Concentration risk requirements

Part

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Chapter

Concentration risk requirements

Printed on: 29/10/2024

Rulebook at: 01/01/2007

BIPRU 10

Concentration risk requirements

BIPRU 10.1

Application and Purpose

01/01/2007

Application

BIPRU 10.1.1

This chapter applies to a BIPRU firm. It applies irrespective of whether the firm adopts the standardised approach or the IRB approach. If it adopts the IRB approach, it applies irrespective of whether the firm adopts the foundation IRB approach or the advanced IRB approach.

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Purpose

BIPRU 10.1.2

This chapter sets out rules and guidance for large exposures and the concentration risk capital component (the CNCOM), implementing the large exposures requirements of articles 66(3) (in part) and 106 to 117 and paragraph 7 of Annex V of the Banking Consolidation Directive and articles 28 to 32 and Annex VI of the Capital Adequacy Directive.

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BIPRU 10.1.3

A large exposure may be in the form of a loan to a single borrower, or it may arise across many transactions involving different types of financial instruments with several counterparties within the same group of companies. Where a firm's exposure to its counterparty is large, it risks a large loss should the counterparty default. Such a loss may be sufficient on its own to threaten the solvency of the firm.

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BIPRU 10.1.4

The purpose of this chapter is to ensure that a firm manages its exposure to counterparties within appropriate limits set in relation to its capital resources.

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Restricted application for UCITS investment firms

BIPRU 10.1.5

This chapter only applies to a UCITS investment firm with respect to its designated investment business. For this purpose scheme management activity is excluded from designated investment business.

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BIPRU 10.2

Identification of exposures

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BIPRU 10.2.1

Unless BIPRU 10.2.2 R applies, an exposure is any of the items included in BIPRU 3.2.9 R (Exposure classes for the purposes of the standardised approach) or the table in BIPRU 3.7.2 R (Classification of off-balance-sheet items for the purposes of the standardised approach), whether held in the trading book or the non-trading book, without application of the risk weight or degrees of risk there provided for.

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BIPRU 10.2.2

An exposure does not include:

(1) an exposure which is entirely deducted from a firm's capital resources;
(2) in the case of foreign currency transactions, exposures incurred in the ordinary course of settlement during the 48 hours following payment; or
(3) in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is earlier.

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BIPRU 10.2.3

An exposure does not include:

(1) a transaction entered into by a firm as trustee or agent without personal liability on the part of the firm;
(2) indemnities for lost share certificates; or
(3) (where the firm acts as lessor, mortgagee or owner of goods under a hire-purchase arrangement) contingent liabilities for injuries, damage or loss on the part of the counterparty to that arrangement in respect of the goods that are the subject of that arrangement.

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BIPRU 10.2.4

If a firm takes a credit risk charge against an exposure equal to the value of that exposure, this can count as a capital deduction for the purposes of BIPRU 10.2.2 R (1).

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BIPRU 10.3

Identification of counterparties

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BIPRU 10.3.1

An individual counterparty may be a natural or legal person.

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BIPRU 10.3.2

Examples of a counterparty include:

(1) the customer or borrower; this includes governments, local authorities, public sector entities, individual trusts, corporations, unincorporated businesses (whether as sole traders or partnerships) and non-profit making bodies;
(2) where the firm is providing a guarantee, the person guaranteed;
(3) for a derivatives contract, the person with whom the contract was made;
(4) for exchange traded contracts novated through a central clearing mechanism, that central clearing mechanism;
(5) where a bill held by a firm has been accepted by a credit institution, the acceptor; and
(6) where a firm is funding the activities of a company that trades on an exchange (whether as principal or on behalf of clients), that company.

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Identification of counterparties for guaranteed exposures

BIPRU 10.3.3

(1) Where an exposure to a counterparty is guaranteed by a third party, a firm may treat the exposure as an exposure to the third party and not to the counterparty.
(2) In deciding whether or not to treat the exposure as an exposure to the third party a firm must ensure that the identification of counterparties for concentration risk purposes is applied in a consistent manner.
(3) Where the guarantee is denominated in a currency different from that in which the exposure is denominated, the amount of the exposure deemed to be covered must be calculated in accordance with the provisions on the treatment of currency mismatch for unfunded credit protection in BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation).
(4) A mismatch between the maturity of the exposure and the maturity of the protection must be treated in accordance with the provisions on the treatment for maturity mismatch in BIPRU 5 and, if applicable, BIPRU 4.10.
(5) Partial coverage must be treated in accordance with BIPRU 5 and, if applicable, BIPRU 4.10.
(6) A guarantee may only be treated in accordance with (1) if the firm complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 and, if applicable, BIPRU 4.10 for the purposes of calculating risk weighted exposure amounts.
(7) For the purpose of this rule, guarantee includes a credit derivative recognised under BIPRU 5 and, if applicable, BIPRU 4.10, other than a credit linked note.

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BIPRU 10.3.4

An example of the eligibility requirements and other minimum requirements set out in BIPRU 5 as referred to in BIPRU 10.3.3 R (6) is the requirement for a legal review in BIPRU 5.2.3 R.

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Groups of connected clients

BIPRU 10.3.5

The Glossary defines a group of connected clients.

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BIPRU 10.3.6

Relationships between individual counterparties which might be considered to constitute a single risk for the purposes of the definition of group of connected clients include:

(1) undertakings in the same group;
(2) companies whose ultimate owner (whether wholly or significantly) is the same individual or individuals, and which do not have a formal group structure;
(3) companies having common directors or management; and
(4) counterparties linked by cross guarantees

01/01/2007

BIPRU 10.3.7

The FSA would not regard the normal business relationships between companies which are competitors, and to which none of the relationships listed in BIPRU 10.3.6 G apply, as falling within the definition of group of connected clients.

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Connected counterparties

BIPRU 10.3.8

For the purposes of BIPRU 10, and in relation to a firm, a connected counterparty means another person ('P') to whom the firm has an exposure and who fulfils at least one of the following conditions:

(1) P is closely related to the firm; or
(2) P is an associate of the firm; or
(3) the same persons significantly influence the governing body of P and of the firm; or
(4) the firm has an exposure to P that was not incurred for the clear commercial advantage of the firm or the firm's group and which is not on an arm's length basis.

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Exposures to counterparties, groups of connected clients and connected counterparties

BIPRU 10.3.9

A firm's total exposure to a counterparty must be calculated by summing its exposures to that counterparty, including both trading book exposures and non-trading book exposures.

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BIPRU 10.3.10

A firm's total exposure to a group of connected clients must be calculated by summing its exposures to the individual persons within that group of connected clients, including both trading book exposures and non-trading book exposures.

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BIPRU 10.3.11

A firm's total exposure to connected counterparties must be calculated by summing its exposures to all the firm's connected counterparties, including both trading book exposures and non-trading book exposures.

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Exposures to trustees

BIPRU 10.3.12

If a firm has an exposure to a person ('A') when A is acting on his own behalf, and also an exposure to A when A acts in his capacity as trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or a similar fund (a "fund), the firm may treat the latter exposure as if it was to the fund, unless such a treatment would be misleading.

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BIPRU 10.3.13

When considering whether the treatment described in BIPRU 10.3.12 R is misleading, factors a firm should consider include:

(1) the degree of independence of control of the fund, including the relation of the fund's board and senior management to the firm or to other funds or to both;
(2) the terms on which the counterparty, when acting as trustee, is able to satisfy its obligation to the firm out of the fund of which it is trustee;
(3) whether the beneficial owners of the fund are connected to the firm, or related to other funds managed within the firm's group, or both; and
(4) for a connected counterparty, whether the exposure arises from a transaction entered into on an arm's length basis.

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BIPRU 10.3.14

In deciding whether a transaction is at arm's length for the purposes of BIPRU 10.3.8 R (4) and, BIPRU 10.3.13 G (4), the following factors should be taken into account:

(1) the extent to which the person to whom the firm has an exposure ('A') can influence the firm's operations, through e.g. the exercise of voting rights;
(2) the management role of A where A is also a director of the firm; and
(3) whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.

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BIPRU 10.4

Measurement of exposures to counterparties and issuers

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General

BIPRU 10.4.1

Unless specifically mentioned, BIPRU 10.4 applies both to non-trading book and trading book exposures.

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BIPRU 10.4.2

For the purpose of calculating the value of an exposure, exposures are divided into counterparty exposures and issuer exposures.

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BIPRU 10.4.3

When calculating a firm's total exposure to a counterparty it must sum the counterparty exposures and the issuer exposures to that counterparty.

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BIPRU 10.4.4

The same asset may give rise to a counterparty exposure and an issuer exposure. For example a purchased option creates an exposure to the other party to the option and the issuer of the underlying security.

