 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]

2.

An institution which does not use models under paragraph 1 may treat as fully offsetting any positions in derivative instruments covered in Articles 328 to 330 which meet the following conditions at least:

1. (a) the positions are of the same value and denominated in the same currency;
2. (b) the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) is closely matched; and
3. (c) the next interest-fixing date or, for fixed coupon positions, residual maturity corresponds with the following limits:
   1. (i) less than one month hence: same day;
   2. (ii) between one month and one year hence: within seven days;
   3. (iii) over one year hence: within 30 days.

[Note: This rule corresponds to Article 331 of CRR as it applied immediately before revocation by the Treasury]

1.

When an institution that is the party who assumes the credit risk (the ‘protection seller’) calculates an own funds requirement for general and specific risk, unless specified differently, that institution shall use the notional amount of the credit derivative contract. Notwithstanding the first sentence, the institution may elect to replace the notional value by the notional value plus the net market value change of the credit derivative since trade inception, a net downward change from the protection seller's perspective carrying a negative sign. For the purpose of calculating the specific risk charge, other than for total return swaps, the institution shall apply the maturity of the credit derivative contract, rather than the maturity of the obligation. An institution shall determine positions as follows:

1. (a) a total return swap creates a long position in the general risk of the reference obligation and a short position in the general risk of a government bond with a maturity equivalent to the period until the next interest fixing and which is assigned a 0% risk weight under the Credit Risk: Standardised Approach (CRR) Part. It also creates a long position in the specific risk of the reference obligation;
2. (b) a credit default swap does not create a position for general risk. For the purposes of specific risk, the institution shall record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt item, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows shall be represented as notional positions in government bonds;
3. (c) a single name credit linked note creates a long position in the general risk of the note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions for a qualifying debt item, a single long position with the specific risk of the note need only be recorded;
4. (d) in addition to a long position in the specific risk of the issuer of the note, a multiple name credit linked note providing proportional protection creates a position in each reference entity, with the total notional amount of the contract assigned across the positions according to the proportion of the total notional amount that each exposure to a reference entity represents. Where more than one obligation of a reference entity can be selected, the obligation with the highest risk weighting determines the specific risk;
5. (e) a first-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity. If the size of the maximum credit event payment is lower than the own funds requirement under the method in the first sentence of this point, the maximum payment amount may be taken as the own funds requirement for specific risk;
6. (f) an n-th-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity less the n-1 reference entities with the lowest specific risk own funds requirement. If the size of the maximum credit event payment is lower than the own funds requirement under the method in the first sentence of this point, this amount may be taken as the own funds requirement for specific risk. Where an n-th-to-default credit derivative is externally rated, the protection seller shall calculate the specific risk own funds requirement using the rating of the derivative and apply the respective securitisation risk weights as applicable.

2.

An institution which is the party who transfers credit risk (the ‘protection buyer’), shall determine the positions as the mirror principle of the protection seller, with the exception of a credit linked note (which entails no short position in the issuer). When calculating the own funds requirement for the protection buyer, the institution shall use the notional amount of the credit derivative contract. Notwithstanding the first sentence, an institution may elect to replace the notional value by the notional value plus the net market value change of the credit derivative since trade inception, a net downward change from the protection seller's perspective carrying a negative sign. If at a given moment there is a call option in combination with a step-up, the institution shall treat such moment as the maturity of the protection.

3.

[Note: Provision left blank]

[Note: This rule corresponds to Article 332 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution that is the transferor of securities or guaranteed rights relating to title to securities in a repurchase agreement and the lender of securities in a securities lending shall include those securities in the calculation of its own funds requirement under Articles 326 to 350 provided that such securities are trading book positions.

[Note: This rule corresponds to Article 333 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall classify net positions according to the currency in which they are denominated and shall calculate the own funds requirement for general and specific risk in each individual currency separately.

[Note: This rule corresponds to Article 334 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution may cap the own funds requirement for specific risk of a net position in a debt instrument at the maximum possible default-risk related loss. For a short position, that limit may be calculated as a change in value due to the instrument or, where relevant, the underlying names immediately becoming default risk-free.

[Note: This rule corresponds to Article 335 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall assign its net positions in the trading book in instruments that are not securitisation positions as calculated in accordance with Article 327 to the appropriate categories in Table 1 of this Article on the basis of their issuer or obligor, external or internal credit assessment, and residual maturity, and then multiply them by the weightings shown in that table. It shall sum its weighted positions resulting from the application of this Article regardless of whether they are long or short in order to calculate its own funds requirement against specific risk.

2.

For institutions which apply the approach set out in the Credit Risk: Internal Ratings Based Approach (CRR) Part to the exposure class of which the issuer of the debt instrument forms part, to qualify for a risk weight as set out in paragraph 1, the issuer of the exposure shall have an internal rating with a probability of default (PD) equivalent to or lower than that associated with the appropriate credit quality step under the Credit Risk: Standardised Approach (CRR) Part.

3.

Institutions may calculate the specific risk requirements for any bonds that qualify for a 10% risk weight in accordance with the treatment set out in paragraphs 4, 5 and 6 of Credit Risk: Standardised Approach (CRR) Part Article 129 as half of the applicable specific risk own funds requirement for the second category in Table 1 of this Article.

4.

Other qualifying items are:

1. (a) long and short positions in assets for which a credit assessment by a nominated ECAI is not available and which meet all of the following conditions:
   1. (i) they are considered by the institution concerned to be sufficiently liquid;
   2. (ii) their investment quality is, according to the institution's own discretion, at least equivalent to that of the assets referred to under Table 1 of this Article, second row; and
   3. (iii) they are listed on at least one regulated market in the United Kingdom or on a stock exchange in a third country provided that the exchange is recognised by the competent authorities of the United Kingdom;
2. (b) long and short positions in assets issued by institutions subject to the own funds requirements set out in CRR and CRR rules which are considered by the institution concerned to be sufficiently liquid and whose investment quality is, according to the institution's own discretion, at least equivalent to that of the assets referred to under Table 1 of this Article, second row; and
3. (c) securities issued by institutions that are deemed to be of equivalent, or higher, credit quality than those associated with credit quality step 2 of exposures to institutions and that are subject to supervisory and regulatory arrangements comparable to those applicable to institutions under CRR, CRR rules and Directive 2013/36/EU UK law.

