Application

Part

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Chapter

Application

Printed on: 07/11/2024

Rulebook at: 01/01/2010

BIPRU 1

Application

BIPRU 1.1

Application

01/01/2007

BIPRU 1.1.1

There is no overall application statement for BIPRU. Each chapter or section has its own application statement. Broadly speaking however, BIPRU applies to:

(1) a bank;
(2) a building society;
(3) a BIPRU investment firm; and
(4) groups containing such firms.

01/01/2007

BIPRU 1.1.2

BIPRU applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

01/01/2007

BIPRU 1.1.3

In the main BIPRU only applies to a UCITS investment firm in respect of designated investment business (excluding scheme management activity). However BIPRU 2.2 (Internal capital adequacy standards), BIPRU 2.3 (Interest rate risk in the non-trading book), BIPRU 8 (Group risk - consolidation) and BIPRU 11 (Disclosure) apply to the whole of its business.

01/01/2007

Purpose

BIPRU 1.1.4

BIPRU 1.1 implements in part Articles 3(1)(b), 5, 9, 10 and 20 of the Capital Adequacy Directive.

01/11/2007

Guidance on the categorisation of BIPRU investment firms

BIPRU 1.1.5

Guidance on the categorisation of investment firms for the purposes of BIPRU and GENPRU is included in PERG 13 (Guidance on the scope of the Markets in Financial Instruments Directive and the recast Capital Adequacy Directive).

01/11/2007

The definition of a BIPRU firm

BIPRU 1.1.6

Subject to BIPRU 1.1.7 R, a BIPRU firm means a firm that is:[deleted]

(1) a building society; or
(2) a bank; or
(3) a full scope BIPRU investment firm; or
(4) a BIPRU limited licence firm; or
(5) a BIPRU limited activity firm.

01/01/2007

BIPRU 1.1.7

None of the following is a BIPRU firm and each of the following is excluded from each of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3) to BIPRU 1.1.6R (5) and BIPRU 1.1.18 R (2) to (4):

(1) an incoming EEA firm;
(2) an incoming Treaty firm;
(3) any other overseas firm;
(4) an ELMI;
(5) an insurer; and
(6) an ICVC.

01/01/2007

BIPRU 1.1.8

A firm falling within BIPRU 1.1.6 R (3) to BIPRU 1.1.6R (5) is a BIPRU investment firm. A BIPRU investment firm includes a UCITS investment firm that is not excluded under BIPRU 1.1.7 R.

01/01/2007

BIPRU 1.1.9

EEA firms are subject to the prudential standards of their home state regulator. But the Banking Consolidation Directive permits a host state competent authority to require a BCD credit institution to meet certain standards relating to its liquidity. The FSA's approach to liquidity for such firms is set out in BIPRU 12.

01/12/2009

BIPRU 1.1.10

(1) This paragraph applies to an undertaking that would be a third country BIPRU firm if it were authorised under the Act.
(2) Except in exceptional circumstances, it is the FSA's policy that it will not give an overseas applicant a Part IV permission unless the FSA is satisfied that the applicant will be subject to prudential regulation by its home state regulatory body that is broadly equivalent to that provided for in the Handbook and the applicable EEA prudential sectoral legislation. The FSA will take into account not only the requirements to which the firm is subject but how they are enforced. The FSA will also take into account the laws, regulations and administrative provisions to which it is subject in its home state. The reasons for that policy include:

(a) it is unlikely that a firm that is not subject to equivalent supervision will be able to satisfy the threshold conditions (and in particular threshold condition 5 (Suitability)) and it is unlikely that it will be possible to establish that the firm does satisfy them;
(b) such a firm is likely to pose a threat to the interests of consumers and potential consumers, particularly as effective supervision of an overseas firm depends on cooperation between the FSA and the regulatory body that authorises the firm in its home country and on the FSA being able to place appropriate reliance on the supervision carried out by such regulatory body; and
(c) under Article 38(1) of the Banking Consolidation Directive the FSA should not apply to branches of credit institutions having their head office outside the EEA, when commencing or carrying on their business, provisions which result in more favourable treatment than that accorded to branches of credit institutions having their head office in the EEA.

