BIPRU 7.3 Equity PRR and basic interest rate PRR for equity derivatives
General rule
 (1)
A firm must calculate its equity PRR by:
 (a)
identifying which positions must be included within the PRR calculation (see BIPRU 7.3.2R);
 (b)
deriving the net position in each equity in accordance with BIPRU 7.3.23R;
 (c)
including each of those net positions in either the simplified equity method (see BIPRU 7.3.29R) or, subject to BIPRU 7.3.27R, the standard equity method (see BIPRU 7.3.32R); and
 (d)
summing the PRR on each net position as calculated under the simplified equity method and standard equity method.
 (a)
 (2)
All net positions, irrespective of their signs, must be converted on a daily basis into the firm's base currency at the prevailing spot exchange rate before their aggregation.
Scope of the equity PRR calculation
A firm's equity PRR calculation must:
 (1)
include all trading book positions in equities, unless:
 (a)
the position is fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude it; or
 (b)
the position is hedging an option or warrant which is being treated under BIPRU 7.6.26R (Table: Appropriate treatment for equities, debt securities or currencies hedging options);
 (a)
 (2)
include notional positions arising from trading book positions in the instruments listed in the table in BIPRU 7.3.3R; and
 (3)
(if the firm is the transferor of equities or guaranteed rights relating to title to equities in a repurchase agreement or the lender of equities in an equities lending agreement) include such equities if those equities meet the criteria for inclusion in the trading book.
Table: Instruments which result in notional positions
This table belongs to BIPRU 7.3.2R(2)
Instrument 
See 

Depository receipts 

Convertibles where: 
(a) the convertible is trading at a market price of less than 110% of the underlying equity; and the first date at which conversion can take place is less than three months ahead, or the next such date (where the first has passed) is less than a year ahead; or 

(b) the conditions in (a) are not met but the firm includes the convertible in its equity PRR calculation rather than including it in its interest rate PRR calculation set out in BIPRU 7.2 (Interest rate PRR). 

Futures, forwards, CFDs and synthetic futures on a single equity 

Futures, forwards, CFDs and synthetic futures on a basket of equities or equity index 

Options or warrants on a single equity, an equity future, a basket of equities or an equity index (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6). 
BIPRU 7.3.2R(1) includes a trading book position in an equity that is subsequently repo'd under a repurchase agreement or lent under a stock lending agreement. Clearly, if the equity had initially been obtained via a reverse repurchase agreement or stock borrowing agreement, the equity would not have been included in the trading book in the first place.
BIPRU 7.3.2R(1) includes net underwriting positions or reduced net underwriting positions in equities. BIPRU 7.3.27R requires a firm to use the simplified equity method in the case of reduced net underwriting positions. In the case of net underwriting positions that have not been reduced according to BIPRU 7.8.27R (Calculating the reduced net underwriting position), there is no such restriction; a firm can choose which of the two equity methods to use.
Firms are reminded that the table in BIPRU 7.6.5R (Table: Appropriate PRR calculation for an option or warrant) divides equity options and warrants into:
The table in BIPRU 7.3.3R does not require every convertible to be included in BIPRU 7.3 's PRR calculation. Where a convertible is not included in this PRR calculation, BIPRU 7.2.3R (1) (Scope of the interest rate PRR calculation) requires that it be included in the BIPRU 7.2 PRR calculation.
Some of the instruments listed in the table in BIPRU 7.3.3R are also included in a firm's interest rate PRR calculation. For simplicity, a firm may use the interest rate PRR calculation in BIPRU 7.3 rather than the calculation in BIPRU 7.2 (Interest rate PRR). BIPRU 7.3.44G explains this in more detail.
Derivation of notional positions: General approach
BIPRU 7.3.10R  BIPRU 7.3.21R convert the instruments listed in the table in BIPRU 7.3.3R into notional positions in individual equities, equity baskets or equity indices.
 (1)
An example of BIPRU 7.3.10R is as follows. The current market value of a particular equity is £2.50. If a firm contracts to sell this equity in five year's time for £3 it would treat the notional short equity position as having a value of £2.50 when calculating the equity PRR.
 (2)
In effect, the forward position has been treated as being equivalent to a spot position for the purposes of calculating equity PRR. To capture the risk that the forward price changes relative to the spot price, forward equity positions are included in the firm's interest rate PRR calculation (see BIPRU 7.3.45R or the table in BIPRU 7.2.4R (Table: Instruments which result in notional positions)).
Derivation of notional positions: Depository receipts
Derivation of notional positions: Convertibles
Where a convertible is included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R):
 (1)
it must be treated as a position in the equity into which it converts; and
 (2)
the firm's equity PRR must be adjusted by making:
 (a)
an addition equal to the current value of any loss which the firm would make if it did convert to equity; or
 (b)
a deduction equal to the current value of any profit which the firm would make if it did convert to equity (subject to a maximum deduction equal to the PRR on the notional position underlying the convertible).
 (a)
Derivation of notional positions: Futures, forwards and CFDs on a single equity
Derivation of notional positions: Futures, forwards and CFDs on equity indices or baskets
A future (including a synthetic future), forward or CFD on an equity index or basket must be treated as either:
 (1)
 (2)
the positions shown in the table in BIPRU 7.3.16R.
Table: Instruments which result in notional positions
This table belongs to BIPRU 7.3.15R(2)
Under the simplified equity method (BIPRU 7.3.29R) 
Under the standard equity method (BIPRU 7.3.32R) 

