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    2022-01-28

This chapter includes rules that refer to provisions of the UK CRR in the form in which it stood at 31 December 2021. That version of the UK CRR can be found on legislation.gov.uk using this link.

MIFIDPRU 4.1 Application

MIFIDPRU 4.1.1 R

1This chapter applies to:

  1. (1)

    a MIFIDPRU investment firm; and

  2. (2)

    a UK parent entity that is required by MIFIDPRU 2.5.7R to comply with MIFIDPRU 4 on the basis of its consolidated situation.

MIFIDPRU 4.1.2 R

1Where this chapter applies to a UK parent entity under MIFIDPRU 4.1.1R(2), it applies with the following modifications:

  1. (1)

    1MIFIDPRU 4.2.1R (Initial capital requirement) does not apply; and

  2. (2)

    any reference to a “firm” or “MIFIDPRU investment firm” in this chapter is to the hypothetical single MIFIDPRU investment firm created under the consolidated situation.

MIFIDPRU 4.1.3 G

1 MIFIDPRU 2.5 contains additional guidance on how a UK parent entity should apply the requirements in this chapter on a consolidated basis.

MIFIDPRU 4.2 Initial capital requirement

MIFIDPRU 4.2.1 R
  1. (1)

    1At the point at which a firm is first authorised as a MIFIDPRU investment firm, it must hold initial capital of not less than the amount in (2).

  2. (2)

    The relevant amount is the permanent minimum capital requirement that would apply if the firm had been granted the permissions that it has requested in its application for authorisation.

MIFIDPRU 4.2.2 G
  1. (1)

    1The initial capital requirement in MIFIDPRU 4.2.1R applies only at the point at which the FCA first grants permission to a MIFIDPRU investment firm to carry on investment services and/or activities. After a firm has been authorised as a MIFIDPRU investment firm, the permanent minimum capital requirement applies on an ongoing basis instead.

  2. (2)

    Where a MIFIDPRU investment firm applies to vary its permissions to add new investment services and/or activities that would result in an increase in its permanent minimum capital requirement, the FCA would generally expect to refuse the application unless the firm demonstrates that it can comply with the new permanent minimum capital requirement.

  3. (3)

    The FCA’s approach to the application of the initial capital requirement under MIFIDPRU is based on the existence of the permanent minimum capital requirement for MIFIDPRU investment firms. For the avoidance of doubt, this guidance does not affect the FCA’s approach to whether the initial capital requirement under another prudential sourcebook applies on an ongoing basis.

MIFIDPRU 4.3 Own funds requirement

MIFIDPRU 4.3.1 R

1A MIFIDPRU investment firm must at all times maintain own funds that are at least equal to its own funds requirement.

MIFIDPRU 4.3.3 R

MIFIDPRU 4.4 Permanent minimum capital requirement

MIFIDPRU 4.4.1 R
  1. (1)

    1Where a MIFIDPRU investment firm has permission to carry on any of the investment services and/or activities in (2), its permanent minimum capital requirement is £750,000, unless MIFIDPRU 4.4.6R applies2.

  2. (2)

    The relevant investment services and/or activities are:

    1. (a)

      dealing on own account;

    2. (b)

      underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; or

    3. (c)

      operating an organised trading facility, if the firm is not subject to a limitation that prevents it from carrying on the activities otherwise permitted by MAR 5A.3.5R.

  3. (3)

    2Where a MIFIDPRU investment firm is appointed to act as a depositary of an unauthorised AIF in accordance with FUND 3.11.10R(2), its permanent minimum capital requirement is £750,000, unless MIFIDPRU 4.4.6R applies.

MIFIDPRU 4.4.2 G
  1. (1)

    1Under MAR 5A.3.5R (Proprietary trading), a firm that has permission to operate an organised trading facility may deal on own account in the following ways without requiring separate permissions for dealing on own account:

    1. (a)

      matched principal trading in the course of operating the OTF; or

    2. (b)

      dealing on own account in relation to sovereign debt instruments for which there is no liquid market.

  2. (2)

    A firm that is operating an organised trading facility and does not wish to carry on the activities in (1) may apply to the FCA under section 55H of the Act for a limitation that prohibits the firm from carrying on the activities on the basis of that permission.

  3. (3)

    The effect of MIFIDPRU 4.4.1R(2)(c) is that if a firm is operating an organised trading facility and is not subject to the limitation described in (2), the firm’s permanent minimum capital requirement is £750,000.

MIFIDPRU 4.4.3 R
  1. (1)

    1Where a MIFIDPRU investment firm satisfies the conditions in (2), its permanent minimum capital requirement is £150,000.

  2. (2)

    The relevant conditions are:

    1. (a)

      the firm has permission for any of the following:

      1. (i)

        operating a multilateral trading facility;

      2. (ii)

        operating an organised trading facility, if the firm is subject to a limitation that prevents it from carrying on the activities otherwise permitted by MAR 5A.3.5R;

      3. (iii)

        holding client money or client assets in the course of MiFID business; 2

    2. (b)

      the firm does not have permission for any of the following:

      1. (i)

        dealing on own account;

      2. (ii)

        underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis;

      3. (iii)

        operating an organised trading facility, if the firm is not subject to a limitation that prevents it from carrying on the activities otherwise permitted by MAR 5A.3.5R; and2

    3. (c)

      2the firm is not appointed to act as a depositary in accordance with FUND 3.11.10R(2) or COLL 6.6A.8R(3)(b)(i).

MIFIDPRU 4.4.4 R
  1. (1)

    1Where a MIFIDPRU investment firm satisfies the conditions in (2), its permanent minimum capital requirement is £75,000.

  2. (2)

    The relevant conditions are:

    1. (a)

      the only investment services and/or activities that the firm has permission to carry on are one or more of the following:

      1. (i)

        reception and transmission of orders in relation to one or more financial instruments;

      2. (ii)

        execution of orders on behalf of clients;

      3. (iii)

        portfolio management;

      4. (iv)

        investment advice; or

      5. (v)

        placing of financial instruments without a firm commitment basis; and

    2. (b)

      the firm is not permitted to hold client money or client assets in the course of MiFID business; and2

    3. (c)

      2the firm is not appointed to act as a depositary in accordance with FUND 3.11.10R(2) or COLL 6.6A.8R(3)(b)(i).

MIFIDPRU 4.4.5 G

1The relevant permanent minimum capital requirement under this section applies to a collective portfolio management investment firm in parallel with its base own funds requirement under IPRU-INV 11. This means that a collective portfolio management investment firm must comply with both requirements, but they are not cumulative.

MIFIDPRU 4.4.6 R

2Where a MIFIDPRU investment firm is appointed to act as the depositary of a UK UCITS or an authorised AIF, its permanent minimum capital requirement is £4 million.

MIFIDPRU 4.5 Fixed overheads requirement

MIFIDPRU 4.5.1 R
  1. (1)

    1The fixed overheads requirement of a MIFIDPRU investment firm is an amount equal to one quarter of the firm’s relevant expenditure during the preceding year.

  2. (2)

    When calculating its fixed overheads requirement in (1), a firm must use the figures resulting from the accounting framework applied by the firm in accordance with MIFIDPRU 4.5.2R.

  3. (3)

    This rule is subject to MIFIDPRU 4.5.7R and MIFIDPRU 4.5.9R.

MIFIDPRU 4.5.2 R
  1. (1)

    1For the purposes of the calculation in MIFIDPRU 4.5.1R, a firm must use the figures in its most recent:

    1. (a)

      audited annual financial statements; or

    2. (b)

      unaudited annual financial statements, where audited financial statements are not available.

  2. (2)

    If a firm has used unaudited annual financial statements in accordance with (1)(b) and audited annual financial statements subsequently become available, the firm must update the calculation in MIFIDPRU 4.5.1R using the audited figures.

  3. (3)

    Where the financial statements in (1) do not cover a 12-month period, the firm must:

    1. (a)

      divide the amounts included in those statements by the number of months the financial statements cover; and

    2. (b)

      multiply the result of the calculation in (a) by 12 to produce an equivalent annual amount.

MIFIDPRU 4.5.3 R
  1. (1)

    1For the purpose of MIFIDPRU 4.5.1R(1), a firm must calculate its relevant expenditure by:

    1. (a)

      calculating the firm’s total expenditure before distribution of profits; and

    2. (b)

      deducting any of the items in (2) from the total expenditure in (1)(a) to the extent that those items have been included in the expenditure.

  2. (2)

    The items that a firm may deduct from its total expenditure are:

    1. (a)

      any of the following, if they are fully discretionary:

      1. (i)

        staff bonuses and other variable remuneration;

      2. (ii)

        employees’, directors’, partners’ and limited liability partnership members’ shares in profits; and

      3. (iii)

        other appropriations of profits;

    2. (b)

      shared commission and fees payable that meet all of the following conditions:

      1. (i)

        they are directly related to commission and fees receivable;

      2. (ii)

        the commission and fees receivable are included within total revenue; and

      3. (iii)

        the payment of the commission and fees payable is contingent on receipt of the commission and fees receivable;

    3. (c)

      fees paid to tied agents;

    4. (d)

      non-recurring expenses from non-ordinary activities;

    5. (e)

      unless MIFIDPRU 4.5.4R applies, fees, brokerage and other charges paid to central counterparties, exchanges and other trading venues and intermediate brokers for the purposes of executing, registering and clearing transactions, provided that the fees, brokerage and charges are directly passed on and charged to customers;

    6. (f)

      80% of the value of any fees, brokerage and other charges, excluding any fees or charges to which MIFIDPRU 4.5.4R applies, paid to central counterparties, exchanges and other trading venues and intermediate brokers for the purposes of executing, registering and clearing transactions in relation to which:

      1. (i)

        the firm is dealing on own account; and

      2. (ii)

        the fees, brokerage or charges have not already been deducted under (e);

    7. (g)

      interest paid to customers on client money, where there is no obligation of any kind to pay the interest;

    8. (h)

      taxes where they fall due in relation to the annual profits of the firm;

    9. (i)

      losses from trading on own account in financial instruments;

    10. (j)

      payments related to contract-based profit and loss transfer agreements according to which the firm is obliged to transfer its annual profit to the parent undertaking following the preparation of the firm’s annual financial statements;

    11. (k)

      payments into a fund for general banking risk in accordance with article 26(1)(f) of the UK CRR, as applied by MIFIDPRU 3.3.1R; and

    12. (l)

      other expenses, to the extent that their value has already been reflected in a deduction from own funds under MIFIDPRU 3.3.6R.

MIFIDPRU 4.5.4 R

1The deducted amounts in MIFIDPRU 4.5.3R(2)(e) and (f) must not include fees and other charges necessary to maintain membership of, or otherwise meet loss-sharing financial obligations to, central counterparties, exchanges and other trading venues.

Additional deduction for commodity and emission allowance dealers

MIFIDPRU 4.5.5 R

1In addition to the deductions in MIFIDPRU 4.5.3R(2), a commodity and emission allowance dealer may deduct expenditure on raw materials in connection with the underlying commodity of the commodity derivatives the firm trades.

Expenses incurred on behalf of the firm by third parties

MIFIDPRU 4.5.6 R
  1. (1)

    1A firm must add any fixed expenses that have been incurred on its behalf by a third party, including a tied agent, to the firm’s total expenditure for the purposes of MIFIDPRU 4.5.3R in accordance with this rule.

  2. (2)

    A firm is not required to add fixed expenses incurred on its behalf by a third party to the firm’s expenditure if the expenses are already included in the figures resulting from MIFIDPRU 4.5.2R.

  3. (3)

    Where a breakdown of the third party’s expenses is available, the firm must add to the firm’s total expenditure the share of the third party’s expenses incurred on behalf of the firm.

  4. (4)

    Where a breakdown of the third party’s expenses is not available, the firm must:

    1. (a)

      add to the firm’s total expenditure the share of the third party’s expenses incurred on behalf of the firm as projected in the firm’s business plan; or

    2. (b)

      if the firm does not have a business plan that projects the third party’s expenses, reasonably estimate the share of those expenses that are attributable to the firm’s business and add that estimated share of expenses to the firm’s total expenditure.

Material change to projected relevant expenditure during the year

MIFIDPRU 4.5.7 R
  1. (1)

    1This rule applies where there:

    1. (a)

      is an increase of 30% or more in the firm’s projected relevant expenditure for the current year; or

    2. (b)

      would be an increase of £2 million or more in the firm’s fixed overheads requirement based on projected relevant expenditure for the current year.

  2. (2)

    Where this rule applies, a firm must:

    1. (a)

      immediately recalculate its fixed overheads requirement by applying the methodology in MIFIDPRU 4.5.3R to the projected relevant expenditure, taking into account the increase in (1);

    2. (b)

      immediately substitute the revised fixed overheads requirement that results from the calculation in (a) for the firm’s original fixed overheads requirement under MIFIDPRU 4.5.1R(1); and

    3. (c)

      immediately recalculate its basic liquid assets requirement using the revised fixed overheads requirement in (b) and substitute the updated amount for its original basic liquid assets requirement.

MIFIDPRU 4.5.8 G
  1. (1)

    1Where there is a material increase in the firm’s projected relevant expenditure that triggers the obligation in MIFIDPRU 4.5.7R, a firm should also consider the potential impact on its ICARA process and the conclusions documented in its last ICARA document. In particular, the firm should consider any potential impact on:

    1. (a)

      the liquid assets that the firm must hold to comply with MIFIDPRU 6, as the requirements in that chapter are calibrated by reference to the fixed overheads requirement;

    2. (b)

      the level of own funds and liquid assets that the firm must hold to comply with its obligations under MIFIDPRU 7; and

    3. (c)

      the calibration of the firm’s wind-down triggers.