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Definition of issuer exposures

BIPRU 10.4.5

The issuer exposure to an individual counterparty must be calculated by summing the following items:

(1) the excess where positive of the firm's long positions over its short positions in all the CRD financial instruments issued by the counterparty in question, in accordance with BIPRU 10.4.28 R (Further details about the calculation of issuer exposures: Establishing the net position in the non-trading book) and BIPRU 10.4.30 R (Further details about the calculation of issuer exposures: Establishing the net position in the trading book); and
(2) the firm's net underwriting exposure to that counterparty.

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Definition of issuer exposures: Position risk

BIPRU 10.4.6

An issuer exposure to a person in the non-trading book does not include an exposure that gives rise to a counterparty exposure to that person.

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BIPRU 10.4.7

In general an issuer exposure in the non-trading book means any exposure that, if it were in the trading book and subject to the standard market risk PRR rules:

(1) (in the case of a derivative in relation to a CRD financial instrument) would give rise to a notional position in the CRD financial instrument underlying that derivative; or
(2) would give rise to a similar notional position in a CRD financial instrument other than the one that the firm actually holds.

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BIPRU 10.4.8

A credit linked note may be an example of an instrument falling within BIPRU 10.4.7 G (2).

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BIPRU 10.4.9

A firm's long physical position in a security held in the non-trading book is generally included as a counterparty exposure rather than an issuer exposure.

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BIPRU 10.4.10

BIPRU 10.4.5 R (1) includes any exposure in the trading book or non-trading book that would give rise to a notional position under the standard market risk PRR rules.

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BIPRU 10.4.11

The netting of long and short positions under BIPRU 10.4.5 R (1) includes the notional positions in the underlying which arise from derivative transactions.

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BIPRU 10.4.12

For the purposes of BIPRU 10.4.5 R (1), a firm may, when calculating its net position in CRD financial instruments in the non-trading book, include counterparty exposures excluded from the issuer exposure calculation under BIPRU 10.4.6 R. However any counterparty exposure used in this way is still subject to the provisions of this chapter about counterparty exposures.

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BIPRU 10.4.13

This paragraph illustrates how BIPRU 10.4.12 R works. Say that a firm has a holding of shares in its non-trading book. Say that the firm has bought a put option over those shares, which it also holds in its non-trading book. The holding of shares gives rise to a counterparty exposure to the issuer of those shares and the option gives rise to a counterparty exposure to the person who wrote the option. The option also gives rise to an issuer exposure to the issuer of the shares. The firm may use BIPRU 10.4.12R to eliminate that issuer exposure by netting its position to zero by taking into account its long non-trading book position in those shares. If it does so, the firm will still have counterparty exposures to the issuer of the shares and the counterparty under the option.

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BIPRU 10.4.14

Another example of how BIPRU 10.4.12 R works is this. Say that a firm has a long non-trading book position in a debt security together with an offsetting credit derivative. If the conditions in BIPRU 10.3.3 R (Identification of counterparties for guaranteed exposures) are met the firm may, for the purposes of the calculation of the counterparty exposure, treat itself as having an exposure to the provider of the credit derivative rather than to the issuer of the debt security. This means that the counterparty exposure to the issuer of the debt security is zero. In calculating the issuer exposure the firm may net the long position in the debt security against the short notional position arising out of the credit derivative. The effect is that the issuer exposure to the issuer of the debt security is also zero. Hence the firm has no exposure to the issuer of the debt security.

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BIPRU 10.4.15

To the extent that BIPRU 10.4 does not otherwise explain what positions are included in BIPRU 10.4.5 R (1) or how to calculate a net position for the purpose of BIPRU 10.4.5 R (1), a firm must apply the provisions of the applicable standard market risk PRR rules or the ones that would apply if the position were in the trading book.

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BIPRU 10.4.16

A firm must not offset exposures in the non-trading book and trading book against each other for the purpose of calculating an issuer exposure except to the extent allowed by the standard market risk PRR rules.

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BIPRU 10.4.17

For the purposes of this chapter, the counterparties with respect to an exposure falling into BIPRU 10.4.5 R (1) are the persons who are or would be treated as an obligor under the standard market risk PRR rules in question.

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Definition of issuer exposures: Underwriting

BIPRU 10.4.18

In accordance with BIPRU 7.8 (Securities underwriting), a firm should include net underwriting exposures to an issuer in the calculation of its total exposure to that issuer.

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Definition of counterparty exposures

BIPRU 10.4.19

A counterparty exposure means, with respect to the non-trading book, any exposure as defined in BIPRU 10.2 (Identification of exposures) held in the non-trading book.

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BIPRU 10.4.20

A counterparty exposure means, with respect to the trading book, any exposure as defined in BIPRU 10.2 (Identification of exposures) due to the transactions, agreements and contracts referred to in BIPRU 14.2.2 R (List of trading book exposures that give rise to a counterparty risk credit charge) and held in the trading book, including credit derivatives.

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BIPRU 10.4.21

For example BIPRU 10.4.19 R to BIPRU 10.4.20 R mean that a share only gives rise to a counterparty exposure when it is held in the non-trading book.

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Calculation of counterparty exposures

BIPRU 10.4.22

Subject to BIPRU 10.4.23 R to BIPRU 10.4.24 R, the value of a firm's counterparty exposures, whether in its non-trading book or its trading book, is the amount at risk calculated in line with GENPRU 1.3 (Valuation).

01/01/2007

BIPRU 10.4.23

A firm must calculate the value of its counterparty exposures in its trading book in the manner laid down in BIPRU 14 (Capital requirements for settlement and counterparty risk) for the calculation of exposure values. For these purposes the reference in BIPRU 14.2.11 R (How to calculate exposure values and risk weighted exposure amounts for the purpose of calculating the counterparty risk capital component) to the provisions of the IRB approach does not apply.

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BIPRU 10.4.24

Counterparty exposures arising from financial derivative instruments must be calculated in accordance with one of the methods set out in BIPRU 13 (Financial derivatives, SFTs and long settlement transactions). For the purposes of this chapter, BIPRU 13.6.6 R (Scope of CCR internal model method) also applies.

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BIPRU 10.4.25

A firm must not offset exposures in the non-trading book and trading book for the purpose of calculating counterparty exposures except to the extent permitted under the standardised approach or, if applicable, the IRB approach.

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BIPRU 10.4.26

For the purposes of this chapter, the counterparty with respect to a counterparty exposure is the person who would be treated as the person to which the firm has the exposure under the standardised approach or, if applicable, the IRB approach.

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Further details about the calculation of issuer exposures: General

BIPRU 10.4.27

BIPRU 10.4.28 R to BIPRU 10.4.42 R apply to issuer exposures arising under BIPRU 10.4.5 R (1).

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Further details about the calculation of issuer exposures: Establishing the net position in the non-trading book

BIPRU 10.4.28

A firm must calculate the value of an exposure to the issuer of a CRD financial instrument which is held in the firm's non-trading book as the sum of the excess, where positive, of the book value of all long positions over all short positions (the net long position), for each identical CRD financial instrument issued by that issuer.

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BIPRU 10.4.29

For the purposes of BIPRU 10.4.28 R, short positions in one CRD financial instrument may be used to offset long positions in a non-identical CRD financial instrument issued by the same issuer if both the CRD financial instrument are denominated in the same currency, and:

(1) where both the CRD financial instrument are fixed rate, they are within the same residual maturity time band, one year or less, or over one year; or
(2) where both the CRD financial instrument are index linked, they are within the same residual maturity time band referred to in (1); or
(3) both the CRD financial instrument are floating rate.

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Further details about the calculation of issuer exposures: Establishing the net position in the trading book

BIPRU 10.4.30

A firm must calculate the value of an exposure to the issuer of a CRD financial instrument which is held in the firm's trading book by calculating the excess of the current market value of all long positions over all short positions in all the CRD financial instruments issued by that issuer.

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Further details about the calculation of issuer exposures: Netting

BIPRU 10.4.31

For the purposes of BIPRU 10.4.28 R and BIPRU 10.4.30 R, the short positions must be netted against the long positions in CRD financial instruments with the highest specific risk PRAs.

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Further details about the calculation of issuer exposures: Netting between different issuers

BIPRU 10.4.32

A firm must not offset an exposure to one issuer against an exposure to another issuer (whether in the trading book or the non-trading book) even where:

(1) the issuers are a group of connected clients; and
(2) the exposures are non-identical exposures which meet the conditions in BIPRU 10.4.29 R.

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Further details about the calculation of issuer exposures: Forward agreements

BIPRU 10.4.33

A firm must include as a long position a commitment by it to buy:

(1) a debt security or an equity at a future date; and
(2) under a note issuance facility, at the request of the issuer, a security which is unsold on the issue date.

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BIPRU 10.4.34

A firm must include as a short position a commitment by it to sell a debt security or an equity at a future date.

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Further details about the calculation of issuer exposures: Interest rate, foreign currency and equity swaps

BIPRU 10.4.35

An interest rate leg of an equity swap, or an interest rate or currency swap, does not generate an issuer exposure.

