Market Risk

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Application Provision

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1

Application and Definitions

1.1

This Part applies to:

  1. (1) every firm that is a CRR firm; and
  2. (2) a CRR consolidation entity.

1.1A

  1. (1) a firm must comply with this Part on an individual basis.
  2. (2) a CRR consolidation entity must comply with this Part on a consolidated basis, and for this purpose, references to a firm in this Part (other than in 1.1 and 1.1A) mean a CRR consolidation entity.

1.2

In this Part the following definitions shall apply:

means a security which gives the investor the right to convert the security into a share at an agreed price on an agreed basis.

means a share.

has the meaning specified in Article 3(1) of the Regulated Activities Order.
means the investment specified in Article 76 of the Regulated Activities Order.

1.3

Unless otherwise defined, any italicised expression used in this Part and defined in the CRR has the same meaning as in the CRR.

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2

Use of Internal Models: Risk Capture

2.1

A firm which has a permission to use internal models in accordance with Title IV, Chapter 5 of the CRR:
  1. (a) must identify any material risks, or risks that when considered in aggregate are material, which are not captured by those models; and
  2. (b) must ensure that it holds own funds to cover those risk(s) in additional to those required to meet its own funds requirement calculated in accordance with Title IV, Chapter 5 of the CRR.

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3

Netting: Convertible Bonds

3.1

For the purposes of Article 327(2) of the CRR, the netting of a convertible bond and an offsetting position in the instrument underlying is permitted. The convertible bond shall be:
  1. (a) treated as a position in the equity into which it converts; and
  2. (b) the firm's own funds requirement for the general and specific risk in its equity instruments shall be adjusted by making:
    1. (i) an addition equal to the current value of any loss which the firm would make if it did convert to equity; or
    2. (ii) a deduction equal to the current value of any profit which the firm would make if it did convert to equity (subject to a maximum deduction equal to the own funds requirements on the notional position underlying the convertible bond).

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4

Instruments for Which No Treatment Specified

4.1

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

4.2

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

4.3

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

4.4

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

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