BIPRU 7.8 Securities underwriting

General rules

BIPRU 7.8.1G

BIPRU 7.8 sets out the method for calculating a net underwriting position or reduced net underwriting position, which is then included in the PRR calculation in other parts of BIPRU 7. It also deals with concentration risk. BIPRU 7.8 only relates to new securities, which is defined in BIPRU 7.8.12R.

BIPRU 7.8.2R

A firm which underwrites or sub-underwrites an issue of securities must, for the purposes of calculating its market risk capital component and its concentration risk capital component:

  1. (1)

    identify commitments to underwrite or sub-underwrite which give rise to an underwriting position (see BIPRU 7.8.8R);

  2. (2)

    identify the time of initial commitment (see BIPRU 7.8.13R); and

  3. (3)

    calculate the net underwriting position (set out in BIPRU 7.8.17R), reduced net underwriting position or the net underwriting exposure.

BIPRU 7.8.3R

A firm must include the net underwriting position or reduced net underwriting position in whichever one or more of the following is or are relevant:

  1. (1)

    BIPRU 7.2.3R (1) where debt securities are being underwritten;

  2. (2)

    BIPRU 7.3.2R (1) where equities are being underwritten;

  3. (3)

    BIPRU 7.6.22R where warrants are being underwritten; and

  4. (4)

    BIPRU 7.5.3R where the equities, debt securities or warrants being underwritten are denominated in a foreign currency.

BIPRU 7.8.4R

A firm must comply with BIPRU 7.8.3R from initial commitment (as determined under BIPRU 7.8.8R) until the end of the fifth business day after working day 0 (as determined under BIPRU 7.8.23R).

BIPRU 7.8.5G

Sub-underwriting is a commitment given by one firm to someone other than the issuer or seller of the securities to sub-underwrite all or part of an issue of securities.

BIPRU 7.8.6G

The net underwriting position calculated in BIPRU 7.8.17R will also be used in calculating the net underwriting exposure under BIPRU 7.8.34R.

BIPRU 7.8.7G

The net underwriting position or reduced net underwriting position arising from underwriting or sub-underwriting a rights or warrants issue should be calculated using the current market price of the underlying security for the purposes of the equity PRR or option PRR. However, the PRR will be limited to the value of the net underwriting position calculated using the initial issue price of the rights or warrants. Where there is no market price because the rights or warrants are in relation to a new class of securities and the initial price has not been set the net underwriting position or reduced net underwriting is the amount of the commitment.

Commitment to underwriting securities

BIPRU 7.8.8R

  1. (1)

    For the purpose of BIPRU 7.8.2R (1), a firm has a commitment to underwrite or sub-underwrite an issue of securities where:

    1. (a)

      it gives a commitment to an issuer of securities to underwrite an issue of securities; or

    2. (b)

      (where BIPRU 7.8.12R (2) applies) it gives a commitment to a seller of securities to underwrite a sale of those securities;

    3. (c)

      it gives a commitment to a person, other than the issuer of securities or, if BIPRU 7.8.12R (2) applies, the seller of the securities, to sub-underwrite an issue of securities; or

    4. (d)

      it is a member of a syndicate or group that gives a commitment of the type described in (1)(a)-(c).

  2. (2)

    Unless a rule deals with them separately or the context otherwise requires, a provision of BIPRU 7.8 that deals with underwriting also applies to sub-underwriting.

Exclusions from BIPRU 7.8

BIPRU 7.8.9G

  1. (1)

    Block trades, including bought deals, and private placements are not within the scope of BIPRU 7.8 because they involve an outright purchase by the firm of the relevant securities.

  2. (2)

    For the purpose of BIPRU 7.8 securities include debt and equity instruments and convertibles but excludes loans.

Grey market transactions

BIPRU 7.8.10R

  1. (1)

    A firm that buys and sells securities before issue is dealing in the grey market for the purposes of BIPRU 7.8.