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BIPRU 10.4.36

Where the equity leg of an equity swap is based on the change in value of an individual equity, it must be treated as giving rise to an exposure to the issuer of the equity.

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Further details about the calculation of issuer exposures: Option positions

BIPRU 10.4.37

When determining its exposure to an issuer arising from an option, a firm must value an option as the amount of principal underlying the option.

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BIPRU 10.4.38

A firm must treat:

(1) a written put option as a long position in the underlying security valued at the strike price or the market price of the underlying security, whichever is lower;
(2) a purchased put option as a short position in the underlying security valued at the strike price or the market price of the underlying security, whichever is lower; and
(3) a purchased call option as a long position in the underlying security equal to the book value of the option provided that the contract has been given a book value in the firm's accounts.

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BIPRU 10.4.39

A written call option does not generate an issuer exposure.

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BIPRU 10.4.40

(1) This rule applies in relation to an option if a firm:

(a) has a CAD 1 permission;
(b) the scope of the CAD 1 waiver covers that option; and
(c) the CAD 1 permission is for a CAD 1 model for option risk aggregation as described in BIPRU 7.9.7 G (Types of CAD 1 model).

(2) This rule also applies in relation to an option if a firm:

(a) has a VaR model permission; and
(b) the scope of the VaR model permission covers that option.

(3) A firm may take as the exposure value of an option the delta weighted value of the notional underlying the option calculated using the models described in (1) and (2), to the extent that those values are relevant for the calculations in BIPRU 10.4.37 R.

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Further details about the calculation of issuer exposures: Indices and baskets of equities or securities

BIPRU 10.4.41

Subject to BIPRU 10.4.42 R, a firm must treat an index or basket of debt securities or equities as giving rise to a series of exposures to the issuers of the underlying securities or equities in accordance with the provisions of BIPRU 7.2 (Interest rate PRR) or BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives).

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BIPRU 10.4.42

A qualifying equity index does not generate an exposure of the type described in BIPRU 10.4.41 R.

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Securities financing transactions

BIPRU 10.4.43

A firm with securities financing transactions in its trading book or its non-trading book must calculate its exposure to:

(1) the issuer of the security it has sold in a repurchase agreement; and
(2) the counterparty to the securities financing transaction (subject to BIPRU 10.3.3 R (Identification of counterparties for guaranteed exposures) and BIPRU 10.6 (Exemptions)).

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Treatment of accrued interest and dividends due

BIPRU 10.4.44

Subject to BIPRU 10.4.45 R, when calculating an exposure, a firm must include accrued interest and dividends due.

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BIPRU 10.4.45

A firm may use the following method of calculating the total amount of a firm's exposures in the non-trading book to a counterparty, connected counterparties or a group of connected clients as an alternative to that in BIPRU 10.4.44 R:

(1) if the total amount of the exposures is less than 20% of the firm's capital resources (ignoring accrued interest), the accrued interest element need not be included in the calculation of the amount of the exposures in the non-trading book; and
(2) if the total amount of the exposures (ignoring accrued interest) is more than 20% (but less than 25%) of the firm's capital resources, the firm must be able to demonstrate that the total amount of the exposures, including the accrued interest element, meet the limits in BIPRU 10.5 (Limits on exposures and large exposures) and that it meets any related CNCOM.

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BIPRU 10.4.46

The reason for BIPRU 10.4.45 R is the systems difficulties of including accrued interest in the total amount of exposures in the non-trading book.

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Exposures to undisclosed counterparties

BIPRU 10.4.47

A firm must not incur an exposure to an undisclosed counterparty unless:

(1) it has satisfied itself that it will continue to meet the limits in BIPRU 10.5 (Limits on exposures and large exposures) for non-trading book exposures and trading book exposures and will continue to meet any CNCOM; and
(2) it has made and retained a record of the steps it has taken to comply with (1).

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BIPRU 10.5

Limits on exposures and large exposures

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Definition of large exposure

BIPRU 10.5.1

A large exposure of a firm means its total exposure to a counterparty, connected counterparties or a group of connected clients, whether in the firm's non-trading book or trading book or both, which in aggregate equals or exceeds 10% of the firm's capital resources.

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Definition of capital resources

BIPRU 10.5.2

A firm must calculate its capital resources for the purposes of this chapter in accordance with GENPRU 2.2 (Capital resources) and BIPRU 10.5.3 R to BIPRU 10.5.5 R.

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BIPRU 10.5.3

Subject to BIPRU 10.5.4 R, for the purposes of this chapter, a firm's capital resources mean capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions).

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BIPRU 10.5.4

For the purposes of monitoring against the trading book limits and charge regime, as set out in BIPRU 10.5.11 R to BIPRU 10.5.22 R, and calculating a firm's CNCOM, a firm's capital resources may include tier three capital resources, in which case a firm's capital resources mean capital resources calculated at stage (T) of the capital resources table (Total capital after deductions).

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BIPRU 10.5.5

A firm must not take into account the following items:

(1) surplus provisions (see GENPRU 2.2.190 R to GENPRU 2.2.193 R); or
(2) expected loss amounts and other negative amounts (see GENPRU 2.2.236 R); or
(3) securitisation positions (see GENPRU 2.2.237 R).

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Non-trading book limits

BIPRU 10.5.6

A firm must ensure that the total amount of its exposures to the following does not exceed 25% of its capital resources (as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R):

(1) a counterparty; or
(2) a group of connected clients; or
(3) its connected counterparties.

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BIPRU 10.5.7

If a connected counterparty is also a member of a group of connected clients the limit in BIPRU 10.5.6 R covers the aggregate of the total amount of the firm's exposures to its connected counterparties and of the total amount of its exposures to that group of connected clients.

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BIPRU 10.5.8

A firm must not incur large exposures which in total exceed 800% of its capital resources (as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R).

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BIPRU 10.5.9

If a firm exceeds (or is aware that it will exceed) the limits in BIPRU 10.5.6 R or BIPRU 10.5.8 R it must notify the FSA without delay.

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BIPRU 10.5.10

A report under BIPRU 10.5.9 R should be made in exceptional circumstances only. A firm which makes such a report should also provide the FSA with an explanation as to how the limits came to be exceeded, and a plan of action for bringing its exposures within the limits. The FSA may, where the circumstances warrant it, allow a firm a limited period of time in which to comply with the limits.

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Trading book limits

BIPRU 10.5.11

Exposures in a firm's trading book are exempt from the 25% and 800% limits in BIPRU 10.5.6 R and BIPRU 10.5.8 R if:

(1) the total amount of the exposures on the firm's non-trading book to the same counterparty or group of connected clients or to its connected counterparties does not exceed the limits laid down in those rules, calculated with reference to the definition of capital resources set out in BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R, so that the excess arises entirely on the trading book; and
(2) the firm meets the additional capital requirements relating to the concentration risk capital component (CNCOM) in relation to the relevant trading book exposures.

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BIPRU 10.5.12

If a trading book concentration risk excess with respect to a counterparty or group of connected clients or to its connected counterparties has existed for 10 business days or less, the firm must ensure that the total amount of its trading book exposures to that counterparty or group of connected clients or to its connected counterparties does not exceed 500% of the firm's capital resources.

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BIPRU 10.5.13

A firm must ensure that the total amount of its trading book concentration risk excesses that have persisted for more than 10 business days does not exceed 600% of its capital resources.

01/01/2007

BIPRU 10.5.14

Within 30 business days of the end of each third Month, a firm must notify the FSA of all cases of trading book concentration risk excesses in that three Month period, giving the amount of the excess and the name of the counterparty.

01/01/2007

BIPRU 10.5.15

A trading book concentration risk excess is defined in BIPRU 10.5.20 R.

01/01/2007

How to calculate the concentration risk capital component

BIPRU 10.5.16

A firm's CNCOM should be calculated as part of its credit risk capital requirement (CRCR) in accordance with GENPRU 2.1 (Calculation of capital resources requirements).

01/01/2007

BIPRU 10.5.17

A firm's CNCOM is the sum of its individual counterparty CNCOMs.

01/01/2007

BIPRU 10.5.18

An individual counterparty CNCOMs is the amount a firm must calculate in accordance with BIPRU 10.5.20 R with respect to its exposures to a particular counterparty or a group of connected clients or to its connected counterparties.

01/01/2007

BIPRU 10.5.19

A CNCOM calculation on a trading book exposure is in addition to, and not instead of, any capital requirement arising under the market risk capital requirement or counterparty risk capital component.