(3) If an undertaking is not subject to equivalent supervision in its home state and it wishes to carry on in the United Kingdom regulated activities coming within the scope of the activities that define a BIPRU firm it should establish a subsidiary undertaking in the United Kingdom. Such a subsidiary undertaking should be able to show, amongst other things, how it would comply with the threshold conditions (and in particular threshold conditions 3 (Close links) and 5 (Suitability)).
(4) If in exceptional circumstances the FSA does grant a Part IV permission to an undertaking that is not subject to equivalent prudential regulation the FSA is likely to take measures under the regulatory system to compensate for the lack of equivalent supervision. These may include applying the prudential requirements for BIPRU firms to the firm.
(5) An overseas firm that is subject to equivalent supervision is subject to the threshold conditions and the Principles. BIPRU and GENPRU do not generally apply. However BIPRU 12 applies to a credit institution with respect to liquidity risk in relation to its United Kingdom branch.

01/12/2009

Types of investment firm: Limited activity firms

BIPRU 1.1.11

A limited activity firm means (as specified by Article 20(3) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that satisfies the following conditions:

(1) it meets the criteria in (a) or the criteria in (b):

(a) it deals on own account only:

(i) for the purpose of fulfilling or executing a client order; or
(ii) for the purpose of gaining entrance to a clearing and settlement system or a recognised investment exchange or designated investment exchange when acting in an agency capacity or executing a client order; or

(b) it satisfies the following conditions:

(i) it does not hold client money or securities in relation to investment services that it provides and is not authorised to do so;
(ii) the only investment service it undertakes is dealing on own account;
(iii) it has no external customers in relation to investment services it provides; and
(iv) the execution and settlement of its transactions in relation to investment services it provides takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution;

(2) (in the case of a CAD investment firm that is a BIPRU investment firm) its base capital resources requirement is €730,000;
(3) (in the case of a CAD investment firm that is an EEA firm) it is subject to the CRD implementation measures of its Home State for Article 9 of the Capital Adequacy Directive (Initial capital requirement of €730,000); and
(4) (in the case of any other CAD investment firm) its base capital resources requirement would be €730,000 if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14 R (3)(b).

01/11/2007

Types of investment firm: Limited licence firms

BIPRU 1.1.12

A limited licence firm means (as specified by Article 20(2) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that is not authorised to:

(1) deal on own account; or
(2) provide the investment services of underwriting or placing financial instruments (as referred to in point 6 of Section A of Annex I of MiFID) on a firm commitment basis.

01/11/2007

Types of investment firm: CAD full scope firm

BIPRU 1.1.13

A CAD full scope firm means a CAD investment firm that is not a limited activity firm or a limited licence firm.

01/01/2007

Types of investment firm: CAD investment firm

BIPRU 1.1.14

(1) In accordance with Article 3(1)(b) of the Capital Adequacy Directive, a person is a CAD investment firm if it falls into (2) or (3).
(2) A person whose head office is in an EEA State is a CAD investment firm if it is an investment firm that is subject to the requirements imposed by MiFID but excludes the following:

(a) a bank, a building society or an ELMI;
(b) a credit institution;
(c) a local; and
(d) an exempt CAD firm.

(3) An investment firm whose head office is not in an EEA State is a CAD investment firm if it would have fallen into (2) if:

(a) its head office had been in an EEA State; and
(b) it had carried on all its business in the EEA and had obtained whatever authorisations for doing so are required under MiFID.

01/11/2007

BIPRU 1.1.15

The following are excluded from the definition of a CAD investment firm and hence from the definition of BIPRU investment firm:

(1) an investment firm to which MiFID does not apply under Article 2(1); and
(2) an investment firm with the benefit of an exemption pursuant to Article 3 of MiFID.

01/11/2007

Types of investment firm: Exempt CAD firm

BIPRU 1.1.16

In accordance with Article 3(1)(b)(iii) of the Capital Adequacy Directive (Definitions), an exempt CAD firm means an investment firm that satisfies the following conditions:

(1) it would have been a CAD investment firm if exempt CAD firms were not excluded from the definition; and
(2) it is only authorised to provide the service of investment advice and/or receive and transmit orders from investors (as referred to in Section A of Annex I of MiFID) without in both cases holding money or securities belonging to its clients and which for that reason may not at any time place itself in debit with its clients.

01/11/2007

Types of BIPRU investment firm

BIPRU 1.1.17

(1) A BIPRU limited licence firm means a limited licence firm that falls into (4).
(2) A BIPRU limited activity firm means a limited activity firm that falls into (4).
(3) A full scope BIPRU investment firm means a CAD full scope firm that falls into (4).
(4) A limited licence firm, limited activity firm or CAD full scope firm falls into (4) if:

(a) it is a firm; and
(b) its head office is in the United Kingdom and it is not otherwise excluded from the definition of BIPRU firm under BIPRU 1.1.7 R.

