Subject to BIPRU 13:
[Note: BCD Article 78(1) part]
BIPRU 13 sets out the method for determination of the exposure value of a financial derivative instrument, with the effects of contracts of novation and other netting agreements taken into account for the purposes of that method in accordance with BIPRU 13.7.
BIPRU 13.3 and BIPRU 13.8 set out the provisions applying to the treatment and determination of the exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions (SFTs).
BIPRU 13.8 provides that, in the case of a firm using the financial collateral comprehensive method under BIPRU 5, where an exposure takes the form of an SFT, the exposure value should be increased by the volatility adjustment appropriate to such securities or commodities set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R (Supervisory volatility adjustments approach and the own estimates of volatility adjustments approach).
BIPRU 13.3.13 R and BIPRU 13.8.8 R set out the provisions relating to determination of the exposure value of certain credit risk exposures outstanding with a central counterparty, where the central counterparty credit risk exposures with all participants in its arrangements are fully collateralised on a daily basis.
claims or contingent claims on central governments or central banks;
claims or contingent claims on regional governments or local authorities;
claims or contingent claims on administrative bodies and non-commercial undertakings;
claims or contingent claims on multilateral development banks;
claims or contingent claims on international organisation;
claims or contingent claims on institutions;
claims or contingent claims on corporates1;
retail claims or contingent retail claims;
claims or contingent claims secured on real estate property;
past due items;
items belonging to regulatory high-risk categories;
claims in the form of covered bonds;
claims in the form of CIUs; or
[Note: BCD Article 79(1)]
the total amount owed to the firm, its parent undertakings and its subsidiary undertakings, including any past due exposure, by the obligor client or group of connected clients, but excluding claims or contingent claims secured on residential real estate collateral, must not, to the knowledge of the firm, exceed €1 million.
[Note: BCD Article 79(2)]
A key driver of the preferential risk weight afforded retail exposures is the lower correlation and systematic risk associated with such exposures. This aspect is unrelated to the absolute number of retail exposures. Accordingly in defining what constitutes a significant number of retail exposures for the purpose of BIPRU 3.2.10 R (2), a firm need only satisfy itself that the number of retail exposures is sufficiently large to diversify away idiosyncratic risk. This assessment will be subject to supervisory review and part of a firm's SREP. It will be looked at as one of the issues relating to overall diversification.
In deciding what steps are reasonable for the purposes of BIPRU 3.2.11 R, a firm may take into account complexity and cost, as well as the materiality of the impact upon its capital calculation. A firm should be able to demonstrate to the FSA that it has complied with the obligation to take reasonable steps under BIPRU 3.2.11 R in the way it takes these factors into account.
The definition of group of connected clients is set out in the Glossary. Paragraph (2) of that definition is "two or more persons ... who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties".
Say that a firm has exposures to A and B. When deciding whether A and B come within paragraph (2) of the definition two conditions should be satisfied. Firstly the connections between A and B should mean that if A experiences financial problems, B should be likely to encounter repayment difficulties. Secondly, the connections between A and B should mean that if B experiences financial problems, A should be likely to encounter repayment difficulties.
The guidance in BIPRU 3.2.16 G is provided for the purpose of BIPRU 3.2.10 R only and not for the purposes of any other provision in the Handbook that uses the defined term group of connected clients.
If a firm has exposures to an owner of a retail SME in his personal capacity and exposures to the retail SME the firm should aggregate the two types of exposure for the purpose of BIPRU 3.2.10 R (3), although it should not include claims secured on residential real estate collateral. In deciding what steps are reasonable for the purposes of BIPRU 3.2.11 R in aggregating these two types of exposure, a firm may take into account the materiality of those personal exposures. A firm should be able to demonstrate to the FSA that it has complied with the obligation to take reasonable steps under BIPRU 3.2.11 R when taking into account materiality in this way.
A firm may monitor compliance with the €1m threshold in BIPRU 3.2.10 R on the basis of approved limits provided it has internal control procedures that are sufficient to ensure that amounts owed cannot diverge from approved limits to such an extent as to give rise to a material breach of the €1m threshold.
