Prudential Regulation Authority Rulebook

3.1

The PRA has regard to each of the following factors in determining whether an Eligible Investment Firm should be designated:

• whether the firm’s balance sheet exceeds an average of £15 billion total gross assets over four quarters, as reported on regulatory returns; and/or
• whether the sum of the balance sheets of all Eligible Investment Firms in a group exceeds an average of £15 billion total gross assets over four quarters; and/or
• where the firm is part of a PRA group, whether the firm’s revenues, balance sheet and risk-taking is significant relative to the group’s revenues, balance sheet and risk-taking.

3.2

The first factor – that a firm is designated where it has total gross assets over four quarters averaging more than £15 billion – relates to the assets consideration in the PRA-regulated Activities Order. While an individual firm’s impact on the financial system is not only a function of its size, but also the complexity of its operations, the substitutability of the services it provides and its connectedness with the rest of the system, the use of a size threshold provides an objective reference point to indicate which firms are likely to be systemically relevant in this context. This does not mean that all firms above this threshold will be systemically relevant, nor that any firm below the threshold cannot be systemically relevant; it is simply indicative as to likely systemic relevance in this context. In deciding to designate a particular firm, the PRA will take account of its substitutability, interconnectedness and complexity using a range of metrics such as its market share in key markets, legal structure, intra-financial system assets and liabilities and leverage ratio.

3.3

When considering a firm’s gross assets, analysing its balance sheet over four quarters prevents any large temporary movements in the balance sheet from distorting the view of a firm’s likely importance. In addition to looking at balance sheet size, the PRA will also consider a firm’s business model, including whether it is a clearing member of a central counterparty providing clearing services to other financial institutions who are not clearing members themselves, and booking practices to ensure that assets booked to the firm do not give a distorted view of the firm’s business and risk profile. Other assessments of asset values beyond those regularly submitted on a firm’s regulatory returns (both end-of-day and intraday) may also be considered in order to identify whether a firm’s assets, as disclosed in regulatory returns, provide an accurate representation of its risk-taking.

3.4

The second factor – that the sum of the total gross assets of all investment firms in a group potentially subject to designation averages more than £15 billion over four quarters – relates to the requirement in the PRA-regulated Activities Order to take into account, where the firm is a member of a group, the assets of the group members. This ensures that groups do not structure themselves in such a way as to avoid designation of a firm by spreading business across several investment firms within the same group which individually fall below the total assets threshold.

3.5

The third factor – that the PRA analyses whether the share of a firm’s revenues, balance sheet and risk-taking is significant relative to the group’s revenues, balance sheet and risk-taking – relates to the provision in the PRA-regulated Activities Order to have regard to the impact of an investment firm on any PRA-authorised person within the group. In some cases, an Eligible Investment Firm may pose risks to other PRA-authorised persons within the group even where the investment firm does not meet the total assets threshold. A firm’s ‘significance’ to the rest of a group would be determined, among other things, through supervisory judgement gained through knowledge of the group and dialogue with the Financial Conduct Authority (FCA). The PRA would typically consider the materiality of a legal entity to its group with reference to its share of the group’s revenues, balance sheet or risk-taking. Given that group structures vary significantly, the materiality of an individual entity requires specific knowledge of the group in question and will be a matter of judgement for the PRA.