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BIPRU 7.5 Foreign currency PRR

General rule

BIPRU 7.5.1R

A firm must calculate its foreign currency PRR by:

  1. (1)

    identifying which foreign currency and gold positions to include in the PRR calculation;

  2. (2)

    calculating the net open position in each currency in accordance with this section (including where necessary the base currency calculated in the same way as it is for foreign currencies) and in gold;

  3. (3)

    calculating the open currency position for foreign currencies as calculated under BIPRU 7.5.19R and the net gold position (see BIPRU 7.5.20R); and

  4. (4)

    multiplying the sum of the absolutes of that open currency position and that net gold position by 8%.

BIPRU 7.5.2G

An example of the operation of BIPRU 7.5.1R is as follows. A firm has an open currency position of £100 and a net gold position of £50. The sum (ignoring the sign) is £150, and so the foreign currency PRR is £12.

Scope of the foreign currency PRR calculation

BIPRU 7.5.3R

A firm's foreign currency PRR calculation must include the following items regardless of whether they are trading book or non-trading book positions:

  1. (1)

    all gold positions;

  2. (2)

    all spot positions in foreign currency (that is, all asset items less all liability items, including accrued interest, in the foreign currency in question);

  3. (3)

    all forward positions in foreign currency;

  4. (4)

    all CRD financial instruments and other items which are denominated in a foreign currency;

  5. (5)

    irrevocable guarantees (and similar instruments) that are certain to be called and likely to be irrecoverable to the extent they give rise to a position in gold or foreign currency; and

  6. (6)

    notional positions arising from the instruments listed in the table in BIPRU 7.5.5R.

BIPRU 7.5.4R

  1. (1)

    The following are excluded from a firm's foreign currency PRR calculation:

    1. (a)

      foreign currency assets which have been deducted in full from the firm's capital resources under the calculations under the capital resources table;

    2. (b)

      positions hedging (a);

    3. (c)

      positions that a firm has deliberately taken in order to hedge against the adverse effect of the exchange rate on the ratio of its capital resources to its capital resources requirement; and

    4. (d)

      transactions to the extent that they fully hedge net future foreign currency income or expenses which are known but not yet accrued.

  2. (2)

    If a firm uses an exclusion under (1) it must:

    1. (a)

      notify the appropriate regulator before it makes use of it;

    2. (b)

      include in the notification in (a) the terms on which the relevant item will be excluded;

    3. (c)

      not change the terms of the exclusion under (b); and

    4. (d)

      document its policy on the use of that exclusion in its trading book policy statement.

  3. (3)

    A position may only be excluded under (1)(b) or (c) if it is of a non-trading or structural nature.

BIPRU 7.5.5R

Table: instruments which result in notional foreign currency positions

This table belongs to BIPRU 7.5.3R(6).

Instruments

See

Foreign currency futures, forwards, synthetic futures and CFDs

BIPRU 7.5.11R

Foreign currency swaps

BIPRU 7.5.13R

Foreign currency options or warrants (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6 (Option PRR)).

BIPRU 7.5.15R

Gold futures, forwards, synthetic futures and CFDs

BIPRU 7.5.16R

Gold options (unless the firm calculates a PRR on the option under BIPRU 7.6).

BIPRU 7.5.17R

Positions in CIUs

BIPRU 7.5.18R

BIPRU 7.5.6G

Firms are reminded that the table in BIPRU 7.6.5R (Table: Appropriate PRR calculation for an option or warrant) divides foreign currency options and warrants into:

  1. (1)

    those which must be treated under BIPRU 7.6 (Option PRR); and

  2. (2)

    those which must be treated under either BIPRU 7.5 or BIPRU 7.6, the firm being able to choose whether BIPRU 7.5 or BIPRU 7.6 is used.

BIPRU 7.5.7R

When determining the currency of denomination firms must:

  1. (1)

    use the currency in which the firm accounts for the instrument where an instrument is quoted in more than one currency; and

  2. (2)

    treat depository receipts as positions in the underlying security.

BIPRU 7.5.8G

Instruments denominated in a foreign currency include, amongst other things, assets and liabilities (including accrued interest); non-foreign currency derivative; net underwriting positions; reduced net underwriting positions; and irrevocable guarantees (or similar instruments) that are certain to be called.

BIPRU 7.5.9R

Where a contract is based on a basket of currencies, the firm can choose either to derive notional positions in each of the constituent currencies or treat it as a single notional position in a separate notional currency.

Derivation of notional positions: General

BIPRU 7.5.10G

BIPRU 7.5.11R - BIPRU 7.5.18R derive notional currency positions for the instruments listed in the table in BIPRU 7.5.5R.

Derivation of notional positions: Foreign exchange forwards, futures, CFDs and synthetic futures

BIPRU 7.5.11R

  1. (1)

    A firm must treat a foreign currency forward, future, synthetic future or CFD as two notional currency positions as follows:

    1. (a)

      a long notional position in the currency which the firm has contracted to buy; and

    2. (b)

      a short notional position in the currency which the firm has contracted to sell.

