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BIPRU 6.4 Operational risk: Standardised approach

Eligibility

BIPRU 6.4.1R
  1. (1)

    To be eligible for the standardised approach, a firm must meet the qualifying criteria set out in this rule, in addition to the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and SYSC 7.1.16 R1.

    1
  2. (2)

    A firm must have a well-documented assessment and management system for operational risk with clear responsibilities for the system assigned within the firm. The system must identify the firm's exposures to operational risk and track relevant operational risk data, including material loss data.

  3. (3)

    A firm's operational risk assessment and management system must be subject to regular independent review.

  4. (4)

    A firm's operational risk assessment system must be closely integrated into the firm's risk management processes. Its output must be an integral part of the process of monitoring and controlling the firm's operational risk profile.

  5. (5)

    A firm must implement a system of management reporting that provides operational risk reports to relevant functions within the firm. A firm must have procedures in place for taking appropriate action in response to the information contained in such reports.

    [Note: BCD Article 104(6) and Annex X, Part 2 point 12 (part)]

BIPRU 6.4.2R

A firm must comply with the criteria in BIPRU 6.4.1 R having regard to the size and scale of its activities and to the principle of proportionality.

[Note: BCD Annex X, Part 2 point 12 (part)]

Business lines

BIPRU 6.4.3R

Under the standardised approach, a firm must divide its activities into a number of business lines as set out in this section.

[Note: BCD Article 104(1)]

BIPRU 6.4.4G

The list of activities in BIPRU 6.4.15 R is not a complete definition of the activities within a business line and it may be possible for an activity to be allocated to a business line other than the one to which it is attributed in BIPRU 6.4.15 R.

BIPRU 6.4.5R

For each business line, a firm must calculate a capital requirement for operational risk as a certain percentage of a relevant indicator, in accordance with the rules in this section.

[Note: BCD Article 104(2)]

ORCR calculated using the standardised approach

BIPRU 6.4.6R

The ORCR under the standardised approach is the average over three years of the risk weighted relevant indicators calculated each yearacross the business lines in BIPRU 6.4.15 R.

[Note: BCD Annex X, Part 2 point 1 (part)]

BIPRU 6.4.7R

In each year, a negative capital requirement in one business line, resulting from a negative relevant indicator, may be imputed to the whole. However, where the aggregate capital charge across all business lines within a given year is negative, then the input to the average for that year must be zero.

[Note: BCD Annex X, Part 2 point 1 (part)]

BIPRU 6.4.8G
  1. (1)

    If a firm considers that, due to exceptional circumstances, using a three year average to calculate the relevant indicator would lead to a major overestimation of its ORCR, the firm may apply for a waiver from BIPRU 6.4.5 R.

  2. (2)

    Exceptional circumstances might include stopping or selling a major business line.

Relevant indicator

BIPRU 6.4.9R

The three year average in BIPRU 6.4.6 R must be calculated on the basis of the last three twelve monthly observations at the end of the financial year. When audited figures are not available, business estimates may be used.

[Note: BCD Annex X, Part 2 point 2]

Principles for business line mapping

BIPRU 6.4.10R

A firm must develop and document specific policies and criteria for mapping the relevant indicator for current business lines and activities into the framework for the standardised approach. The criteria must be reviewed and adjusted for new or changing business activities and risks as appropriate.

[Note: BCD Annex X, Part 2 point 4 (part)]

BIPRU 6.4.11R
  1. (1)

    The principles for business line mapping that a firm must meet are set out in this rule.

  2. (2)

    All activities must be mapped into the business lines in a mutually exclusive and jointly exhaustive manner.

  3. (3)

    Any activity which cannot be readily mapped into the business line framework, but which represents an ancillary function to an activity included in the framework, must be allocated to the business line it supports. If more than one business line is supported through the ancillary activity, an objective mapping criterion must be used (e.g., proportional allocation of the indicators).

  4. (4)

    If an activity cannot be mapped into a particular business line then the business line yielding the highest charge for the firm must be used. The same business line equally applies to any associated ancillary activity.

  5. (5)

    A firm may use internal pricing methods to allocate the relevant indicator between business lines.

  6. (6)

    The mapping of activities into business lines for operational risk capital purposes must be consistent with the definitions of business lines used by the firm for credit and market risks.

  7. (7)

    Senior management must be responsible for the mapping policy.

  8. (8)

    The mapping process to business lines must be subject to independent review.

