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Status: You are viewing the version of the handbook as on 2009-03-31.

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

Application

BIPRU 7.1.1RRP

1This chapter applies to a BIPRU firm.

Purpose

BIPRU 7.1.2GRP

The purpose of this chapter is to implement Annexes I, III, IV and V of the Capital Adequacy Directive.

General provisions: Obligation to calculate PRR

BIPRU 7.1.3RRP

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 7.1.4RRP

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 7.1.5GRP

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 7.1.6RRP

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 7.1.7GRP

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 7.1.8GRP

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 7.1.9RRP

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 7.1.10RRP

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 7.1.11GRP

Under BIPRU 1.2.30 R (2) a firm should notify the FSA 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 FSA.

BIPRU 7.1.12RRP

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 7.1.13RRP

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 7.1.14RRP
  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 FSA 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 7.1.15RRP

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 7.1.16ERP
  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 FSA 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.