  2. (2)

    BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market unless the firm:

    1. (a)

      has an underwriting commitment to the issuer in respect of those securities; or

    2. (b)

      has a sub-underwriting commitment in respect of those securities and is using the grey market solely for the purpose of reducing that sub-underwriting commitment.

  3. (3)

    BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market if the transaction is undertaken by the proprietary trading part of the firm or is undertaken for proprietary trading purposes.

  4. (4)

    BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market except as described in BIPRU 7.8.17R.

BIPRU 7.8.11G

In BIPRU 7.8 the grey market is the market in which dealers "buy" and "sell" securities ahead of issue. In reality the dealers are buying and selling promises to deliver the securities when issued.

New securities

BIPRU 7.8.12R

For the purposes of BIPRU 7.8, a firm must treat securities as being new for the purposes of the definition of underwriting if they are:

  1. (1)

    securities that, prior to the allotment following the underwriting, were not in issue; or

  2. (2)

    securities that do not fall within (1) but that have not previously been offered for sale or subscription to the public and have not been admitted to trading on a market operated by a recognised investment exchange or an overseas investment exchange.

Time of initial commitment

BIPRU 7.8.13R

Subject to BIPRU 7.8.14R, the time of initial commitment is the earlier of:

  1. (1)

    (in the case of underwriting) the time the firm agrees with the issuer of securities to underwrite those securities; or

  2. (2)

    (in the case of underwriting falling under BIPRU 7.8.12R (2)) the time the firm agrees with the seller of securities to underwrite those securities; or

  3. (3)

    (in the case of sub-underwriting) the time the firm agrees with the person referred to BIPRU 7.8.8R (1)(c) to sub-underwrite those securities; or

  4. (4)

    (in the case of BIPRU 7.8.8R (1)(d)) the time the group or syndicate in question (or a member of that group or syndicate on behalf of the others) agrees with the issuer or other person to whom the commitment is given as referred to in BIPRU 7.8.8R (1)(d) to underwrite or sub-underwrite the securities in question; or

  5. (5)

    (if the firm at that time has a commitment, whether legally or binding or not) the time the price and allocation of the issue or offer are set.

BIPRU 7.8.14R

If a firm has an irrevocable and unfettered right to withdraw from an underwriting commitment, exercisable within a certain period, the commitment commences (and thus the time of initial commitment occurs) when that right expires.

BIPRU 7.8.15G

Subject to the existence of a right described in BIPRU 7.8.14R an underwriting commitment commences even if it is subject to formal, legal or other conditions that would normally be expected to be satisfied.

BIPRU 7.8.16G

A force majeure or material adverse change clause would not be a right of the sort referred to in BIPRU 7.8.14R.

Calculating the net underwriting position

BIPRU 7.8.17R

A firm must calculate a net underwriting position by adjusting the gross amount it has committed to underwrite for:

  1. (1)

    any sales or sub-underwriting commitments received that have been confirmed in writing at the time of initial commitment (but excluding any sales in the grey market as defined in BIPRU 7.8.10R (1));

  2. (2)

    any underwriting or sub-underwriting commitments obtained from others since the time of initial commitment;

  3. (3)

    any purchases or sales of the securities since the time of initial commitment (other than purchases or sales in the grey market as defined in BIPRU 7.8.10R (1));

  4. (4)

    (in the case of sales in the grey market as defined in BIPRU 7.8.10R (1)) any sales of the securities as at the time of initial commitment or since the time of initial commitment subject, in both cases, to the following conditions:

    1. (a)

      any sales of the securities as at the time of initial commitment must be confirmed in writing at the time of initial commitment; and

    2. (b)

      sales must be net of any purchases in the grey market as defined in BIPRU 7.8.10R (1); and

  5. (5)

    any allocation of securities granted or received, arising from the commitment to underwrite the securities, since the time of initial commitment.

BIPRU 7.8.18R

If the allocation of securities has not been fixed a firm must calculate the gross amount of its commitment, for the purposes of BIPRU 7.8.17R, by reference to the maximum amount it has committed to underwrite until the time the allocation is set.