01/01/2007

Alternative classification of BIPRU investment firms

BIPRU 1.1.18

BIPRU investment firm are divided into the following classes for the purposes of the calculation of the base capital resources requirement and for the purpose of any other provision of the Handbook that applies this classification:

(1) a UCITS investment firm;
(2) a BIPRU 50K firm;
(3) a BIPRU 125K firm; and
(4) a BIPRU 730K firm.

01/01/2007

Types of investment firm: BIPRU 125K firm

BIPRU 1.1.19

A BIPRU 125K firm means a BIPRU investment firm that satisfies the following conditions:

(1) it does not:

(a) deal on own account; or
(b) underwrite issues of financial instruments (as referred in Section A of Annex I of MiFID) on a firm commitment basis;

(2) it holds clients' money or securities in relation to investment services it provides or is authorised to do so;
(3) it offers one or more of the following services (all as referred to in Section A of Annex I of MiFID):

(a) reception and transmission of investors' orders for financial instruments; or
(b) the execution of investors' orders for financial instruments; or
(c) the management of individual portfolios of investments in financial instruments;

(4) it is not a UCITS investment firm and;
(5) it does not operate a multilateral trading facility.

01/11/2007

Types of investment firm: BIPRU 50K firm

BIPRU 1.1.20

A BIPRU 50K firm means a BIPRU investment firm that satisfies the following conditions:

(1) it satisfies the conditions in BIPRU 1.1.19 R (1) and (3);
(2) it does not hold clients' money or securities in relation to investment services it provides and it is not authorised to do so;
(3) it is not a UCITS investment firm; and
(4) it does not operate a multilateral trading facility.

01/11/2007

Types of investment firm: 730K firm

BIPRU 1.1.21

A BIPRU investment firm that is not a UCITS investment firm, a BIPRU 50K firm or a BIPRU 125K firm is a BIPRU 730K firm. A BIPRU investment firm that operates a multilateral trading facility is a BIPRU 730K firm.

01/11/2007

Types of investment firm: Part IV permission

BIPRU 1.1.22

A firm also falls into one of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3)to (5) or BIPRU 1.1.18 R if its Part IV permission contains a requirement that it comply with the rules in GENPRU and BIPRU applicable to that category of firm. If a firm is subject to such a requirement and it would otherwise also fall into another category of BIPRU investment firm it does not fall into that other category.

01/01/2007

Meaning of dealing on own account

BIPRU 1.1.23

(1) Dealing on own account means (for the purpose of GENPRU and BIPRU) the service of dealing in any financial instruments for own account as referred to in point 3 of Section A of Annex I to MiFID, subject to (2) and (3).
(2) In accordance with Article5(2) of the Capital Adequacy Directive (Definition of dealing on own account), a CAD investment firm that executes investors' orders for financial instruments and holds such financial instruments for its own account does not for that reason deal on own account if the following conditions are met:

(a) such position only arise as a result of the CAD investment firm's failure to match investors' orders precisely;
(b) the total market value of all such positions is no higher than 15% of the CAD investment firm's initial capital;
(c) (in the case of a BIPRU investment firm) it complies with the main BIPRU firm Pillar 1 rules and BIPRU 10(Concentration risk);
(d) (in the case of a CAD investment firm that is an EEA firm) it complies with the CRD implementation measures of its Home State for Articles 18 and 20 (Minimum capital requirements) and 28 (Large exposures) of the Capital Adequacy Directive;
(e) (in the case of any other CAD investment firm) it would comply with the rules in (2)(c) if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14R (3)(b); and
(f) such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.

(3) In accordance with Article 5(2) of the Capital Adequacy Directive, the holding of non-trading book positions in financial instruments in order to invest capital resources is not dealing on own account for the purposes referred to in BIPRU 1.1.18 R.

01/11/2007

Interpretation of the definition of types of firm and undertaking

BIPRU 1.1.24

For the purposes of the definitions in BIPRU 1.1, a person does any of the activities referred to in BIPRU 1.1 if:

(1) it does that activity anywhere in the world; or
(2) if its permission includes that activity; or
(3) (in the case of an EEA firm) it is authorised by its Home State regulator to do that activity; or
(4) (if the carrying on of that activity is prohibited in a state or territory without an authorisation in that state or territory) that firm has such an authorisation.