01/01/2007

BIPRU 10.5.20

A firm must calculate its individual counterparty CNCOM for its exposures to a counterparty or group of connected clients or to its connected counterparties as follows:

(1) break down its total exposure into its trading book and non-trading book components;
(2) calculate 25% of the firm's capital resources and deduct those parts of the total exposure which are in the non-trading book;
(3) if the non-trading book exposures deducted in (2) equal 25% of the firm's capital resources, steps (4), (5) and (6) do not apply and if so the trading book concentration risk excess means, with respect to a counterparty, a group of connected clients or its connected counterparties, all trading book exposures to that counterparty or group of connected clients or to its connected counterparties;
(4) if the total amount of the non-trading book exposures deducted in (2) is less than 25% of the firm's capital resources, a firm must allocate (in the order set out in (6)) trading book exposures to the unutilised portion of the 25% limit to that counterparty or counterparties or to its connected counterparties;
(5) no further trading book exposures can be allocated once the 25% limit has been reached; the remaining trading book exposures constitute the trading book concentration risk excess with respect to that counterparty or group of connected clients or to its connected counterparties;
(6) for the purposes of (4), a firm must allocate first the individual trading book exposures with the lowest capital requirements for specific risk under the market risk capital requirement and/or the lowest capital requirements under the counterparty risk capital component and allocate those trading book exposures with the highest capital requirements last;
(7) the individual counterparty CNCOM is the sum of the capital requirements for each individual exposure included in the trading book concentration risk excess in accordance with (8) and (9) (each such capital requirement being an individual CNCOM);
(8) if the trading book concentration risk excess has persisted for 10 business days or less (irrespective of the age of each component part), the individual CNCOMs must be calculated in accordance with this formula:

each individual CNCOM = capital requirement referred to in (6) x 200%;

(9) if the trading book concentration risk excess has persisted for more than 10 business days (irrespective of the age of each component part), the individual CNCOMs must be calculated in accordance with this formula:

each individual CNCOM = capital requirement referred to in (6) x appropriate percentage in BIPRU 10.5.21 R.

01/01/2007

BIPRU 10.5.21

The appropriate percentage referred to in BIPRU 10.5.20 R (9) must be established in accordance with the following:

(1) the individual exposures included in the trading book concentration risk excess must be assigned to the bands in the first column of the table in BIPRU 10.5.22 R;
(2) the maximum amount that may be put in any band other than the last equals the percentage of the firm's capital resources in column 1 of that table;
(3) no amount may be allocated to the second or any later band unless the one before has been filled;
(4) exposures must be assigned to the bands in the order established by BIPRU 10.5.20 R (6); and
(5) for the purposes of (4), those exposures with the lowest capital requirements (as referred to in BIPRU 10.5.20 R (6)) must be assigned first and those with the highest last.

01/01/2007

Percentages applicable under BIPRU 10.5.21R

BIPRU 10.5.22

This table belongs to BIPRU 10.5.21 R

Excess exposure (as a percentage of the firm's capital resources)

Percentage

0% up to 40%

200%

Portion from 40% - 60%

300%

Portion from 60% - 80%

400%

Portion from 80% - 100%

500%

Portion from 100% - 250%

600%

Portion over 250%

900%

01/01/2007

BIPRU 10.5.23

The table in BIPRU 10.5.24 G sets out an example of a CNCOM calculation.

01/01/2007

Example of a CNCOM calculation (all numbers 000s)

BIPRU 10.5.24

This table belongs to BIPRU 10.5.23 G

Capital resources position

(1)

An firm's capital resources comprises:

Tier one and tier two capital resources

1000

Eligible tier three capital resources

100

Amended capital resources

1100

(2)

The components of the large exposure comprise:

(a) Non-trading book exposure

200

(b) Mark to market value of trading book securities:

% specific risk weight

Short: qualifying bond

1.00

(20)

Long: qualifying commercial paper

0.25

100

Long: equity

4.00

150

Long: qualifying convertible

1.60

Total net long securities position:

260

Total net large exposures position [(a) + (b)]

460

Calculating the exposure for which incremental capital is needed

(3)

The short position in the qualifying bond is offset against the highest specific risk weight items in this case equities:

Net long equity position (150- 20)

130

(4)

The remaining items are ranked according to specific risk weight.

% specific risk weight

Security

0.25

Qualifying commercial paper

100

1.60

Qualifying convertible

4.00

Equity (net)

130

(5)

The 'headroom' between the non-securities exposure and 25% of the amended capital resources is calculated.

25% of amended capital base (1100)

275

Non securities exposure

200

Headroom

(6)

Applying the securities positions in ascending order of specific risk weight, 75 of the 100 qualifying commercial paper may be counted before 25% of the amended capital base is reached.
The remaining 25 of qualifying commercial paper, along with 30 qualifying convertible and 130 equity (net) are traded securities exposures in excess of the limit and should therefore be covered by incremental capital. The amount of incremental capital should be included in the calculation for determining how much trading book capital a firm should have.

(7)

If the excess exposure has been outstanding for 10 days or less, the specific risk weights for the elements over 25% of amended capital resources should be doubled.
The 25% limit (275) is taken up by 200 counterparty exposure and 75 securities exposure within the limit. These two items, when added to the items in bold below, total 460. 460 is the total net large exposures position as set out in (2) above.

Qualifying commercial paper

25 x 0.25% x 200% =

0.125

Qualifying convertible

30 x 1.60% x 200% =

0.960

Equity

130 x 4% x 200% +

10.400

Additional capital requirement

11.485

(8)

If the excess exposure has been outstanding for more than 10 days, the 25% limit (275) is taken up by 200 counterparty exposure and 75 securities exposure within the limit. These two items, when added to the items in bold below, total 460. 460 is the total net large exposures position as set out in (2) above.

(a)

Over 25% and up to 40% of amended capital base at 200% (40% of 1100 = 440)

Amount of trading book concentration risk excess = 185
Proportion of Capital Base= 16.8%
Appropriate % Multiplier Band = 200%

25 x 0.25% x 200% =

0.125

30 x 1.60% x 200% =

0.960

130 x 4.00% x 200% =

10.400

(b)

Excess exposure 40% - 60% of amended capital base at 300%

20 x 4.00% x 300% =

2.400

Additional capital requirement [(a)+(b)]

13.885

01/01/2007

BIPRU 10.6

Exemptions

01/01/2007

General exemptions

BIPRU 10.6.1

The exposures listed in BIPRU 10.6.3 R, whether trading book exposures or non-trading book exposures, are exempt from the limits described in BIPRU 10.5 (Limits on exposures and large exposures), provided that the exposures are to counterparties which are not connected counterparties.

01/01/2007

BIPRU 10.6.2

(1) In BIPRU 10.6.3 R and BIPRU 10.6.4 R, references to guarantees include credit derivatives recognised under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation), other than credit linked notes.
(2) BIPRU 10.3.3 R (6) (Compliance with minimum credit risk mitigation requirements) applies for the purpose of BIPRU 10.6.3 R and BIPRU 10.6.4 R.

01/01/2007

BIPRU 10.6.3

The exposures referred to in BIPRU 10.6.1 R are as follows:

(1) asset items constituting claims on central governments or central banks which claims would unsecured receive a 0% risk weight under the standardised approach;
(2) asset items constituting claims on international organisations or multilateral development banks which claims would unsecured receive a 0% risk weight under the standardised approach;
(3) asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations or multilateral development banks, where unsecured claims on the entity providing the guarantee would receive a 0% risk weight under the standardised approach;
(4) other exposures attributable to, or guaranteed by, central governments, central banks, international organisations or multilateral development banks where unsecured claims on the entity to which the exposure is attributable or by which it is guaranteed would receive a 0% risk weight under the standardised approach;
(5) asset items constituting claims on and other exposures to central governments or central banks not within (1), which are denominated and, where applicable, funded in the national currencies of the borrowers;
(6) asset items constituting claims on and other exposures to institutions, with a maturity of one year or less, but not constituting such institutions' capital resources;
(7) asset items constituting claims on EEA States' regional governments and local authorities which claims would receive a 0% risk weight under the standardised approach;
(8) other exposures to or guaranteed by EEA States' regional governments and local authorities claims on which would receive a 0% risk weight under the standardised approach;
(9) asset items constituting claims and other exposures on recognised third country investment firms, recognised clearing houses, designated clearing houses, recognised investment exchanges and designated investment exchanges in CRD financial instruments, with a maturity of one year or less, but not constituting such institutions' capital resources;
(10) covered bonds within the meaning of the second paragraph of that definition;
(11) loans secured by mortgages on residential property and leasing transactions under which the lessor retains full ownership of the residential property leased for as long as the lessee has not exercised his option to purchase, in all cases up to 50% of the value of the residential property concerned;
(12) the following, where they would receive a 50% risk weight under the standardised approach, and only up to 50% of the value of the property concerned:

(a) exposures secured by mortgages on offices or other commercial premises; and
(b) exposures related to property leasing transactions concerning offices or other commercial premises; and

(13) bill endorsements on bills with a maturity of 1 year or less already endorsed by another firm.