  2. (2)

    The review in (1) is particularly important if the firm’s own funds requirement was determined by the fixed overheads requirement immediately before the change occurred.

MIFIDPRU 4.5.9 R
  1. (1)

    1This rule applies where there:

    1. (a)

      is a decrease of 30% or more in the firm’s projected relevant expenditure for the current year; or

    2. (b)

      would be a decrease of £2 million or more in the firm’sfixed overheads requirement based on projected relevant expenditure for the current year.

  2. (2)

    Where this rule applies, a firm may:

    1. (a)

      recalculate its fixed overheads requirement by applying the methodology in MIFIDPRU 4.5.3R to the projected relevant expenditure, taking into account the decrease in (1); and

    2. (b)

      if it has obtained prior permission from the FCA, substitute the revised fixed overheads requirement that results from the calculation in (a) for the firm’s original fixed overheads requirement under MIFIDPRU 4.5.1R.

  3. (3)

    To obtain the permission in (2), a firm must:

    1. (a)

      complete the application form in MIFIDPRU 4 Annex 11R and submit it to the FCA in accordance with the instructions on that form;

    2. (b)

      demonstrate all of the following:

      1. (i)

        that one of the conditions in (1)(a) or (b) is met and the projected reduction in the firm’s relevant expenditure is a reasonable projection;

      2. (ii)

        that the firm has adequately considered the impact of the reduction on the firm’s ICARA process and the conclusions documented in the firm’s last ICARA document; and

      3. (iii)

        that there is a reasonable basis to conclude that, following the reduction in the firm’s fixed overheads requirement, the firm will continue to hold sufficient own funds and liquid assets to comply with its obligations under MIFIDPRU 7.

MIFIDPRU 4.5.10 G
  1. (1)

    1Under MIFIDPRU 4.5.1R, a MIFIDPRU investment firm is required to calculate its fixed overheads requirement based on its relevant expenditure as set out in its annual financial statements for the previous year.

  2. (2)

    Under MIFIDPRU 4.5.7R, if there is a material increase in the firm’s projected relevant expenditure for the current year, the firm must recalculate its fixed overheads requirement on the basis of the projected increased relevant expenditure, taking into account the impact of that change.

  3. (3)

    However, under MIFIDPRU 4.5.9R, if there is a material change that results in a decrease in the firm’s projected relevant expenditure for the current year, the firm must obtain permission from the FCA before substituting a reduced fixed overheads requirement calculated on the basis of the projected decrease.

  4. (4)

    In many cases, a material change of the type specified in MIFIDPRU 4.5.7R(1) or MIFIDPRU 4.5.9R(1) would result from planned changes to the firm’s business. Examples of these changes may include:

    1. (a)

      starting or ceasing a major business line;

    2. (b)

      acquiring or disposing of a major business; or

    3. (c)

      undertaking a significant investment, upgrade or restructuring programme.

    A firm that is planning to implement a material change to its business should calculate the anticipated impact of that change on its fixed overheads requirement (and its broader own funds requirement) before executing the relevant change. This should include considering the potential impact on its ICARA process and its obligations under MIFIDPRU 7.

Firms that have been providing investment services and/or activities for less than one year

MIFIDPRU 4.5.11 R
  1. (1)

    1This rule applies where a firm has been in business for less than one year.

  2. (2)

    For the purposes of the calculation in MIFIDPRU 4.5.1R, a firm must use the relevant expenditure included in its projections for the first 12 months’ trading, as submitted in its application for authorisation.

MIFIDPRU 4.6 Overall K-factor requirement

MIFIDPRU 4.6.1 R
MIFIDPRU 4.6.2 G
  1. (1)

    1The rules and guidance in MIFIDPRU 4.7 to MIFIDPRU 4.16 explain how a MIFIDPRU investment firm should calculate each component of its overall K-factor requirement.

  2. (2)

    The manner in which firms carry on activities that are potentially relevant to one or more K-factor metrics may vary considerably. It is not practical for the FCA to give an exhaustive set of rules and guidance covering every conceivable business arrangement that firms may operate when carrying on such activities.

  3. (3)

    If a firm is unsure whether a particular arrangement is within scope of one or more components of the K-factor requirement, the FCA expects the firm to apply a purposive approach to the interpretation of the requirement, as required by GEN 2.2.1R. Among other factors, the FCA would therefore expect the firm to consider:

    1. (a)

      whether the arrangement is sufficiently analogous to another arrangement that is clearly covered by any rules or associated guidance;

    2. (b)

      the risks that the relevant component of the K-factor requirement is designed to address and whether the same or similar risks arise in relation to the arrangement in question; and

    3. (c)

      where the component of the K-factor requirement is calculated by reference to a specific investment service and/or activity, the approach that the firm has adopted to applying other rules or guidance elsewhere in the Handbook to the arrangement, where those rules or guidance refer to the same investment service and/or activity.

  4. (4)

    The FCA expects that if asked, a firm will be able to justify the approach that the firm has taken to applying the K-factor requirement to a particular activity.

  5. (5)

    MIFIDPRU investment firms are reminded that even if an activity does not contribute towards the K-factor requirement, they should still consider, in accordance with the requirements in MIFIDPRU 7, whether that activity may give rise to potential material risks of harm or may be relevant to the firm’s wind-down analysis.

MIFIDPRU 4.7 K-AUM requirement

MIFIDPRU 4.7.1 R
MIFIDPRU 4.7.2 R

1When measuring its AUM, a MIFIDPRU investment firm must include any amounts that relate to the MiFID business of the firm that is carried on by any tied agents acting on its behalf.

MIFIDPRU 4.7.3 G

1The definition of AUM does not include any amounts arising from the firm’s provision of the ancillary service in paragraph 3 of Part 3A of Schedule 2 to the Regulated Activities Order (i.e. providing advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings).

MIFIDPRU 4.7.4 R

1A firm must calculate its K-AUM requirement on the first business day of each month.

MIFIDPRU 4.7.5 R
  1. (1)

    1A firm must calculate the amount of its average AUM by:

    1. (a)

      taking the total AUM as measured on the last business day of each of the previous 15 months;

    2. (b)

      excluding the 3 most recent monthly values; and

    3. (c)

      calculating the arithmetic mean of the remaining 12 monthly values.

  2. (2)

    When measuring the value of its AUM on the last business day of each month, a firm must convert any amounts in foreign currencies on that date into the firm’s functional currency.

  3. (3)

    For the purposes of the currency conversion in (2), a firm must:

    1. (a)

      determine the conversion rate by reference to an appropriate market rate; and

    2. (b)

      record the rate used.

MIFIDPRU 4.7.6 G
  1. (1)

    1The effect of MIFIDPRU 4.7.5R(2) is that when measuring the value of AUM at the end of each month, a firm must apply the relevant conversion rate on that date to the AUM attributable to that month. The AUM for each relevant preceding month should continue to be measured by reference to the conversion rate that was applicable at the end of that particular preceding month.

  2. (2)

    For purposes of MIFIDPRU 4.7.5R(3), where a firm is carrying out a conversion that involves sterling, the FCA considers that an example of an appropriate market rate is the relevant daily spot exchange rate against sterling published by the Bank of England.

MIFIDPRU 4.7.7 R
  1. (1)

    1When measuring the amount of its AUM, a firm must:

    1. (a)

      where available, use the market value of the relevant assets;

    2. (b)

      where a market value is not available for an asset, use an alternative measure of fair value, which may include an estimated value calculated on a best efforts basis;

    3. (c)

      exclude any amounts that are included in the firm’s calculation of its CMH.

  2. (2)

    When measuring the amount of its AUM, a firm may offset any negative values or liabilities attributable to positions within the relevant portfolios, so that AUM is equal to the net total value of the relevant assets.

MIFIDPRU 4.7.8 R

1Where the firm has delegated the management of assets to another entity, the firm must include the value of those assets in its measurement of AUM.

MIFIDPRU 4.7.9 R
  1. (1)

    1Subject to (2), where a financial entity has formally delegated the management of assets to the firm, the firm may exclude the value of those assets from its measurement of AUM.

  2. (2)

    The exclusion in (1) does not apply if the financial entity has excluded the relevant assets from the financial entity’s calculation of its own capital requirements because the financial entity is also acting as a delegated manager.

  3. (3)

    For the purposes of (1), formal delegation requires a legally binding agreement between the financial entity and the firm that sets out the rights and obligations of each party in relation to the delegation of the relevant portfolio management activities.

MIFIDPRU 4.7.10 G
  1. (1)

    1MIFIDPRU 4.7.8R and MIFIDPRU 4.7.9R apply where one entity delegates management of assets to another entity. For these purposes, delegation involves a delegating entity (“A”) assuming a duty to the relevant client to manage the assets, and A then delegating the performance of that duty (in whole or in part) to another entity (“B”).

  2. (2)

    The following are not delegation for the purposes of MIFIDPRU 4.7.8R or MIFIDPRU 4.7.9R:

    1. (a)

      where A only arranges for B to provide a service directly to a client, so that B owes a duty directly to the client to manage the assets and A does not; or

    2. (b)

      where A advises a client to use B’s management services for the client’s assets, but A does not assume any responsibility to the client for managing the assets.

  3. (3)

    MIFIDPRU 4.7.8R states that a MIFIDPRU investment firm cannot reduce its AUM by delegating management of assets to another entity. This is because the firm will normally continue to owe a duty directly to the client, even if performance of that duty has been delegated (wholly or partly) to another entity.

  4. (4)

    However, MIFIDPRU 4.7.9R(1) permits a firm to which the management of assets has been formally delegated to exclude the value of the assets when measuring its AUM if the delegating entity is a financial entity. However, if the delegation does not meet the requirements to be a formal delegation, the firm may not exclude the relevant assets from its measurement of AUM. The definition of a financial entity covers:

    1. (a)

      entities that are subject to an AUM-based capital requirement that is similar to the K-AUM requirement;

    2. (b)

      an insurance undertaking that forms part of the same financial conglomerate as the firm if the FCA is the coordinator for that financial conglomerate; and

    3. (c)

      an undertaking that is part of the same investment firm group as the firm, provided that the investment firm group is subject to prudential consolidation under MIFIDPRU 2.5 and both entities are included within the resulting consolidated situation of the UK parent entity of that investment firm group.

  5. (5)

    MIFIDPRU 4.7.9R(1) is a limited exclusion that applies where assets under management have been delegated to the firm by a financial entity. This reflects the fact that the financial entity will either have a minimum AUM-based capital requirement or the FCA will have additional supervisory powers to take into account the position of the financial entity because it forms part of the same financial conglomerate or prudential consolidation group as the firm. However, even where a financial entity is included within the same financial conglomerate or investment firm group to which MIFIDPRU 2.5 applies, MIFIDPRU 4.7.9R(1) may be disapplied by MIFIDPRU 4.7.9R(2) for sub-delegation arrangements. This is because extended chains of delegation may involve additional operational risks.

  6. (6)

    MIFIDPRU 4.7.9R(2) applies if a firm is managing a portfolio under sub-delegation arrangements. Its effect is illustrated by the following example: Firm A (a third country entity that is a financial entity) formally delegates the management of a portfolio of assets to Firm B (a MIFIDPRU investment firm). Firm B formally sub-delegates the management of part of the portfolio to Firm C (another MIFIDPRU investment firm). Firm B may apply the exclusion in MIFIDPRU 4.7.9R(1), on the basis that Firm A is a financial entity. However, if Firm B applies the MIFIDPRU 4.7.9R(1) exclusion, Firm C cannot also exclude the value of the sub-delegated assets from Firm C’s measurement of AUM. This is because MIFIDPRU 4.7.9R(2) disapplies the MIFIDPRU 4.7.9R(1) exclusion if the delegating entity has already applied a similar exclusion in relation to the same portfolio.

  7. (7)

    MIFIDPRU 4.7.9R(2) also applies if the delegating entity is a financial entity in a third country and is applying an equivalent exclusion. For example, Firm D (an entity in a third country) delegates the management of a portfolio to Firm E (a financial entity in a third country). Firm E sub-delegates the management of part of that portfolio to Firm F (a MIFIDPRU investment firm). The third country rules to which Firm E is subject permit Firm E to exclude the value of the assets delegated by Firm D from Firm E’s AUM-based capital requirement. If Firm E is relying on that exclusion, Firm F cannot rely on the exclusion in MIFIDPRU 4.7.9R(1).

MIFIDPRU 4.7.11 G

1Where a financial entity (“A”) provides investment advice of an ongoing nature to a MIFIDPRU investment firm (“B”) and B undertakes discretionary portfolio management, the arrangement does not fall within MIFIDPRU 4.7.9R. This is because the arrangement is not a formal delegation of the management of assets by A to B, but involves 2 distinct activities: ongoing investment advice provided by A and discretionary portfolio management undertaken by B. In this situation, if A is a MIFIDPRU investment firm, it must include any assets in relation to which it is providing the advice in its measurement of AUM. Where B undertakes discretionary portfolio management in relation to the same assets, B must also include those assets in its own measurement of AUM.

MIFIDPRU 4.7.12 R
  1. (1)

    1This rule applies where a firm has been managing assets for its clients under discretionary portfolio management or non-discretionary arrangements constituting investment advice of an ongoing nature for less than 15 months.

