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GENPRU 2.1 Calculation of capital resources requirements

Application

GENPRU 2.1.1RRP

1This section applies to a BIPRU firm.14

GENPRU 2.1.2G

The scope of application of this section is not restricted to firms that are subject to the relevant EU6 Directives.

6
GENPRU 2.1.3R

  1. (1)

    This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

  2. (2)

    [deleted]14

GENPRU 2.1.4GRP

The adequacy of a firm's capital resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise.

GENPRU 2.1.5G

The requirements in this section apply to a firm on a solo basis.

Purpose

GENPRU 2.1.6GRP

Principle 4 requires a firm to maintain adequate financial resources. GENPRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. The adequacy of a firm's capital resources needs to be assessed both by that firm and the appropriate regulator. Through its rules, the FCA14 sets minimum capital resources requirements for firms. It also reviews a firm's own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate (see GENPRU 1.2 (Adequacy of financial resources) and BIPRU 2.2 (Internal capital adequacy standards)14).

GENPRU 2.1.7GRP

This section sets capital resources requirements for a firm. GENPRU 2.2 (Capital resources) sets out how, for the purpose of meeting capital resources requirements, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are set out in GENPRU 1.3 (Valuation)14 and, for a BIPRU firm, BIPRU.

GENPRU 2.1.8GRP

  1. (1)

    [deleted]12

    12
  2. (2)

    This section also implements the third paragraph of article 95(2) of the EU CRR applying the 12provisions of the Capital Adequacy Directive and Banking Consolidation Directive concerning the level of capital resources which a BIPRU firm is required to hold. In particular it implements (in part) article 1275 of the Banking Consolidation Directive and Articles 5, 9, 10 and 18 of the Capital Adequacy Directive.

  3. (3)

    [deleted] 12

    1291212121271212

Monitoring requirements

GENPRU 2.1.9RRP

A firm must at all times monitor whether it is complying with14 the main BIPRU firm Pillar 1 rules and be able to demonstrate that it knows at all times whether it is complying with those rules.

GENPRU 2.1.10GRP

For the purposes of GENPRU 2.1.9 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with14 the main BIPRU firm Pillar 1 rules14 at all times. This does not necessarily mean that a firm needs to measure the precise amount of its capital resources and its CRR on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by the FCA14.

GENPRU 2.1.11RRP

A firm must notify the FCA14 immediately of any breach, or expected breach, of14 the main BIPRU firm Pillar 1 rules14.

Additional capital requirements

GENPRU 2.1.12GRP

The FCA14 may impose a higher capital requirement than the minimum requirement set out in this section as part of the firm's Part 4A permission (see GENPRU 1.2 (Adequacy of financial resources) and14 BIPRU 2.2 (Internal capital adequacy standards)14).

Main requirement: BIPRU firms

GENPRU 2.1.40RRP

A BIPRU firm must maintain at all times capital resources equal to or in excess of the amount specified in the table in GENPRU 2.1.45 R (Calculation of the variable capital requirement for a BIPRU firm).

GENPRU 2.1.41RRP

A BIPRU firm must maintain at all times capital resources equal to or in excess of the base capital resources requirement (see the table in GENPRU 2.1.48 R).

GENPRU 2.1.42RRP

At the time that it first becomes a BIPRU firm12, a firm must hold initial capital of not less than the base capital resources requirement applicable to that firm.

12
GENPRU 2.1.43GRP

The purpose of the base capital resources requirement for a BIPRU firm is to act as a minimum capital requirement or floor. It has been written as a separate requirement as there are restrictions in GENPRU 2.2 (Capital resources) on the types of capital that a BIPRU firm may use to meet the base capital resources requirement which do not apply to some other parts of the capital requirement calculation. In order to preserve the base capital resources requirement's role as a floor rather than an additional requirement, GENPRU 2.2.60 R allows a BIPRU firm to meet the base capital resources requirement with capital that is also used to meet the variable capital requirements in GENPRU 2.1.40 R.

GENPRU 2.1.44GRP

The base capital resources requirement and the variable capital requirement in GENPRU 2.1.40 R are together called the capital resources requirement (CRR) in the case of a BIPRU firm.

Calculation of the variable capital requirement for a BIPRU firm

GENPRU 2.1.45RRP

This table belongs to GENPRU 2.1.40 R

Firm category

Capital requirement

BIPRU firm 12(including collective portfolio management investment firm9)

129

the higher of (1) and (2):

(1)

the sum of:

(a)

the credit risk capital requirement; and

(b)

the market risk capital requirement; and

(2)

the fixed overheads requirement.