01/01/2007

BIPRU 10.6.4

For the purposes of BIPRU 10.6.3 R (11), the value of the property must be calculated on the basis of strict valuation standards laid down by law, regulation or administrative provisions. Valuation must be carried out at least once a year. For these purposes, residential property means a residence to be occupied or let by the borrower.

01/01/2007

Parental guarantees

BIPRU 10.6.5

A firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a counterparty or to a group of connected clients if the following conditions are met:

(1) the parent undertaking of the firm guarantees that exposure;
(2) the total exposure to that counterparty or group of connected clients does not exceed 100% of the firm's capital resources;
(3) the total amount of the firm's exposures to connected counterparties does not exceed 200% of the firm's capital resources (any exposure treated as exempt under this rule or under BIPRU 10.6.7 R must be treated as being to the parent undertaking for the purpose of this paragraph (3) and included in the calculation of the limit in this paragraph (3));
(4) the firm complies with whichever of SYSC 3.1.1 R (Systems and controls) and SYSC 4.1.1 R (General organisational requirements) applies to it; and
(5) both the firm and the parent undertaking of the firm satisfy BIPRU 3.2.27 R (Consolidation condition relating to zero risk weights for intra-group exposures).

01/01/2007

BIPRU 10.6.6

For the purposes of BIPRU 10.6.5 R, BIPRU 10.3.3 R (3) to (6) (Provisions relating to the treatment of guaranteed exposures) apply.

01/01/2007

Capital maintenance arrangements

BIPRU 10.6.7

A firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a counterparty which is not a connected counterparty if the following conditions are met:

(1) the exposure is subject to a legally binding agreement by the parent undertaking of the firm that it will promptly on demand by the firm increase the firm's capital resources by:

(a) an amount that is sufficient to reverse completely the effect of any loss the firm may sustain in connection with that exposure; or
(b) the amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 and any other requirements relating to capital resources or concentration risk imposed on the firm by or under the regulatory system;

(2) the firm notifies the FSA in writing of its intention to enter into the agreement and of its terms at least one Month before the firm enters into it; and
(3) the conditions in BIPRU 10.3.3 R (6) (Compliance with minimum credit risk mitigation requirements) and BIPRU 10.6.5 R (2) to (5) are met.

01/01/2007

Collateral exemptions: Top slicing

BIPRU 10.6.8

(1) 'Top slicing' involves systematically collateralising only part of an exposure to bring it within the limits in BIPRU 10.5 (Limits on exposures and large exposures).
(2) The practice of top-slicing can give rise to concerns and will be subject to review by the FSA when carrying out the SREP.

01/01/2007

Exemptions for firms using the financial collateral simple method under the standardised approach

BIPRU 10.6.9

A firm which uses the financial collateral simple method under the standardised approach may treat the following exposures as exempt from the limits described in BIPRU 10.5 (Limits on exposures and large exposures), provided that the exposures are to counterparties which are not connected counterparties:

(1) asset items and other exposures secured by collateral in the form of debt securities issued by central governments, central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities, which securities constitute claims on their issuer which would receive a 0% risk weight under the standardised approach;
(2) asset items and other exposures secured by collateral in the form of cash deposits placed with the lending firm or with a credit institution which is the parent undertaking or a subsidiary undertaking of the lending firm;
(3) asset items and other exposures secured by collateral in the form of certificates of deposit issued by the lending firm or by a credit institution which is the parent undertaking or a subsidiary undertaking of the lending firm and lodged with either of them; and
(4) exposures secured by collateral in the form of securities other than those referred to in (1).

01/01/2007

BIPRU 10.6.10

Cash received under a credit linked note issued by the firm and loans and deposits of a counterparty to or with the firm which are subject to an on-balance sheet netting agreement recognised under BIPRU 5 (Credit risk mitigation) must be treated as falling under BIPRU 10.6.9 R (2).

01/01/2007

BIPRU 10.6.11

For the purposes of BIPRU 10.6.9 R (4), the securities used as collateral must be valued at market price, have a value that exceeds the exposures guaranteed, and be either traded or effectively negotiable and regularly quoted on a recognised investment exchange or a designated investment exchange. The excess value required must be 100%. It must, however, be 150% in the case of shares and 50% in the case of debt securities issued by institutions, EEA States' regional governments or local authorities other than those referred to in BIPRU 10.6.9 R (1), and in the case of debt securities issued by multilateral development banks other than those receiving a 0% risk weight under the standardised approach. Where there is a mismatch between the maturity of the exposure and the maturity of the credit protection, the collateral must not be recognised. Where the issuer of securities used as collateral is an institution, such collateral may not constitute the institution's capital resources.

01/01/2007

BIPRU 10.6.12

A firm may only recognise collateral for the purpose of BIPRU 10.6.9 R if the collateral complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation) for the purposes of calculating risk weighted exposure amounts under the standardised approach using the financial collateral simple method or, if applicable, the method in BIPRU 5.5 (Other funded credit risk mitigation). In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral simple method or other applicable method.

01/01/2007

BIPRU 10.6.13

As indicated in BIPRU 5 (Credit risk mitigation), the financial collateral simple method will be available only to firms using the standardised approach and only in relation to exposures for which they adopt the standardised approach.

01/01/2007

Exemptions for firms using the financial collateral comprehensive method

BIPRU 10.6.14

A firm which uses the financial collateral comprehensive method under the standardised approach or the IRB approach (but not the advanced IRB approach) may calculate the value of its exposures to a counterparty or to a group of connected clients (but not connected counterparties) as being the fully-adjusted value of the exposures to the counterparty or group of connected clients calculated in accordance with the financial collateral comprehensive method under BIPRU 5 (Credit risk mitigation) and, if relevant, BIPRU 4.10 (The IRB approach: Credit risk mitigation), taking into account the credit risk mitigation, volatility adjustments and any maturity mismatch (E*) in accordance with those rules.

01/01/2007

BIPRU 10.6.15

Where BIPRU 10.6.14 R applies, BIPRU 10.6.9 R does not apply.

01/01/2007

BIPRU 10.6.16

A firm may only recognise collateral for the purpose of BIPRU 10.6.14 R if the collateral complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation) and, if relevant, BIPRU 4.10 (The IRB approach: Credit risk mitigation) for the purposes of calculating risk weighted exposure amounts under the standardised approach or, if applicable, the IRB approach using the financial collateral comprehensive method. In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral comprehensive method.

01/01/2007

Exemptions for firms using own estimates of LGDs and conversion factors under the IRB approach

BIPRU 10.6.17

A firm that uses own estimates of LGDs and conversion factors under the IRB approach for an IRB exposure class may recognise the effects described in (1) in calculating the value of its exposures to a counterparty or to a group of connected clients (but, subject to the firm's IRB permission, not connected counterparties) for the purposes of BIPRU 10.5 (Limits on exposures and large exposures) if:

(1) the firm is able to satisfy the FSA that it can estimate the effects of financial collateral on its exposures separately from other LGD-relevant aspects;
(2) the firm is able to demonstrate the suitability of the estimates produced; and
(3) the firm's IRB permission specifically allows it.

01/01/2007

BIPRU 10.6.18

BIPRU 10.6.17 R (3) means that a firm with an IRB permission may not use the approach in BIPRU 10.6.17 R unless its IRB permission expressly says that it may do so.

01/01/2007

BIPRU 10.6.19

If a firm that uses own estimates of LGDs and conversion factors under the IRB approach uses its own estimates of the effects of financial collateral on its exposures for large exposures purposes, it must do so on a consistent basis and on a basis consistent with the approach adopted in the calculation of capital requirements. In particular, this approach must be adopted for all exposures the nominal value of which would be a large exposure. A firm may only use one of BIPRU 10.6.14 R and BIPRU 10.6.17 R. A firm must be able to satisfy the FSA that it is complying with this rule.

01/01/2007

BIPRU 10.6.20

A firm to which BIPRU 10.6.17 R applies must still report to the FSA the gross value of its exposures.

01/01/2007

BIPRU 10.6.21

If a firm relies on BIPRU 10.6.17 R the recognition of credit protection is subject to the relevant requirements of the IRB approach.

01/01/2007

Stress testing of credit risk concentrations

BIPRU 10.6.22

A firm which calculates the value of its exposures in accordance with BIPRU 10.6.17 R must conduct periodic stress tests of its credit risk concentrations including in relation to the realisable value of any collateral taken.

01/01/2007

BIPRU 10.6.23

The stress tests required by BIPRU 10.6.22 R must address:

(1) risks arising from potential changes in market conditions that could adversely impact the firm's adequacy of capital resources; and
(2) risks arising from the realisation of collateral in stressed situations.

01/01/2007

BIPRU 10.6.24

A firm must be able to satisfy the FSA that the stress tests that the firm carries out in accordance with BIPRU 10.6.22 R are adequate and appropriate for the assessment of such risks.

