IFPRU 8.2 Large Exposures

Application

IFPRU 8.2.1 R

This section applies to an IFPRU investment firm, unless it is an exempt IFPRU commodities firm to which article 493 of the EU CRR applies.

IFPRU 8.2.2 R

This section does not apply to a FCAconsolidation group on the basis of its consolidated situation if the group only contains limited activity firms or limited licence firms.

Purpose

IFPRU 8.2.3 G

This section contains the rules that exercise the discretion afforded to the FCA as competent authority under article 400(2)(c) and (3) of the EU CRR (Large exposures: exemptions). The FCA does not intend to exercise its discretion for any of the other exemptions in article 400(2).

Intra-group exposures: non-core large exposures group

IFPRU 8.2.4 G

Article 400(2) of the EU CRR permits the FCA to fully or partially exempt exposures incurred by a firm to intra-group undertakings that meet the specified criteria from the limit stipulated in article 395(1) of the EU CRR in relation to a firm's group of connected clients that represent its wider group. The FCA will consider exempting non-trading book and trading book exposures to intra-group undertakings if specified conditions throughout IFPRU 8.2 are met.

IFPRU 8.2.5 G

The FCA expects that applications for exemptions under article 400(2)(c) of the EU CRR will be for firms established in the UK where the intra-group undertakings to which they have exposures meet the criteria for the core UK group in article 113(6) of the EU CRR, except for article 113(6)(d) (established in the same EEA State as the firm).

IFPRU 8.2.6 R

A firm with a non-core large exposures grouppermission may (in line with that permission) exempt, from the application of article 395(1) of the EU CRR (Limits to large exposures), exposures, including participations or other kinds of holdings, incurred by a firm to:

  1. (1)

    its parent undertaking; or

  2. (2)

    other subsidiary undertakings of that parent undertaking; or

  3. (3)

    its own subsidiary undertakings;

in so far as those undertakings are covered by the supervision on a consolidated basis to which the firm itself is subject, in accordance with the EU CRR, Directive 2002/87/EC regarding the supplementary supervision of financial entities in a financial conglomerate or with equivalent standards in force in a third country; exposures that do not meet these criteria, whether or not exempted from article 395(1), shall be treated as exposures to a third party.

[Note: article 400(2) of the EU CRR]

IFPRU 8.2.7 R

A firm may only make use of the non-core large exposure group exemption where the following conditions are met:

  1. (1)

    the total amount of the non-trading book exposures from the firm to its non-core large exposures group does not exceed 100% of the firm'seligible capital; or

    (if the firm has a core UK grouppermission) the total amount of non-trading book exposures from its core UK group (including the firm) to its non-core large exposures group does not exceed 100% of the core UK groupeligible capital;

  2. (2)

    the total amount of trading book exposures from the firm to its non-core large exposures group does not exceed 500% of the firm's eligible capital; or

    (if the firm has a core UK grouppermission) the total amount of trading bookexposures from its core UK group (including the firm) to its non-core large exposures group does not exceed 500% of the core UK groupeligible capital;

  3. (3)

    (if the firm has a core UK grouppermission) it gives the FCA prior written notice if it intends to concentrate its intra-group exposure to a particular member of its non-core large exposures group in excess of 25% of core UK groupeligible capital.

    The written notice must contain the following:

    1. (a)

      an explanation of how the firm will ensure that it will still meet the condition in (1) on a continuing basis;

    2. (b)

      details of the counterparty, the size of the exposure and the expected duration of the exposure; and

    3. (c)

      an explanation of the reason for the exposure;

  4. (4)

    if the firm stops concentrating its intra-group exposure to a particular member of its non-core large exposures group in excess of 25% of core UK groupeligible capital, it gives the FCA prior written notice as set out in (3) if it intends to start to do so again; and

  5. (5)

    the firm submits FSA018 under SUP 16.12 (Integrated regulatory reporting) as applicable to it.

[Note: article 400(2)(c) of the EU CRR]

IFPRU 8.2.8 R

A firm may calculate limits in IFPRU 8.2.7 R after taking into account the effect of credit risk mitigation in line with articles 399 to 403 of the EU CRR.

Core UK group eligible capital

IFPRU 8.2.9 R

For the purposes of the conditions in IFPRU 8.2.7 R, a firm must calculate core UK groupeligible capital in line with the deduction and aggregation method in IFPRU 8.2.10 R.

IFPRU 8.2.10 R
  1. (1)

    Core UK groupeligible capital is equal to the sum of the following amounts for each member of the core UK group and the firm (the sub-group):

    1. (a)

      for ultimate parent undertaking of the sub-group, the amount calculated in line with article 6 of the EUCRR (or other prudential requirements that apply);

    2. (b)

      for any other member of the sub-group, the amount calculated in line with article 6 of the EUCRR (or other prudential requirements that apply) less the book value of the sub-group's holdings of capital instruments in that member, to the extent not already deducted in calculations in line with article 6 of the EUCRR (or other prudential requirements that apply) for:

      1. (i)

        the ultimate parent undertaking of the sub-group; or

      2. (ii)

        any other member of the sub-group.

    3. (c)

      The deduction in (1)(b) must be carried out separately for each type of capital instrument eligible as own funds.

IFPRU 8.2.11 G

The FCA will assess core UK group and non-core large exposure group applications against article 400(2)(c) on a case-by-case basis. The FCA will only approve this treatment for non-core large exposure group undertakings where the conditions in article 400(2)(c) are met. A firm should note that the FCA will still make a wider judgement whether it is appropriate to grant this treatment even where the conditions in article 400(2)(c) are met.

Notification

IFPRU 8.2.12 R

A firm must immediately notify the FCA in writing if it becomes aware that any exposure that it has treated as exempt under IFPRU 8.2.6 R or any counterparty that it has been treating as a member of its non-core large exposures group has ceased to meet the conditions for application of the treatment in this section.

Conditions for exemptions

IFPRU 8.2.13 R

A firm may only make use of the exemptions provided in this section where the following conditions are met:

  1. (1)

    the specific nature of the exposure, the counterparty or the relationship between the firm and the counterparty eliminate or reduce the risk of the exposure; and

  2. (2)

    any remaining concentration risk can be addressed by other equally effective means, such as the arrangements, processes and mechanisms in article 81 of CRD (Concentration risk).

[Note: article 400(3) of the EU CRR]

Exposures to trustees

IFPRU 8.2.14 G

If a firm has an exposure to a person ('A') when A is acting on his own behalf, and also an exposure to A when A acts in his capacity as trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or a similar fund (a "fund"), the firm may treat the latter exposure as if it was to the fund, unless such a treatment would be misleading.

IFPRU 8.2.15 G

When considering whether the treatment described is misleading, factors a firm should consider include:

  1. (1)

    the degree of independence of control of the fund, including the relation of the fund's board and senior management to the firm or to other funds or to both;

  2. (2)

    the terms on which the counterparty, when acting as trustee, is able to satisfy its obligation to the firm out of the fund of which it is trustee;

  3. (3)

    whether the beneficial owners of the fund are connected to the firm, or related to other funds managed within the firm's group, or both; and

  4. (4)

    for a counterparty that is connected to the firm itself, whether the exposure arises from a transaction entered into on an arm's length basis.

IFPRU 8.2.16 G

In deciding whether a transaction is at arm's length, the following factors should be taken into account:

  1. (1)

    the extent to which the person to whom the firm has an exposure ('A') can influence the firm's operations through, for example, the exercise of voting rights;

  2. (2)

    the management role of A where A is also a director of the firm; and

  3. (3)

    whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.