  2. (2)

    For the purposes of calculating average AUM under MIFIDPRU 4.7.5R, a firm must use the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

    1. (a)

      in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has been managing assets for its clients under discretionary portfolio management or non-discretionary arrangements constituting investment advice of an ongoing nature (with the month during which the firm begins that activity counted as month zero); and

    2. (b)

      during month zero of the calculation, the firm must:

      1. (i)

        use a best efforts estimate of expected AUM for that month based on the firm’s projections when beginning the new activity; and

      2. (ii)

        use the estimate in (i) as its average AUM;

    3. (c)

      during month 1 of the calculation and each month thereafter, the firm must apply the approach in (a) using observed historical data from the preceding months; and

    4. (d)

      the modified calculation ceases to apply on the date that falls 15 months after the date on which the firm began managing assets under (1).

MIFIDPRU 4.7.13 G

1 MIFIDPRU 4.10.26G to MIFIDPRU 4.10.32G and MIFIDPRU 4 Annex 12G contain additional guidance on the interaction between the measurement of a firm’s AUM and the measurement of a firm’s COH.

Investment advice of an ongoing nature

MIFIDPRU 4.7.14 G
  1. (1)

    1The definition of investment advice of an ongoing nature includes:

    1. (a)

      the recurring provision of investment advice; or

    2. (b)

      investment advice given in the context of the continuous or periodic assessment and monitoring, or review of a client portfolio of financial instruments, including of the investments undertaken by the client on the basis of a contractual arrangement.

  2. (2)

    In either case, the firm must provide investment advice as part of the relevant arrangement. This means that the firm must provide a personal recommendation to the client. Therefore, where a firm merely provides generic advice to a client that does not result in a personal recommendation, the firm does not need to include the value of any assets that are the subject of the generic advice in its measurement of AUM. Firms should refer to the guidance in PERG 13.3 for further information on investment advice, personal recommendations and generic advice.

  3. (3)

    For example, a firm may undertake a periodic review of a client’s portfolio to assess whether the balance between investments in equities and fixed income products is appropriate. If the firm advises the client only in general terms to invest a higher proportion of the portfolio in equities and a lower proportion in bonds, this would not normally constitute investment advice, unless the firm also gave advice on investing in specific equities or bonds. Provided that the firm does not give advice relating to specific investments (i.e. a personal recommendation), it therefore would not need to include the value of the portfolio when measuring its AUM.

MIFIDPRU 4.7.15 G
  1. (1)

    1When giving investment advice of an ongoing nature, the assets that the firm must include within its measurement of AUM will depend on the scope of the firm’s obligation to provide investment advice.

  2. (2)

    In some circumstances, a firm may have assumed a duty to provide investment advice in relation to the client’s entire portfolio. For example, a financial adviser may agree to carry out periodic reviews of a client’s entire portfolio and to make recommendations to the client about the specific financial instruments in which the client should invest. In that case, the firm must include the entire value of the client’s portfolio (to the extent that the portfolio consists of financial instruments) in the firm’s measurement of AUM. This is because the firm has assumed a duty to provide investment advice of an ongoing nature in relation to the entire portfolio.

  3. (3)

    In other situations, the scope of the firm’s duty to provide investment advice may be more limited. For example, a firm may agree with a client that the firm will provide investment advice only on a particular subset of assets or only when specifically requested by the client. In that case, the firm’s duty to provide investment advice of an ongoing nature is limited to the relevant subset of assets, or the specific financial instruments in respect of which the client requests advice. Therefore, the firm would be required to include only the value of those particular assets or financial instruments when measuring its AUM.

  4. (4)

    A firm may have assumed different duties in respect of different parts of a client’s portfolio. For example, a firm may have agreed to carry out a general review of whether the client’s portfolio is appropriately balanced in a manner that would constitute only generic advice, rather than a personal recommendation. However, the firm may also be under a duty to provide investment advice on the equities held within the portfolio. In that case, the general review would not constitute investment advice (as it is only generic advice) and therefore the firm does not need to include the entire value of the client’s portfolio in the firm’s measurement of AUM. However, as the firm does have an ongoing duty to provide investment advice in relation to the equities held in the portfolio, the firm must include the value of those assets within its measurement of AUM.

  5. (5)

    Where a firm provides recurring investment advice to a client without assuming a continuing duty, the firm is only required to include the value of the particular financial instruments in respect of which it provides investment advice in the firm’s measurement of its AUM.

MIFIDPRU 4.7.16 G
  1. (1)

    1Investment advice of an ongoing nature includes arrangements involving periodic or continuous investment advice and arrangements involving recurring investment advice.

  2. (2)

    Periodic or continuous investment advice is most likely to arise where a firm agrees with a client that the firm will keep the client’s portfolio under review or will provide advice to the client at various points during a specified period. For example, a firm may agree to manage a client’s portfolio on a non-discretionary basis so that the firm has an ongoing duty to make personal recommendations to the client, but the client decides whether to proceed with each transaction. Alternatively, the firm may agree with the client to review the client’s portfolio on, for example, a quarterly basis and to provide the client with personal recommendations following each review.

  3. (3)

    Recurring investment advice does not require the firm to have assumed an ongoing or periodic duty to provide investment advice to the client. Instead, the firm provides investment advice to the same client repeatedly, even though there is no agreement with the client to establish a formal ongoing relationship. When considering whether investment advice is recurring for these purposes, a firm should assess whether, in substance, the type and pattern of advice that it provides is similar to periodic or continuous advice. This means that a firm cannot prevent what are, in substance, ongoing advisory arrangements for a client from constituting investment advice of an ongoing nature by artificially separating them into multiple individual agreements to provide advice to that client. If requested by the FCA, a firm should be able to justify why the firm has concluded that a particular set of advisory arrangements with a client does not constitute investment advice of an ongoing nature.

  4. (4)

    Investment advice of an ongoing nature does not include genuinely isolated or sporadic instances of investment advice provided to the same client that do not, in substance, amount to ongoing arrangements. However, a firm should assess the potential harms arising from any investment advice that is not investment advice of an ongoing nature as part of its ICARA process.

MIFIDPRU 4.7.17 G
  1. (1)

    1Where a firm provides investment advice in the context of the continuous or periodic assessment and monitoring or review of a client portfolio of financial instruments, the value of AUM that the firm includes in respect of that portfolio should be determined by the scope of the firm’s duty to the client.

  2. (2)

    If the firm is under a duty to review the client’s entire portfolio and provide investment advice as a result, the value of all financial instruments in the portfolio should be included in AUM. If the firm’s duty is limited to specific financial instruments, only those financial instruments need to be included in AUM.

MIFIDPRU 4.7.18 R

1For the purposes of the calculation of average AUM in MIFIDPRU 4.7.5R:

  1. (1)

    if the firm is under a duty to undertake a continuous assessment of the portfolio (or a subset of the portfolio), the firm must measure the value of AUM of the portfolio (or the relevant subset of it) on the last business day of each month during which that duty applies; and

  2. (2)

    if the firm is under a duty to undertake periodic assessments of the portfolio (or a subset of the portfolio), the firm must use the value of the portfolio (or the relevant subset of it) at the time of the last review as the relevant value of AUM for each month until the next periodic review occurs (or the firm’s duty ends, if earlier).

MIFIDPRU 4.7.19 G

1The requirement in MIFIDPRU 4.7.18R(2) is illustrated by the following example:

  1. (1)

    On 1 March, the firm reviews the client’s entire portfolio of financial instruments and provides investment advice to the client. The value of the client’s portfolio is 100 on that date. The firm is required to carry out its next review of the client’s portfolio on 1 June. The firm would include a value of 100 in its AUM for each of March, April and May.

  2. (2)

    On 1 June, the firm reviews the client’s entire portfolio again and provides further investment advice to the client. The value of the client’s portfolio on that date is 110. The firm would include a value of 110 in its AUM for June and each subsequent month until the time of the next review, or until the firm’s duty to carry out a review of the client’s portfolio ends (if earlier).

MIFIDPRU 4.7.20 G
  1. (1)

    1Where a firm provides recurring investment advice to a client, the value of AUM that the firm must include in respect of that client should be measured by the value of the financial instruments that are the subject of the relevant investment advice.

  2. (2)

    Under MIFIDPRU 4.7.5R, to calculate its average AUM, a firm must take the 15 most recent monthly values of AUM and exclude the most recent 3 months before calculating the arithmetic mean of the remaining values. MIFIDPRU 4.7.21R explains how a firm should measure the monthly value of AUM when it is providing recurring investment advice to a client.

MIFIDPRU 4.7.21 R
  1. (1)

    1Subject to (2), for the purposes of the calculation of average AUM under MIFIDPRU 4.7.5R, the value of AUM for recurring investment advice given in relation to a client in any given month is the sum of:

    1. (a)

      the AUM arising from the recurring investment advice given by the firm to that client during that month; and

    2. (b)

      the AUM arising from the recurring investment advice given by the firm to that client during the immediately preceding 11 months.

  2. (2)

    When measuring AUM under (1), a firm may adjust the AUM figure to reflect the fact that the firm has previously given investment advice in relation to the same assets during the preceding 11 months.

MIFIDPRU 4.7.22 G
  1. (1)

    1The effect of MIFIDPRU 4.7.21R is illustrated by the following example.

  2. (2)

    A firm provides recurring investment advice to a client. The dates on which the firm provides advice and the value of the financial instruments that are the subject of the advice are set out in the table below. In October 2022, the firm provides advice in relation to the same assets worth 25 on which the firm advised in March 2022, plus additional assets worth 45.

    Date of advice

    Value of financial instruments

    January 2022

    50

    February 2022

    No advice given

    March 2022

    25

    April 2022

    100

    May 2022

    No advice given

    June 2022

    50

    July 2022

    No advice given

    August 2022

    No advice given

    September 2022

    80

    October 2022

    70 (consisting of the same assets in March 2022 worth 25 and 45 of new assets)

    November 2022

    No advice given

    December 2022

    10

    January 2023

    No advice given

    February 2023

    No advice given

    March 2023

    30

  3. (3)

    MIFIDPRU 4.7.21R means that AUM from recurring investment advice is cumulative across a rolling 12-month period. The following table shows how the firm in (2) would calculate the AUM attributable to the provision of recurring investment advice to the client.

    Date of advice

    Value of AUM

    January 2022

    50

    February 2022

    50

    March 2022

    75

    (i.e. 50 + 25)

    April 2022

    175

    (i.e. 50 + 25 + 100)

    May 2022

    175

    June 2022

    225

    (i.e. 50 + 25 + 100 + 50)

    July 2022

    225

    August 2022

    225

    September 2022

    305

    (i.e. 50 + 25 + 100 + 50 + 80)

    October 2022

    350

    (i.e. 50 + 25 + 100 + 50 +80 + 70 = 375

    375 – 25 (adjustment for the same assets in March 2022) = 350)

    November 2022

    350

    December 2022

    360

    (i.e. 50 + 25 + 100 + 50 + 80 + 70 + 10 = 385

    385 – 25 (adjustment for the same assets in March 2022) = 360)

    January 2023

    310

    (i.e. 25 + 100 + 50 + 80 + 70 + 10 = 335

    335 – 25 (adjustment for the same assets in March 2022) = 310)

    February 2023

    310

    March 2023

    340

    (i.e. 100 + 50 + 80 + 70 + 10 + 30)

  4. (4)

    At the end of March 2023, the firm would therefore calculate average AUM and the K-AUM requirement resulting from the above example of investment advice of an ongoing nature as follows:

    Sum of the most recent 15 months of AUM, excluding the 3 most recent monthly values

    50 + 50 + 75 + 175 + 175 + 225 +225 + 225 + 305 + 350 + 350 + 360 = 2,565

    Average AUM

    2,565 / 12 = 213.75

    K-AUM requirement

    213.75 * 0.0002 = 0.043

MIFIDPRU 4.8 K-CMH requirement

MIFIDPRU 4.8.1 R

1The K-CMH requirement of a MIFIDPRU investment firm is equal to the sum of:

  1. (1)

    0.4% of average CMH held by the firm in segregated accounts; and

  2. (2)

    0.5% of average CMH held by the firm in non-segregated accounts.

MIFIDPRU 4.8.2 G
  1. (1)

    1Generally, a MIFIDPRU investment firm should be holding client money in one or more segregated accounts. Under MIFIDPRU 4.8.9E, where a firm complies with the applicable requirements of CASS 7 in relation to an amount of client money, there is a presumption that the client money is being held in a segregated account.

  2. (2)

    As a result, the K-CMH requirement for non-segregated accounts is most likely to be relevant where:

    1. (a)

      the K-CMH requirement applies on a consolidated basis and:

      1. (i)

        the consolidated situation includes one or more entities to which CASS does not apply, such as third country entities, that receive money from customers; and

      2. (ii)

        the arrangements under which the entity in (i) holds money received from customers do not meet the conditions in MIFIDPRU 4.8.8R (as they apply on a consolidated basis under MIFIDPRU 2.5.30R); or

    2. (b)

      a MIFIDPRU investment firm has not complied with the CASS 7 requirements, in which case the firm should treat any non-compliant arrangements as non-segregated accounts for the purposes of calculating any K-CMH requirement that includes that period of non-compliance.

  3. (3)

    However, the scenario in (2)(b) does not affect any obligation that the firm has under CASS, or under any other rule, to take specified action or to notify the FCA where the firm has identified that it has breached the requirements of CASS.

MIFIDPRU 4.8.3 R

1When calculating its CMH in accordance with this section, a MIFIDPRU investment firm must include any amounts that relate to MiFID business of the firm that is carried on by any tied agent acting on its behalf.

