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BIPRU 7.1 Application, purpose, general provisions and non-standard transactions

Application

BIPRU 7.1.1R

1This chapter applies to a BIPRU firm.

Purpose

BIPRU 7.1.2G

Pursuant to the third paragraph of article 95(2) of the EU CRR, the4 purpose of this chapter is to implement Annexes I, III, IV and V of the Capital Adequacy Directive.

4

General provisions: Obligation to calculate PRR

BIPRU 7.1.3R

A firm must calculate a PRR in respect of:

  1. (1)

    all its trading book positions;

  2. (2)

    all positions falling within BIPRU 7.5.3 R (Scope of the foreign exchange PRR calculation), whether or not in the trading book; and

  3. (3)

    all positions in commodities (including physical commodities) whether or not in the trading book;

even if no treatment is provided for that position in the other sections of this chapter.

BIPRU 7.1.4R

A firm must calculate a PRR for any position falling into BIPRU 7.1.3 R using:

  1. (1)

    the PRR calculations contained in BIPRU 7; or

  2. (2)

    another method provided the firm is able to demonstrate that in all circumstances the calculation being employed results in a higher PRR for the position than would be required under (1).

General provisions: Non-trading book items

BIPRU 7.1.5G

Positions in instruments which are non-trading book items should be treated under BIPRU 3 (Standardised credit risk), BIPRU 4 (The IRB approach) or BIPRU 13 (Financial derivatives, SFTs and long settlement transactions) unless deducted as an illiquid asset. If they fall into BIPRU 7.1.3R(2) or (3) they also give rise to a PRR charge.

General provisions: Frequency of calculation

BIPRU 7.1.6R

A firm must be able to monitor its total PRR on an intra-day basis, and, before executing any trade, must be able to re-calculate PRR to the level of detail necessary to establish whether or not the firm's capital resources exceed its capital resources requirement.

BIPRU 7.1.7G

A firm may rely on intra-day limits for the purposes of BIPRU 7.1.6R.

Purpose of rules for non-standard transactions and instruments for which no PRR treatment has been specified

BIPRU 7.1.8G

The methodologies which have been developed for calculating PRR charges have been based on existing instruments and assume instruments with standard characteristics. However, as a result of innovation and because there are instruments which, although based on a standard contract, contain structural features which would make the rules in the rest of this chapter inappropriate, flexible rules are required. The rules in this section about transactions for which no PRR treatment has been specified and non-standard transactions are designed to address this.

Instruments for which no PRR treatment has been specified

BIPRU 7.1.9R

Where a firm has a position for which no PRR treatment has been specified, it must calculate the PRR for that position in accordance with BIPRU 7.1.12R-BIPRU 7.1.13R.

BIPRU 7.1.10R

If BIPRU 7.1.9 R applies, a firm must document its policies and procedures for calculating the PRR for that position of that type in its trading book policy statement.

BIPRU 7.1.11G

Under BIPRU 1.2.30 R (2) a firm should notify the appropriate regulator as soon as is reasonably practicable if its trading book policy statement is subject to significant changes. Therefore if a firm makes a change in accordance with BIPRU 7.1.10R it should consider whether it is necessary to report it to the appropriate regulator.

BIPRU 7.1.12R

A firm may calculate the PRR for a position falling into BIPRU 7.1.9R by applying by analogy the rules relating to the calculation of the interest rate PRR, the equity PRR, the commodity PRR, the foreign currency PRR2, the option PRR or the collective investment undertaking PRR if doing so is appropriate and if the position and PRR item are sufficiently similar to those that are covered by those rules.

BIPRU 7.1.13R

Where a firm has a position for which no PRR treatment has been specified and it is not applying BIPRU 7.1.12R, it must calculate a PRR of an appropriate percentage of the current value of the position calculated under GENPRU 1.3 (Valuation).

Instruments in non-standard form

BIPRU 7.1.14R
  1. (1)

    If a firm has a position:

    1. (a)

      in a PRR item in non-standard form; or

    2. (b)

      that is part of a non-standard arrangement; or

    3. (c)

      that, taken together with other positions (whether or not they are subject to PRR charges under BIPRU 7), gives rise to a non-standard market risk;

    the firm must notify the appropriate regulator of that fact and of details about the position, PRR item, arrangements and type of risk concerned.

  2. (2)

    Except as (1) provides to the contrary, (1) applies to a position that is subject to a PRR under BIPRU 7.1.3R.

  3. (3)

    The question of what is non-standard for the purposes of (1) must be judged by reference to the standards:

    1. (a)

      prevailing at the time the rule is being applied; and

    2. (b)

      of firms generally who carry on business which gives rise to PRRs under BIPRU 7 rather than merely by reference to the firm's own business.

BIPRU 7.1.15R

If a firm has a position or combination of positions falling into BIPRU 7.1.14R and the PRR relating to that position or positions materially underestimates the market risk incurred by the firm to which they give rise, the firm must calculate the PRR for that position or positions under BIPRU 7.1.13R.

Meaning of appropriate percentage for non-standard transactions

BIPRU 7.1.16E
  1. (1)

    In BIPRU 7.1.13R and, to the extent that that rule applies BIPRU 7.1.13R, BIPRU 7.1.15R, an "appropriate percentage" is:

    1. (a)

      100%; or

    2. (b)

      a percentage which takes account of the characteristics of the position concerned and of discussions with the appropriate regulator or a predecessor regulator under the Banking Act 1987 or the Financial Services Act 1986.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with BIPRU 7.1.13R or, insofar as it incorporates the requirements relating to an appropriate percentage, BIPRU 7.1.15R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention with BIPRU 7.1.13 R or, insofar as it incorporates the requirements relating to an appropriate percentage, BIPRU 7.1.15 R.

Stress testing and scenario analyses of trading book positions

BIPRU 7.1.17R

3A firm must conduct a regular programme of stress testing and scenario analysis of its trading book positions, both at the trading desk level and on a firm-wide basis. The results of these tests must be reviewed by senior management and reflected in the policies and limits the firm sets.

BIPRU 7.1.17AG

3The firm's stress testing programme should be comprehensive in terms of both risk and firm coverage, and appropriate to the size and complexity of trading book positions held.

BIPRU 7.1.18R

3In carrying out the stress tests and scenario analyses required by BIPRU 7.1.17 R, a firm must incorporate and take into account any other relevant stress tests and scenario analyses that it is required to carry out under any other provision of the Handbook, and in particular under BIPRU 7.10.72 R where the firm has a VaR model permission.

BIPRU 7.1.19G

3This paragraph gives guidance in relation to the stress testing programme that a firm must carry out in relation to its trading book positions.

  1. (1)

    The frequency of the stress testing of trading book positions should be determined by the nature of the positions.

  2. (2)

    The stress testing should include shocks which reflect the nature of the portfolio and the time it could take to hedge out or manage risks under severe market conditions.

  3. (3)

    The firm should have procedures in place to assess and respond to the results of the stress testing programme. In particular, stress testing should be used to evaluate the firm's capacity to absorb losses or to identify steps to be taken by the firm to reduce risk.

  4. (4)

    As part of its stress testing programme, the firm should consider how prudent valuation principles (see GENPRU 1.3) will be met in a stressed scenario.

BIPRU 7.1.20G

3The stress testing and scenario analysis under BIPRU 7.1.17 R should be taken into account under the overall Pillar 2 rule.