01/01/2007

BIPRU 10.6.25

In the event that a stress test carried out in accordance with BIPRU 10.6.22 R indicates a lower realisable value of collateral taken than would be permitted to be taken into account under BIPRU 10.6.17 R to BIPRU 10.6.21 R as appropriate, the value of collateral permitted to be recognised in calculating the value of exposures for the purposes of BIPRU 10.5 (Limits on exposures and large exposures) is the lower value.

01/01/2007

BIPRU 10.6.26

A firm to which BIPRU 10.6.22 R applies must include in its strategy to address concentration risk:

(1) policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures;
(2) policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account under BIPRU 10.6.17 R to BIPRU 10.6.21 R; and
(3) policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, and in particular large indirect credit exposures (for example to a single issuer of securities taken as collateral).

01/01/2007

BIPRU 10.6.27

A firm should determine the frequency needed for the stress testing of its credit risk concentrations with emphasis on having sufficient frequency to maintain the currency of its capital calculations. In any case such testing should be carried out at least once a year.

01/01/2007

BIPRU 10.7

Treasury concession and intra-group securities financing transactions

01/01/2007

Treasury concession

BIPRU 10.7.1

Subject to BIPRU 10.11.1 R (Notification procedures for BIPRU 10.7 to BIPRU 10.10), a firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a concentration risk group counterparty provided that one or more of the following conditions is satisfied:

(1) the exposure has an original maturity of one year or less and it is incurred in the course of the firm carrying on a treasury role for other members of its group;
(2) the following conditions are satisfied:

(a) the exposure is a cash loan to a parent undertaking of the firm or to another member of the firm's immediate group;
(b) (if the loan is to a member of the firm's immediate group other than a parent undertaking of the firm) that member carries on a treasury role for the firm's group;
(c) the cash lent is surplus to the needs of the firm; and
(d) the amount of the surplus fluctuates regularly; or

(3) the exposure arises from the firm or the counterparty operating a central risk management function for members of the firm's group for exposures arising from derivatives.

01/01/2007

BIPRU 10.7.2

The total amount of the exposures that a firm may treat as exempt under BIPRU 10.7.1 R must not exceed 50% of the firm's capital resources as set out in stage (N) of the capital resources table (Total tier one capital plus tier two capital after deductions).

01/01/2007

BIPRU 10.7.3

Any exposures that would, but for BIPRU 10.7.2 R, fall to be treated in accordance with BIPRU 10.7.1 R remain subject to the limits in BIPRU 10.5 (Limits on exposures and large exposures).

01/01/2007

Intra-group securities financing transactions

BIPRU 10.7.4

Subject to BIPRU 10.11.1 R (Notification procedures for BIPRU 10.7 to BIPRU 10.10), a firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure in the form of a securities financing transaction provided that:

(1) the counterparty is a concentration risk group counterparty;
(2) the firm does not apply the CCR internal model method with respect to any securities financing transaction under this chapter;
(3) the exposure in question is collateralised by collateral whose value equals or exceeds 90% of the amount of the exposure; and
(4) (whether or not the firm uses the financial collateral comprehensive method) the collateral is eligible under the financial collateral comprehensive method and the firm meets the other minimum requirements under BIPRU 5 (Credit risk mitigation) in relation to that collateral.

01/01/2007

BIPRU 10.7.5

The level of collateralisation referred to in BIPRU 10.7.4 R (3) must be measured by reference to the gross amount of the exposure without taking into account the effects of netting and without applying volatility adjustments or adjustments for maturity mismatches under the financial collateral comprehensive method.

01/01/2007

BIPRU 10.7.6

A firm using the exemption in BIPRU 10.7.4 R must be able to demonstrate to the FSA:

(1) (if the firm has an CCR internal model method permission) any roll-out programme as referred to in BIPRU 13.6.13 R (Sequential implementation of the CCR internal model method) or any combination of the CCR internal model method with either or both of the CCR mark to market method or the CCR standardised method;
(2) the selection of counterparties for securities financing transactions; and
(3) the booking of its securities financing transactions and the way that it carries on its business with respect to them;

are not designed or chosen wholly or mainly with a view to coming within the limits in BIPRU 10.5 (Limits on exposures and large exposures) or reducing capital requirements applicable to the firm under the regulatory system through the use of that exemption.

01/01/2007

BIPRU 10.8

UK integrated groups

01/01/2007

Application

BIPRU 10.8.1

This section applies to a firm if:

(1) it is a member of a UK integrated group; and
(2) it gives notice in accordance with BIPRU 10.11.1 R (Notification procedures for BIPRU 10.7 to BIPRU 10.10) that it will apply BIPRU 10.8.

01/01/2007

BIPRU 10.8.2

If this section applies to a firm, it must apply this section to all exposures to all its concentration risk group counterparties and not just some of them.

01/01/2007

Guidance about UK integrated groups

BIPRU 10.8.3

Guidance on the treatment of intra-group exposures under this chapter if this section applies can be found in BIPRU 10 Annex 1 G (Treatment of exposures under the integrated groups regime for concentration risk).

01/01/2007

Definition of UK integrated group

BIPRU 10.8.4

An undertaking is a member of a firm's UK integrated group if, in relation to the firm, that undertaking satisfies the following conditions:

(1) it is a concentration risk group counterparty;
(2) it is an institution, financial holding company, financial institution, asset management company or ancillary services undertaking;
(3) it is subject to the same risk evaluation, measurement and control procedures as the firm;
(4) it is established in the United Kingdom and either it is incorporated in the United Kingdom or (if that counterparty is of a type that falls within the scope of that Regulation) the centre of its main interests is situated within the United Kingdom within the meaning of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC); and
(5) there is no current or foreseen material practical or legal impediment to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.

01/01/2007

BIPRU 10.8.5

Firms are referred to the guidance in BIPRU 3.2.30 G and BIPRU 3.2.31 G (guidance relating to 0% risk weights for intra-group exposures under the standardised approach) on the prompt transfer of capital resources and repayment of liabilities.

01/01/2007

Revised concentration risk limits for a UK integrated group

BIPRU 10.8.6

A firm must ensure that the rules listed in BIPRU 10.8.7 R are complied with on a consolidated basis in accordance with the following:

(1) the rules apply in relation to the firm's UK integrated group rather than in relation to the firm;
(2) the rules apply in relation to exposures of members of the UK integrated group to members of the residual block; and
(3) the UK integrated group and the residual block must each be treated as a single undertaking.

01/01/2007

BIPRU 10.8.7

The rules referred to in BIPRU 10.8.6 R are:

(1) BIPRU 10.5.6 R (25% non-trading book limit);
(2) BIPRU 10.5.11 R (trading book limits) other than BIPRU 10.5.11 R (2) (CNCOM);
(3) BIPRU 10.5.12 R (500% limit for trading book excess exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and
(4) BIPRU 10.7 (Treasury concession and intra-group securities financing transactions).

01/01/2007

BIPRU 10.8.8

Exposures between members of the UK integrated group are exempt if this section applies.

01/01/2007

BIPRU 10.8.9

The 800% limit in BIPRU 10.5.8 RR and the 600% limit in BIPRU 10.5.13 R do not apply to exposures to concentration risk group counterparties if this section applies.

01/01/2007

Adjustments to the Treasury concession exemption

BIPRU 10.8.10

A firm may only treat an exposure as exempt under BIPRU 10.7.1 R (Treasury Concession) as applied under this section if the exposure is or (if that rule applied to the member of the UK integrated group in question) would be exempt under BIPRU 10.7.1 R on a solo basis. The following adjustments apply:

(1) the exposure must be to a concentration risk group counterparty; and
(2) the limit in BIPRU 10.7.2 R (Exemption limited to 50% of a firm's capital resources) is calculated on a consolidated basis with respect to the UK integrated group.

01/01/2007

Adjustments to the exemption for securities financing transactions

BIPRU 10.8.11

A firm may only treat an exposure as exempt under BIPRU 10.7.4 R (Intra-group securities financing transactions) as applied under this section if the exposure is or (if that rule applied to the undertaking in question) would be exempt under BIPRU 10.7.4 R on a solo basis. BIPRU 10.7.6 R (Abuse of the exemption) continues to apply. The exemption is not available if the firm uses the CCR internal model method for securities financing transactions for the purpose of this chapter.

01/01/2007

Definition of residual block

BIPRU 10.8.12

For the purposes of this section, a member of the residual block means, in relation to a firm and its UK integrated group, a concentration risk group counterparty of the firm which is not a member of the firm's UK integrated group.

01/01/2007

Calculation of capital resources for a UK integrated group

BIPRU 10.8.13

For the purposes of this section, a firm must calculate the capital resources of the UK integrated group in accordance with GENPRU 3 Annex 1 R Part 2 (Method 2 of Annex I of the Financial Groups Directive (Deduction and aggregation Method)) and apply the limits set out in this section to those capital resources rather than the capital resources of the firm. For these purposes the definition of solo capital resources is adjusted so that the rules on which the calculation for each member of the UK integrated group is based are the ones that would apply under the procedure in BIPRU 8.6.6 R to BIPRU 8.6.9 R (Consolidated capital resources).