MIFIDPRU 4.8.4 G

1As a result of the restrictions in SUP 12.6.5R and SUP 12.6.15R, the FCA generally expects that MIFIDPRU 4.8.3R would not be directly relevant to MIFIDPRU investment firms on an individual basis. However, where this section applies on a consolidated basis in accordance with MIFIDPRU 2.5 (Prudential consolidation), the UK parent entity must include any CMH attributable to a tied agent of a third country investment firm included within the consolidated situation.

MIFIDPRU 4.8.5 G
  1. (1)

    1The definition of CMH includes only client money which is MiFID client money. Therefore, client money which is received in connection with business other than MiFID business does not need to be included within a MIFIDPRU investment firm’s calculation of CMH, except to the extent that MIFIDPRU 4.8.6R applies.

  2. (2)

    The definition of MiFID client money includes the following:

    1. (a)

      money deposited into a client bank account in accordance with CASS 7.13.3R;

    2. (b)

      money originally received in connection with MiFID business which a firm has placed in a qualifying money market fund in accordance with CASS 7.13.3R(4). This means that while the units or shares in the relevant qualifying money market fund must still be treated by the firm as client assets for the purposes of CASS and must be dealt with in accordance with CASS 7.13.26R, the value of those units or shares must be included in CMH for the purposes of MIFIDPRU;

    3. (c)

      an amount of the firm’s own money that the firm has paid into its client bank account for the purposes of CASS 7.13.65R where the firm is applying alternative approach mandatory prudent segregation; and

      1. (i)

        prudent segregation;

      2. (ii)

        alternative approach mandatory prudent segregation; or

      3. (iii)

        clearing arrangement mandatory prudent segregation; and

    4. (d)

      money received from a client in connection with MiFID business which a firm has allowed a third party (such as an exchange, a clearing house or an intermediate broker) to hold in accordance with CASS 7.14 (Client money held by a third party).

  3. (3)

    Where a firm controls money under a mandate in accordance with CASS 8, the money is not MiFID client money if it is not client money received or held by the firm. A firm is not required to include any money it controls but does not hold within its calculation of CMH.

  4. (4)

    Although money that is not MiFID client money does not contribute to the K-CMH requirement, a MIFIDPRU investment firm should still consider any potential material harms that may arise in connection with receiving money from clients as part of their ICARA process under MIFIDPRU 7. This includes any material harms that may arise in relation to amounts received that are not treated as client money, such as under a title transfer collateral arrangement.

MIFIDPRU 4.8.6 R

1If a MIFIDPRU investment firm is unsure whether client money should be classified as MiFID client money, it must treat the relevant amount as MiFID client money for the purposes of this section until the firm is satisfied that the amount is not MiFID client money.

MIFIDPRU 4.8.7 G

1 MIFIDPRU 4.8.6R applies only for the purposes of determining how the client money concerned should be treated for the purposes of MIFIDPRU. It does not affect how the client money should be treated for the purposes of other provisions in the Handbook (such as CASS or COBS) or under any other legislation.

MIFIDPRU 4.8.8 R

1An arrangement is a segregated account if it is an arrangement in respect of which a firm (“A”) ensures that all of the following conditions are met:

  1. (1)

    A keeps records and accounts enabling A, at any time and without delay, to distinguish assets held for one client from assets held for any other client and from A’s own assets;

  2. (2)

    A maintains its records and accounts in a way that ensures their accuracy, and in particular that they correspond to the assets held for clients and may be used as an audit trail;

  3. (3)

    A conducts, on a regular basis, reconciliations between A’s internal accounts and records and those of any third parties by whom those assets are held;

  4. (4)

    A takes the necessary steps to ensure that deposited client funds are held in an account or accounts identified separately from any accounts used to hold funds belonging to A;

  5. (5)

    A operates adequate organisational arrangements to minimise the risk of the loss or diminution of client assets or of rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence; and

  6. (6)

    the applicable national law provides that, in the event of A’s insolvency or entry into resolution or administration, assuming that A has complied with (1) to (5), client funds cannot be used to satisfy claims against A, other than claims by the relevant clients.

MIFIDPRU 4.8.9 E
  1. (1)

    1This rule applies for the purposes of MIFIDPRU 4.8.8R.

  2. (2)

    A MIFIDPRU investment firm which holds client money must comply with, among other requirements, the applicable requirements on:

    1. (a)

      organisational requirements in relation to client money in CASS 7.12;

    2. (b)

      segregation of client money in CASS 7.13 or client money held by a third party in CASS 7.14;

    3. (c)

      records, accounts and reconciliations in CASS 7.15; and

    4. (d)

      acknowledgement letters in CASS 7.18.

  3. (3)

    Compliance with (2) in relation to an arrangement may be relied on as tending to establish compliance with the conditions for that arrangement to be classified as a segregated account in MIFIDPRU 4.8.8R.

  4. (4)

    Contravention of (2) in relation to an arrangement may be relied on as tending to establish contravention of the conditions for that arrangement to be classified as a segregated account in MIFIDPRU 4.8.8R.

MIFIDPRU 4.8.10 G

1The effect of MIFIDPRU 4.8.9E is that if a MIFIDPRU investment firm complies with the provisions of CASS specified in MIFIDPRU 4.8.9E(2) for a particular arrangement for client money, it can proceed on the basis that the client money is being held in a segregated account for the purposes of the K-CMH requirement. However, if the firm does not comply with the relevant CASS provisions in relation to a client money arrangement, this will generally be evidence that the relevant client money should be treated as being held in a non-segregated account for the purposes of calculating the K-CMH requirement.

MIFIDPRU 4.8.11 G

1Where consolidation under MIFIDPRU 2.5 (Prudential consolidation) applies to an investment firm group, MIFIDPRU 2.5.30R and MIFIDPRU 2.5.31R explain how to calculate the consolidated K-CMH requirement.

MIFIDPRU 4.8.12 R

1A firm must calculate its K-CMH requirement on the first business day of each month.

MIFIDPRU 4.8.13 R

1A firm must calculate the amount of its average CMH by:

  1. (1)

    taking the total CMH as measured at the end of each business day during the previous 9 months;

  2. (2)

    excluding the daily values for the most recent 3 months; and

  3. (3)

    calculating the arithmetic mean of the daily values for the remaining 6 months.

MIFIDPRU 4.8.14 R

1For the purpose of the calculation in MIFIDPRU 4.8.13R, a firm must measure CMH in accordance with, to the extent applicable:

  1. (1)

    any records, accounts and reconciliations that the firm maintains to comply with the requirements of CASS 7.15 (Records, accounts and reconciliations); and

  2. (2)

    any values contained in accounting records.

MIFIDPRU 4.8.15 R

1Where a firm has been holding CMH for less than 9 months, it must calculate its average CMH using the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

  1. (1)

    in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has been holding CMH (with the month during which the firm begins that activity counted as month zero);

  2. (2)

    during month zero of the calculation, the firm must:

    1. (a)

      use a best efforts estimate of expected CMH for that month based on the firm’s projections when beginning the new activity; and

    2. (b)

      use the estimate in (a) as its average CMH;

  3. (3)

    during month 1 of the calculation and each month thereafter, the firm must apply the approach in (1) using observed historical data from the preceding month;

  4. (4)

    the modified calculation ceases to apply on the date that falls 9 months after the date on which the firm began holding CMH.

MIFIDPRU 4.8.16 G
  1. (1)

    1Under MIFIDPRU 4.8.13R(1), a firm must measure its CMH at the end of each business day. The relevant amount should reflect any subsequent adjustment that the firm must apply as a result of any requirement to carry out internal reconciliations in relation to client money (for example, under CASS 7.15). Therefore, where an internal reconciliation subsequently identifies that the amount of CMH recorded for a particular business day is incorrect, the firm should update the relevant amount to reflect the correct figure.

  2. (2)

    Where the K-CMH requirement applies on a consolidated basis, the guidance in (1) also applies in relation to any reconciliations carried out in accordance with the requirements of the jurisdiction in which any third country entity included in the consolidated situation is based.

MIFIDPRU 4.9 K-ASA requirement

MIFIDPRU 4.9.1 R
MIFIDPRU 4.9.2 R

1When calculating its K-ASA requirement in accordance with this section, a MIFIDPRU investment firm must include within its ASA any amounts that relate to MiFID business of the firm that is carried on by any tied agents acting on its behalf.

MIFIDPRU 4.9.3 G

1Due to the limited types of activities in respect of which a tied agent may be exempt from the requirement for authorisation in the UK (as explained in SUP 12.2.7G), the FCA generally expects that MIFIDPRU 4.9.2R would not be directly relevant to a MIFIDPRU investment firm on an individual basis. However, where MIFIDPRU 4.9 applies on a consolidated basis in accordance with MIFIDPRU 2.5 (Prudential consolidation), the UK parent entity must include any ASA attributable to a tied agent of a third country investment firm included within the consolidated situation.

MIFIDPRU 4.9.4 R

1A firm must exclude from its measurement of ASA any units or shares in a qualifying money market fund that are treated as MiFID client money.

MIFIDPRU 4.9.5 G
  1. (1)

    1The definition of ASA includes only client assets held by a MIFIDPRU investment firm in the course of MiFID business. Therefore, client assets which are held in connection with business other than MiFID business do not need to be included within a MIFIDPRU investment firm’s calculation of ASA, except to the extent that MIFIDPRU 4.9.6R applies.

  2. (2)

    As explained in MIFIDPRU 4.8.5G, the definitions of MiFID client money and CMH include amounts that a MIFIDPRU investment firm has placed with qualifying money market funds in accordance with CASS 7.13.3R(4). As a result, although the resulting units or shares in a qualifying money market fund may be treated as client assets for the purposes of the custody rules, under MIFIDPRU 4.9.4R, their value must be included in CMH not in ASA.

  3. (3)

    Although client assets that a firm holds other than in the course of MiFID business do not contribute to the K-ASA requirement, a MIFIDPRU investment firm should still consider any potential material harms that may arise in connection with receiving assets from clients as part of its ICARA process under MIFIDPRU 7.

  4. (4)

    As part of its ICARA process, a firm should also consider material harms that may arise in relation to amounts received that are not treated as client assets for the purposes of the custody rules but in relation to which the firm may have future obligations to a client, such as under a title transfer collateral arrangement.

MIFIDPRU 4.9.6 R

1If a MIFIDPRU investment firm is unsure whether client assets are held in the course of MiFID business, it must treat those assets as held in the course of MiFID business for the purposes of this section until it is satisfied that the assets are not held in the course of MiFID business.

MIFIDPRU 4.9.7 R

1A firm must calculate its K-ASA requirement on the first business day of each month.

MIFIDPRU 4.9.8 R

1A firm must calculate the amount of its average ASA by:

  1. (1)

    taking the total ASA as measured at the end of each business day for the previous 9 months;

  2. (2)

    excluding the values for the most recent 3 months; and

  3. (3)

    calculating the arithmetic mean of the daily values for the remaining 6 months.

MIFIDPRU 4.9.9 R

1When measuring ASA, a firm must:

  1. (1)

    where available, use the market value of the relevant assets; and

  2. (2)

    where a market value is not available for an asset, use an alternative measure of fair value, which may include an estimated value calculated on a best efforts basis.

MIFIDPRU 4.9.10 G

1The values used by a firm under MIFIDPRU 4.9.8R should be consistent with the information on client assets in any relevant regulatory data reported by the firm to the FCA, and in any internal or external reconciliations and records maintained in accordance with CASS 6.6 (Records, accounts and reconciliations) unless a rule or relevant guidance requires the firm to take a different approach.

MIFIDPRU 4.9.11 R

1Where either of the following applies, a firm must include the value of the relevant assets in its measurement of ASA:

  1. (1)

    the firm has delegated the safeguarding and administration of assets to another entity; or

  2. (2)

    another entity has delegated the safeguarding and administration of assets to the firm.

MIFIDPRU 4.9.12 G

1The effect of MIFIDPRU 4.9.11R is that a firm will not reduce its level of ASA by delegating the safeguarding of assets to a third party. However, a firm will increase the level of its ASA by accepting the delegation of safeguarding and administration of assets to the firm by a third party. This reflects the harm that may result from a breach of the firm’s direct safeguarding responsibilities or the firm’s responsibilities in relation to the selection, appointment and periodic review of any third party to which the firm has delegated safeguarding.

MIFIDPRU 4.9.13 R

1Where a firm has been safeguarding assets constituting ASA for less than 9 months, it must calculate its average ASA using the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

  1. (1)

    in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has been safeguarding assets (with the month during which the firm begins that activity counted as month zero); and

  2. (2)

    during month zero of the calculation, the firm must:

    1. (a)

      use a best efforts estimate of expected ASA for that month based on its projections when beginning the new activity;

    2. (b)

      use the estimate in (a) as its average ASA;

  3. (3)

    during month 1 of the calculation and each month thereafter, the firm must apply the approach in (1) using observed historical data from the preceding months; and

  4. (4)

    the modified calculation ceases to apply on the date that falls 9 months after the date on which the firm began safeguarding assets constituting ASA.

MIFIDPRU 4.10 K-COH requirement

MIFIDPRU 4.10.1 R

1The K-COH requirement of a MIFIDPRU investment firm is equal to the sum of:

  1. (1)

    0.1% of average COH attributable to cash trades; and

  2. (2)

    0.01% of average COH attributable to derivatives trades.