Institutions that make use of point (a) or (b) shall have a documented methodology in place to assess whether assets meet the requirements in those points and shall notify this methodology to the PRA.

[Note: This rule corresponds to Article 336 of CRR as it applied immediately before revocation by the Treasury]

1.

For instruments in the trading book that are securitisation positions, an institution shall weight the net positions as calculated in accordance with paragraph 1 of Article 327 with 8% of the risk weight the institution would apply to the position in its non-trading book according to Securitisation (CRR) Part Articles 247 to 270A.

2.

[Note: Provision left blank]

3.

For securitisation positions that are subject to an additional risk weight in accordance with Securitisation (CRR) Part Article 247(6), an institution shall apply 8% of the total risk weight.

4.

An institution shall sum its weighted positions resulting from the application of paragraphs 1, 2 and 3 regardless of whether they are long or short, in order to calculate its own funds requirement against specific risk.

5.

Where an originator institution of a traditional securitisation does not meet any of the conditions set out in paragraph 1 of Article 244 of the Securitisation (CRR) Part, the originator institution shall include the exposures underlying the securitisation in its calculation of own funds requirement as if those exposures had not been securitised.

Where an originator institution of a synthetic securitisation does not meet any of the conditions set out in paragraph 1 of Article 245 of the Securitisation (CRR) Part, the originator institution shall include the exposures underlying the securitisation in its calculation of own funds requirements as if those exposures had not been securitised and shall ignore the effect of the synthetic securitisation for credit protection purposes.

[Note: Paragraphs 1, 3, 4 and 5 of this rule correspond to Article 337(1), (3), (4) and (5) of CRR as it applied immediately before revocation by the Treasury]

[Note: Provision left blank]

1.

In order to calculate own funds requirements against general risk an institution shall assign a risk weight to all positions according to maturity as explained in paragraph 2 in order to compute the amount of own funds required against them. This requirement shall be reduced when a weighted position is held alongside an opposite weighted position within the same maturity band. A reduction in the requirement shall also be made when the opposite weighted positions fall into different maturity bands, with the size of this reduction depending both on whether the two positions fall into the same zone, or not, and on the particular zones they fall into.

2.

An institution shall assign its net positions to the appropriate maturity bands in column 2 or 3, as appropriate, in Table 2 in paragraph 4. It shall do so on the basis of residual maturity in the case of fixed-rate instruments and on the basis of the period until the interest rate is next set in the case of instruments on which the interest rate is variable before final maturity. It shall also distinguish between debt instruments with a coupon of 3% or more and those with a coupon of less than 3% and thus allocate them to column 2 or column 3 in Table 2. It shall then multiply each of them by the weighting for the maturity band in question in column 4 in Table 2.

3.

An institution shall then work out the sum of the weighted long positions and the sum of the weighted short positions in each maturity band. The amount of the former which are matched by the latter in a given maturity band shall be the matched weighted position in that band, while the residual long or short position shall be the unmatched weighted position for the same band. The total of the matched weighted positions in all bands shall then be calculated.

4.

An institution shall compute the totals of the unmatched weighted long positions for the bands included in each of the zones in Table 2 in order to derive the unmatched weighted long position for each zone. Similarly, the sum of the unmatched weighted short positions for each band in a particular zone shall be summed to compute the unmatched weighted short position for that zone. That part of the unmatched weighted long position for a given zone that is matched by the unmatched weighted short position for the same zone shall be the matched weighted position for that zone. That part of the unmatched weighted long or unmatched weighted short position for a zone that cannot be thus matched shall be the unmatched weighted position for that zone.

5.

The amount of the unmatched weighted long or short position in zone one which is matched by the unmatched weighted short or long position in zone two shall then be the matched weighted position between zones one and two. The same calculation shall then be undertaken with regard to that part of the unmatched weighted position in zone two which is left over and the unmatched weighted position in zone three in order to calculate the matched weighted position between zones two and three.

6.

An institution may reverse the order in paragraph 5 so as to calculate the matched weighted position between zones two and three before calculating that position between zones one and two.

7.

The remainder of the unmatched weighted position in zone one shall then be matched with what remains of that for zone three after the latter's matching with zone two in order to derive the matched weighted position between zones one and three.

8.

Residual positions, following the three separate matching calculations in paragraphs 5, 6 and 7 shall be summed.

9.

An institution shall calculate its own funds requirement as the sum of:

1. (a) 10% of the sum of the matched weighted positions in all maturity bands;
2. (b) 40% of the matched weighted position in zone one;
3. (c) 30% of the matched weighted position in zone two;
4. (d) 30% of the matched weighted position in zone three;
5. (e) 40% of the matched weighted position between zones one and two and between zones two and three;
6. (f) 150% of the matched weighted position between zones one and three; and
7. (g) 100% of the residual unmatched weighted positions.

[Note: This rule corresponds to Article 339 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution may use an approach for calculating the own funds requirement for the general risk on debt instruments which reflects duration, instead of the approach set out in Article 339, provided that the institution does so on a consistent basis.

2.

Under the duration-based approach referred to in paragraph 1, an institution shall take the market value of each fixed-rate debt instrument and hence calculate its yield to maturity, which is implied discount rate for that instrument. In the case of floating-rate instruments, the institution shall take the market value of each instrument and hence calculate its yield on the assumption that the principal is due when the interest rate can next be changed.

3.

An institution shall then calculate the modified duration of each debt instrument on the basis of the following formula:

\[modified\ duration=\ \frac{D}{1+R}\]

\[D=\ \frac{\sum_{t=1}^{M}\frac{t\times C_t}{{(1-R)}^t}}{\sum_{t=1}^{M}\frac{C_t}{{(1-R)}^t}}\]

where:
R = yield to maturity;
C_t= cash payment in time t;
M = total maturity.

4.

An institution shall then allocate each debt instrument to the appropriate zone in Table 3. It shall do so on the basis of the modified duration of each instrument.

5.