BIPRU 7.8.19R

An underwriting commitment may only be reduced under BIPRU 7.8.17R on the basis of a formal agreement.

BIPRU 7.8.20G

Allocations may arise, after date of initial commitment, from the agreement to underwrite. For example obligations or rights may be allocated to or from the issuer, the underwriting group or syndicate.

Over-allotment options

BIPRU 7.8.21R

  1. (1)

    This rule deals with the treatment of short positions that arise when a firm commits to distribute securities that it is underwriting in an amount that exceeds the allocation to the firm made by the issuer of the securities being underwritten.

  2. (2)

    When calculating its net underwriting position, a firm may use an over-allotment option granted to it by the issuer of the securities being underwritten to reduce the short positions in (1).

  3. (3)

    A firm may also use an over-allotment option granted to another member of the underwriting syndicate for the purpose in (2).

  4. (4)

    (2) and (3) only apply from working day 0.

  5. (5)

    (2) and (3) only apply to the extent that the treatment is consistent with the terms of the over-allotment option.

BIPRU 7.8.22R

Except as provided in BIPRU 7.8.21R, a firm must not take into account an over-allotment option granted to it or another member of the underwriting syndicate in calculating its net underwriting position.

Working day 0

BIPRU 7.8.23R

For the purposes of BIPRU 7.8 working day 0 is the business day on which a firm that is underwriting or sub-underwriting becomes unconditionally committed to accepting a known quantity of securities at a specified price.

BIPRU 7.8.24G

For debt issues and securities which are issued in a similar manner, working day 0 is the later of the date on which the securities are allotted and the date on which payment for them is due.

BIPRU 7.8.25G

For equity issues and securities which are issued in a similar manner, working day 0 is the later of the date on which the offer becomes closed for subscriptions and the date on which the allocations are made public.

BIPRU 7.8.26G

For rights issues, working day 0 is the first day after the date on which the offer becomes closed to acceptances for subscription.

Calculating the reduced net underwriting position

BIPRU 7.8.27R

To calculate the reduced net underwriting position a firm must apply the reduction factors in the table in BIPRU 7.8.28R to the net underwriting position (calculated under BIPRU 7.8.17R) as follows:

  1. (1)

    in respect of debt securities, a firm must calculate two reduced net underwriting positions; one for inclusion in the firm's interest rate PRR specific risk calculation (BIPRU 7.2.43R), the other for inclusion in its interest rate PRR general market risk calculation (BIPRU 7.2.52R); and

  2. (2)

    in respect of equities, a firm must calculate only one reduced net underwriting position, and then include it in the simplified equity method (see BIPRU 7.3.29R).

BIPRU 7.8.28R

Table: Net underwriting position reduction factors

This table belongs to BIPRU 7.8.27R

Underwriting timeline

Debt

Equity

General market risk

Specific risk

Time of initial commitment until working day 0

0%

100%

90%

Working day 1

0%

90%

90%

Working day 2

0%

75%

75%

Working day 3

0%

75%

75%

Working day 4

0%

50%

50%

Working day 5

0%

25%

25%

Working day 6 and onwards

0%

0%

0%

BIPRU 7.8.29G

The table in BIPRU 7.8.30G gives an example of the reduced net underwriting position calculation. The example is based on the firm starting with a commitment to underwrite £100 million of a new equity issue. Firms are reminded that in the case of an equity, the reduced net underwriting position should be treated under the simplified equity method (see BIPRU 7.8.27R (Simplified and standard equity methods) and BIPRU 7.8.27R).

BIPRU 7.8.30G

Table: Example of the reduced net underwriting position calculation

This table belongs to BIPRU 7.8.29G

Time

Net underwriting position (see BIPRU 7.8.17R)

Percentage reduction (see BIPRU 7.8.28R)

Reduced net underwriting position

At initial commitment 9.00am Monday

£100m gross amount is reduced by £20m due to sales/sub-underwriting commitments confirmed in writing at the time of initial commitment (see BIPRU 7.8.17R (1)) and (4)).