MIFIDPRU 4.10.2 R

1When calculating its K-COH requirement in accordance with this section, a MIFIDPRU investment firm must include within its COH any amounts that relate to MiFID business of the firm that is carried on by any tied agent acting on its behalf.

MIFIDPRU 4.10.3 G

1The definition of COH includes orders that a firm handles when carrying on either of the following types of MiFID business:

  1. (1)

    reception and transmission of client orders; and

  2. (2)

    execution of orders on behalf of a client.

MIFIDPRU 4.10.4 R

1A firm is not required to include the following in its measurement of COH:

  1. (1)

    an order executed by a firm in its own name (including where the firm executes an order in its own name on behalf of a client);

  2. (2)

    an order that a firm handles when acting in the capacity of the operator of a multilateral trading facility or organised trading facility;

  3. (3)

    a transaction that falls within the definition of reception and transmission of client orders only as a result of the situation described in recital 44 of MiFID; and

  4. (4)

    orders that are not ultimately executed.

MIFIDPRU 4.10.5 G

1 MIFIDPRU 4.10.6G to MIFIDPRU 4.10.17G contain further guidance on whether particular arrangements are included within the measurement of COH.

Execution of orders in the firm’s own name

MIFIDPRU 4.10.6 G

1Where a firm executes an order in its own name (irrespective of whether the order is ultimately for the benefit of a client), the order is included within the firm’s measurement of its DTF under MIFIDPRU 4.15 (K-DTF requirement) and not within its measurement of COH under this section.

The extended (“bringing together”) definition of reception and transmission

MIFIDPRU 4.10.7 G

1Recital 44 of MiFID describes transactions that result from a firm bringing together 2 or more investors (such as introducing an issuer to a potential source of funding), but where the firm does not otherwise interpose itself within the chain of execution of any resulting order. In practice, this is most likely to be relevant in the context of corporate finance business or private equity business. A firm may exclude these transactions from its measurement of COH provided that its role does not go beyond this “extended” definition of reception and transmission. This is further described in the guidance in PERG 13.3 (Investment Services and Activities).

Matched principal trading

MIFIDPRU 4.10.8 G

1A firm that trades in a matched principal capacity will be placing orders in its own name. These orders must therefore be included in the measurement of the firm’s DTF and are not included in the calculation of COH.

Name give-up activities

MIFIDPRU 4.10.9 G
  1. (1)

    1The FCA understands that activities that are described as involving “name give-up” may take different forms.

  2. (2)

    In certain cases, a firm may distribute indications of interest that indicate a willingness to enter into a transaction, but do not have fixed terms. The firm may then pass the names of the counterparties to each other following a match to allow them to facilitate the trade. These indications of interest and name-passing are not included within the measurement of COH. However, this does not mean that every transaction which begins with an indication of interest is outside the scope of COH. Where a firm is subsequently instructed to transmit an order on firm terms, or to execute an order, that transaction will be within scope of COH, even if the order results from a process that began with an initial indication of interest.

  3. (3)

    In some circumstances, a firm may disseminate orders on firm terms that result in a transaction as soon as they are confirmed by the recipient, following which the firm will disclose the name of the relevant counterparty. This activity is included within the measurement of COH because it involves reception and transmission of an order on firm terms.

Exchange give-up activities

MIFIDPRU 4.10.10 G
  1. (1)

    1A firm may facilitate trading by its clients on exchanges. Once a transaction has been executed, the relevant trade is then given up to the client’s clearing firm.

  2. (2)

    A firm should consider the exact capacity in which it is acting, and whether it incurs any liability as principal, when determining whether orders resulting from exchange give-up activities are included within the measurement of COH.

  3. (3)

    If the firm enters into the transaction in its own name and therefore incurs principal liability, even for a short period, in relation to the trade before it is given up, the order should be included within the firm’s measurement of DTF and not within its measurement of COH.

  4. (4)

    If the firm does not incur liability as principal and merely acts as agent in the name of a third party in relation to the trade, the order should be included within the firm’s measurement of COH.

Exchange block trades

MIFIDPRU 4.10.11 G
  1. (1)

    1A firm may be involved in negotiating a bilateral trade in relation to an exchange-traded instrument between counterparties that takes place off-exchange because the size of the trade exceeds certain specified levels. In some cases, the exchange may provide communications functionality to facilitate the block trades, but the trades are not executed on the exchange’s public market.

  2. (2)

    A firm must determine the capacity in which the firm is acting in relation to the block trade to determine if the value of the trade should be included in the firm’s measurement of COH.

  3. (3)

    If the firm enters into the block trade in its own name and the trade is then given up to a client, the firm should include the value of that trade in its measurement of DTF.

  4. (4)

    If the firm executes the block trade as agent by committing the client to the terms of the trade, the firm should include the value of that trade in its measurement of COH.

  5. (5)

    If the firm receives firm terms of the block trade from the client and transmits the terms to the counterparty in order for the counterparty to confirm the terms to create a binding transaction, the firm should include the value of that trade in its measurement of COH.

Broker functionality

MIFIDPRU 4.10.12 G

1A firm may be a member of an exchange and may provide functionality whereby trades can be executed and booked directly into the account of the relevant client. In this case, the FCA considers that the trades should be included in the firm’s measurement of COH, as the firm is still being used to execute the relevant trade.

Orders connected with the operation of trading venues

MIFIDPRU 4.10.13 G
  1. (1)

    1A firm which is operating a multilateral trading facility or operating an organised trading facility does not need to include any orders it handles solely in that capacity in its measurement of COH. However, it should consider as part of its ICARA process whether that activity gives rise to the risk of material potential harm which may require it to hold additional own funds or liquid assets under MIFIDPRU 7.

  2. (2)

    However, if the operator of an organised trading facility is engaging in matched principal trading, as permitted by MAR 5A.3.5R, any matched principal trades are included in its measurement of DTF under MIFIDPRU 4.15 (K-DTF requirement).

MIFIDPRU 4.10.14 G

1A firm that executes client orders on a multilateral trading facility or an organised trading facility when the firm is not acting in the capacity of the trading venue operator must include the orders in its measurement of COH (unless the firm executes the orders in its own name, in which case it must include the orders in its measurement of DTF).

MIFIDPRU 4.10.15 G

1In certain circumstances, the same firm may both act as the operator of a multilateral trading facility or an organised trading facility and also submit an order on that trading venue on behalf of a client. In this case, although the firm is not required to measure COH in relation to its role as the operator of the trading venue, it must still measure COH (or DTF if it is possible to enter into transactions in its own name on the trading venue and it is executing in that capacity) in relation to the order that it executes for the client.

Orders that are never executed

MIFIDPRU 4.10.16 G
  1. (1)

    1The effect of MIFIDPRU 4.10.4R(4) is that where a firm receives a client order but that order is not ultimately executed, it does not have to include the value of that order in its measurement of COH. However, as part of its ICARA process, a firm should consider whether the fact that an order has not been executed gives rise to any material risks to the firm or to its clients. This may depend on the reasons why the client order has not been executed.

  2. (2)

    If, for example, the order was not executed because market conditions did not allow the firm (or another entity to whom the order was ultimately transmitted) to achieve an appropriate outcome for the client, this may be consistent with the firm’s contractual and regulatory duties. In that case, this may not give rise to any additional material risks.

  3. (3)

    However, if the firm failed to transmit or execute an order because of an oversight or an internal systems failure, this may indicate that the firm has been failing in its duties to its client or in its regulatory obligations. Alternatively, the firm may have successfully transmitted an order, but failed to select an appropriate entity to receive and execute the order, and therefore may have failed to comply with its obligations to act in the best interests of the client when transmitting the order. In this case, the firm should consider as part of its ICARA process whether the failures may give rise to material risks and how these risks should be addressed.

MIFIDPRU 4.10.17 G
  1. (1)

    1Although failure to achieve the execution of an individual order does not necessarily indicate potential material harms, a series or pattern of failures may be evidence of potential material harms.

  2. (2)

    A firm’s analysis under its ICARA process is separate from the application of any individual regulatory or other legal duties owed to an individual client. Therefore, while a firm may conclude that an isolated oversight in relation to a client order does not give rise to the risk of material harm under the ICARA process, this does not affect any obligations that the firm owes to the client.

Calculating COH

MIFIDPRU 4.10.18 R

1A firm must calculate its K-COH requirement on the first business day of each month.

MIFIDPRU 4.10.19 R
  1. (1)

    1A firm must calculate the amount of its average COH by:

    1. (a)

      taking the total COH measured throughout each business day over the previous 6 months;

    2. (b)

      excluding the daily values for the most recent 3 months; and

    3. (c)

      calculating the arithmetic mean of the daily values of the remaining 3 months.

  2. (2)

    When measuring the value of COH for a particular business day, a firm must convert any amounts in foreign currencies on that date into the firm’s functional currency.

  3. (3)

    For the purposes of the currency conversion in (2), a firm must:

    1. (a)

      determine the conversion rate by reference to an appropriate market rate; and

    2. (b)

      record the rate used.

Measuring the value of orders for COH

MIFIDPRU 4.10.20 R
  1. (1)

    1When measuring its COH, a firm must use the sum of the absolute value of each buy order and sell order, as determined in accordance with the remainder of this rule.

  2. (2)

    For cash trades relating to financial instruments, the value of the order is the amount paid or received on the trade at the time at which it is executed, unless the firm has applied the approach in MIFIDPRU 4.10.23R.

  3. (3)

    For derivatives trades other than orders relating to interest rate derivatives, the value of the order is the notional amount of the contract, determined in accordance with MIFIDPRU 4.14.20R(2).

  4. (4)

    For orders relating to interest rate derivatives, the value of the order is the notional amount of the contract determined in accordance with MIFIDPRU 4.14.20R(2), adjusted in accordance with MIFIDPRU 4.10.25R.

  5. (5)

    A firm may calculate the value of an order by deducting any transaction costs to reflect the consideration received or paid by the client for the relevant instruments, provided that the transaction costs are not paid separately to the firm by the client.

MIFIDPRU 4.10.21 G
  1. (1)

    1Under the general approach in MIFIDPRU 4.10.20R(2), a firm determines the gross value of an order by multiplying the market price of the instrument by the quantity of the instrument being purchased or sold.

  2. (2)

    However, MIFIDPRU 4.10.20R(5) permits (but does not require) a firm to calculate the value of an order by reference to the consideration paid or received by the client for the instruments (i.e. net of transaction costs), provided that the transaction costs are included in the gross value of the order and are not paid by the client to the firm separately.

  3. (3)

    For example, Firm A executes an order for a client to buy 100 shares. The total cost of the order, including transaction costs, is £100. The client receives shares worth £88, after the firm uses £12 to cover transaction costs. Under the standard approach in MIFIDPRU 4.10.20R(2), the firm may record the value of the order in its COH as £100 (i.e. the gross cost of the order). The firm may, for example, choose this approach for reasons of simplicity and administrative convenience.

  4. (4)

    Alternatively, in the example above, the firm may apply the approach under MIFIDPRU 4.10.20R(5) to record the value of the order in its COH as £88 (i.e. net of transaction costs paid by the client in relation to the transaction).

  5. (5)

    However, a firm cannot rely on MIFIDPRU 4.10.20R(5) to reduce the value of an order by transaction costs that are paid separately by the client to the firm. For example, Firm B executes an order for a client to buy 100 shares. The total cost of the order is £100. The client additionally pays £12 to Firm B for transaction costs. In this case, the firm must record the net value of the order under MIFIDPRU 4.10.20R(5) in its COH as £100 (and not £88), as the transaction costs have been paid separately.

  6. (6)

    The effect of MIFIDPRU 4.10.19R(2) is that when measuring the value of COH at the end of each business day, a firm must apply the relevant conversion rate on that date to any amounts in foreign currencies forming part of the COH attributable to that business day. The COH for each preceding business day should continue to be measured by reference to the conversation rate that was applicable on that preceding day.

  7. (7)

    For the purposes of MIFIDPRU 4.10.19R(3), where a firm is carrying out a conversion that involves sterling, the FCA considers that an example of an appropriate market rate is the relevant daily spot exchange rate against sterling published by the Bank of England.

MIFIDPRU 4.10.22 G

1For cash trades relating to exchange-traded options, the amount paid or received under MIFIDPRU 4.10.20R(2) is the premium paid for the option.

MIFIDPRU 4.10.23 R
  1. (1)

    1By way of derogation from MIFIDPRU 4.10.20R(2), a firm that receives and transmits an order that is a cash trade may apply the approach in this rule to determine the value of that order for the purposes of measuring COH.

  2. (2)

    Where a firm applies the approach in this rule, the value of the order shall be determined by reference to:

    1. (a)

      for an order which specifies a fixed price or limit price at which the order should be executed, that price; or

    2. (b)

      for an order which does not specify a price, the market price of the relevant instrument at the end of the day on which the order is transmitted by the firm.

  3. (3)

    A firm that applies the approach in this rule must apply it either:

    1. (a)

      in relation to all cash trades that the firm receives and transmits; or

    2. (b)

      only in relation to cash trades that the firm receives and transmits where it does not receive timely information from the executing entity about the terms on which the order was executed.

  4. (4)

    A firm that applies the approach in this rule must document which basis in (3) applies.