An institution shall then calculate the duration-weighted position for each instrument by multiplying its market price by its modified duration and by the assumed interest rate change for an instrument with that particular modified duration (see column 3 in Table 3).

6.

An institution shall calculate its duration-weighted long and its duration-weighted short positions within each zone. The amount of the former which are matched by the latter within each zone shall be the matched duration-weighted position for that zone.

The institution shall then calculate the unmatched duration-weighted positions for each zone. It shall then follow the procedures laid down for unmatched weighted positions in paragraphs 5 to 8 of Article 339.

7.

An institution shall calculate its own funds requirement as the sum of the following:

1. (a) 2% of the matched duration-weighted position for each zone;
2. (b) 40% of the matched duration-weighted positions between zones one and two and between zones two and three;
3. (c) 150% of the matched duration-weighted position between zones one and three; and
4. (d) 100% of the residual unmatched duration-weighted positions.

[Note: This rule corresponds to Article 340 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall separately sum all its net long positions and all its net short positions in accordance with Article 327. The sum of the absolute values of the two figures shall be its overall gross position.

2.

An institution shall calculate, separately for each market, the difference between the sum of the net long and the net short positions. The sum of the absolute values of those differences shall be its overall net position.

3.

For the purposes of paragraph 2, the term ‘market’ shall mean all equities listed in stock markets located within a national jurisdiction.

[Note: This rule corresponds to Article 341(1) and (2) of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall multiply its overall gross position by 8% in order to calculate its own funds requirement against specific risk.

[Note: This rule corresponds to Article 342 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall multiply its overall net position by 8% in order to calculate its own funds requirement against general risk.

[Note: This rule corresponds to Article 343 of CRR as it applied immediately before revocation by the Treasury]

1.

For the purposes of paragraph 4, an institution may only determine that the exchange-traded index is appropriately diversified if the index meets the following criteria:

1. (a) Number:
   1. (i) A diversified index shall contain at least 20 equities;
2. (b) Concentration:
   1. (i) By equity: no single equity shall represent more than 25% of the total index;
   2. (ii) By group of equities: 10% of the largest equities (rounded up to the next whole number) shall represent less than 60% of the total index;
3. (c) Diversification:
   1. (i) By geography: the index shall encompass equities from at least one national market; no regional indices shall be recognised as appropriately diversified;
   2. (ii) By industry: the index shall comprise equities from at least four of the following industries:
      1. (1) Oil and Gas
      2. (2) Basic Materials
      3. (3) Industrials
      4. (4) Consumer Goods
      5. (5) Health Care
      6. (6) Consumer Services
      7. (7) Telecommunications
      8. (8) Utilities
      9. (9) Financials
      10. (10) Technology

2.

[Note: Provision left blank]

3.

An institution may break down stock-index futures, the delta-weighted equivalents of options in stock-index futures and stock indices (collectively referred to hereafter as ‘stock-index futures’), into positions in each of their constituent equities. The institution may treat these positions as underlying positions in the equities in question, and may, be netted against opposite positions in the underlying equities themselves. The institution shall notify the PRA of the use they make of that treatment.

4.

Where a stock-index future is not broken down into its underlying positions, an institution shall treat it as if it were an individual equity. However, the institution may ignore the specific risk on this individual equity if the stock-index future in question is exchange traded and represents a relevant appropriately diversified index.

[Note: Paragraphs 3 and 4 of this rule correspond to Article 344(3) and (4) of CRR as it applied immediately before revocation by the Treasury]

1.

In the case of the underwriting of debt and equity instruments, an institution may use the following procedure in calculating its own funds requirements. An institution shall first calculate the net positions by deducting the underwriting positions which are subscribed or sub-underwritten by third parties on the basis of formal agreements. An institution shall then reduce the net positions by the reduction factors in Table 4 and calculate its own funds requirements using the reduced underwriting positions.

‘Working day 0’ shall be the working day on which the institution becomes unconditionally committed to accepting a known quantity of securities at an agreed price.

2.

An institution shall notify the PRA to the extent it makes use of the process set out in paragraph 1.

[Note: This rule corresponds to Article 345 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution may give allowance for hedges provided by credit derivatives, in accordance with the principles set out in paragraphs 2 to 6.

2.

An institution shall treat the position in the credit derivative as one 'leg' and the hedged position that has the same nominal, or, where applicable, notional amount, as the other 'leg'.

3.

An institution shall give full allowance when the values of the two legs always move in the opposite direction and broadly to the same extent. This will be the case in the following situations:

1. (a) the two legs consist of completely identical instruments;
2. (b) a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e. the cash position). The maturity of the swap itself may be different from that of the underlying exposure.

In these situations, a specific risk own funds requirement shall not be applied to either side of the position.

4.

An institution shall apply an 80% offset when the values of the two legs always move in the opposite direction and where there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure. In addition, key features of the credit derivative contract shall not cause the price movement of the credit derivative to materially deviate from the price movements of the cash position. To the extent that the transaction transfers risk, an institution shall apply an 80% specific risk offset to the side of the transaction with the higher own funds requirement, while the specific risk requirements on the other side shall be zero.

5.

An institution shall give partial allowances, absent the situations in paragraphs 3 and 4, in the following situations:

1. (a) the position falls under point (b) of paragraph 3 but there is an asset mismatch between the reference obligation and the underlying exposure. However, the positions meet the following requirements:
   1. (i) the reference obligation ranks pari passu with or is junior to the underlying obligation; and
   2. (ii) the underlying obligation and reference obligation share the same obligor and have legally enforceable cross-default or cross-acceleration clauses;
2. (b) the position falls under point (a) of paragraph 3 or paragraph 4 but there is a currency or maturity mismatch between the credit protection and the underlying asset. Such currency mismatch shall be included in the own funds requirement for foreign exchange risk;
3. (c) the position falls under paragraph 4 but there is an asset mismatch between the cash position and the credit derivative. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.

In order to give partial allowance, rather than adding the specific risk own funds requirements for each side of the transaction, the institution shall apply only the higher of the two own funds requirements.

6.

In all situations not falling under paragraphs 3 to 5, an institution shall calculate an own funds requirement for specific risk for both sides of the positions separately.

