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BIPRU 10.5 Limits on exposures and large exposures

Definition of large exposure

BIPRU 10.5.1R

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.

Definition of capital resources

BIPRU 10.5.2R

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.

BIPRU 10.5.3R

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).

BIPRU 10.5.4R

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).

BIPRU 10.5.5R

A firm must not take into account the following items:

  1. (1)

    surplus provisions (see GENPRU 2.2.190 R to GENPRU 2.2.193 R); or

  2. (2)

    expected loss amounts and other negative amounts (see GENPRU 2.2.236 R); or

  3. (3)

    securitisation positions (see GENPRU 2.2.237 R).

Non-trading book limits

BIPRU 10.5.6R

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. (1)

    a counterparty; or

  2. (2)

    a group of connected clients; or

  3. (3)

    its connected counterparties.

BIPRU 10.5.7G

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.

BIPRU 10.5.8R

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).

BIPRU 10.5.9R

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.

BIPRU 10.5.10G

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.

Trading book limits

BIPRU 10.5.11R

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. (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. (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 10.5.12R

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.

BIPRU 10.5.13R

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.

BIPRU 10.5.14R

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.

BIPRU 10.5.15G

How to calculate the concentration risk capital component

BIPRU 10.5.16G

A firm's CNCOM should be calculated as part of its credit risk capital requirement (CRCR)1 in accordance with GENPRU 2.1 (Calculation of capital resources requirements).

BIPRU 10.5.17R
BIPRU 10.5.18R

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.

BIPRU 10.5.19G

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 10.5.20R

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. (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 and deduct those parts of the total exposure which are in the non-trading book;

  3. (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. (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. (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. (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. (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) x 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) x appropriate percentage in BIPRU 10.5.21 R.

BIPRU 10.5.21R

The appropriate percentage referred to in BIPRU 10.5.20 R (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 10.5.22 R;

  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 10.5.20 R (6); and

  5. (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.

Percentages applicable under BIPRU 10.5.21R

BIPRU 10.5.22R

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%

BIPRU 10.5.23G

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

Example of a CNCOM calculation (all numbers 000s)

BIPRU 10.5.24G

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

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-securities exposure and 25% of the amended capital resources is calculated.

25% of amended capital base (1100)

275

Non-trading book exposure1

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 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

110 x 4.00% x 200% =1

1

8.8001

1

(b)

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

20 x 4.00% x 300% =

2.400

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

12.2851

1