MIFIDPRU 4.10.24 G
  1. (1)

    1The effect of MIFIDPRU 4.10.23R is to permit a firm that receives and transmits orders that are cash trades to determine the COH attributable to the orders using an alternative approach. A firm may either:

    1. (a)

      apply the standard approach in MIFIDPRU 4.10.20R(2) and use the price at which the relevant order was ultimately executed, once this has been confirmed by the entity that executes the order; or

    2. (b)

      apply the alternative approach in MIFIDPRU 4.10.23R and use a deemed price that is determined by reference to the limit price of the order or, if there is no limit price, the end-of-day market price at the time at which the order is transmitted.

  2. (2)

    However, a firm must not use the alternative approach in MIFIDPRU 4.10.23R for regulatory arbitrage to reduce its K-COH requirement. To prevent this, a firm may only apply the alternative approach either:

    1. (a)

      in relation to all cash trades that the firm receives and transmits; or

    2. (b)

      in relation to cash trades that the firm receives and transmits where the firm does not receive timely information from the broker about the terms on which the order was executed. In this case, the firm must apply the standard approach in MIFIDPRU 4.10.20R(2) in relation to all other cash trades. This is designed to ensure that the firm can record daily information for COH in circumstances where information about the ultimate execution of the order is otherwise missing or significantly delayed.

MIFIDPRU 4.10.25 R
  1. (1)

    1For the purposes of MIFIDPRU 4.10.20R(4), a firm must adjust the notional amount of an interest rate derivative by multiplying the notional amount by the duration.

  2. (2)

    The duration in (1) shall be determined in accordance with the following formula:

    1. Duration = time to maturity (in years) / 10

Interaction between K-COH requirement and K-AUM requirement

MIFIDPRU 4.10.26 G

1 MIFIDPRU 4.10.27G to MIFIDPRU 4.10.32G and MIFIDPRU 4 Annex 12G explain the circumstances in which a firm must include orders that arise in connection with portfolio management or investment advice in, or may exclude orders from, its measurement of COH.

MIFIDPRU 4.10.27 G
  1. (1)

    1The basic definition of COH includes:

    1. (a)

      orders that the firm executes when providing execution services for a client; and

    2. (b)

      orders that the firm has received from a client and transmitted to another entity for execution.

  2. (2)

    The rules and guidance in MIFIDPRU 4.10.28R to 4.10.32G explain how this definition applies in particular scenarios and certain exclusions or modifications that may apply.

MIFIDPRU 4.10.28 R

1A firm may exclude from its calculation of COH any order that the firm generates in the course of providing either of the following in relation to a portfolio, if the portfolio is included in the firm’s calculation of its K-AUM requirement:

  1. (1)

    portfolio management; or

  2. (2)

    investment advice of an ongoing nature.

MIFIDPRU 4.10.29 R
  1. (1)

    1This rule applies where:

    1. (a)

      portfolio management has been delegated to a firm by a financial entity; and

    2. (b)

      as a result of the delegation in (a), the firm has excluded the delegated portfolio from its calculation in AUM in accordance with MIFIDPRU 4.7.9R.

  2. (2)

    The firm in (1) must include in its measurement of COH any orders that the firm executes in the course of providing portfolio management in relation to the delegated portfolio.

  3. (3)

    The firm in (1) is not required to include in its measurement of COH:

    1. (a)

      any order that the firm passes back to the delegating financial entity for execution (whether the order is executed by that financial entity or is transmitted by the financial entity to another entity for execution); or

    2. (b)

      any order that the firm places with another entity for execution in the course of providing portfolio management in relation to the delegated portfolio.

MIFIDPRU 4.10.30 G

1The exclusions in MIFIDPRU 4.7.9R, MIFIDPRU 4.10.28R and MIFIDPRU 4.10.29R(3) may result in a firm that carries on delegated portfolio management having no K-AUM requirement or K-COH requirement in relation to all or part of a delegated portfolio. Where one or more exclusions apply, a firm should still assess as part of its ICARA process whether the activity of providing delegated portfolio management may give rise to potential material harms that may need to be covered by additional financial resources. Firms should refer to the rules and guidance in MIFIDPRU 7 for additional information on the ICARA process.

MIFIDPRU 4.10.31 G
  1. (1)

    1MIFIDPRU 4.10.29R does not apply where a financial entity (“A”) carries on portfolio management in relation to a portfolio and a MIFIDPRU investment firm (“B”) provides investment advice of an ongoing nature to A in relation to that portfolio. In this situation, A has not delegated portfolio management to B. Instead, A provides the service of portfolio management to A’s client, and B provides the separate service of investment advice to A. If A is a MIFIDPRU investment firm, A will include the value of the relevant portfolio when calculating its K-AUM requirement. B will calculate its own K-AUM requirement in relation to the same portfolio.

  2. (2)

    Although MIFIDPRU 4.10.29R does not apply in this scenario, B may benefit from the separate exclusion in MIFIDPRU 4.10.28R(2) and therefore would not be required to include any orders that result from its ongoing investment advice within B’s calculation of COH, because B will calculate a K-AUM requirement in relation to the relevant portfolio.

MIFIDPRU 4.10.32 G

1When measuring COH for the purposes of MIFIDPRU 4.10.19R, a firm must include:

  1. (1)

    an order that the firm executes, or receives and transmits, as a result of providing investment advice (other than investment advice of an ongoing nature, if the firm calculates a K-AUM requirement in relation to the advice) to a client and subsequently receiving instructions from the client to transmit or execute the relevant order; and

  2. (2)

    an order that a firm receives from another firm (“X”), where:

    1. (a)

      X provides investment advice (including investment advice of an ongoing nature) to a client;

    2. (b)

      as a result of the advice in (a), the client instructs X to place an order with the firm; and

    3. (c)

      the firm executes or receives and transmits the order received from X.

Firms with less than 6 months data on COH

MIFIDPRU 4.10.33 R
  1. (1)

    1This rule applies where a firm has been handling client orders constituting COH for less than 6 months.

  2. (2)

    For the purposes of its calculation of average COH under MIFIDPRU 4.10.19R, a firm must use the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

    1. (a)

      in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has been handling client orders constituting COH (with the month during which the firm begins that activity being counted as month zero); and

    2. (b)

      during month zero of the calculation, the firm must:

      1. (i)

        generate a best efforts estimate of expected COH for that month based on the firm’s projections when beginning the new activity; and

      2. (ii)

        use the estimate in (i) as its average COH;

    3. (c)

      during month 1 of the calculation and each month thereafter, the firm must apply the approach in (a) using observed historical data from the preceding months; and

    4. (d)

      the modified calculation ceases to apply on the date that falls 6 months after the date on which the firm began handling client orders constituting COH.

MIFIDPRU 4.11 Trading book and dealing on own account: general provisions

MIFIDPRU 4.11.1 G

1References to trading book positions in MIFIDPRU include all trading book positions of the firm, including positions in:

  1. (1)

    equity instruments;

  2. (2)

    debt instruments (including securitisation instruments);

  3. (3)

    collective investment undertakings;

  4. (4)

    foreign exchange;

  5. (5)

    gold; and

  6. (6)

    commodities and emissions allowances.

MIFIDPRU 4.11.2 G
  1. (1)

    1For the purposes of the definition of a position held with trading intent in relation to the trading book, positions arising from client servicing include those arising out of contracts in relation to which a firm is acting as principal (even in the context of activity described as ‘broking’ or ‘customer business’). This applies even if the nature of the business means that the only risks incurred by the firm are counterparty risks (i.e. no market risk charges apply).

  2. (2)

    If the nature of the business means that the only risks incurred by the firm are counterparty risks, the position will generally still be a position held with trading intent.

  3. (3)

    The FCA understands that business carried out under International Uniform Brokerage Execution (“Give-Up”) Agreements involve back to back trades as principal. If so, positions arising out of business carried out under such agreements should be allocated to a firm’s trading book.

MIFIDPRU 4.11.3 R
  1. (1)

    1A MIFIDPRU investment firm must manage its trading book in accordance with Chapter 3 of Title I of Part Three of the UK CRR in the form in which it stood at 31 December 2021, with the following modifications:

    1. (a)

      if a firm is unsure whether a position is a position held with trading intent or is held to hedge a position held with trading intent, the firm must include that position within its trading book;

    2. (b)

      the following provisions of the UK CRR do not apply:

      1. (i)

        article 102(1);

      2. (ii)

        article 102(4);

      3. (iii)

        article 104(2)(g); and

      4. (iv)

        article 106;

    3. (c)

      the reference in article 104(1) of the UK CRR to “policies and procedures for determining which position to include in the trading book” is a reference to “policies and procedures for identifying which positions form part of the trading book”.

  2. (2)

    Any reference to the UK CRR in this rule is to the UK CRR as applied and modified by (1).

MIFIDPRU 4.11.4 R

1The following requirements only apply to a firm that deals on own account, whether on its own behalf or on behalf of its clients:

  1. (1)

    the K-NPR requirement;

  2. (2)

    the K-CMG requirement; and

  3. (3)

    the K-TCD requirement.

MIFIDPRU 4.11.5 R

1The K-DTF requirement applies to a firm that:

  1. (1)

    deals on own account; or

  2. (2)

    executes orders on behalf of clients in the firm’s own name.

MIFIDPRU 4.11.6 G

1A MIFIDPRU investment firm that deals on own account is also subject to the K-CON requirement in accordance with MIFIDPRU 5.

MIFIDPRU 4.11.7 G

1A MIFIDPRU investment firm that has permission to operate an organised trading facility may rely on that permission to:

  1. (1)

    carry out matched principal trading in certain types of financial instruments with client consent, in accordance with MAR 5A.3.5R(1); and

  2. (2)

    deal on own account in illiquid sovereign debt instruments in accordance with MAR 5A.3.5R(2).

In either case, the firm will be dealing on own account and is therefore subject to the requirements in MIFIDPRU 4.11.4R and MIFIDPRU 4.11.5R to the extent relevant to the transactions it undertakes. MIFIDPRU 5 explains how the K-CON requirement applies to such firms.

MIFIDPRU 4.11.8 R

1A firm to which MIFIDPRU 4.11.4R applies is required to calculate its K-NPR requirement and K-CMG requirement only in relation to:

  1. (1)

    trading book positions; and

  2. (2)

    positions other than trading book positions where the positions give rise to foreign exchange risk or commodity risk.

MIFIDPRU 4.11.9 R
  1. (1)

    1This rule applies where a firm has deliberately taken a position to hedge against the adverse impact of a foreign exchange rate on:

    1. (a)

      the firm’s own funds requirement; or

    2. (b)

      an item which the firm has deducted from its own funds.

  2. (2)

    A firm may exclude a position in (1) from its net open currency positions for the purpose of article 352 of the UK CRR (as applied by MIFIDPRU 4.12.2R) if the firm has prior permission from the FCA.

  3. (3)

    To obtain the permission in (2), a firm must:

    1. (a)

      complete the application form in MIFIDPRU 4 Annex 1R and submit it to the FCA using the online notification and application system;

    2. (b)

      in the application, demonstrate to the satisfaction of the FCA that the position is:

      1. (i)

        used for one of the hedging purposes in (1)(a) or (1)(b); and

      2. (ii)

        of a non-trading or structural nature.

  4. (4)

    This rule replaces article 352(2) UK CRR where that article would otherwise apply under MIFIDPRU 4.12.2R.

MIFIDPRU 4.11.10 R

1A firm to which MIFIDPRU 4.11.4R applies is required to calculate its K-TCD requirement only in relation to the following:

  1. (1)

    transactions that form part of its trading book; and

  2. (2)

    transactions specified in MIFIDPRU 4.14.3R(7).

MIFIDPRU 4.12 K-NPR requirement

MIFIDPRU 4.12.1 R

1A MIFIDPRU investment firm must calculate its K-NPR requirement by reference to every position referred to in MIFIDPRU 4.11.8R that does not form part of a portfolio for which the firm has been granted a K-CMG permission.

MIFIDPRU 4.12.2 R
  1. (1)

    1The K-NPR requirement of a MIFIDPRU investment firm must be calculated in accordance with Title IV of Part Three of the UK CRR in the form in which it stood at 31 December 2021.

  2. (2)

    Any reference in this section to the UK CRR is to the UK CRR as applied by (1) and modified by the rules in this section.

  3. (3)

    When applying the UK CRR in accordance with (1):

    1. (a)

      any provision in the UK CRR relating to the effect that the market risk of a position has on the “own funds requirement” should be interpreted as relating instead to the effect that the position has on the K-NPR requirement of the MIFIDPRU investment firm;

    2. (b)

      article 363 of the UK CRR does not apply;

    3. (c)

      any reference in Title IV of Part Three of the UK CRR to:

      1. (i)

        article 363 of the UK CRR (permission to use internal models) refers to MIFIDPRU 4.12.4R to MIFIDPRU 4.12.7R; and

      2. (ii)

        permissions granted under article 363 of the UK CRR refers to equivalent permissions granted under MIFIDPRU 4.12.4R to MIFIDPRU 4.12.7R.

MIFIDPRU 4.12.2A R
  1. (1)

    2When applying the UK CRR for the purposes of this section, a firm must apply the following, as modified by (2):

    1. (a)

      the Appropriately Diversified Indices RTS;

    2. (b)

      the Market Definition RTS; and

    3. (c)

      the Non-Delta Risk of Options RTS.

  2. (2)

    The relevant modifications are as follows:

    1. (a)

      a reference to an “institution” is a reference to the firm;

    2. (b)

      a reference to “Regulation (EU) No 575/2013” is a reference to the UK CRR as modified by the rules in MIFIDPRU;

    3. (c)

      a reference to an “own funds requirement” is a reference to the contribution of a position to the firm’s K-NPR requirement; and

    4. (d)

      a reference to the calculation of requirements “on a consolidated basis” is a reference to the calculation of those requirements on a consolidated basis under MIFIDPRU 2.5.