[Note: This rule corresponds to Article 346 of CRR as it applied immediately before revocation by the Treasury]

1.

In the case of first-to-default credit derivatives and nth-to-default credit derivatives, an institution shall apply the following treatment for the purposes of giving the allowance in accordance with Article 346:

1. (a) where an institution obtains credit protection for a number of reference entities underlying a credit derivative under the terms that the first default among the assets shall trigger payment and that this credit event shall terminate the contract, the institution may offset specific risk for the reference entity to which the lowest specific risk percentage charge among the underlying reference entities applies in accordance with Table 1 in Article 336;
2. (b) where the nth default among the exposures triggers payment under the credit protection, the protection buyer may only offset specific risk if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such cases, the methodology set out in point (a) for first-to-default credit derivatives shall be followed appropriately amended for nth-to-default products.

[Note: This rule corresponds to Article 347 of CRR as it applied immediately before revocation by the Treasury]

1.

Without prejudice to other provisions in this Section (including, without limitation, paragraph 3), an institution must hold an own funds requirement for position risk for positions in CIUs, comprising specific and general risk, of 32%. Without prejudice to Article 353, taken together with the amended gold treatment set out in paragraph 4 of Article 352, and without prejudice to paragraph 3, an institution must hold an own funds requirement for position risk for positions in CIUs, comprising specific and general risk, and foreign-exchange risk of 40%.

2.

Unless otherwise provided for in Article 350, an institution may not net between the underlying investments of a CIU and other positions held by the institution.

3.

An institution shall treat a position in a CIU which is also a closed-ended investment fund as an equity position in accordance with this Part. For the purposes of this paragraph, the term ‘closed-ended investment fund’ shall have the meaning given to the term in the FCA Handbook.

[Note: This rule corresponds to Article 348 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution may apply the approach set out in Article 350 to a position in a CIU, where all the following conditions are met:

1. (a) the CIU's prospectus or equivalent document includes all of the following:
   1. (i) the categories of assets in which the CIU is authorised to invest;
   2. (ii) where investment limits apply, the relative limits and the methodologies to calculate them;
   3. (iii) where leverage is allowed, the maximum level of leverage; and
   4. (iv) where concluding OTC financial derivatives transactions or repurchase transactions or securities borrowing or lending is allowed, a policy to limit counterparty risk arising from these transactions;
2. (b) the business of the CIU is reported in half-yearly and annual reports to enable an assessment to be made of the assets and liabilities, income and operations over the reporting period;
3. (c) the shares or units of the CIU are redeemable in cash, out of the undertaking's assets, on a daily basis at the request of the unit holder;
4. (d) investments in the CIU are segregated from the assets of the CIU manager;
5. (e) there are adequate risk assessment of the CIU, by the investing institution; and
6. (f) CIUs are managed by persons supervised in accordance with United Kingdom legislation which implemented Directive 2009/65/EC or equivalent legislation.

[Note: This rule corresponds to Article 349 of CRR as it applied immediately before revocation by the Treasury]

1.

Where an institution is aware of the underlying investments of the CIU on a daily basis, the institution may look through to those underlying investments in order to calculate the own funds requirements for position risk, comprising specific and general risk. Under such an approach, an institution shall treat positions in CIUs as positions in the underlying investments of the CIU. Netting shall be permitted between positions in the underlying investments of the CIU and other positions held by the institution, provided that the institution holds a sufficient quantity of shares or units to allow for redemption/creation in exchange for the underlying investments.

2.

An institution may calculate the own funds requirements for position risk, comprising specific and general risk, for positions in CIUs by assuming positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities or debt securities referred to in point (a), subject to the following conditions:

1. (a) the purpose of the CIU's mandate is to replicate the composition and performance of an externally generated index or fixed basket of equities or debt securities; and
2. (b) a minimum correlation coefficient between daily returns on the CIU and the index or basket of equities or debt securities it tracks of 0.9 can be clearly established over a minimum period of six months.

3.

Where the institution is not aware of the underlying investments of the CIU on a daily basis, the institution may calculate the own funds requirements for position risk, comprising specific and general risk, subject to the following conditions:

1. (a) it will be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting the highest own funds requirement for specific and general risk separately, and then continues making investments in descending order until the maximum total investment limit is reached. The position in the CIU will be treated as a direct holding in the assumed position;
2. (b) institutions shall take account of the maximum indirect exposure that they could achieve by taking leveraged positions through the CIU when calculating their own funds requirement for specific and general risk separately, by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the mandate; and
3. (c) if the own funds requirement for specific and general risk together in accordance with this paragraph exceed that set out in paragraph 1 of Article 348 the own funds requirement shall be capped at that level.

4.

An institution may rely on the following third parties to calculate and report own funds requirements for position risk for positions in CIUs falling under paragraphs 1 to 3, in accordance with the methods set out in Articles 326 to 350:

1. (a) the depository of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at this depository;
2. (b) for other CIUs, the CIU management company, provided that the CIU management company is managed by a company that is subject to supervision in the United Kingdom or, in the case of third country CIU, where the CIU is established in a third country that carries out activities similar to those carried out by a CIU 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 CIUs.

An institution shall ensure the correctness of the calculation is confirmed by an external auditor.

[Note: This rule corresponds to Article 350 of CRR as it applied immediately before revocation by the Treasury]

1.

If the sum of an institution's overall net foreign-exchange position and its net gold position, calculated in accordance with the procedure set out in Article 352, including for any foreign exchange and gold positions for which own funds requirements are calculated using an internal model, exceeds 2% of its total own funds, the institution shall calculate an own funds requirement for foreign exchange risk. The own funds requirement for foreign exchange risk shall be the sum of its overall net foreign-exchange position and its net gold position in the reporting currency, multiplied by 8%.

[Note: This rule corresponds to Article 351 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution's net open position in each currency (including the reporting currency) and in gold shall be calculated as the sum of the following elements (positive or negative):

1. (a) the net spot position (i.e. all asset items less all liability items, including accrued interest, in the currency in question or, for gold, the net spot position in gold);
2. (b) the net forward position, which are all amounts to be received less all amounts to be paid under forward exchange and gold transactions, including currency and gold futures and the principal on currency swaps not included in the spot position;
3. (c) irrevocable guarantees and similar instruments that are certain to be called and likely to be irrecoverable;
4. (d) the net delta, or delta-based, equivalent of the total book of foreign-currency and gold options; and
5. (e) the market value of other options.

