BIPRU 14.4 Free deliveries

Scope

BIPRU 14.4.1R

BIPRU 14.4 applies in respect of items in the trading book and the non-trading book.

BIPRU 14.4.2R

A firm must hold capital resources with respect to a free delivery, as set out in the Table in BIPRU 14.4.3 R, if:

  1. (1)

    it has paid for securities, foreign currencies or commodities before receiving them or it has delivered securities foreign currencies or commodities before receiving payment for them; and

  2. (2)

    in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.

    [Note: CAD Annex II point 2]

Exposure

BIPRU 14.4.3R

Table: Capital treatment for free deliveries

This table belongs to BIPRU 14.4.2 R.

Transaction Type

Up to first contractual payment leg or delivery leg

From first contractual payment leg or delivery leg up to four days after second contractual payment leg or delivery leg

From 5 business days post second contractual payment leg or delivery leg until extinction of the transaction

Free delivery

No capital charge in the trading book

Treat as an exposure

Deduct value transferred plus current positive exposure from capital resources

[Note: CAD Annex II Table 2]

BIPRU 14.4.4R

  1. (1)

    In the case of the non-trading book, a firm must treat an exposure falling into columns 2 and 3 of the table in BIPRU 14.4.3 R in accordance with the relevant provisions of the standardised approach to credit risk or the IRB approach, as the case may be.

  2. (2)

    In the case of the trading book, a firm must apply the treatment set out in BIPRU 14.4.5 R.

[Note: CAD Annex II point 3 (part)]

BIPRU 14.4.5R
  1. (1)

    In applying a risk weight to free delivery exposures treated according to column 3 of the table in BIPRU 14.4.3 R, a firm using the IRB approach may assign PD to counterparties, for which they have no other non-trading book exposure, on the basis of the counterparty's external rating.

  2. (2)

    A firm using own estimates of LGDs may apply the LGD set out in BIPRU 4.4.34 R to BIPRU 4.4.35 RBIPRU 4.4.35 R (IRB foundation approach: LGDs) to free delivery exposures treated according to column 3 of the table in BIPRU 14.4.3 R, provided that it applies it to all such exposures.

  3. (3)

    Alternatively, a firm using the IRB approach may apply the risk weights, as set out in the standardised approach to credit risk provided that it applies them to all such exposures or may apply a 100% risk weight to all such exposures.

    [Note: CAD Annex II point 3 (part)]

BIPRU 14.4.6R

If the amount of positive exposure resulting from free delivery transactions is not material, a firm may apply a risk weight of 100% to these exposures.

BIPRU 14.4.7G

In cases of a system wide failure of a settlement or clearing system, a firm should refer to the emergency provisions in GEN 1.3. Where the requirements of GEN 1.3.2 R are met, until the situation is rectified failure of a counterparty to settle a trade will not be deemed a default for purposes of credit risk.

[Note: CAD Annex II point 4]