01/01/2007

BIPRU 10.8.14

The calculation of capital resources under GENPRU 3 Annex 1 R Part 2 (Method 2 of Annex I of the Financial Groups Directive (Deduction and aggregation Method)) is based on the solo capital resources of members of a financial conglomerate. The definition of solo capital resources depends on what type of undertakings the financial conglomerate contains. For instance, if a financial conglomerate contains a bank the solo capital resources calculation for every group member in the banking sector and the investment services sector is based on the capital resources calculation for banks. The purpose of BIPRU 10.8.13 R is to apply the corresponding procedure that applies under BIPRU 8.6 (Calculation of capital resources on a consolidated basis for BIPRU firms).

01/01/2007

Exemption for intra-group exposures on a solo basis

BIPRU 10.8.15

If this section applies to a firm, then subject to BIPRU 10.10 (Treatment of the trading book concentration risk excess under the integrated groups regime), it may, on a solo basis, treat an exposure to a concentration risk group counterparty as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures).

01/01/2007

BIPRU 10.8.16

The purpose of BIPRU 10.8.15 R is to reflect the fact that the limits in BIPRU 10.5 (Limits on exposures and large exposures) so far as they apply to concentration risk group counterparties are calculated on a consolidated basis with respect to a firm's UK integrated group. It is therefore necessary to switch them off on a purely solo basis.

01/01/2007

BIPRU 10.9

Wider Integrated Group

01/01/2007

Application

BIPRU 10.9.1

This section applies to a BIPRU firm if:

(1) it has a wider integrated group waiver; and
(2) it is a member of a UK integrated group and of a wider integrated group.

01/01/2007

BIPRU 10.9.2

If this section applies, BIPRU 10.8 (UK Integrated Groups) does not apply.

01/01/2007

BIPRU 10.9.3

If this section applies to a firm, it must apply it to all exposures to all its concentration risk group counterparties and not just some of them.

01/01/2007

Guidance about wider integrated groups

BIPRU 10.9.4

Guidance on the treatment of intra-group exposures under BIPRU 10 if this section applies can be found in BIPRU 10 Annex 1 G (Treatment of exposures under the integrated groups regime for concentration risk).

01/01/2007

Definition of wider integrated group

BIPRU 10.9.5

The wider integrated group of a firm consists of each concentration risk group counterparty of the firm that is not a member of the firm's UK integrated group but satisfies all the conditions for membership of the firm's UK integrated group except for BIPRU 10.8.4 R (4) (Establishment in the United Kingdom).

01/01/2007

Definition of diverse block

BIPRU 10.9.6

For the purposes of this section, and in relation to a firm and its wider integrated group, a diverse block means all undertakings in the wider integrated group designated as a single diverse block by the applicable wider integrated group permission.

01/01/2007

Definition of residual block

BIPRU 10.9.7

For the purposes of this section, and in relation to a firm and its wider integrated group, a member of the residual block means a concentration risk group counterparty of the firm which is not a member of the firm's UK integrated group or wider integrated group.

01/01/2007

Revised concentration risk limits for a wider integrated group

BIPRU 10.9.8

A firm to which this section applies must ensure that the rules listed in BIPRU 10.9.9 R are complied with on a consolidated basis on the following basis:

(1) the rules apply in relation to the firm's UK integrated group rather than in relation to the firm;
(2) the rules apply in relation to exposures of the members of the UK integrated group to members of each of the following:

(a) each diverse block; and
(b) the residual block; and

(3) the UK integrated group, each diverse block and the residual block must each be treated as separate single undertakings.

01/01/2007

BIPRU 10.9.9

The rules referred to in BIPRU 10.9.8 R are:

(1) BIPRU 10.5.6 R (25% non-trading book limit);
(2) BIPRU 10.5.11 R (trading book limits) other than BIPRU 10.5.11 R (2) (CNCOM);
(3) BIPRU 10.5.12 R (500% limit for trading book excess exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and
(4) BIPRU 10.7 (Treasury concession and intra-group securities financing transactions).

01/01/2007

BIPRU 10.9.10

Exposures between members of the UK integrated group are exempt if this section applies.

01/01/2007

BIPRU 10.9.11

The 800% limit in BIPRU 10.5.8 R and the 600% limit in BIPRU 10.5.13 R do not apply to exposures to concentration risk group counterparties if this section applies.

01/01/2007

Adjustments to the Treasury concession and securities financing exemptions

BIPRU 10.9.12

BIPRU 10.8.10 R (Adjustments to the Treasury concession exemption) and BIPRU 10.8.11 R (Adjustments to the exemption for securities financing transactions) apply for the purposes of this section in the same way that they apply for the purposes of BIPRU 10.8 (UK Integrated Groups).

01/01/2007

Calculation of capital resources for a UK integrated group

BIPRU 10.9.13

BIPRU 10.8.13 R (Calculation of capital resources for a UK integrated group) applies for the purposes of this section in the same way that it applies for the purposes of BIPRU 10.8 (UK Integrated Groups).

01/01/2007

How diverse blocks are chosen

BIPRU 10.9.14

As part of the process of applying for a wider integrated group waiver, a firm should agree with the FSA the number, nature and size of the diverse blocks. The basis of the diverse blocks will depend on the nature, scale and diversity of the business of the firm, its UK integrated group and its wider integrated group. The different diverse blocks are taken to reflect different groupings of risk, reflecting appropriately low levels of correlation. In general, the FSA will expect to permit a firm to establish no more than four diverse blocks. However, there may be circumstances in which the nature and scale of a firm, its UK integrated group and its wider integrated group would warrant the creation of additional diverse blocks. Each member of a firm's wider integrated group will be allocated to a diverse block. Blocks may be diverse according to geography, business or a combination of both.

01/01/2007

Exemption for intra-group exposures on a solo basis

BIPRU 10.9.15

01/01/2007

BIPRU 10.9.16

The purpose of BIPRU 10.9.15 R is to reflect the fact that the limits in BIPRU 10.5 (Limits on exposures and large exposures) so far as they apply to concentration risk group counterparties are calculated on a consolidated basis with respect to a firm's UK integrated group. It is therefore necessary to switch them off on a purely solo basis.

01/01/2007

BIPRU 10.10

Treatment of the trading book concentration risk excess under the integrated groups regime

01/01/2007

BIPRU 10.10.1

BIPRU 10.10 applies to a firm applying the treatments set out in BIPRU 10.8 (UK Integrated Groups) or BIPRU 10.9 (Wider Integrated Group).

01/01/2007

BIPRU 10.10.2

A firm must calculate the CNCOM that would have applied if BIPRU 10.5.11 R (2) (Additional capital requirements relating to the concentration risk capital component) applied in relation to the UK integrated group in question.

01/01/2007

BIPRU 10.10.3

A firm must then calculate the percentage of the amount calculated under BIPRU 10.10.2 R which is attributable to exposures of the firm.

01/01/2007

BIPRU 10.10.4

A firm must add the result of the calculation in BIPRU 10.10.3 R to the CNCOM applied to the firm on a solo basis in accordance with BIPRU 10.5.16 G to BIPRU 10.5.22 R (How to calculate the concentration risk capital component).

01/01/2007

BIPRU 10.11

Notification procedures for BIPRU 10.7 to BIPRU 10.10

01/01/2007

BIPRU 10.11.1

(1) A firm may not apply BIPRU 10.7 (Treasury concession and intra-group securities financing transactions) or BIPRU 10.8 (UK integrated groups) unless it has given one Month's prior notice to the FSA that it intends do so.
(2) The written notice referred to in (1) must explain how the firm meets the conditions for the application of the treatment in question and how it will ensure that it will still meet the requirements of BIPRU 10 on a continuing basis when using the relevant treatment.
(3) A firm may stop applying BIPRU 10.7 or BIPRU 10.8 if it has given one Month's prior notice to the FSA that it intends do so.
(4) If a firm stops applying BIPRU 10.7 or BIPRU 10.8 it may start to apply it again if it notifies the FSA under (1) that it intends do so.
(5) A firm need only give the FSA the notice required in (1) once rather than with respect to each exposure.

01/01/2007

BIPRU 10.11.2

A firm must notify the FSA if it becomes aware that any exposure that it has treated as exempt under BIPRU 10.7 (Treasury concession and intra-group securities financing transactions) or any counterparty that it has been treating as a member of its UK integrated group or, if BIPRU 10.9 (Wider Integrated Group) applies, its wider integrated group has ceased to meet the conditions for application of the relevant treatment.