The delta used for purposes of point (d) shall be that of the exchange concerned. For OTC options, or where delta is not available from the exchange concerned, the institution may with the prior permission of the PRA calculate delta itself 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 that it is using an appropriate model which estimates the rate of change of the option's or warrant's value with respect to small changes in the market price of the underlying.

An institution that has been permitted to calculate delta itself as set out in the second sub-paragraph:

1. (i) may include net future income/expenses not yet accrued but already fully hedged if it does so consistently; and
2. (ii) may break down net positions in composite currencies into the component currencies in accordance with the quotas in force.

An institution that has been permitted to calculate delta itself as set out in the second sub-paragraph shall comply with the requirements set out in that second 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]

2.

[Note: Provision left blank]

3.

An institution may use the net present value when calculating the net open position in each currency and in gold provided that the institution applies this approach consistently.

4.

An institution shall convert net short and long positions in each currency other than the reporting currency and the net long or short position in gold at spot rates into the reporting currency. They shall then be summed separately to form the total of the net short positions and the total of the net long positions respectively. The higher of these two totals shall be the institution's overall net foreign-exchange position.

5.

An institution shall adequately reflect other risks associated with options, apart from the delta risk, in the own funds requirements in accordance with Article 352a.

6.

[Note: Provision left blank]

[Note: Paragraphs 1, 3, 4 and 5 of this rule correspond to Article 352(1), (3), (4) and (5) of CRR as applied immediately before revocation by the Treasury]

1.

An institution shall calculate their own funds requirements for market risk in relation to the non-delta risk of options or warrants as required by paragraph 2 of Article 329, paragraph 5 of Article 352 and paragraph 3 of Article 358, according to one of the following approaches:

1. (a) the simplified approach as set out in paragraphs 4 and 5;
2. (b) the delta plus approach as set out in paragraphs 6, 7 and 8; or
3. (c) the scenario approach as set out in paragraphs 9, 10 and 11.

2.

When calculating own funds requirements on a consolidated basis an institution may combine the use of different approaches. On an individual basis, an institution may only combine the scenario approach and the delta plus approach subject to the conditions established in paragraphs 6 to 11.

3.

For the purposes of the calculation referred to in paragraph 1, an institution shall take the following steps:

1. (a) break down baskets of options or warrants into their fundamental components;
2. (b) break down caps and floors or other options which relate to interest rates at various dates, into a chain of independent options referring to different time periods (e.g. ‘caplets’ and ‘floorlets’);
3. (c) treat options or warrants on fixed-to-floating interest rates swaps as options or warrants on the fixed interest leg of the swap; and
4. (d) treat options or warrants that relate to more than one underlying among those described in point (c) of paragraph 7, as a basket of options or warrants where each option has a single distinct underlying.

4.

Only an institution that exclusively purchases options and warrants may use the simplified approach set out in paragraph 5.

5.

An institution shall determine its own funds requirements under the simplified approach in accordance with the following:

1. (a) an institution applying the simplified approach shall calculate the own funds requirements relative to non-delta risks of call and put options or warrants as the higher amount between zero and the difference between the following values:
   1. (i) the gross amount, as described in points (b) to (e);
   2. (ii) the risk-weighted delta equivalent amount, which it shall calculate as the market value of the underlying instrument, multiplied by the delta and then multiplied by one of the following relevant weightings:
      1. (1) for specific and general equity risk or interest rate risk, according to Articles 326 to 350;
      2. (2) for commodity risk, according to Articles 355 to 361; and
      3. (3) for foreign exchange risk, according to Articles 351, 352, 352a, 353 and 354;
2. (b) for options or warrants which fall under one of the following two categories, an institution shall determine the gross amount referred to in point (a) according to points (c) to (d):
   1. (i) where the buyer has the unconditional right to buy the underlying asset at a predetermined price at the expiration date or at any time before the expiration date, and where the seller has the obligation to fulfil the buyer's demand (e.g. ‘simple call options or warrants’);
   2. (ii) where the buyer has the unconditional right to sell the underlying asset in the same manner as described in point (i) (e.g. ‘simple put options or warrants’);
3. (c) an institution shall calculate the gross amount referred to in point (a) as the maximum between zero and the market value of the underlying security multiplied by the sum of specific and general market risk own funds requirements for the underlying minus the amount of the profit, if any, resulting from the instant execution of the option (e.g. ‘in the money’), where one of the following conditions is met:
   1. (i) the option or warrant incorporates a right to sell the underlying asset (e.g. ‘long put’) and is combined with holdings in the underlying asset (e.g. ‘long position in the underlying instrument’); or
   2. (ii) the option or warrant incorporates a right to buy the underlying asset (e.g. ‘long call’) and is combined with the promise to sell holdings in the underlying instrument (e.g. ‘short position in the underlying asset’);
4. (d) where the option or warrant incorporates a right to buy the underlying asset (e.g. ‘long call’) or a right to sell the underlying asset (e.g. ‘long put’), the gross amount referred to in point (a) shall be the lesser of the following two amounts:
   1. (i) the market value of the underlying security multiplied by the sum of specific and general market risk requirements for the underlying asset; and
   2. (ii) the value of the position determined by the mark-to-market method or the mark-to-model method as provided in points (b) and (c) of paragraph 1 of Trading Book (CRR) Part Article 103 (e.g. ‘market value of the option or warrant’);
5. (e) for all types of options or warrants which do not have the characteristics referred to in point (b), the gross amount referred to in point (a) shall be the market value of the option or warrant.

6.