01/01/2007

BIPRU 1.1.25

For the purposes of the definitions in BIPRU 1.1, a person offers any of the services referred to in BIPRU 1.1.19 R (3) if:

(1) it offers that service anywhere in the world; or
(2) any of BIPRU 1.1.24 R (1) to BIPRU 1.1.24R (4) apply.

01/01/2007

BIPRU 1.1.26

For the purposes of the definitions in BIPRU 1.1, a person has an authorisation to do any of the activities referred to in BIPRU 1.1 if any of BIPRU 1.1.24 R (2) to (4) apply.

01/01/2007

BIPRU 1.2

Definition of the trading book

01/01/2007

Application

BIPRU 1.2.1

This section applies to a BIPRU firm.

01/01/2007

Purpose

BIPRU 1.2.2

This section implements certain provisions of the Capital Adequacy Directive and the Banking Consolidation Directive relating to the trading book. The precise provisions being implemented are listed as a note after each rule.

01/01/2007

Definition of the trading book: General

BIPRU 1.2.3

The trading book of a firm consists of all position in CRD financial instrument and commodities held either with trading intent or in order to hedge other elements of the trading book and which are either free of any restrictive covenants on their tradability or able to be hedged.

[Note: CAD Article 11(1)]

01/01/2007

Definition of the trading book: Positions

BIPRU 1.2.4

The term position includes proprietary positions and positions arising from client servicing and market making.

01/01/2007

BIPRU 1.2.5

Positions arising from client servicing include those arising out of contracts where a firm acts as principal (even in the context of activity described as 'broking' or 'customer business'). Such positions should be allocated to a firm's trading book if the intent is trading (see BIPRU 1.2.10 R). This applies even if the nature of the business means that generally the only risks incurred by the firm are counterparty risks (i.e. no market risk charges apply). If the nature of the business means that generally the only risks incurred by the firm are counterparty risks, the position will generally still meet the trading intent requirement in BIPRU 1.2.10 R if the position would meet the trading intent requirement if position risk did arise. The FSA understands that business carried out under International Uniform Brokerage Execution ("Give-Up") Agreements involve back to back trades as principal. Thus positions arising out of business carried out under such agreements should be allocated to a firm's trading book.

01/01/2007

Definition of the trading book: Repos

BIPRU 1.2.6

Term trading-related repo-style transactions that a firm accounts for in its non-trading book may be included in the trading book for capital requirement purposes so long as all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are defined as those that meet the requirements of BIPRU 1.2.4 R, BIPRU 1.2.10 R and BIPRU 1.2.12 R, and both legs are in the form of either cash or securities includable in the trading book. Regardless of where they are booked, all repo-style transactions are subject to a non-trading book counterparty credit risk charge.
[Note: CAD Annex VII Part D point 4]

01/01/2007

BIPRU 1.2.6A

Capital requirements for term trading-related repo-style transactions are the same whether the risks arise in the trading book as counterparty credit risk or in the non-trading book as credit risk.

29/06/2007

CRD financial instruments

BIPRU 1.2.7

A CRD financial instrument means any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party.

01/01/2007

BIPRU 1.2.8

CRD financial instruments include both primary CRD financial instrument or cash instruments, and derivative CRD financial instruments the value of which is derived from the price of an underlying CRD financial instrument, a rate, an index or the price of another underlying item and include as a minimum the instruments specified in Section C of Annex I to the MIFID.

[Note: CAD Article 3(1) last paragraph]

01/01/2007

BIPRU 1.2.9

Generally, for the purpose of the definition of CRD financial instrument:

(1) a financial asset means cash, the right to receive cash or another financial asset, the contractual right to exchange financial assets on potentially favourable terms or an equity instrument; and
(2) a financial liability means the contractual obligation to deliver cash or another financial asset or to exchange financial liabilities under conditions that are potentially unfavourable.

01/01/2007

Trading intent

BIPRU 1.2.10

Positions held with trading intent for the purpose of the definition of the trading book are those held intentionally for short-term resale and/or with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations.

01/01/2007

BIPRU 1.2.11

Trading intent must be evidenced on the basis of the strategies, policies and procedures set up by the firm to manage the position or portfolio in accordance with BIPRU 1.2.12 R.