  2. (2)

    In (1) the notional positions have a value equal to either:

    1. (a)

      the contracted amount of each currency to be exchanged in the case of a forward, future, synthetic future or CFD held in the non-trading book; or

    2. (b)

      the present value of the amount of each currency to be exchanged in the case of a forward, future, synthetic future or CFD held in the trading book.

BIPRU 7.5.12G

  1. (1)

    The following example illustrates BIPRU 7.5.11R. In this example, a firm contracts to sell $106 for €108 in one year's time and the present values of each cash flow are $100 and €100 respectively.

    BIPRU_Chapter_7_009
  2. (2)

    In the non-trading book, this forward would be treated as a combination of a €108 long position and a $106 short position.

  3. (3)

    In the trading book, this forward would be treated as a combination of a €100 long position and a $100 short position.

  4. (4)

    Firms are reminded that foreign currency forwards held in the trading book should also be included in the firm's interest rate PRR calculation (see BIPRU 7.2.4R (Instruments which result in notional positions for the purpose of the interest rate PRR)).

Derivation of notional positions: Foreign currency swaps

BIPRU 7.5.13R

  1. (1)

    A firm must treat a foreign currency swap as:

    1. (a)

      a long notional position in the currency in which the firm has contracted to receive interest and principal; and

    2. (b)

      a short notional position in the currency in which the firm has contracted to pay interest and principal.

  2. (2)

    In (1) the notional positions have a value equal to either:

    1. (a)

      the nominal amount of each currency underlying the swap if it is held in the non-trading book; or

    2. (b)

      the present value amount of all cash flows in the relevant currency in the case of a swap held in the trading book.

BIPRU 7.5.14G

  1. (1)

    The following example illustrates BIPRU 7.5.13R. In this example a firm enters into a five year foreign currency swap where it contracts to pay six month US$ Libor on $100 in return for receiving 6% fixed on €100. The present values of each leg are $100 and €98 respectively.

  2. (2)

    In the non-trading book, this swap would be treated as a combination of a €100 long position and a $100 short position.

  3. (3)

    In the trading book, this swap would be treated as a combination of a €98 long position and a $100 short position.

  4. (4)

    Firms are reminded that foreign currency swaps held in the trading book should also be included in the firm's interest rate PRR calculation (see BIPRU 7.2.4R (Instruments which result in notional positions for the purpose of the interest rate PRR)).

Derivation of notional positions: Foreign currency options and warrants

BIPRU 7.5.15R

Where included in BIPRU 7.5's PRR calculation (see the table in BIPRU 7.5.5R), a foreign currency option or warrant must be treated as a foreign currency forward.

Derivation of notional positions: Gold forwards, futures, synthetic futures and CFDs

BIPRU 7.5.16R

A forward, future, synthetic future or CFD on gold must be treated as a notional position in gold with a value equal to the amount of gold underlying multiplied by the current spot price for gold.

Derivation of notional positions: Gold options

BIPRU 7.5.17R

If included in the PRR calculation under BIPRU 7.5 (see the table in BIPRU 7.5.5R), a gold option must be treated as a gold forward.

Derivation of notional positions: CIUs

BIPRU 7.5.18R

  1. (1)

    This rule deals with positions in CIUs.

  2. (2)

    The actual foreign currency positions of a CIU must be included in a firm's foreign currency PRR calculation under BIPRU 7.5.1 R1.

  3. (3)

    A firm may rely on third party reporting of the foreign currency positions in the CIU, where the correctness of this report is adequately ensured.

  4. (4)

    If a firm is not aware of the foreign currency positions in a CIU, the firm must assume that the CIU is invested up to the maximum extent allowed under the CIUs mandate in foreign currency and the firm must, for trading book positions, take account of the maximum indirect exposure that it could achieve by taking leveraged positions through the CIU when calculating its foreign currency PRR. This must be done by proportionally increasing the position in the CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate.

  5. (5)

    The assumed position of the CIU in foreign currency calculated in accordance with BIPRU 7.5.18R(4) must be treated as a separate currency according to the treatment of investments in gold, subject to the modification that, if the direction of the CIUs investment is available, the total long position may be added to the total long open foreign currency position and the total short position may be added to the total short open foreign currency position. No netting is allowed between such positions prior to this calculation.

Open currency position

BIPRU 7.5.19R

A firm must calculate its open currency position by:

  1. (1)

    calculating the net position in each foreign currency;

  2. (2)

    converting each such net position into its base currency equivalent at current spot rates;

  3. (3)

    summing all short net positions and summing all long net positions calculated under (1) and (2); and

  4. (4)

    selecting the larger sum (ignoring the sign) from (3).

Net gold position

BIPRU 7.5.20R

A firm must calculate its net gold position by:

  1. (1)

    valuing all gold positions using the prevailing spot price for gold (regardless of the maturity of the positions);

  2. (2)

    offsetting long and short positions; and

  3. (3)

    converting the resulting net position into the base currency equivalent using the current spot foreign currency rate.