An institution shall determine own funds requirements under the Delta-plus approach in accordance with the following:

1. (a) where institutions opt to apply the Delta-plus approach, for options and warrants whose gamma is a continuous function in the price of the underlying and whose vega is a continuous function in the implied volatility (e.g. continuous options and warrants), the own funds requirements for non-delta risks on options or warrants shall be calculated as the sum of the following requirements:
   1. (i) the own funds requirements relating to the partial derivative of delta with reference to the price of the underlying which, for bond options or warrants is the partial derivative of delta with reference to the yield-to-maturity of the underlying bond, and for swaptions is the partial derivative of the delta with reference to the swap rate;
   2. (ii) the requirement relating to the first partial derivative of the value of an option or warrant, with reference to the implied volatility;
2. (b) implied volatility shall be taken to be the value of the volatility in the option or warrant pricing formula for which, given a certain pricing model and given the level of all other observable pricing parameters, the theoretical price of the option or warrant is equal to its market value, where ‘market value’ is understood in the manner described in point (d) of paragraph 5; and
3. (c) the own funds requirements for non-delta risks related to non-continuous options or warrants shall be determined as follows:
   1. (i) where the options or warrants have been bought, as the maximum amount between zero and the difference between the following values:
      1. (1) the market value of the option or warrant, understood in the manner described in point (d) of paragraph 5; and
      2. (2) the risk-weighted delta equivalent amount, understood in the manner described in point (a)(ii) of paragraph 5;
   2. (ii) where the options or warrants have been sold, as the maximum between zero and the difference between the following amounts:
      1. (1) the relevant market value of the underlying asset, which shall be taken to be either the maximum possible payment at expiry date, if it is contractually fixed, or the market value of the underlying asset or the effective notional value if no maximum possible payment is contractually fixed; and
      2. (2) the risk weighted delta equivalent amount, understood in the manner described in point (a)(ii) of paragraph 5; and
4. (d) the value for gamma and vega used in the calculation of own funds requirements shall be calculated using an appropriate pricing model as referred to in Article 329(1), Article 352(1) and Article 358(3). Where either gamma or vega cannot be calculated in accordance with this point (d), the capital requirement on non-delta risks shall be calculated according to point (c) of this paragraph.

7.

An institution shall determine own funds requirements for gamma risk under the Delta-plus approach in accordance with the following:

1. (a) for the purposes of point (a)(i) of paragraph 6, an institution shall calculate the own funds requirements for gamma risk by a process consisting of the following sequence of steps:
   1. (i) for each individual option or warrant a gamma impact shall be calculated;
   2. (ii) the gamma impacts of individual options or warrants which refer to the same distinct underlying type shall be summed up; and
   3. (iii) the absolute value of the sum of all of the negative values resulting from step (ii) shall provide the own funds requirements for gamma risk. Positive values resulting from step (ii) shall be disregarded;
2. (b) for the purpose of the step in point (a)(i), an institution shall calculate gamma impacts in accordance with the following formula:

\[Gamma\ impact=\frac{1}{2}\times Gamma\times VU^2\]

1. where VU:
   1. (i) for options or warrants on interest rates or bonds is equal to the assumed change in yield indicated in column 5 of Table 2 of Article 339;
   2. (ii) for equity options or warrants and equity indices the market value of the underlying multiplied by the weighting indicated in Article 343;
   3. (iii) for foreign exchange and gold options or warrants is equal to the market value of the underlying, calculated in the reporting currency and multiplied by the weighting indicated in Article 351 or, if it meets the conditions for such approach, the weighting indicated in Article 354;
   4. (iv) for commodity options or warrants is equal to the market value of the underlying, multiplied by the weighting indicated in point (a) of Article 360(1);
2. (c) for the purposes of the step in paragraph (a)(ii), a distinct underlying type shall be:
   1. (i) for interest rates in the same currency: each maturity time band as set out in Table 2 of Article 339;
   2. (ii) for equities and stock indices: each market as defined in paragraph 3 of Article 341;
   3. (iii) for foreign currencies and gold: each currency pair and gold; and
   4. (iv) for commodities: commodities considered identical as defined in paragraph 4 of Article 357.

8.

For the purposes of point (a)(ii) of paragraph 6, an institution shall calculate the own funds requirement for vega risk by a process consisting of the following sequence of steps:

1. (a) for each individual option the value of vega shall be determined;
2. (b) for each individual option an assumed plus/minus 25% shift in the implied volatility shall be calculated, where implied volatility shall be understood in the manner described in point (b) of paragraph 6;
3. (c) for each individual option the vega value resulting from the step in point (a) shall be multiplied by the assumed shift in implied volatility resulting from the step in point (b);
4. (d) for each distinct underlying type, understood in the manner described in point (c) of paragraph 7, the values resulting from the step in point (c) shall be summed up; and
5. (e) the sum of absolute values resulting from the step in point (d) shall provide the total own funds requirement for vega risk.

9.

An institution may use the scenario approach where they fulfil all of the following requirements:

1. (a) it has established a risk control unit that monitors the risk of the options portfolio of the institutions and reports the results to the management;
2. (b) it has notified the PRA of a predefined scope of exposures to be covered by this approach consistently over time; and
3. (c) it integrates the results of the scenario approach in the internal reporting to the management of the institution.

For the purposes of point (b), an institution shall define the precise positions that are subject to the scenario approach, including the type of product or identified desk and portfolio, the distinctive risk management approach that applies to such positions, the dedicated IT application that applies to such positions, and a justification for the allocation of those positions to the scenario approach, with regard to those positions allocated to other approaches.

10.

An institution shall define the scenario matrix in accordance with the following requirements:

1. (a) for each distinct underlying type, as referred to in point (c) of paragraph 7, an institution shall define a scenario matrix which contains a set of scenarios;
2. (b) the first dimension of the scenario matrix shall be the price changes in the underlying above and below its current value. That range of changes shall consist of the following:
   1. (i) for interest rate options or warrants, plus/minus the assumed change in interest rates set out in column 5 of Table 2 of Article 339;
   2. (ii) for options or warrants on equity or equity indices, plus/minus the weighting provided in Article 343;
   3. (iii) for foreign exchange and gold options or warrants, plus/minus the weighting indicated in Article 351 where appropriate, plus/minus the weighting indicated in Article 354; and
   4. (iv) for commodity options (warrants), plus/minus the weighting indicated in point (a) of paragraph 1 of Article 360;
3. (c) the price change scenarios in the underlying shall be defined by a grid of at least seven points which includes the current observation and divides the range indicated in point (b) in equally spaced intervals;
4. (d) the second dimension of the scenario matrix shall be defined by volatility changes. The range of changes in volatilities shall be between plus/minus 25% of the implied volatility, where implied volatility shall be understood as referred to in paragraph 6(b). That range shall be divided into a grid of at least three points which include a 0% change and where the range is divided into equally spaced intervals; and
5. (e) the scenario matrix is determined by all possible combinations of points, as referred to in points (c) and (d). Each combination shall constitute a single scenario.

