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BIPRU 5.5 Other funded credit risk mitigation

Deposits with third parties: Eligibility

BIPRU 5.5.1R

Cash on deposit with, or cash assimilated instruments held by, a third party institution in a non-custodial arrangement and pledged to a lending firm may be recognised as eligible credit protection.

[Note: BCD Annex VIII Part 1 point 23]

Deposits with third parties: Minimum requirements

BIPRU 5.5.2R

To be eligible for the treatment set out at BIPRU 5.5.3 R, the protection referred to in BIPRU 5.5.1 R must satisfy the following conditions:

  1. (1)

    the borrower's claim against the third party institution is openly pledged or assigned to the lending firm and such pledge or assignment is legally effective and enforceable in all relevant jurisdictions;

  2. (2)

    the third party institution is notified of the pledge or assignment;

  3. (3)

    as a result of the notification, the third party institution is able to make payments solely to the lending firm or to other parties with the lending firm's consent; and

  4. (4)

    the pledge or assignment is unconditional and irrevocable.

    [Note: BCD Annex VIII Part 2 point 12]

Deposits with third parties: Calculating the effects of the credit risk mitigation

BIPRU 5.5.3R

Where the conditions set out in BIPRU 5.5.2 R are satisfied, credit protection falling within the terms of BIPRU 5.5.1 R may be treated as a guarantee by the third party institution.

[Note: BCD Annex VIII Part 3 point 79]

Life insurance policies: Eligibility

BIPRU 5.5.4R

Life insurance policies pledged to a lending firm may be recognised as eligible credit protection.

[Note: BCD Annex VIII Part 1 point 24]

Life insurance policies: Minimum requirements

BIPRU 5.5.5R

For life insurance policies pledged to a lending firm to be recognised the following conditions must be met:

  1. (1)

    the party providing the life insurance must be subject to the Solvency II Directive2, or is subject to supervision by a competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the Community;1

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  2. (2)

    the life insurance policy is openly pledged or assigned to the lending firm;

  3. (3)

    the party providing the life insurance is notified of the pledge or assignment and as a result may not pay amounts payable under the contract without the consent of the lending firm;

  4. (4)

    the surrender value is declared by the company providing the life insurance and1 is non-reducible;

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  5. (4A)

    1the surrender value must be paid in a timely manner upon request;

  6. (4B)

    1the surrender value must not be requested without the consent of the lending firm;

  7. (5)

    the lending firm must have the right to cancel the policy and receive the surrender value in a timely way in the event of the default of the borrower;

  8. (6)

    the lending firm is informed of any non-payments under the policy by the policyholder;

  9. (7)

    the credit protection must be provided for the maturity of the loan. Where this is not possible because the insurance relationship ends before the loan relationship expires, the lending firm must ensure that the amount deriving from the insurance contract serves the lending firm as security until the end of the duration of the credit agreement;1 and

  10. (8)

    the pledge or assignment must be legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.

    [Note: BCD Annex VIII Part 2 point 13 (part)]

BIPRU 5.5.6R

Where it is not possible for a firm to meet the condition set out in BIPRU 5.5.5 R (7), because the insurance relationship ends before the loan relationship expires, the firm must ensure that the amount deriving from the insurance contract serves the firm as security until the end of the duration of the credit agreement.

[Note: BCD Annex VIII Part 2 point 13 (part)]

Life insurance policies: Calculating the effects of the credit risk mitigation

BIPRU 5.5.7R
1
  1. (1)

    1Where the conditions set out in BIPRU 5.5.5 R are satisfied, the portion of the exposure collateralised by the current surrender value of credit protection falling within the terms of BIPRU 5.5.4 R must be either:

    1. (a)

      1subject to the risk weights specified in (3) where the exposure is subject to the standardised approach to credit risk; or

    2. (b)

      1assigned an LGD of 40% where the exposure is subject to the IRB approach but not subject to the firm's own estimates of LGD.

  2. (2)

    1In case of a currency mismatch, the current surrender value must be reduced according to BIPRU 5.7.17 R and BIPRU 5.7.18R, the value of the credit protection being the current surrender value of the life insurance policy.

  3. (3)

    1For the purpose of (1)(a), the following risk weights must be assigned on the basis of the risk weight assigned to a senior unsecured exposure to the company providing the life insurance:

    1. (a)

      1a risk weight of 20%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 20%;

    2. (b)

      1a risk weight of 35%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 50%;

    3. (c)

      1a risk weight of 70%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 100%; and

    4. (d)

      1a risk weight of 150%, where the senior unsecured exposure to the company providing the life insurance is assigned a risk weight of 150%.

[Note: BCD Annex VIII Part 3 point 80]

Instruments purchased on request: Eligibility

BIPRU 5.5.8R

Instruments issued by third party institutions which will be repurchased by that institution on request may be recognised as eligible credit protection.

[Note: BCD Annex VIII Part 1 point 25]

Instruments purchased on request: Calculating the effects of the credit risk mitigation

BIPRU 5.5.9R

Instruments eligible under BIPRU 5.5.8 R may be treated as a guarantee by the issuing institution.

[Note: BCD Annex VIII Part 3 point 81]

BIPRU 5.5.10R

For the purposes of BIPRU 5.5.9 R, the value of the credit protection recognised is the following:

  1. (1)

    where the instrument will be repurchased at its face value, the value of the protection is that amount; or

  2. (2)

    where the instrument will be repurchased at market price, the value of the protection is the value of the instrument valued in the same way as the debt securities specified in BIPRU 5.4.5 R.

    [Note: BCD Annex VIII Part 3 point 82]

Credit linked notes

BIPRU 5.5.11R

Investments in credit linked notes issued by a lending firm may be treated as cash collateral.

[Note: BCD Annex VIII Part 3 point 3]