    [Note: BCD Annex X, Part 2 point 4 (part)]

BIPRU 6.4.12G

A firm that is mapping activities to a business line should take into account:

  1. (1)

    the activities listed in respect of each business line in the table in BIPRU 6.4.15 R; and

  2. (2)

    the organisation of the firm's business in respect of that business line.

BIPRU 6.4.13G

A firm should take into account its business and organisation when mapping activities to the business lines in the table in BIPRU 6.4.15 R.

BIPRU 6.4.14R

For the purposes of BIPRU 6.4.11 R (5), costs generated in one business line which are imputable to a different business line may be reallocated to the business line to which they pertain, for instance by using a treatment based on internal transfer costs between two business lines.

[Note: BCD Annex X, Part 2 point 4 (part)]

BIPRU 6.4.15R

Table: Percentages applying to the income indicator of individual business lines

This table belongs to BIPRU 6.4.3 R

Business line

List of activities

Percentage

Corporate finance

  • Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis
  • Services related to underwriting
  • Investment advice
  • Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to the mergers and the purchase of undertakings
  • Investment research and financial analysis and other forms of general recommendation relating to transactions in financial instruments

18%

Trading and sales

  • Dealing on own account
  • Money broking
  • Reception and transmission of orders in relation to one or more financial instruments
  • Execution of orders on behalf of clients
  • Placing of financial instruments on a best efforts basis
  • Operation of multilateral trading facilities

18%

Retail brokerage

(Activities with individual physical persons or with a retail SME as defined under the standardised approach to credit risk)

  • Reception and transmission of orders in relation to one or more financial instruments
  • Execution of orders of behalf of clients
  • Placing of financial instruments without a firm commitment basis

12%

Commercial banking

  • Acceptance of deposits and other repayable funds
  • Lending
  • Financial leasing
  • Guarantees and commitments

15%

Retail banking

(Activities with an individual physical persons or with a retail SME as defined under the standardised approach to credit risk)

  • Acceptance of deposits and other repayable funds
  • Lending
  • Financial leasing
  • Guarantees and commitments

12%

Payment and settlement

  • Money transmission services
  • Issuing and administering means of payment

18%

Agency services

  • Safekeeping and administration of financial instruments for the account of clients including custodianship and related services such as cash/collateral management

15%

Asset management

  • Portfolio management
  • UCITS management and other forms of asset management

12%

The alternative standardised approach

BIPRU 6.4.16G

Under the alternative standardised approach, a firm using the standardised approach may use alternative indicators for retail banking and commercial banking business lines if it complies with BIPRU 6.4.17 R to BIPRU 6.4.21 R.

[Note: BCD Annex X, Part 2 point 3]

Eligibility for the alternative standardised approach

BIPRU 6.4.17R

To be eligible to use the alternative standardised approach, a firm must meet the following conditions, in addition to the general risk management standards set out in SYSC 4.1.1 R to SYSC 4.1.2 R and 1SYSC 7.1.16 R1:

  1. (1)

    the firm must meet the eligibility criteria for the standardised approach in BIPRU 6.4.1 R;

  2. (2)

    the firm must be overwhelmingly active in retail and/or commercial banking activities, which must account for at least 90% of its income; and

  3. (3)

    the firm must be able to demonstrate that a significant proportion of its retail and/or commercial banking activities comprise loans associated with a high probability of default, and that the alternative standardised approach provides an improved basis for assessing the operational risk.

    [Note: BCD Article 104(3) and Annex X, Part 2 points 5 and 8 to 11]

BIPRU 6.4.18G

In relation to BIPRU 6.4.17 R (3), the FSA's view is that a high probability of default is equal to or greater than 3.5%.

ORCR calculated using the alternative standardised approach

BIPRU 6.4.19R
  1. (1)

    The relevant indicators under the alternative standardised approach are the same as for the standardised approach except for the two following business lines:

    1. (a)

      retail banking; and

    2. (b)

      commercial banking.

  2. (2)

    For retail banking and commercial banking, the ORCR must be calculated as a normalised income indicator equal to the three-year average of the total nominal amount of loans and advances multiplied:

    1. (a)

      by 0.035, and then

    2. (b)

      by the appropriate business line percentage set out in BIPRU 6.4.15 R.

      [Note: BCD Annex X, Part 2 point 6]

BIPRU 6.4.20R

For the retail and/or commercial banking business lines, the loans and advances must consist of the total drawn amounts in the corresponding credit portfolios.

[Note: BCD Annex X, Part 2 point 7 (part)]

BIPRU 6.4.21R

For the commercial banking business line, the securities held in the non-trading book must also be included.

[Note: BCD Annex X, Part 2 point 7 (part)]