01/01/2007

BIPRU 1.2.12

Positions/portfolios held with trading intent must comply with the following requirements:

(1) there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which must include the expected holding horizon;
(2) there must be clearly defined policies and procedures to monitor the position against the firm's trading strategy including the monitoring of turnover and stale position in the firm's trading book; and
(3) there must be clearly defined policies and procedures for the active management of the position, which must include the following:

(a) position entered into on a trading desk;
(b) position limits are set and monitored for appropriateness;
(c) dealers have the autonomy to enter into/manage the position within agreed limits and according to the approved strategy;
(d) positions are reported to senior management as an integral part of the firm's risk management process; and
(e) positions are actively monitored with reference to market information sources and an assessment made of the marketability or hedge-ability of the position or its component risks, including the assessment of, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market.

[Note: CAD Annex VII Part A]

01/01/2007

Internal hedges

BIPRU 1.2.13

Internal hedges may be included in the trading book, in which case BIPRU 1.2.14 R to BIPRU 1.2.16 R apply.

[Note: CAD Article 11(5)]

01/01/2007

BIPRU 1.2.14

(1) An internal hedge is a position that materially or completely offsets the component risk element of a non-trading book position or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:

(a) internal hedges must not be primarily intended to avoid or reduce capital requirements;
(b) internal hedges must be properly documented and subject to particular internal approval and audit procedures;
(c) the internal transaction must be dealt with at market conditions;
(d) the bulk of the market risk that is generated by the internal hedge must be dynamically managed in the trading book within the authorised limits; and
(e) internal transactions must be carefully monitored.

(2) Monitoring must be ensured by adequate procedures.

[Note: CAD Annex VII Part C point 1]

01/01/2007

BIPRU 1.2.15

The treatment referred to in BIPRU 1.2.14 R applies without prejudice to the capital requirements applicable to the "non-trading book leg" of the internal hedge.

01/01/2007

BIPRU 1.2.16

Notwithstanding BIPRU 1.2.14 R to BIPRU 1.2.15 R, when a firm hedges a non-trading book credit risk exposure using a credit derivative booked in its trading book (using an internal hedge), the non-trading book exposure is not deemed to be hedged for the purposes of calculating capital requirements unless the firm purchases from an eligible third party protection provider a credit derivative meeting the requirements set out in BIPRU 5.7.13 R (Additional requirements for credit derivatives) with regard to the non-trading book exposure. Where such third party protection is purchased and is recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, neither the internal nor external credit derivative hedge maybe included in the trading book for the purposes of calculating capital requirements.

[Note: CAD Annex VII Part C point 3]

01/01/2007

Size thresholds

BIPRU 1.2.17

(1) Subject to (3), a firm may calculate its capital requirements for its trading book business in accordance with the standardised approach to credit risk (or, if it has an IRB permission, the IRB approach) as it applies to the non-trading book where the size of the trading book business meets the following requirements:

(a) the trading book business of the firm does not normally exceed 5% of its total business;
(b) its total trading book position do not normally exceed €15 million; and
(c) the trading book business of the firm never exceeds 6% of its total business and its total trading book positions never exceed €20 million.

(2) Subject to (3), if (1) applies, the following are disapplied:

(a) the rules relating to the interest rate PRR, the equity PRR, the CIU PRR and the PRR calculated under BIPRU 7.11 (Credit derivatives in the trading book);
(b) the rules relating to the option PRR (but only in relation to positions which under BIPRU 7.6.5 R (Table: Appropriate calculation for an option or warrant) may be subject to one of the other PRR charges listed in (2)(a) or which would be subject to such a PRR charge if BIPRU 7.6.5 R did not require an option PRR to be calculated);
(c) BIPRU 7.10 (Use of a Value at Risk Model) so far as BIPRU 7.10 relates to the risks covered by the requirements in (a) and (b); and
(d) BIPRU 14 (Capital requirements for settlement and counterparty risk).

(3) If (1) applies, the following continue to apply:

(a) the rules relating to the commodity PRR and the foreign currency PRR;
(b) the rules relating to the option PRR (so far as not disapplied under (2)(b);
(c) BIPRU 7.10 (so far as not disapplied under (2)(c));
(d) BIPRU 14.2.3 R to BIPRU 14.2.8 R (Credit derivatives); and
(e) BIPRU 14.2.15 R to BIPRU 14.2.16 R (Collateral for repurchase transactions and other products).

[Note: CAD Article 18(2)]

01/01/2007

BIPRU 1.2.18

In order to calculate the proportion that trading book business bears to total business for the purpose of BIPRU 1.2.17 R (1)(a) to BIPRU 1.2.17R (1)(c) the firm must refer to the size of the combined on- and off-balance-sheet business. For this purpose, debt instruments must be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and short positions must be summed regardless of their signs.