    [Note: BTS 525/2014, BTS 528/2014 and BTS 945/2014.]

MIFIDPRU 4.12.2B R

2Where a provision in Title IV of Part Three of the UK CRR requires a firm to determine a risk weighting by reference to the Standardised Approach to credit risk, for the purposes of this section, a firm must:

  1. (1)

    apply the provisions in the UK CRR relating to the Standardised Approach to credit risk in the form in which they stood on 31 December 2021; but

  2. (2)

    for the purposes of determining any mapping of credit quality steps under the provisions in (1), use the ECAI mappings applied by the PRA for the purposes of the rules in the PRA Rulebook relating to the Standardised Approach to credit risk for CRR firms, as amended from time to time.

[Note: BTS 2016/1799.]

MIFIDPRU 4.12.2C G
  1. (1)

    2Certain market risk provisions in the UK CRR (in the form in which it stood on 31 December 2021) require a firm to consider the underlying credit risk attaching to a position under the UK CRR Standardised Approach to credit risk. In certain cases, the credit risk rules require a firm to determine the risk attaching to the position by reference to “credit quality steps”, which are mapped to credit ratings issued by particular credit rating agencies. As the credit risk requirements in the UK CRR are no longer directly relevant under MIFIDPRU, the FCA will no longer be maintaining an FCA version of the ECAI credit quality step mappings in BTS 2016/1799 for these purposes.

  2. (2)

    The effect of MIFIDPRU 4.12.2BR is that where a firm needs to determine the underlying credit risk of a position for the purposes of the K-NPR requirement by reference to credit quality steps, the firm should use the updated ECAI mappings maintained by the PRA for the purposes of the Standardised Approach to credit risk as it applies to CRR firms under the PRA Rulebook.

MIFIDPRU 4.12.2D R

2A firm may treat the currency pairs listed in MIFIDPRU 4 Annex 13R as closely correlated for the purposes of article 354(1) of the UK CRR.

Instruments for which no treatment is specified in the UK CRR

MIFIDPRU 4.12.3 R
  1. (1)

    1Where a MIFIDPRU investment firm has a position in a financial instrument for which no treatment is specified in the UK CRR, it must consider whether:

    1. (a)

      the position is sufficiently similar to a position for which a treatment is specified in the UK CRR; and

    2. (b)

      the application of the treatment in (a) would be prudent and appropriate.

  2. (2)

    If there is a treatment in the UK CRR that meets the requirements in (1), the firm must calculate the K-NPR requirement resulting from that position by applying that treatment.

  3. (3)

    If there are multiple treatments in the UK CRR that meet the requirements in (1), the firm must calculate the K-NPR requirement resulting from that position by applying the most appropriate treatment.

  4. (4)

    If there are no appropriate treatments in the UK CRR, the firm must add an appropriate percentage of the current value of the position to its overall K-NPR requirement. An appropriate percentage is either 100%, or a percentage that takes into account the characteristics of the position.

  5. (5)

    A firm must document its policies and procedures for calculating the K-NPR requirement of positions under this rule in its trading book policy statement.

Permission to use internal models

MIFIDPRU 4.12.4 R
  1. (1)

    1A firm must obtain prior permission from the FCA before using an internal model to calculate any of the following requirements under Part Three, Title IV, Chapter 5 of the UK CRR:

    1. (a)

      general risk of equity instruments;

    2. (b)

      specific risk of equity instruments;

    3. (c)

      general risk of debt instruments;

    4. (d)

      specific risk of debt instruments;

    5. (e)

      foreign exchange risk; and

    6. (f)

      commodities risk.

  2. (2)

    To obtain the permission in (1), a firm must:

    1. (a)

      complete the application form in MIFIDPRU 4 Annex 2R and submit it to the FCA using the online notification and application system; and

    2. (b)

      in the application, demonstrate to the satisfaction of the FCA that:

      1. (i)

        the firm meets the conditions for the use of the internal model specified in Part Three, Title IV, Chapter 5 of the UK CRR, as supplemented by the rules and guidance in this section; and

      2. (ii)

        the internal model covers a significant share of the positions of the relevant risk category in (1).

  3. (3)

    A firm must obtain a separate permission under this rule for each risk category in (1).

MIFIDPRU 4.12.5 G

1 MIFIDPRU 4.12.8R to MIFIDPRU 4.12.65G contain rules and guidance setting out requirements for internal models and explaining the factors that the FCA will consider when deciding whether to grant permission to use an internal model.

MIFIDPRU 4.12.6 R
  1. (1)

    1A firm that has a permission under MIFIDPRU 4.12.4R for an internal model must obtain approval from the FCA before it:

    1. (a)

      implements a material change to the use of the model; or

    2. (b)

      makes a material extension to the use of the model.

  2. (2)

    To determine if a change or extension is material for the purposes of (1), a firm must apply the criteria and methodology set out in article 3 (to the extent that it relates to the Internal Models Approach (IMA)), articles 7a and 7b and Annex III2 of the Market Risk Model Extensions and Changes RTS.

  3. (3)

    To obtain the approval in (1), a firm must:

    1. (a)

      complete the application form in MIFIDPRU 4 Annex 3R and submit it to the FCA using the online notification and application system; and

    2. (b)

      perform an initial calculation of stressed value-at-risk in accordance with article 365(2) of the UK CRR on the basis of the model as changed or extended and submit the results as part of the application in (a).

MIFIDPRU 4.12.7 R
  1. (1)

    1A firm that has a permission under MIFIDPRU 4.12.4R for an internal model must notify the FCA before it:

    1. (a)

      implements a change to the use of the model that is not a material change; or

    2. (b)

      extends the use of the model in a manner that is not material.

  2. (2)

    A firm must notify the FCA by completing the form in MIFIDPRU 4 Annex 4R and submitting it using the online notification and application system.

Use of internal models: risk capture

MIFIDPRU 4.12.8 R

1A MIFIDPRU investment firm that has a permission to use an internal model in accordance with Part Three, Title IV, Chapter 5 of the UK CRR must:

  1. (1)

    identify any material risks (or group of risks are material in aggregate) that are not captured by those models;

  2. (2)

    hold own funds to cover those risk(s) in addition to the own funds required to comply with the K-NPR requirement, calculated in accordance with Part Three, Title IV, Chapter 5 of the UK CRR; and

  3. (3)

    hold additional own funds for value-at-risk (VaR) and stressed value-at-risk (sVaR) models that apply to the firm.

MIFIDPRU 4.12.9 G
  1. (1)

    1The methodology for identifying the risks in MIFIDPRU 4.12.8R and calculating additional own funds for VaR and sVaR models is called the “Risks not in VaR (RNIV) framework”. A firm is responsible for identifying these additional risks and this should be an opportunity for risk managers and the firm’s management to better understand the shortcomings of the firm’s models. Following this initial assessment, the FCA will engage with the firm to provide challenge and ensure an appropriate outcome.

  2. (2)

    The RNIV framework is intended to ensure that own funds are held to meet all risks that are not captured, or not captured adequately, by the firm’s VaR and sVaR models. These include, but are not limited to, missing and/or illiquid risk factors such as cross-risks, basis risks, higher-order risks, and calibration parameters. The RNIV framework is also intended to cover event risks that could adversely affect the relevant business.

  3. (3)

    A firm should systematically identify and measure all risks that are not captured, or not captured adequately. This analysis should be carried out at least quarterly, but the FCA may request more frequent analysis. The measurement of these risks should capture the losses that could arise due to the risk factor(s) of all products that are within the scope of the permission for the relevant internal model, but are not adequately captured by the relevant internal model.

  4. (4)

    On a quarterly basis, the firm should identify and assess individual risk factors covered by the RNIV framework. The FCA will review the results of this exercise and may require that firms identify additional risk factors as being eligible for measurement.

  5. (5)
    1. (a)

      Where sufficient data is available, and where it is appropriate to do so, the FCA expects a firm to calculate a VaR and sVaR metric for each risk factor within scope of the framework. The stressed period for the RNIV framework should be consistent with that used for sVaR. No offsetting or diversification may be recognised across risk factors included in the RNIV framework. The multipliers used for VaR and sVaR should be applied to generate a K-NPR requirement.

    2. (b)

      If it is not appropriate to calculate a VaR and sVaR metric for a risk factor, a firm should instead measure the size of the risk based on a stress test. The confidence level and capital horizon of the stress test should be commensurate with the liquidity of the risk, and should be at least as conservative as comparable risk factors under the internal model approach. The capital charge should be at least equal to the losses arising from the stress test.

Standardised approach for options

MIFIDPRU 4.12.10 R
  1. (1)

    1A MIFIDPRU investment firm may use its own estimates for delta for the purposes of the standardised approach for options under article 329, article 352(1) or article 358 of the UK CRR if:

    1. (a)

      the option is:

      1. (i)

        an over-the-counter option; or

      2. (ii)

        is traded on an exchange, but delta for the option is not available from that exchange;

    2. (b)

      the firm adequately reflects non-delta risks in the K-NPR requirement in accordance with the Non-Delta Risk of Options RTS;

    3. (c)

      the model the firm uses meets the minimum standards set out in MIFIDPRU 4.12.12G to MIFIDPRU 4.12.18G (Minimum standards for own estimates of delta) for each type of option for which it calculates delta;

    4. (d)

      the firm notifies the FCA that the requirements in (a) to (c) have been met before the firm begins to use its own estimates for the relevant delta; and

    5. (e)

      the notification in (d) is made using the form in MIFIDPRU 4 Annex 5R and submitted using the online notification and application system.

  2. (2)

    The value of delta is 1 where:

    1. (a)

      a MIFIDPRU investment firm is not permitted to use its own estimates for delta in accordance with (1); and

    2. (b)

      if the option is traded on an exchange, delta is not available from that exchange.

MIFIDPRU 4.12.11 G

1If a MIFIDPRU investment firm has notified the FCA under MIFIDPRU 4.12.10R that a model meets the minimum standards for a particular option type, but is subsequently unable to demonstrate to the FCA that the model meets those minimum standards, the FCA may apply a capital add-on and agree a risk mitigation plan. If a firm does not comply with the risk mitigation plan within the mandated timeframe, the FCA may take further supervisory measures. This may include variation of a firm’s Part 4A permission so that the firm is no longer allowed to trade the relevant option types.

Minimum standards for own estimates of delta

MIFIDPRU 4.12.12 G

1The sophistication of a pricing model used to calculate own estimates of delta for use in the standardised approach for options should be proportionate to the complexity and risk of each option and the overall risk of the firm’s options trading business. In general, the FCA considers that the risk of sold options will be higher than the risk of the same options when bought.

MIFIDPRU 4.12.13 G

1Delta should be recalculated at least daily. A firm should also recalculate delta promptly if there are significant movements in the market parameters used as inputs to calculate delta.

MIFIDPRU 4.12.14 G

1The pricing model used to calculate delta should be:

  1. (1)

    based on appropriate assumptions that have been assessed and challenged by suitably qualified parties independent of the development process;

  2. (2)

    independently tested, including validation of the mathematics, assumptions and software implementation; and

  3. (3)

    developed or approved independently of the trading desk.

MIFIDPRU 4.12.15 G

1A firm should use generally accepted industry standard pricing models for the calculation of own deltas where these are available, such as for relatively simple options.

MIFIDPRU 4.12.16 G

1The IT systems used to calculate delta should be sufficient to ensure delta is calculated accurately and reliably.

MIFIDPRU 4.12.17 G

1A firm should have adequate systems and controls in place when using a pricing model to calculate delta. This should include the following documented policies and procedures:

  1. (1)

    clearly defined responsibilities of the various areas involved in the calculation;

  2. (2)

    frequency of independent testing of the accuracy of the model used to calculate delta; and

  3. (3)

    guidelines for the use of unobservable inputs, where relevant.

MIFIDPRU 4.12.18 G

1A firm should ensure its risk management functions are aware of weaknesses of the model used to calculate a delta. Where a firm identifies weaknesses, it should ensure that estimates of delta result in a prudent contribution to the K-NPR requirement. The outcome should be prudent across the whole portfolio of options and underlying positions at all times.

Netting: convertible

MIFIDPRU 4.12.19 R

1The netting of a convertible and an offsetting position in the underlying instrument is permitted for the purposes of article 327(2) of the UK CRR (Netting).

MIFIDPRU 4.12.20 G

1For the purposes of article 327(2) of the UK CRR, the convertible should be:

  1. (1)

    treated as a position in the equity into which it converts; and

  2. (2)

    the component of the firm’s K-NPR requirement attributable to the general and specific risk in its equity instruments should be adjusted by making:

    1. (a)

      an addition equal to the current value of any loss that the firm would make if it did convert to equity; or

    2. (b)

      a deduction equal to the current value of any profit that the firm would make if it did convert to equity (subject to a maximum deduction equal to the K-NPR requirement that would be attributable to the notional position underlying the convertible).

Offsetting derivative instruments

MIFIDPRU 4.12.21 G

1Article 331(2) of the UK CRR (Interest rate risk in derivative instruments) sets out conditions that must be met before a firm not using interest rate pre-processing models can fully offset interest rate risk on derivative instruments. One of the conditions is that the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) should be ‘closely matched’. The FCA will normally consider a difference of less than 15 basis points as indicative of the reference rate or coupon being ‘closely matched’ for the purposes of this requirement. A firm that wishes to use sensitivity models to calculate interest rate risk on derivative instruments in accordance with article 331(1) of the UK CRR should refer to MIFIDPRU 4.12.66R.