01/01/2007

BIPRU 10.12

Systems and controls and general

01/01/2007

Systems and controls

BIPRU 10.12.1

A firm must have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying and recording all large exposures and subsequent changes to them, and for that of monitoring those large exposures in the light of the firm's own exposure policies.

01/01/2007

BIPRU 10.12.2

A firm must take reasonable care to establish and maintain adequate systems and controls to identify, monitor, and control exposures to a parent undertaking of the firm, a subsidiary undertaking of the firm, or a subsidiary undertaking of the firm's parent undertaking.

01/01/2007

Concentration risk policies

BIPRU 10.12.3

A firm must be able to demonstrate to the FSA that:

(1) it has written policies and procedures to address and control the concentration risk arising from:

(a) exposures to counterparties and groups of connected clients;
(b) counterparties in the same economic sector or geographic region;
(c) the same activity or commodity; and
(d) the application of credit risk mitigation techniques, including in particular risks associated with large indirect credit exposures (for example to a single collateral issuer); and

(2) those policies and procedures are implemented.

01/01/2007

Reporting

BIPRU 10.12.4

Other than in relation to repurchase transactions or securities or commodities lending or borrowing transactions, exposures must be reported on a gross basis, not including the recognition of credit risk mitigation.

01/01/2007

Artificial transactions

BIPRU 10.12.5

In line with the general principle in GENPRU 2.2.1 R (Purposive interpretation) a firm must not, with a view to avoiding the additional capital requirements that it would otherwise incur on exposures exceeding the limits laid down in BIPRU 10.5 (Limits on exposures and large exposures) once those exposures have been maintained for more than ten business days:

(1) temporarily transfer the exposures in question to another person (whether in the same group or not); or
(2) undertake artificial transactions to close out the exposure during the ten business day period and create a new exposure.

01/01/2007

BIPRU 10.12.6

A firm must notify the FSA if it enters into a transfer, transaction or arrangement of the type mentioned in BIPRU 10.12.5 R.

01/01/2007

BIPRU 10 Annex 1

Treatment of exposures under the integrated groups regime for concentration risk

01/01/2007

No UK Integrated Group and no Wider Integrated Group

Situation

Exposure from / to

Summary of the available modifications

Intra group exposures but no UKIG or WIG in place

The firm is not subject to an integrated groups treatment of large exposures. The normal large exposure limits (BIPRU 10.5) apply to connected exposures of the firm at the solo level. (This assumes that no other large exposure exemptions are utilised.)
Although a firm's exposures to connected counterparties may not qualify for an integrated groups treatment, they may still qualify for a treasury and intra-group securities financing transaction concession (BIPRU 10.7).

UK Integrated Group established but no Wider Integrated Group in place

Situation

Exposure from / to

Summary of the available modifications

UKIG firm to another UKIG firm (they are members of the same UKIG)
(No WIG in place)

Exposures between members of a firm's UKIG are exempt from the large exposure limits. This means that the 25%, 800%, 500% and 600% limits are disapplied and that the exposures are not included in the notional CNCOM. (BIPRU 10.8.8 G)

UKIG firm to an undertaking within its residual block (no WIG in place)

In situation 3, there is a UKIG and a residual block. But no WIG has been established.
The UKIG's exposures to undertakings within its residual block are exempt from the normal large exposures limits at the solo level. Instead, the total of the UKIG's exposures to its residual block is subject to the following limits (BIPRU 10.8.6 R -BIPRU 10.8.7 R):

BIPRU 10.5.6 R (25% non-trading book limit);BIPRU 10.5.11 R (trading book limits) other than BIPRU 10.5.11 R (2) (CNCOM);BIPRU 10.5.12 R (500% limit for excess trading book exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and BIPRU 10.7 (Treasury concession and intra group securities financing transactions).

The capital resources to which the limits apply are those of the UKIG, rather than those of the solo firm (BIPRU 10.8.6 R (3) and BIPRU 10.8.13 R).
BIPRU 10.7 (Treasury concession and intra-group securities financing transactions) may be applied to exposures of the UKIG to its residual block if the requisite conditions are satisfied.
In respect of the treasury concession (BIPRU 10.7.1 R BIPRU 10.7.3 G), the UKIG's exposures to undertakings within its residual block may be exempt from the 25 % limit, subject to a maximum of 50% of the capital resources of the UKIG. These exempt exposures would also be exempt for the purposes of calculating the notional CNCOM. Any exposure that meets the treasury concession conditions but is above the 50% limit would not be exempt from the large exposure limits. They would not be exempt from the notional CNCOM. The UKIG exposures that were eligible for a treasury concession, but which, together with other such exposures, exceeded the 50% limit are not exempt and are treated as other exposures of the UKIG and remain subject to the 25% limit.

A firm in the residual block to another undertaking in the residual block

Not within the scope of the preferential large exposure treatments.

A firm in the residual block to an undertaking which is a member of the UKIG

UK Integrated Group in place, Wider Integrated Group waiver granted

Situation

Exposure from / to

Summary of the available modifications

UKIG firm to another UKIG member (within the same UKIG)
(WIG in place)

exposures between members of a firm's UKIG are exempt from the large exposure limits (BIPRU 10.9.8 R). (The modifications available are the same as those noted for Situation 2.)

UKIG firm to an undertaking in its WIG
(WIG in place)

In situation 7 there is a UKIG, WIG (comprising diverse blocks agreed under the WIG waiver) and a residual block.
The aggregate exposure of the UKIG to each individual diverse block within the WIG is subject to the following limits (BIPRU 10.9.8 R BIPRU 10.9.9 R9R):

BIPRU 10.5.6 R (25% non-trading book limit;);BIPRU 10.5.11 R (trading book limits) other that BIPRU 10.5.11 R (2) (CNCOM);BIPRU 10.5.12 R (500% limit for excess trading book exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and BIPRU 10.7 (Treasury concession and intra-group securities financing transactions).

The capital resources to which these limits apply are those of the UKIG, rather than those of the solo firm (BIPRU 10.9.8 R (3) and BIPRU 10.9.13 R).
BIPRU 10.7 (Treasury concession and intra-group securities financing transactions) may also be applied to the exposures of the UKIG to each of its diverse blocks within the WIG if the requisite conditions are satisfied.
In respect of the treasury concession (BIPRU 10.7.1 R BIPRU 10.7.6 R6), where there is a WIG, the UKIG's exposures to each individual diverse block may be exempt from the 25% limit up to a maximum amount of 50% of the capital resources of the UKIG. Exempt exposures are also exempt for the purpose of calculating the notional CNCOM for each diverse block. The UKIG exposures to the individual diverse blocks that were eligible for the treasury concession, but which together with other such exposures exceed the 50% limit, are not exempt and are treated as otheor exposures of the UKIG and remain subject to the 25% limit.

UKIG firm to a undertaking within its residual block
(WIG in place)

In situation 8, there is a UKIG, WIG (comprising diverse blocks agreed under the WIG waiver) and residual block.
The UKIG's exposures to members of its residual block are exempt from the normal large exposures limits at the solo level. Instead, the total of the UKIG's exposures to the residual block is subject to the following limits (BIPRU 10.9.8 R BIPRU 10.9.11 G)

BIPRU 10.5.6 R (25 % non-trading book limit);BIPRU 10.5.11 R (trading book limits) other than BIPRU 10.5.11 R (2) (CNCOM);BIPRU 10.5.12 R (500% limit for excess trading book exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and BIPRU 10.7 (Treasury concession and intragroup securities financing transactions).

The capital resources to which these limits apply are those of the UKIG, rather than those of the solo firm (BIPRU 10.9.8 R and BIPRU 10.9.13 R).
BIPRU 10.7 (Treasury concession and intra-group securities financing transactions may also be applied to exposures of the UKIG to its residual block if the requisite conditions are satisfied.
In respect of the treasury concession (BIPRU 10.7.1 R BIPRU 10.7.6 R), where, subject to meeting the treasury concession conditions, the UKIG's exposures to undertakings within its residual block may be exempt from the 25% limit, subject to a maximum of 50% of the capital resources of the UKIG. These exempt exposures would also be exempt for the purposes of calculating the notional CNCOM. Any exposure that meets the treasury concession conditions but is above the 50% limit would not be exempt from the large exposure limits. They would not be exempt from the notional CNCOM. UKIG exposures that were eligible for a treasury concession, but which, together with other such exposures, exceeded the 50% limit are not exempt and are treated as other exposures of the UKIG and remain subject to the 25% limit.

WIG firm to an undertaking in the UKIG

Not within the scope of the preferential large exposure treatments.

WIG firm to another undertaking in the same WIG
(either within the same diverse block or between diverse blocks)

WIG firm to an undertaking within the residual block

A firm within the residual block to an undertaking within the UKIG

A firm within the residual block to an undertaking within the WIG

A firm within the residual block to an undertaking in the residual block

This table assumes that BIPRU TP 17 and BIPRU TP 18 have not been applied.

01/01/2007