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Status: You are viewing the version of the handbook as on 2012-12-13.

BIPRU 10.10A Trading book limits3

Application

BIPRU 10.10A.1R

1This section only applies to exposures in a firm's trading book to counterparties which fulfil the following conditions:3

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  1. (1)

    3subject to (2), and in relation to a firm, a counterparty ('P') to whom the firm has an exposure and who fulfils at least one of the following conditions:

    1. (a)

      P is closely related to the firm; or

    2. (b)

      P is an associate of the firm; or

    3. (c)

      the same persons significantly influence the governing body of P and of the firm; or

    4. (d)

      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;

  2. (2)

    where P is Business Growth Fund plc or another financial institution which makes venture capital investments and the firm is entitled to ignore that financial institution in accordance with GENPRU 2.2.209 R (2) for the purposes of determining whether there is a material holding, (1) applies with the following modifications to the definition of associate:

    1. (a)

      paragraph (3)(c) (community of interest) of that definition does not apply; and

    2. (b)

      in applying paragraph (3)(a) (affiliated company) of that definition, paragraph (1)(e) (participating interests) of the definition of group does not apply.

BIPRU 10.10A.1AG

3In deciding whether a transaction is at arm's length for the purposes of BIPRU 10.10A.1R (1)(d), the factors set out in BIPRU 10.3.14 G should be taken into account.

Trading book limits

BIPRU 10.10A.2R

Exposures in a firm's trading book to counterparties falling within BIPRU 10.10A.1 R3 are exempt from the 25% limit in BIPRU 10.5.6 R (large exposures limit) if:

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  1. (1)

    the total amount of the exposures on the firm's non-trading book to counterparties falling within BIPRU 10.10A.1 R3 does not exceed the limit laid down in that rule, calculated with reference to the definition of capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) as 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

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  2. (2)

    the firm meets the additional capital requirements relating to the concentration risk capital component (CNCOM) in relation to the relevant trading book exposures.

BIPRU 10.10A.2AG

3The applicable limit for the purposes of BIPRU 10.10A.2R (1) is the total amount of the exposures on the firm's non-trading book to counterparties falling within BIPRU 10.10A.1 R, even though there is no explicit limit to such counterparties in BIPRU 10.5.6 R (large exposures limit).

BIPRU 10.10A.3R

A firm must ensure that the total amount of its trading book exposures to its counterparties falling within BIPRU 10.10A.1 R3 does not exceed 500% of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions).

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How to calculate the concentration risk capital component

BIPRU 10.10A.4G

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).

BIPRU 10.10A.5R
BIPRU 10.10A.6R

An individual counterparty CNCOM is the amount a firm must calculate in accordance with BIPRU 10.10A.8R with respect to its exposures to its counterparties falling within BIPRU 10.10A.1 R3.

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BIPRU 10.10A.7G

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.

BIPRU 10.10A.8R

A firm must calculate its individual counterparty CNCOM for its exposures to itscounterparties falling within BIPRU 10.10A.1 R3 as follows:

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  1. (1)

    break down its total exposure into its trading book and non-trading book components;

  2. (2)

    calculate 25% of the firm's capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) to determine the total amount of the exposures in the firm's non-trading book does not exceed this limit in accordance with BIPRU 10.10A.2R (1);

  3. (3)

    calculate 25% of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions) and deduct those parts of the total exposure which are in the non-trading book falling within the limit in (2);

  4. (4)

    a firm must allocate (in the order set out in (6)) trading book exposures to its counterparties falling within BIPRU 10.10A.1 R3 to the unutilised portion of the 25% limit of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions) remaining after deducting the non-trading book exposures in accordance with (3);

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  5. (5)

    no further trading book exposures can be allocated once the 25% limit in (4) has been reached; the remaining trading book exposures constitute the trading book concentration risk excess with respect to its counterparties falling within BIPRU 10.10A.1 R3;

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  6. (6)

    for the purposes of (4), a firm must allocate the trading book exposures in the order of the level of capital requirements, starting 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 moving towards those trading book exposures with the highest capital requirements last;

  7. (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. (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) 200%;

  9. (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) appropriate percentage in BIPRU 10.10A.9R.

BIPRU 10.10A.9R

The appropriate percentage referred to in BIPRU 10.10A.8R (9) must be established in accordance with the following:

  1. (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 10.10A.10R;

  2. (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. (3)

    no amount may be allocated to the second or any later band unless the one before has been filled;

  4. (4)

    exposures must be assigned to the bands in the order established by BIPRU 10.10A.8R (6); and

  5. (5)

    for the purposes of (4), those exposures with the lowest capital requirements (as referred to in BIPRU 10.10A.8R (6)) must be assigned first and those with the highest last.

Percentages applicable under BIPRU 10.10A.9R

BIPRU 10.10A.10R

This table belongs to BIPRU 10.10A.9 R

Trading book concentration risk excess2 (as a percentage of the firm's capital resources calculated at stage (T) of the capital resources table (Total capital after deductions))

2

Percentage

Up2 to 40%

2

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%

How CNCOM applies to the non-core large exposures group

BIPRU 10.10A.11R

A firm that has a non-core large exposures group waiver must meet the CNCOM in relation to exposures to members of its non-core large exposures group in accordance with this section, subject to the following:

  1. (1)

    in BIPRU 10.10A.8 R, 25% is substituted with 100%; and

  2. (2)

    the excess exposures for the purpose of BIPRU 10.10A.8R (9) must be assigned to the bands in the first column of the table in BIPRU 10.10A.10 R beginning with the portion from 100% - 250%.

Core UK group and non-core large exposures group: treatment of the trading book concentration risk excess

BIPRU 10.10A.12R
  1. (1)

    This rule applies to a firm that has a core UK group waiver or a non-core large exposures group waiver.

  2. (2)

    A firm must calculate the CNCOM in relation to the core UK group in question in accordance with BIPRU 10.10A.2 R (Trading book limits).

  3. (3)

    A firm must then calculate the percentage of the amount calculated under (2) which is attributable to exposures of the firm.

  4. (4)

    A firm must add the result of the calculation in (3) to the CNCOM applied to the firm on a solo basis in accordance with BIPRU 10.10A.5R to BIPRU 10.10A.11R (How to calculate the concentration risk capital component).

Examples

BIPRU 10.10A.13G
  1. (1)

    The table in BIPRU 10.10A.14G sets out an example of a CNCOM calculation under BIPRU 10.10A.8R.

  2. (2)

    BIPRU 10 Annex 2 G (Examples of treatment of exposures under BIPRU 10) sets out examples of how the large exposures limits apply, particularly in relation to a core UK group and non-core large exposures group, taking into account various examples of firm's exposure profiles.

Example of a CNCOM calculation (all numbers 000s)

BIPRU 10.10A.14G

This table belongs to BIPRU 10.10A.13G (1)

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

30

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

30

4.00

Equity (net)

130

(5)

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

25% of amended capital base (1100)

275

Non-trading book exposure

200

Headroom

75

(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 non-trading book exposure and 75 trading book 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 non-trading book exposure and 75 trading book 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

Appropriate % Multiplier Band = 200%

25 x 0.25% x 200% =

0.125

30 x 1.60% x 200% =

0.960

110 x 4.00% x 200% =

8.800

(b)

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

20 x 4.00% x 300% =

2.400

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

12.285