Adjustment of the variable capital requirement calculation for collective portfolio management investment firms9

GENPRU 2.1.46RRP

When a3 collective portfolio management investment firm9 calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only3 in respect of designated investment business. For this purpose managing an AIF or managing a UCITS9 is excluded from designated investment business.

3939

Calculation of the base capital resources requirement for a BIPRU firm

GENPRU 2.1.47RRP

The amount of a BIPRU firm's base capital resources requirement is set out in the table in GENPRU 2.1.48 R.

Table: Base capital resources requirement for a BIPRU firm

GENPRU 2.1.48RRP

This table belongs to GENPRU 2.1.47 R

Firm category

Amount: Currency equivalent of12

BIPRU firm (but not a collective portfolio management investment firm)12

12

€50,00012

GENPRU 2.1.48AGRP

A collective portfolio management investment firm is required to maintain base own funds requirement of €125,000 (in line with IPRU-INV -link- 11.3.1R(1)).12

Definition of BIPRU firm12

GENPRU 2.1.49GRP

The Capital Adequacy Directive sets out various categories of investment firms subject to differing levels of initial capital. For the purpose of the third paragraph of article 95(2) of the EU CRR, a BIPRU firm falls into the category in article 5(3) of the Capital Adequacy Directive. In summary, a BIPRU firm: 12

12
  1. (1)

    does not provide the ancillary service of safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management, and is not authorised to do so; 12

  2. (2)

    is not authorised to provide the following investment services:

    1. (a)

      to deal in any financial instruments for its own account;

    2. (b)

      to underwrite issues of financial instruments on a firm commitment basis;

    3. (c)

      to place financial instruments without a firm commitment basis; and

    4. (d)

      to operate a multilateral trading facility;

    5. 12
  3. (3)

    is authorised to provide one or more of the following investment services:

    1. (a)

      the execution of investors’ orders for financial instruments; or

    2. (b)

      the management of individual portfolios of investments in financial instruments;

    3. 12
  4. (4)

    may be authorised to provide one or more of the following investment services:12

    1. (a)

      reception and transmission of investors’ orders for financial instruments; or

    2. (b)

      investment advice; and

  5. (5)

    does not hold clients’ money and/or securities and is not authorised to do so (it should have a limitation or requirement prohibiting the holding of client money and its permission should not include safeguarding and administering investments).

  6. 12
12

Calculation of the credit risk capital requirement (BIPRU firm only)

GENPRU 2.1.51RRP

Calculation of the market risk capital requirement (BIPRU firm only)

GENPRU 2.1.52RRP

  1. (1)

    A BIPRU firm must calculate its market risk capital requirement as the sum of:

    1. (a)

      the interest rate PRR (including the basic interest rate PRR for equity derivatives set out in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives));

    2. (b)

      the equity PRR;

    3. (c)

      the commodity PRR;

    4. (d)

      the foreign currency PRR;

    5. (e)

      the option PRR; and

    6. (f)

      the collective investment undertaking PRR.

  2. (2)

    Any amount calculated under BIPRU 7.1.9 R - BIPRU 7.1.13 R (Instruments for which no PRR treatment has been specified) must be allocated between the PRR charges in (1) in the most appropriate manner.

Calculation of the fixed overheads requirement 12

GENPRU 2.1.53RRP

A 12BIPRU firm must12 calculate a fixed overheads requirement, an amount that 12is equal to one quarter of the firm's relevant fixed expenditure calculated in accordance with GENPRU 2.1.54 R.

12
GENPRU 2.1.54RRP

For the purpose of GENPRU 2.1.53 R, and subject to GENPRU 2.1.55 R to GENPRU 2.1.57 R,a BIPRU firm's12 relevant fixed expenditure is the amount described as total expenditure in its most recent audited annual report and accounts, less the following items (if they are included within such expenditure):

12
  1. (1)

    staff bonuses, except to the extent that they are guaranteed;

  2. (2)

    employees' and directors' shares in profits, except to the extent that they are guaranteed;

  3. (3)

    other appropriations of profits;

  4. (4)

    shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue;

  5. (5)

    interest charges in respect of borrowings made to finance the acquisition of the firm's readily realisable investments;

  6. (6)

    interest paid to customers on client money;

  7. (7)

    interest paid to counterparties;

  8. (8)

    fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;

  9. (9)

    foreign exchange losses; and

  10. (10)

    other variable expenditure.