Only one country in the index or basket (see BIPRU 7.3.32R) 
One position in the index or basket 
One position in the index or basket 

More than one country in the index or basket 
One position in the index or basket 
Several notional basket positions, one for each country 
or 
One notional basket position in a separate, notional country 
An example of BIPRU 7.3.16R is as follows. A firm decides to treat a FTSE Eurotop 300 future under the standard equity method, and furthermore, chooses to treat it as one notional position. The table in BIPRU 7.3.16R requires that this notional position be treated as if it were from a separate notional country rather than any of the countries to which the underlying equities are from.
The notional positions created under BIPRU 7.3.15R have the following values:
 (1)
where only one notional position is created, it has a value equal to the total market value of the equities underlying the contract; or
 (2)
where more than one notional position is created, each one has a value which reflects the relevant equity's or country's contribution to the total market value of the equities underlying the contract.
Derivation of notional positions: Equity legs of equity swaps
The interest rate leg of an equity swap is included in a firm's interest rate PRR calculation (see the table in BIPRU 7.2.4R (Table: Instruments which result in notional positions)) unless it is treated under BIPRU 7.3.45R.
Derivation of notional positions: Options
If included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R), options must be treated as follows:
Deriving the net position in each equity
 (1)
When deriving the net position in each equity, a firm must not net long and short positions except in accordance with this rule.
 (2)
Subject to (3), a firm may net long and short positions in the same equity. Two equities are the same if and only if they:
 (3)
Long and short positions in different tranches of the same equity may be treated as being in the same equity for the purpose of (1), where:
 (a)
the tranches enjoy the same rights in all respects; and
 (b)
the tranches become fungible with each other within 180 days, and thereafter the equity of one tranche can be delivered in settlement of the other tranche.
 (a)
A firm must not net a reduced net underwriting position with any other equity position.
BIPRU 7.3.24R only relates to reduced net underwriting position.
Simplified and standard equity methods
BIPRU 7.3.1R (1) requires that the net position in each equity be included in either the simplified equity method or the standard equity method, subject to the restriction in BIPRU 7.3.27R. A firm does not have to use the same method for all equities.
A firm must use the simplified equity method for reduced net underwriting positions.
A firm may use either method for a net underwriting position; BIPRU 7.3.27R only relates to reduced net underwriting positions.
Simplified equity method
Under the simplified equity method, the PRR for each equity, equity index, or equity basket equals the market value of the net position (ignoring the sign) multiplied by the appropriate position risk adjustment from the table in BIPRU 7.3.30R. The result must be converted into the firm's base currency at current spot foreign currency rates.
Table: simplified equity method position risk adjustments
This table belongs to BIPRU 7.3.29R
Instrument 

Single equities 
16%2 2 
Qualifying equity indices2 (see BIPRU 7.3.38R) 2 
8% 
All other equity indices or baskets 
16%2 2 
If it is necessary to distinguish between the specific risk position risk adjustment and the general market risk position risk adjustment, the specific risk position risk adjustment for the first and third rows is 8%2 and that for the second row is 0%. The rest of the position risk adjustment in the second column is the general market risk position risk adjustment 2 
Standard equity method
The standard equity method divides the risk of loss from a firm's equity positions into the risk of loss from a general move in a country's equity market and the risk of loss from an individual equity's price changing relative to that country's equity market. These are called general market risk and specific risk respectively.
Under the standard equity method, a firm must:
 (1)
group equity positions into country portfolios as follows:
 (a)
 (b)
a position in an equity basket or index that is treated under BIPRU 7.3.15R(2), is allocated to one or more country portfolios based on the countries to which the underlying equities belong to under (a) or a notional country provided for in the table in BIPRU 7.3.16R; and
 (2)
sum:
 (a)
the PRRs for specific risk calculated under BIPRU 7.3.33R; and
 (b)
the PRRs for general market risk for each country portfolio as calculated under BIPRU 7.3.41R and BIPRU 7.3.42R.
 (a)
Standard equity method: Specific risk
Under the standard equity method, a firm must calculate a PRR for specific risk based on the net position in each equity, equity index or equity basket by multiplying its market value (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.3.34R.
Table: position risk adjustment for specific risk under the standard equity method
This table belongs to BIPRU 7.3.33R1
Instrument 