Credit quality may be determined by reference to:
Subject to BIPRU 3.2.35 R, and with the exception of exposures giving rise to liabilities in the form of the items referred to in BIPRU 3.2.26 R, a firm is not required to comply with BIPRU 3.2.20 R (Calculation of risk weighted exposures amounts under the standardised approach) in the case of the exposures of the firm to a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking provided that the following conditions are met:2
the counterparty is2
(in relation to a subsidiary undertaking) 100% of the voting rights attaching to the shares in the counterparty's capital is held by the firm or a financial holding company (or a subsidiary undertaking of the financial holding company), whether individually or jointly, and that the firm or financial holding company (or its subsidiary undertaking) must have the right to appoint or remove a majority of the members of the board of directors, committee of management or other governing body of the counterparty; 2
the counterparty is subject to the same risk evaluation, measurement and control procedures as the firm;
the counterparty is incorporated in the United Kingdom ; and22
Firms are referred to BIPRU 10.8A (Intra-group exposures: core UK group) under which exposures within the core UK group are exempt from the limits described in BIPRU 10.5 (Limits on exposures) if they would be assigned a risk weight of 0% under BIPRU 3.2.25 R.
Therefore, a firm that is applying for a core UK group waiver should demonstrate that it meets the conditions in BIPRU 3.2.25 R and BIPRU 10.8A for establishing a core UK group. A firm that is granted a core UK group waiver may rely on it for the purpose of assigning a risk weight of 0% to exposures within its core UK group and for the purpose of exempting the exposures within the core UK group from the 25% large exposure limit.
2For the purpose of BIPRU 3.2.25R (1)(e), a firm must be able on an ongoing basis to demonstrate fully to the FSA the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.
In relation to a counterparty that is not a firm, the arrangements referred to in (1) must include a legally binding agreement with each firm that is a member of the core UK group that it will promptly on demand by the firm increase the firm's capital resources by an amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 (Large exposures) and any other requirements relating to capital resources or concentration risk imposed on a firm by or under the regulatory system.
For the purpose of BIPRU 3.2.25 R (1)(c) it is the risk management functions of the group that should be integrated, rather than the group's operational management. A firm should ensure that if risk management functions are integrated in this way it should be possible for the FSA to undertake qualitative supervision of the management of the integrated risk management function.
In relation to a core concentration risk group counterparty, an 2 undertaking is included within the scope of consolidation of a group on a full basis if it is at the head of the group or if its assets and liabilities are taken into account in full as referred to in BIPRU 8.5.2 G (Basis of inclusion of undertakings in consolidation).22
2In relation to BIPRU 3.2.25 R (1)(ba), a subsidiary undertaking should generally be 100% owned and controlled by a single shareholder. However, if a subsidiary undertaking has more than one shareholder, that undertaking may be a member of the core UK group if all its shareholders are also members of the same core UK group.
For the purpose of BIPRU 3.2.25R (1)(d) (Incorporation in the UK), if a counterparty is of a type that falls within the scope of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC) and it is established in the United Kingdom other than by incorporation, a firm wishing to include that counterparty in its core UK group may apply to the FSA for a waiver of this condition if it can demonstrate fully to the FSA that the counterparty's centre of main interests is situated in the United Kingdom within the meaning of that Regulation.
2in the case of an undertaking that is a firm the requirement in BIPRU 3.2.25R (1)(e) for the prompt transfer of capital resources refers to capital resources in excess of the capital and financial resources requirements to which it is subject under the regulatory system; and2
2the following guidance relating to the condition in BIPRU 10.8A.2 R (6) requiring the prompt transfer of capital resources within a core UK group as applicable for the exemption from large exposure limits is also relevant:
The guidance in BIPRU 3.2.30 G - BIPRU 3.2.31 G does not apply to BIPRU 2.1 (Solo consolidation) even though the provisions have similar wording. This is because the purpose of the provisions in BIPRU 2.1 is to define the conditions under which two undertakings should be treated as a single undertaking. The purpose of BIPRU 3.2.25 R (1) is to define the circumstances in which it is appropriate to apply a zero risk weight.
- (1) 2
A firm must notify the FSA if it becomes aware that any exposure that it has treated as exempt under BIPRU 3.2.25 R has ceased to meet the conditions for exemption or if the firm ceases to treat an exposure under that rule.
For the purposes of the standardised approach (including as it applies for the purposes of BIPRU 14) and without prejudice to BIPRU 13.3.13 R and BIPRU 13.8.8 R (Exposure to a central counterparty), exposures to recognised third country investment firms and exposures to recognised clearing houses, designated clearing houses, recognised investment exchanges and designated investment exchanges must be treated as exposures to institutions.
[Note: CAD Article 40]