11.

According to the scenario approach, an institution shall calculate the own funds requirement on non-delta risk of options or warrants through a process consisting of the following sequence of steps:

1. (a) for each individual option or warrant, all the scenarios referred to in paragraph 10 shall be applied to calculate simulated net loss or gain corresponding to each scenario. That simulation shall be done using full revaluation methods, by simulating the price changes by the use of pricing models and without relying to local approximations of those models;
2. (b) for each distinct underlying type, as referred to in point (c) of paragraph 7, the values obtained as a result of the calculation in point (a) and referring to the individual scenarios, shall be aggregated;
3. (c) for each distinct underlying type as referred to in point (c) of paragraph 7, the ‘relevant scenario’ shall be calculated as the scenario for which the values determined in step (b) result in the largest loss, or the lowest gain if there are no losses;
4. (d) for each distinct underlying type, as referred to in point (c) of paragraph 7, the own funds requirements shall be calculated in accordance with the following formula:

Own funds requirement = – min(0, PC – DE)

1. where:

PC (Price Change) = the sum of price changes of the options with the same distinct underlying type understood in the manner described in point (c) of paragraph 7 (negative sign for losses and positive sign for gains) and corresponding to the relevant scenario determined in step (c) of paragraph 11;

DE = the delta effect, calculated as follows:

DE = ADEV x PPCU

where:

ADEV (aggregated delta equivalent value) = the sum of negative or positive deltas, multiplied by the market value of the underlying of the contract, of options that have the same distinct underlying type understood in the manner described in point (c) of paragraph 7;

PPCU (percentage price change of the underlying) = the percentage price change of the underlying understood in the manner described in point (c) of paragraph 7, corresponding to the relevant scenario determined in step (c) of paragraph 11; and

1. (e) the total own funds requirement in the case of non-delta risk of options or warrants shall be the sum of the own fund requirements obtained from the calculation referred to in step (d) for all distinct underlying types as referred to in point (c) of paragraph 7.

1.

For the purposes of Article 352, an institution shall, in respect of CIUs take the actual foreign exchange positions of the CIU into account.

2.

An institution may rely on the following third parties' reporting of the foreign exchange positions in the CIU:

1. (a) the depository institution of the CIU provided that the CIU exclusively invests in securities and deposits all securities at this depository institution; and
2. (b) for other CIUs, the CIU management company, provided that the CIU management company is managed by a company that is subject to supervision in the United Kingdom or, in the case of third country CIU, where the CIU is established in a third country that carries out activities similar to those carried out by a CIU 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 CIUs.

The correctness of the calculation shall be confirmed by an external auditor.

3.

Where an institution is not aware of the foreign exchange positions in a CIU, it shall assume that the CIU is invested up to the maximum extent allowed under the CIU's mandate in foreign exchange and the institution shall, for trading book positions, take account of the maximum indirect exposure that it could achieve by taking leveraged positions through the CIU when calculating their own funds requirement for foreign exchange risk. To do this, the institution shall proportionally increase the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate. The institution shall treat the assumed position of the CIU in foreign exchange as a separate currency according to the treatment of investments in gold, subject to the addition of the total long position to the total long open foreign exchange position and the total short position to the total short open foreign exchange position where the direction of the CIU's investment is available. The institution shall not net between such positions prior to the calculation.

[Note: This rule corresponds to Article 353 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution may provide lower own funds requirements against positions in relevant closely correlated currencies. A pair of currencies is deemed to be closely correlated only if the likelihood of a loss, calculated on the basis of daily exchange-rate data for the preceding three or five years, occurring on equal and opposite positions in such currencies over the following 10 working days, which is 4% or less of the value of the matched position in question (valued in terms of the reporting currency) has a probability of at least 99%, when an observation period of three years is used, and 95%, when an observation period of five years is used. The own-funds requirement on the matched position in two closely correlated currencies shall be 4% multiplied by the value of the matched position.

2.

In calculating the requirements of Articles 351 to 354, an institution may disregard positions in currencies, which are subject to a legally binding intergovernmental agreement to limit its variation relative to other currencies covered by the same agreement. It shall calculate the matched positions in such currencies and subject them to an own funds requirement no lower than half of the maximum permissible variation laid down in the intergovernmental agreement in question in respect of the currencies concerned.

3.

An institution may determine the list of currencies for which the treatment set out in paragraph 1 is available, based on the following criteria:

1. (a) daily percent currency movement shall be calculated on the basis of the following formula:

% Change = In(exchange_t) – In(exchange_t–1)

where:

exchange = relevant currency pair;

1. (b) the resulting percentage shall be compared to the threshold of the maximum daily change in value within a pair of currencies of 1.265%. Any values exceeding this threshold shall be treated as breaches of the 4%, 10-day maximum loss;
2. (c) only the unmatched positions in currencies shall be incorporated into the overall net open position in accordance with paragraph 4 of Article 352.

[Note: This rule corresponds to Article 354 of CRR as it applied immediately before revocation by the Treasury]

1.

Subject to Articles 356 to 358, an institution shall calculate the own funds requirement for commodities risk with one of the methods set out in Articles 359, 360 or 361.

[Note: This rule corresponds to Article 355 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution with ancillary agricultural commodities business may determine the own funds requirements for their physical commodity stock at the end of each year for the following year where all of the following conditions are met:

1. (a) at any time of the year it holds own funds for this risk which are not lower than the average own funds requirement for that risk estimated on a conservative basis for the coming year;
2. (b) it estimates on a conservative basis the expected volatility for the figure calculated under point (a);
3. (c) its average own funds requirement for this risk does not exceed 5% of its own funds or GBP 880,000 and, taking into account the volatility estimated in accordance with (b), the expected peak own funds requirements do not exceed 6.5% of its own funds; and
4. (d) the institution monitors on an ongoing basis whether the estimates carried out under points (a) and (b) still reflect the reality.