GENPRU 2.1.55RRP

The relevant fixed expenditure of a firm in the following circumstances is:

  1. (1)

    where its most recent audited annual report and accounts do not represent a twelve month period, an amount calculated in accordance with GENPRU 2.1.54 R, pro-rated so as to produce an equivalent annual amount; and

  2. (2)

    where it has not completed twelve months' trading, an amount based on forecast expenditure included in the budget for the first twelve months' trading, as submitted with its application for authorisation.

GENPRU 2.1.56RRP

A firm must adjust its relevant fixed expenditure calculation so far as necessary if and to the extent that since the date covered by the most recent audited annual report and accounts or (if GENPRU 2.1.55R (2) applies) since the budget was prepared:

  1. (1)

    its level of fixed expenditure changes materially; or

  2. (2)

    its regulated activities comprised within its permission change.

GENPRU 2.1.57RRP

If a firm has a material proportion of its expenditure incurred on its behalf by third parties and such expenditure is not fully recharged to that firm then the firm must adjust its relevant fixed expenditure calculation by adding back in the whole of the difference between the amount of the expenditure and the amount recharged.

GENPRU 2.1.58GRP

For the purpose of GENPRU 2.1.57 R, the FCA would consider as material 10% of a firm's expenditure incurred on its behalf by third parties.

GENPRU 2.1.59GRP

For the purpose of GENPRU 2.1.54 R to 2.1.57 R, fixed expenditure is expenditure which is inelastic relative to fluctuations in a firm's levels of business. Fixed expenditure is likely to include most salaries and staff costs, office rent, payment for the rent or lease of office equipment, and insurance premiums. It may be viewed as the amount of funds which a firm would require to enable it to cease business in an orderly manner, should the need arise. This is not an exhaustive list of such expenditure and a firm will itself need to identify (taking appropriate advice where necessary) which costs amount to fixed expenditure.

GENPRU 2.1.60RRP

  1. (1)

    This rule applies to a bank that meets the following conditions:

    1. (a)

      on 31 December 2006 it had the benefit of IPRU(BANK) rule 3.3.12 (Reduced minimum capital requirement for a bank that is a credit institution which immediately before 1 January 1993 was authorised under the Banking Act 1987);

    2. (b)

      the relevant amount (as referred to in IPRU(BANK) rule 3.3.12) applicable to it was below €5 million as at 31 December 2006; and

    3. (c)

      on 1 January 2007 it did not comply with the base capital resources requirement as set out in the table in GENPRU 2.1.48 R (€5 million requirement).

  2. (2)

    Subject to (3), the applicable base capital resources requirement as at any time (the "relevant time") is the higher of:

    1. (a)

      the relevant amount applicable to it under IPRU(BANK) rule 3.3.12 as at 31 December 2006 as adjusted under GENPRU 2.1.62R (2); and

    2. (b)

      the highest amount of eligible capital resources which that bank has held between 1 January 2007 and the relevant time.

  3. (3)

    This rule ceases to apply when:

    1. (a)

      that bank's eligible capital resources at any time since 1 January 2007 equal or exceed €5 million; or

    2. (b)

      a person (other than an existing controller) becomes the parent undertaking of that bank.

  4. (4)

    If this rule ceases to apply under (3)(a) it continues not to apply if the bank's eligible capital resources later fall below €5 million.

GENPRU 2.1.61GRP

Where two or more banks merge, all of which individually have the benefit of GENPRU 2.1.60 R, the PRA may agree in certain circumstances that the base capital resources requirement for the bank resulting from the merger may be the sum of the aggregate capital resources of the merged banks, calculated at the time of the merger, provided this figure is less than €5 million.

GENPRU 2.1.62RRP

For the purpose of GENPRU 2.1.60 R:

  1. (1)

    an existing controller of a bank means:

    1. (a)

      a person who has been a parent undertaking of that bank since 31 December 2006 or earlier; or

    2. (b)

      a person who became a parent undertaking of that bank after 31 December 2006 but who, when he became a parent undertaking of that bank, was a subsidiary undertaking of an existing controller of that bank;

  2. (2)

    the relevant amount of capital as referred to in GENPRU 2.1.60R (2)(a) is adjusted by identifying the time as of which the amount of capital it was obliged to hold under IPRU(BANK) rule 3.3.12 as referred to in GENPRU 2.1.60R (2)(a) was fixed and then recalculating the capital resources it held at that time in accordance with the definition of eligible capital resources (as defined in (3)); and

  3. (3)

    eligible capital resources mean capital resources eligible under GENPRU 2.2 (Capital resources) to be used to meet the base capital resources requirement.