[Note: CAD Article 18(3)]

01/01/2007

BIPRU 1.2.19

If a firm should happen for more than a short period to exceed either or both of the limits imposed in BIPRU 1.2.17 R (1)(a) and BIPRU 1.2.17R (1)(b) or either or both of the limits imposed in BIPRU 1.2.17 R (1)(c):

(1) BIPRU 1.2.17 R ceases to apply; and
(2) the firm must notify the FSA.

[Note: CAD Article 18(4)]

01/01/2007

BIPRU 1.2.20

As required by BIPRU 8.7.21 R (Special rules for the consolidated market risk requirement), a firm should consider whether it meets the threshold conditions in BIPRU 1.2.17 R on both an unconsolidated (or solo) basis and a consolidated basis. If a firm's trading activities on both an unconsolidated (or solo) basis and a consolidated basis are below the threshold size, it may be appropriate for the firm not to adopt the trading book treatment. However, even if the firm does not apply the trading book treatment it should still adopt a trading book policy statement. That statement may be restricted to identifying the activities the firm normally considers to be trading and that would constitute part of its trading book. The firm should use this policy statement to help it to decide whether or not adopting the trading book treatment is appropriate.

01/01/2007

Systems and controls for the trading book

BIPRU 1.2.21

A firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.

01/01/2007

BIPRU 1.2.22

A firm must establish and maintain systems and controls to manage its trading book, in accordance with the trading book systems and controls rules, BIPRU 1.2.6 R (Definition of the trading book: Repos) and the overall financial adequacy rule to BIPRU 1.2.27 R (Trading book policy statements).

01/01/2007

BIPRU 1.2.23

A firm must establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.

01/01/2007

BIPRU 1.2.24

Systems and controls must include at least the following elements:

(1) documented policies and procedures for the process of valuation (including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures); and
(2) reporting lines for the department accountable for the valuation process that are clear and independent of the front office.

[Note: CAD Annex VII Part B point 2]

01/01/2007

BIPRU 1.2.25

The reporting line in relation to the matters covered by BIPRU 1.2.21 R to BIPRU 1.2.24 R must ultimately be to an executive director on the firm's governing body.

01/01/2007

Trading book policy statements

BIPRU 1.2.26

A firm must have clearly defined policies and procedures for determining which positions to include in the trading book for the purposes of calculating its capital requirements, consistent with the criteria set out in BIPRU 1.2.3 R to BIPRU 1.2.4 R, BIPRU 1.2.10 R to BIPRU 1.2.11 R, BIPRU 1.1.13 R and BIPRU 1.2.22 R and taking into account the firm's risk management capabilities and practices. Compliance with these policies and procedures must be fully documented and subject to periodic internal audit.

[Note: CAD Annex VII Part D point 1]

01/01/2007

BIPRU 1.2.27

A firm must have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures must address:

(1) the activities the firm considers to be trading and as constituting part of the trading book for capital requirement purposes;
(2) the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;
(3) for positions that are marked-to-model, the extent to which the firm can:

(a) identify all material risks of the position;
(b) hedge all material risks of the position with instruments for which an active, liquid two-way market exists; and
(c) derive reliable estimates for the key assumptions and parameters used in the model;

(4) the extent to which the firm can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;
(5) the extent to which legal restrictions or other operational requirements would impede the firm's ability to effect a liquidation or hedge of the position in the short term;
(6) the extent to which the firm can, and is required to, actively risk manage the position within its trading operation; and
(7) the extent to which the firm may transfer risk or positions between the non-trading book and trading book and the criteria for such transfers.

[Note: CAD Annex VII Part D point 2]

01/01/2007

BIPRU 1.2.28

The policies and procedures referred to in BIPRU 1.2.27 R (1) should cover:

(1) the CRD financial instrument and commodities that the firm proposes to trade in, including the currencies, maturities, issuers and quality of issues; and
(2) any instruments to be excluded from its trading book.

01/01/2007

BIPRU 1.2.29

(1) The policies and procedures referred to in the overall financial adequacy rule and BIPRU 1.2.27 R must be recorded in a single written document. A firm may record those policies and procedures in more than one written document if the firm has a single written document that identifies:

(a) all those other documents; and
(b) the parts of those documents that record those policies and procedures.

(2) A trading book policy statement means the single document referred to in this rule.