2.

An institution shall notify to the PRA the use they make of the option provided in paragraph 1.

[Note: This rule corresponds to Article 356 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall express:

1. (a) each position in commodities or commodity derivatives in terms of the standard unit of measurement; and
2. (b) the spot price in each commodity in the reporting currency.

2.

An institution shall treat positions in gold or gold derivatives as subject to foreign-exchange risk and treat these positions in accordance with Articles 351 to 354 for the purpose of calculating commodities risk.

3.

For the purpose of paragraph 1 of Article 360, the institution shall calculate its net position in each commodity as the excess of an institution's long positions over its short positions, or vice versa, in the same commodity and identical commodity futures, options and warrants. It shall treat derivative instruments, as laid down in Article 358, as positions in the underlying commodity.

4.

For the purposes of calculating a position in a commodity, an institution shall treat the following positions as positions in the same commodity:

1. (a) positions in different sub-categories of commodities in cases where the sub-categories are deliverable against each other; and
2. (b) positions in similar commodities if they are close substitutes and where a minimum correlation of 0.9 between price movements can be clearly established over a minimum period of one year.

[Note: This rule corresponds to Article 357 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution shall incorporate commodity futures and forward commitments to buy or sell individual commodities in the measurement system as notional amounts in terms of the standard unit of measurement and assigned a maturity with reference to expiry date.

2.

An institution shall treat commodity swaps where one side of the transaction is a fixed price and the other the current market price, as a series of positions equal to the notional amount of the contract, with, where relevant, one position corresponding with each payment on the swap and slotted into the maturity bands in paragraph 1 of Article 359. The positions shall be long positions if the institution is paying a fixed price and receiving a floating price and short positions if the institution is receiving a fixed price and paying a floating price. An institution shall report commodity swaps in which the sides of the transaction are in different commodities in the relevant reporting ladder for the maturity ladder approach.

3.

An institution shall treat options and warrants on commodities or on commodity derivatives as if they were positions equal in value to the amount of the underlying to which the option refers, multiplied by its delta for the purposes of this Chapter. The latter positions may be netted off against any offsetting positions in the identical underlying commodity or commodity derivative. The delta used shall be that of the exchange concerned. For OTC options, or where delta is not available from the exchange concerned the institution may with the prior permission of the PRA calculate delta itself 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 that it is using an appropriate model which estimates the rate of change of the option's or warrant's value with respect to small changes in the market price of the underlying.

An institution that has been permitted to calculate delta itself as set out in the first sub-paragraph shall:

1. (i) adequately reflect other risks associated with options, apart from the delta risk, in the own funds requirements in accordance with Article 352a; and
2. (ii) 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]

4.

[Note: Provision left blank]

5.

Where an institution is either of the following, it shall include the commodities concerned in the calculation of its own funds requirement for commodities risk:

1. (a) the transferor of commodities or guaranteed rights relating to title to commodities in a repurchase agreement; or
2. (b) the lender of commodities in a commodities lending agreement.

[Note: Paragraphs 1, 2, 3 and 5 of this rule correspond to Article 358(1), (2), (3) and (5) of CRR as applied immediately before revocation by the Treasury]

1.

An institution shall use a separate maturity ladder in line with Table 1 of this Article for each commodity. All positions in that commodity shall be assigned to the appropriate maturity bands. Physical stocks shall be assigned to the first maturity band between 0 and up to and including one month.

2.

An institution may offset and assign positions in the same commodity to the appropriate maturity bands on a net basis for the following:

1. (a) positions in contracts maturing on the same date; and
2. (b) positions in contracts maturing within 10 days of each other if the contracts are traded on markets which have daily delivery dates.

3.

The institution shall then calculate the sum of the long positions and the sum of the short positions in each maturity band. The amount of the former which are matched by the latter in a given maturity band shall be the matched positions in that band, while the residual long or short position shall be the unmatched position for the same band.

4.

An institution shall treat that part of the unmatched long position for a given maturity band that is matched by the unmatched short position, or vice versa, for a maturity band further out as the matched position between two maturity bands. That part of the unmatched long or unmatched short position that cannot be thus matched shall be the unmatched position.

5.

The institution shall calculate its own funds requirement for each commodity on the basis of the relevant maturity ladder as the sum of the following:

1. (a) the sum of the matched long and short positions, multiplied by the appropriate spread rate as indicated in the second column of Table 1 of this Article for each maturity band and by the spot price for the commodity;
2. (b) the matched position between two maturity bands for each maturity band into which an unmatched position is carried forward, multiplied by 0.6%, which is the carry rate and by the spot price for the commodity; and
3. (c) the residual unmatched positions, multiplied by 15% which is the outright rate and by the spot price for the commodity.

6.

The institution's overall own funds requirement for commodities risk shall be calculated as the sum of the own funds requirements calculated for each commodity in accordance with paragraph 5.

[Note: This rule corresponds to Article 359 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution's own funds requirement for each commodity shall be calculated as the sum of the following:

1. (a) 15% of the net position, long or short, multiplied by the spot price for the commodity; and
2. (b) 3% of the gross position, long plus short, multiplied by the spot price for the commodity.

2.

An institution's overall own funds requirement for commodities risk shall be calculated as the sum of the own funds requirements calculated for each commodity in accordance with paragraph 1.

[Note: This rule corresponds to Article 360 of CRR as it applied immediately before revocation by the Treasury]

1.

An institution may use the minimum spread, carry and outright rates set out in Table 2 of this Article instead of those indicated in Article 359 provided that the institution:

1. (a) undertakes significant commodities business;
2. (b) has an appropriately diversified commodities portfolio; and
3. (c) is not yet in a position to use internal models for the purpose of calculating the own funds requirement for commodities risk.

2.

An institution shall notify the use they make of this Article to the PRA together with evidence of their efforts to implement an internal model for the purpose of calculating the own funds requirement for commodities risk.

[Note: This rule corresponds to Article 361 of CRR as it applied immediately before revocation by the Treasury]