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BIPRU 10.3 Identification of counterparties

BIPRU 10.3.1R

An individual counterparty may be a natural or legal person.

BIPRU 10.3.2G

Examples of a counterparty include:

  1. (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. (2)

    where the firm is providing a guarantee, the person guaranteed;

  3. (3)

    for a derivatives contract, the person with whom the contract was made;

  4. (4)

    for exchange traded contracts novated through a central clearing mechanism, that central clearing mechanism;

  5. (5)

    where a bill held by a firm has been accepted by a credit institution, the acceptor; and

  6. (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.

Identification of counterparties for guaranteed and collateralised exposures1

BIPRU 10.3.3R

  1. (1)

    1Where an exposure to a counterparty is:

    1
    1. (a)

      guaranteed by a third party, a firm may treat the portion of the exposure which is guaranteed as having been incurred to the guarantor rather than to the counterparty, provided that the unsecured exposure to the guarantor would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the counterparty under the standardised approach; or

    2. (b)

      secured by collateral issued by a third party, a firm may treat the portion of the exposure collateralised by the market value of recognised collateral as having been incurred to the third party rather than to the counterparty, provided that the collateralised portion of the exposure would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the counterparty under the standardised approach.

      [Note: BCD Article 117(1)(a) and (b)]

  2. (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. (3)

    [deleted]1

    1
  4. (4)

    [deleted]1

    1
  5. (5)

    [deleted]1

    1
  6. (6)

    A guarantee or collateral 1may only be treated in accordance with (1) if the firm complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation)1 and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) 1for the purposes of calculating risk weighted exposure amounts.

  7. (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.

    1[Note: BCD Article 112(1)]

BIPRU 10.3.4G
1
  1. (1)

    1If a firm treats an exposure to a counterparty as guaranteed, or secured by collateral issued, by a third party for the purposes of BIPRU 5 (Credit risk mitigation), it should apply the same approach on a consistent basis when identifying a counterparty for the purposes of this chapter.

  2. (2) 1

    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.

  3. (3) 1

    Where the guarantee is denominated in a currency different from that in which the exposure is denominated, the provisions on the treatment of currency mismatch for unfunded credit protection in BIPRU 5.7 (Unfunded credit protection) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the calculation of the amount of the exposure deemed to be covered.

    [Note: BCD Article 117(2)(a)]

  4. (4)

    1Where there is a mismatch between the maturity of the exposure and the maturity of the protection provided by guarantee, BIPRU 5.8 (Maturity mismatches) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the treatment for mismatch.

    [Note: BCD Article 117(2)(b)]

  5. (5)

    1For the purpose of BIPRU 10.3.3R (1), where there is a mismatch between the maturity of the exposure and the maturity of the protection provided by collateral, BIPRU 5.8.7 R (Valuation of protection: Transactions subject to funded credit protection - financial collateral simple method) requires that the collateral must not be recognised.

    [Note: BCD Article 117(1) second paragraph]

  6. (6)

    1In relation to a guarantee, BIPRU 5.7 (Unfunded credit protection) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the treatment of partial coverage.

    [Note: BCD Article 117(2)(c)]

Groups of connected clients

BIPRU 10.3.5G
BIPRU 10.3.6G

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. (1)

    undertakings in the same group;

  2. (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. (3)

    companies having common directors or management; and

  4. (4)

    counterparties linked by cross guarantees

BIPRU 10.3.7G

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.

Connected counterparties

BIPRU 10.3.8R
  1. (1)

    Subject to (2), 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:3

    1. (a)

      P is closely related to the firm; or3

    2. (b)

      P is an associate of the firm; or

      3
    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.3

  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:3

    1. (a)

      paragraph (3)(c) (community of interest) of that definition does not apply; and3

    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.3

BIPRU 10.3.8AG

The Committee of European Banking Supervisors (CEBS) has issued guidelines in relation to the definition of a group of connected clients, in particular with reference to the concepts of control and economic interconnection. These guidelines can be found at: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-the-revised-large-exposures-reg.aspx- Part I .

Exposures to counterparties, groups of connected clients and connected counterparties

BIPRU 10.3.9R

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.

BIPRU 10.3.10R

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.

BIPRU 10.3.11R

Exposures to trustees

BIPRU 10.3.12R

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.1

BIPRU 10.3.13G

When considering whether the treatment described in BIPRU 10.3.12 G1 is misleading, factors a firm should consider include:

  1. (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. (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. (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. (4)

    for a connected counterparty, whether the exposure arises from a transaction entered into on an arm's length basis.

BIPRU 10.3.14G

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. (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. (2)

    the management role of A where A is also a director of the firm; and

  3. (3)

    whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.

1Exposures to underlying assets

BIPRU 10.3.15R

1Where under a transaction or scheme (for example, securitisation positions or claims in the form of CIUs) there is an exposure to underlying assets, a firm must assess the exposure to the transaction or scheme, or its underlying exposures, or both, in order to determine the existence of a group of connected clients. For the purpose of this rule, a firm must evaluate the economic substance and the risks inherent in the structure of the transaction.

[Note: BCD Article 106(3)]

BIPRU 10.3.16G

2The Committee of European Banking Supervisors (CEBS) has issued guidelines in relation to the treatment for large exposures purposes of schemes with exposures to underlying assets. These guidelines can be found at: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-the-revised-large-exposures-reg.aspx - Part II.