=

£80m

90%

£8m

Post initial commitment 9.02am Monday

Remaining £80m is reduced by £40m due to further sales, sub-underwriting commitments obtained and allocations granted (see BIPRU 7.8.17R (2) - (5)).

=

£40m

90%

£4m

At the end of working day 1

Remaining £40m is reduced to £20m due to further sales.

=

£20m

90%

£2m

End of working day 3

Remaining £20m is reduced to £5m due to further sales.

=

£5m

75%

£1.25 m

End of working day 4

Remaining £5m is reduced to £2m due to further sales.

=

£2m

50%

£1m

End of working day 5

Remaining £2m is reduced to £1m due to further sales.

=

£1m

25%

£0.75 m

Start of working day 6

£1m remaining

=

£1m

0%

£1m

Large exposure risk from underwriting securities: Calculating the net underwriting exposure

BIPRU 7.8.31R

For the purposes of calculating the total amount of its trading book exposures to a person for concentration risk purposes, a firm must include net underwriting exposure to that person.

BIPRU 7.8.32R

A firm must include any other exposures arising out of underwriting (including any counterparty exposures to any sub-underwriters) for the purposes of calculating the total amount of its trading book exposures to a person for concentration risk purposes.

BIPRU 7.8.33R

A firm, before entering into a new underwriting commitment, must be able to recalculate the concentration risk capital component to the level of detail necessary to ensure that the firm's capital resources requirement does not exceed the firm's capital resources.

BIPRU 7.8.34R

Except where otherwise specified by a requirement on its Part 4A permission, a firm must calculate the net underwriting exposure to an issuer by applying the relevant reduction factors in the table in BIPRU 7.8.35R to its net underwriting position calculated under BIPRU 7.8.17R.

BIPRU 7.8.35R

Table: Calculation of net underwriting exposure

This table belongs to BIPRU 7.8.34R

Time

Reduction factor to be applied to net underwriting position

Initial commitment to working day 0

100%

Working day 0

100%

Working day 1

90%

Working day 2

75%

Working day 3

75%

Working day 4

50%

Working day 5

25%

Working day 6 onwards

0%

BIPRU 7.8.36G

The effect of BIPRU 7.8.34R is that there is no concentration limit for net underwriting exposures between initial commitment and the end of working day 0, except where specified by a requirement on a firm's Part 4A permission.

Large exposure risk from underwriting securities: Monitoring and reporting concentration risk

BIPRU 7.8.37R

For the purposes of concentration risk monitoring only, a firm must report its net underwriting exposure both before and after the application of the reduction factors in the table in BIPRU 7.8.35R.

Risk management

BIPRU 7.8.38R

A firm must take reasonable steps to establish and maintain such systems and controls to monitor and manage its underwriting and sub-underwriting business as are appropriate to the nature, scale and complexity of its underwriting and sub-underwriting business. In particular, a firm must have systems to monitor and control its underwriting exposures between the time of the initial commitment and working day one in the light of the nature of the risks incurred in the markets in question.

BIPRU 7.8.39G

A firm should take reasonable steps to:

  1. (1)

    allocate responsibility for the management of its underwriting and sub-underwriting business;

  2. (2)

    allocate adequate resources to monitor and control its underwriting and sub-underwriting business;

  3. (3)

    satisfy itself that its systems to monitor exposure to counterparties will calculate, revise and update its exposure to each counterparty arising from its underwriting or sub-underwriting business;

  4. (4)

    satisfy itself of the suitability of each person who performs functions for it in connection with the firm's underwriting and sub-underwriting business having regard to the person's skill and experience; and

  5. (5)

    satisfy itself that its procedures and controls to monitor and manage its underwriting business address, on an on-going basis, the capacity of sub-underwriters to meet sub-underwriting commitments.