Qualifying equity indices2 (see BIPRU 7.3.38R) 2 
0% 
All equities, and other2 equity indices or equity2 baskets 22 
8%2 2 
Definition of a qualifying equity
[deleted]2
[deleted]2
Definition of a qualifying equity index
A qualifying equity index is one which is traded on a recognised investment exchange or a designated investment exchange and:
 (1)
is listed in the table in BIPRU 7.3.39R; or
 (2)
is not listed in the table in BIPRU 7.3.39R, but is constructed in such a way that:
Table: Qualifying equity indices
This table belongs to BIPRU 7.3.38R
Country or territory 
Name of index 
Australia 
All Ordinaries 
Austria 
Austrian Traded Index 
Belgium 
BEL 20 
Canada 
TSE 35, TSE 100, TSE 300 
France 
CAC 40, SBF 250 
Germany 
DAX 
European 
Dow Jones Stoxx 50 Index, FTSE Eurotop 300, MSCI Euro Index 
Hong Kong 
Hang Seng 33 
Italy 
MIB 30 
Japan 
Nikkei 225, Nikkei 300, TOPIX 
Korea 
Kospi 
Netherlands 
AEX 
Singapore 
Straits Times Index 
Spain 
IBEX 35 
Sweden 
OMX 
Switzerland 
SMI 
UK 
FTSE 100, FTSE Mid 250, FTSE All Share 
US 
S&P 500, Dow Jones Industrial Average, NASDAQ Composite, Russell 2000 
Standard equity method: General market risk: General
Under the standard equity method, a firm must apply approach one, as set out in BIPRU 7.3.41R, to each country portfolio (or part portfolio) unless the conditions in BIPRU 7.3.42R(3) are met, in which case the firm may instead apply approach two, as set out in BIPRU 7.3.42R, to the relevant country portfolios (or part portfolios).
Standard equity method: General market risk: Approach One: No offset between different country portfolios
Under approach one as referred to in BIPRU 7.3.40R, the PRR for general market risk equals the net value (ignoring the sign) of the country portfolio multiplied by 8%.
Standard equity method: General market risk: Approach Two: Limited offset between different country portfolios
 (1)
Under approach two as referred to in BIPRU 7.3.40R, the PRR for general market risk is calculated using the following formula:
 (2)
In the formula in (1) CP_{i} denotes the net value of _{i}th country portfolio (converted to the firm's base currency using current spot foreign currency rates).
 (3)
The conditions referred to in BIPRU 7.3.40R that must be met for a firm to be able to use approach two as referred to in BIPRU 7.3.40R are as follows:
 (a)
at least four country portfolios are included (that is: n 4);
 (b)
only country portfolios for countries which are full members of the OECD, Hong Kong or Singapore are included;
 (c)
no individual country portfolio comprises more than 30% of the total gross value of country portfolios included; and
 (d)
the total net value of country portfolios included equals zero, that is:
 (a)
In order to meet BIPRU 7.3.42R(3)(d), it is likely that part of a country portfolio will have to be excluded from approach two under BIPRU 7.3.42R (and therefore included in approach one under BIPRU 7.3.41R), even if that country portfolio meets BIPRU 7.3.42R(3)(a)  (c).
Basic interest rate calculation for equity instruments
A basic interest rate PRR calculation is included in BIPRU 7.3 for a firm that does not wish to use the calculation in BIPRU 7.2 (Interest rate PRR). However, it tends to result in higher charges than the methods in BIPRU 7.2, largely because the interest rate PRR is calculated on each notional equity position separately and then summed without offsetting long and short positions.
This rule applies to a firm that does not include a forward, future, option or swap on an equity, basket of equities or equity index in the calculation of its interest rate PRR calculation under BIPRU 7.2 (Interest rate PRR). However it does not apply to cliquet as defined in BIPRU 7.6.18R (Table: Option PRR: methods for different types of option). A firm must calculate the interest rate PRR for a position being treated under this rule as follows:
 (1)
multiply the market value of the notional equity position underlying the instrument by the appropriate percentage from the table in BIPRU 7.3.47R; and
 (2)
sum the results from (1), ignoring the sign.
Cliquets on equities, baskets of equities or equity indices do not attract an interest rate PRR. BIPRU 7.3.45R excludes them from the basic interest rate PRR calculation and the table in BIPRU 7.2.4R (Table: Instruments which result in notional positions) excludes them from the scope of the interest rate PRR calculation in BIPRU 7.2 (Interest rate PRR).
Table: Percentages used in the basic interest rate PRR calculation for equity instruments
This table belongs to BIPRU 7.3.45R(1)
Time to expiration 
Percentage (%) 
0 ≤ 3 months 
0.20 
> 3 ≤ 6 months 
0.40 
> 6 ≤ 12 months 
0.70 
> 1 ≤ 2 years 
1.25 
> 2 ≤ 3 years 
1.75 
> 3 ≤ 4 years 
2.25 
> 4 ≤ 5 years 
2.75 
> 5 ≤ 7 years 
3.25 
> 7 ≤ 10 years 
3.75 
> 10 ≤ 15 years 
4.50 
> 15 ≤ 20 years 
5.25 
> 20 years 
6.00 
Additional capital charge in relation to equity indices
If a firm nets off positions in one or more of the equities constituting an equity index future, forward or CFD against one or more positions in the equity index future, forward or CFD itself, the firm must apply an additional equity PRR to the netted position to cover the risk of loss caused by the value of the future, forward or CFD not moving fully in line with that of its constituent equities. The same applies if a firm holds opposite positions in a future, forward or CFD on an equity index that are not identical in respect of either their maturity or their composition or both.