01/01/2007

BIPRU 1.2.30

(1) A firm must notify the FSA as soon as is reasonably practicable when it adopts a trading book policy statement.
(2) A firm must notify the FSA as soon as is reasonably practicable if the trading book policy statement is subject to significant changes.

01/01/2007

BIPRU 1.2.31

A significant change for the purpose of the overall Pillar 2 rule includes new types of customers or business requiring different funding or provisioning.

01/01/2007

BIPRU 1.2.32

There is likely to be an overlap between what the trading book policy statement should contain and other documents such as dealing or treasury manuals. A cross reference to the latter in the trading book policy statement is adequate and material in other documents need not be set out again in the trading book policy statement. However where this is the case the matters required to be included in the trading book policy statement should be readily identifiable.

01/01/2007

BIPRU 1.2.33

The trading book policy statement may be prepared on either a consolidated or a solo (or solo-consolidated) basis. It should be prepared on a consolidated basis when a group either manages its trading risk centrally or employs the same risk management techniques in each group member. A trading book policy statement prepared on a consolidated basis should set out how it applies to each firm in the group and should be approved by each such firm's governing body.

01/01/2007

Treatments common to the trading book and the non-trading book

BIPRU 1.2.34

Capital requirements for foreign currency risk and commodity position risk are the same whether the risk arises in the trading book or the non-trading book. The calculation of capital requirements for foreign currency risk is set out in BIPRU 7.5. The calculation of capital requirements for commodity position risk is set out in BIPRU 7.4.

01/01/2007

Trading book treatments

BIPRU 1.2.35

All positions that are in a firm's trading book require capital to cover position risk and may require capital to cover counterparty credit risk and to cover large exposures. Counterparty credit risk in the trading book is dealt with by BIPRU 14 and capital for large exposures is covered by BIPRU 10.

01/01/2007

Non-trading book treatments

BIPRU 1.2.36

All positions that are not in a firm's trading book are included in its non-trading book and subject capital requirements for the non-trading book unless they are deducted from capital resources under GENPRU 2.2 (Capital resources).

01/01/2007

BIPRU 1.3

Applications for advanced approaches

01/01/2007

Application

BIPRU 1.3.1

This section of the Handbook applies to every BIPRU firm that wishes to apply for a permission to use any of the approaches set out in BIPRU 1.3.2 G.

01/01/2007

Purpose

BIPRU 1.3.2

(1) A firm may apply for an Article 129 permission or a waiver in respect of:

(a) the IRB approach;
(b) the advanced measurement approach;
(c) the CCR internal model method; and
(d) the VaR model approach.

(2) A firm should apply for a waiver if it wants to:

(a) apply the CAD 1 model approach;
(b) apply the master netting agreement internal models approach;
(c) disapply consolidated supervision under BIPRU 8 for its UK consolidation group or non-EEA sub-group;
(d) apply the treatment in BIPRU 2.1 (Solo-consolidation waiver); or
(e) apply the treatment in BIPRU 10.9 (Wider integrated groups waiver).

01/01/2007

Article 129

BIPRU 1.3.3

An EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of its EEA parent financial holding company that wish to use any of the approaches listed in BIPRU 1.3.2 G (1) in respect of its group, including members of its group that are BIPRU firms, may apply for an Article 129 permission.

01/01/2007

BIPRU 1.3.4

The Article 129 procedure allows an EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of its EEA parent financial holding company to apply for permission to use the approaches in BIPRU 1.3.2 G (1) without making separate applications to the competent authority of each EEA State where members of a firm's group are authorised.

01/01/2007

BIPRU 1.3.5

The Capital Requirements Regulations 2006 set out the Article 129 procedure.

01/01/2007

BIPRU 1.3.6

Where a firm or its group has been granted an Article 129 permission, each competent authority, including the lead competent authority, will need to take action to apply that Article 129 permission to the institutions that they authorise. Part 3 of the Capital Requirements Regulations 2006 governs how the FSA will take that action, whether or not the FSA is the lead competent authority.

01/01/2007

Article 129 permissions and waivers - specific conditions

BIPRU 1.3.7

When an advanced measurement approach is intended to be used by an EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of an EEA parent financial holding company, the application of a firm in accordance with BIPRU 1.3.14 D must include the elements listed in BIPRU 6.5.5 R (Minimum standards for the advanced measurement approach).

[Note: BCD Article 105(2)]

01/01/2007

BIPRU 1.3.8

When an advanced measurement approach is intended to be used by an EEA parent institution and its subsidiary undertakings or the subsidiary undertakings of an EEA parent financial holding company, the application of a firm must include a description of the methodology used for allocating operational risk capital between the different entities of the group.

[Note: BCD annex X Part 3 point 30]

01/01/2007

BIPRU 1.3.9

For the purposes of BIPRU 1.3.8 D, the application of a firm must indicate whether and how diversification effects are intended to be factored in the risk measurement system.

[Note: BCD annex X Part 3 point 31]

01/01/2007

Waiver - general

BIPRU 1.3.10

As explained in SUP 8, under of the Act, the FSA may not grant a waiver to a firm unless it is satisfied that:

(1) compliance by the firm with the rules, or with the rules as modified, would be unduly burdensome or would not achieve the purpose for which the rules were made; and
(2) the waiver would not result in undue risk to persons whose interests the rules are intended to protect objects.

01/01/2007

BIPRU 1.3.11

The conditions relating to the use of an approach listed in BIPRU 1.3.2 G referred to in the relevant chapter of BIPRU are minimum standards. Satisfaction of those conditions does not automatically mean the FSA will grant a waiver referred to in those paragraphs. The FSA will in addition also apply the tests in section 148 of the Act.

01/01/2007

BIPRU 1.3.12

In the FSA's view, if the minimum standards referred to in BIPRU 1.3.11 G are satisfied, the conditions referred to in BIPRU 1.3.10 G (1) will generally be met.

01/01/2007

Forms and method of application

BIPRU 1.3.13

Subject to BIPRU 1.3.14 D to BIPRU 1.3.20 D, if a firm wishes to apply for a waiver to apply an approach set out in BIPRU 1.3.2 G, it must comply with SUP 8.3.3 D.

01/01/2007

BIPRU 1.3.14

If a firm wishes to apply for a waiver or an Article 129 permission to use the advanced measurement approach, it must complete and submit the form in BIPRU 1 Annex 1D D.

01/01/2007

BIPRU 1.3.15

If a firm wishes to apply for a waiver or an Article 129 permission to use the IRB approach, it must complete and submit the form in BIPRU 1 Annex 2D D.

01/01/2007

BIPRU 1.3.16

If a firm wishes to apply for a waiver or an Article 129 permission to use the CCR internal model method, it must complete and submit the form in BIPRU 1 Annex 3D D.

01/01/2007

BIPRU 1.3.17

Where a firm makes an application in accordance with BIPRU 1.3.14 D, BIPRU 1.3.15 D or BIPRU 1.3.16 D, the firm must state on the application whether it is making an application for a waiver or an Article 129 permission.

01/01/2007

BIPRU 1.3.18

Where a firm applies for a VaR model permission, the firm must state whether it is making an application for a waiver or an Article 129 permission.

01/01/2007

BIPRU 1.3.19

In respect of the application for waivers to apply the approaches set out in BIPRU 1.3.2 G (1), the FSA will aim to give decisions on applications as soon as practicable. However, the FSA expects that it will take a significant period to determine and give a decision due to the complexity of the issues raised by the applications. Details of timelines for applications for waivers to use advanced approaches and under the Article 129 procedure are set out on the FSA website.

01/01/2007

BIPRU 1.3.20

Where a firm applies for a solo consolidation waiver, it must demonstrate how each of the conditions set out in BIPRU 2.1.20 R to BIPRU 2.1.24 R are met and address the criteria set out in the guidance in BIPRU 2.1.25 G as part of its application in accordance with BIPRU 1.3.13 D.

01/01/2007

BIPRU 1.3.21

Before sending in an application for a waiver or Article 129 permission, a firm may find it helpful to discuss the application with its usual supervisory contact at the FSA. However, the firm should still ensure that all relevant information is included in the application.

01/01/2007

BIPRU 1.4

Actions for damages

01/01/2007

BIPRU 1.4.1

A contravention of the rules in BIPRU does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).

01/01/2007

BIPRU 1 Annex 1D

Application form to apply the advanced measurement approach

01/01/2007

This annex consists only of one or more forms. Forms are to be found through the 'Forms' link at www.fashandbook.info or through the Handbook section of the CD-ROM under Forms.

01/01/2007

BIPRU 1 Annex 2D

Application form to apply the IRB approach

01/01/2007

This annex consists only of one or more forms.
Forms

01/01/2007

BIPRU 1 Annex 3D

Application form to apply the CCR internal model method approach

01/01/2007

This annex consists only of one or more forms.
Forms

01/01/2007