Exclusion of overshootings when determining multiplication factor addends

MIFIDPRU 4.12.22 G
  1. (1)

    1The FCA’s starting assumption is that all overshootings should be taken into account to calculate addends. If a firm believes that an overshooting should not count for that purpose, it should seek a variation of its VaR model permission from the FCA in accordance with MIFIDPRU 4.12.4R to exclude the overshooting.

  2. (2)

    An example of when a firm’s overshooting might properly be disregarded is when it has arisen as a result of a risk that is not captured in a firm’s VaR model but against which own funds are already held.

Derivation of notional positions for standardised approaches: general

MIFIDPRU 4.12.23 G

1 MIFIDPRU 4.12.24G to MIFIDPRU 4.12.38G set out guidance for the derivation of notional positions for standardised approaches to market risk under the UK CRR.

Futures and forwards on a basket or index of debt securities

MIFIDPRU 4.12.24 G

1Futures or forwards on a basket or index of debt securities should be converted into forwards on single debt securities as follows:

  1. (1)

    futures or forwards on a single currency basket or index of debt securities should be treated as either:

    1. (a)

      a series of forwards, one for each of the constituent debt securities in the basket or index, of an amount that is a proportionate part of the total underlying the contract, according to the weighting of the relevant debt security in the basket; or

    2. (b)

      a single forward on a notional debt security; and

  2. (2)

    futures or forwards on multiple currency baskets or indices of debt securities should be treated as either:

    1. (a)

      a series of forwards (using the method in (1)(a)); or

    2. (b)

      a series of forwards, each one on a notional debt security to represent one of the currencies in the basket or index, of an amount that is a proportionate part of the total underlying the contract according to the weighting of the relevant currency in the basket.

MIFIDPRU 4.12.25 G

1Notional debt securities derived through this treatment should be assigned a specific risk position risk adjustment and a general market risk position risk adjustment equal to the highest that would apply to the debt securities in the basket or index.

MIFIDPRU 4.12.26 G

1The debt security with the highest specific risk position risk adjustment within the basket might not be the same as the one with the highest general market risk position risk adjustment. A firm should select the highest percentages, even if they relate to different debt securities in the basket or index, and regardless of the proportion of those debt securities in the basket or index.

Bonds where coupons and principal are paid in different currencies

MIFIDPRU 4.12.27 G

1Where a debt security pays coupons in one currency but will be redeemed in a different currency, it should be treated as:

  1. (1)

    a debt security denominated in the coupon’s currency; and

  2. (2)

    a foreign currency forward to capture the fact that the debt security’s principal will be repaid in a different currency from that in which it pays coupons, specifically:

    1. (a)

      a notional forward sale of the coupon currency and purchase of the redemption currency, in the case of a long position in the debt security; or

    2. (b)

      a notional forward purchase of the coupon currency and sale of the redemption currency, in the case of a short position in the debt security.

Interest rate risk on other futures, forwards and swaps

MIFIDPRU 4.12.28 G

1Other futures, forwards, and swaps for which a treatment is not specified in article 328 of the UK CRR (Interest rate futures and forwards) should be treated as positions in zero specific risk securities, each of which:

  1. (1)

    has a zero coupon;

  2. (2)

    has a maturity equal to that of the relevant contract; and

  3. (3)

    is long or short, as set out in the table in MIFIDPRU 4.12.29G.

MIFIDPRU 4.12.29 G

1This table belongs to MIFIDPRU 4.12.28G.

Instrument

Notional positions

Foreign currency forward or future

A long position denominated in the currency purchased

and

A short position denominated in the currency sold

Gold forward or future

A long position if the forward or future involves an actual (or notional) sale of gold

or

A short position if the forward or future involves an actual (or notional) purchase of gold

Equity forward or future

A long position if the contract involves an actual (or notional) sale of the underlying equity

or

A short position if the contract involves an actual (or notional) purchase of the underlying equity

Deferred start interest rate swaps or foreign currency swaps

MIFIDPRU 4.12.30 G

1Interest rate swaps or foreign currency swaps with a deferred start should be treated as two notional positions (one long, one short). The paying leg should be treated as a short position in a zero specific risk security with a coupon equal to the fixed rate of the swap. The receiving leg should be treated as a long position in a zero specific risk security that also has a coupon equal to the fixed rate of the swap.

MIFIDPRU 4.12.31 G

1The maturities of the notional positions in MIFIDPRU 4.12.30G are set out in the table in MIFIDPRU 4.12.32G.

MIFIDPRU 4.12.32 G

1This table belongs to MIFIDPRU 4.13.31G.

Paying leg

Receiving leg

Receiving fixed and paying floating

The maturity equals the start date of the swap

The maturity equals the end date of the swap

Paying fixed and receiving floating

The maturity equals the end date of the swap

The maturity equals the start date of the swap

Swaps where only one leg is an interest rate leg

MIFIDPRU 4.12.33 G

1For interest rate risk, a firm should treat a swap (such as an equity swap) with only one interest rate leg as a notional position in a zero specific risk security:

  1. (1)

    with a coupon equal to that on the interest rate leg;

  2. (2)

    with a maturity equal to the date that the interest rate will be reset; and

  3. (3)

    that is a long position if the firm is receiving interest payments and is a short position if making interest payments.

Foreign exchange forwards, futures and contracts for differences

MIFIDPRU 4.12.34 G
  1. (1)

    1A firm should treat a foreign currency forward, future or contract for differences as two notional currency positions as follows:

    1. (a)

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

    2. (b)

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

  2. (2)

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

    1. (a)

      the contracted amount of each currency to be exchanged in a forward, future or contract for differences held outside the trading book; or

    2. (b)

      the present value of the amount of each currency to be exchanged in a forward, future or contract for differences held in the trading book.

Foreign currency swaps

MIFIDPRU 4.12.35 G
  1. (1)

    1A firm should 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 should have a value equal to either:

    1. (a)

      the nominal amount of each currency underlying the swap if it is held outside the 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.

Futures, forwards and contract for differences on a single commodity

MIFIDPRU 4.12.36 G

1Where a forward, future or contract for differences settles according to:

  1. (1)

    the difference between the price set on trade date and the price prevailing at contract expiry, the notional position should:

    1. (a)

      equal the total quantity underlying the contract; and

    2. (b)

      have a maturity equal to the expiry date of the contract;

  2. (2)

    the difference between the price set on trade date and the average of prices prevailing over a certain period up to contract expiry, a notional position should be derived for each of the reference dates used in the averaging period to calculate the average price, which:

    1. (a)

      equals a fractional share of the total quantity underlying the contract; and

    2. (b)

      has a maturity equal to the relevant reference date.

Buying or selling a single commodity at an average of spot prices prevailing in the future

MIFIDPRU 4.12.37 G

1Commitments to buy or sell at the average spot price of the commodity prevailing over some period between trade date and maturity should be treated as a combination of:

  1. (1)

    a position equal to the full amount underlying the contract with a maturity equal to the maturity date of the contract, which should be:

    1. (a)

      long, where the firm will buy at the average price; or

    2. (b)

      short, where the firm will sell at the average price; and

  2. (2)

    a series of notional positions, one for each of the reference dates where the contract price remains unfixed, each of which should:

    1. (a)

      be long if the position under (1) is short, or short if the position under (1) is long;

    2. (b)

      be equal to a fractional share of the total quantity underlying the contract; and

    3. (c)

      have a maturity date of the relevant reference date.

Cash legs of repurchase agreements and reverse repurchase agreements

MIFIDPRU 4.12.38 G

1The forward cash leg of a repurchase agreement or reverse repurchase agreement should be treated as a notional position in a zero specific risk security that:

  1. (1)

    is a short notional position in the case of a repurchase agreement and a long notional position in the case of a reverse repurchase agreement;

  2. (2)

    has a value equal to the market value of the borrowing or deposit;

  3. (3)

    has a maturity equal to that of the borrowing or deposit, or the next date the interest rate is reset (if earlier); and

  4. (4)

    has a coupon equal to:

    1. (a)

      zero, if the next interest payment date coincides with the maturity date; or

    2. (b)

      the interest rate on the borrowing or deposit, if any interest is due to be paid before the maturity date.

Expectations relating to internal models

MIFIDPRU 4.12.39 G

1 MIFIDPRU 4.12.40G to MIFIDPRU 4.12.65G describe some of the standards that the FCA expects to be met when it is considering an application under MIFIDPRU 4.12.4R to use an internal model.

High-level standards

MIFIDPRU 4.12.40 G

1A firm should be able to demonstrate that it meets the risk management standards in article 368 of the UK CRR (Qualitative requirements) on a legal entity and business-line basis where appropriate. This is particularly important for a subsidiary in a group subject to matrix management where the business lines cut across legal entity boundaries.

Categories of position

MIFIDPRU 4.12.41 G

1A VaR model permission generally sets out the broad classes of position within each risk category in its scope. It may also specify how individual products within one of the classes may be brought into or taken out of the scope of the VaR model permission. The broad classes of permission are:

  1. (1)

    linear products, which comprise securities with linear pay-offs (such as bonds and equities) and derivative products which have linear pay-offs in the underlying risk factor (such as interest rate swaps, FRAs, and total return swaps);

  2. (2)

    European, American and Bermudan put and call options (including caps, floors, and swaptions) and investments with these features;

  3. (3)

    Asian options, digital options, single barrier options, double barrier options, look-back options, forward-starting options, compound options and investments with these features; and

  4. (4)

    all other option-based products (such as basket options, quantos, outperformance options, timing options, and correlation-based products) and investments with these features.

Data standards

MIFIDPRU 4.12.42 G

1A firm should ensure that the data series used by its VaR model is reliable. Where a reliable data series is not available, the firm may use proxies or any other reasonable value-at-risk measurement if the model meets the requirements in article 367(2)(e) of the UK CRR (Requirements on risk measurement). The technique must be appropriate and must not materially understate the modelled risks.

MIFIDPRU 4.12.43 G

1Data may be insufficient if, for example, it contains missing data points or data points that contain stale data. For less liquid risk factors or positions, the FCA expects the firm to make a conservative assessment of those risks, using a combination of prudent valuation techniques and alternative VaR estimation techniques to ensure there is a sufficient cushion against risk over the close-out period, which takes account of the illiquidity of the risk factor or position.

MIFIDPRU 4.12.44 G

1A firm is expected to update data sets to maintain standards of reliability in accordance with the frequency set out in its VaR model permission, or more frequently if necessary due to volatility in market prices or rates. This is in order to ensure a prudent calculation of the VaR measure.

Aggregating VaR measures

MIFIDPRU 4.12.45 G
  1. (1)

    1In determining whether it is appropriate for a firm to use empirical correlations within risk categories and across risk categories within a model, the FCA will consider whether such an approach is sound and implemented with integrity. In general, the FCA expects a firm to determine the aggregate VaR measure by adding the relevant VaR measure for each category, unless the firm’s permission provides for a different method of aggregating VaR measures that is empirically sound.

  2. (2)

    The FCA does not expect a firm to use the square root of the sum of the squares approach when aggregating measures across risk categories unless the assumption of zero correlation between these categories is empirically justified. If correlations between risk categories are not empirically justified, the VaR measures for each category should simply be added to determine its aggregate VaR measure. However, to the extent that a firm’s VaR model permission provides for a different way of aggregating VaR measures:

    1. (a)

      that method applies instead; and

    2. (b)

      if the correlations between risk categories used for that purpose cease to be empirically justified then the firm is expected to notify the FCA immediately.

Testing prior to model validation

MIFIDPRU 4.12.46 G

1A firm should demonstrate its ability to comply with the requirements for a VaR model permission. In general, a firm should have a back-testing programme in place and should provide 3 months of back-testing history.

MIFIDPRU 4.12.47 G

1A firm should carry out a period of initial monitoring or live testing before the FCA will recognise a VaR model. This will be agreed on a firm-by-firm basis.

MIFIDPRU 4.12.48 G

1The FCA will take into account the results of internal model validation procedures used by the firm to assess the VaR model when assessing the firm’s VaR model and risk management.

Back-testing

MIFIDPRU 4.12.49 G

1 MIFIDPRU 4.12.50G to MIFIDPRU 4.12.53G provide further guidance on how a firm should comply with the requirements in article 366 of the UK CRR (Regulatory back testing and multiplication factors).

MIFIDPRU 4.12.50 G

1If the day on which a loss is made is day n, the value-at-risk measure for that day will be calculated on day n-1, or overnight between day n-1 and day n. Profit and loss figures are produced on day n+1, and back-testing also takes place on day n+1. The firm’s supervisor should be notified of any overshootings by close of business on day n+2.

MIFIDPRU 4.12.51 G

1Any overshooting initially counts for the purpose of the calculation of the plus factor, even if subsequently the FCA agrees to exclude it. Therefore, where the firm experiences an overshooting and already has 4 or more overshootings during the previous 250 business days, changes to the multiplication factor resulting from changes to the plus factor become effective at day n+3.

MIFIDPRU 4.12.52 G

1A longer time period generally improves the power of back-testing. However, a longer time period may not be desirable if the VaR model or market conditions have changed to the extent that historical data is no longer relevant.

MIFIDPRU 4.12.53 G

1The FCA will review a firm’s processes and documentation relating to the derivation of profit and loss used for back-testing when assessing a VaR model permission application under MIFIDPRU 4.12.4R. A firm’s documentation should clearly set out the basis for cleaning profit and loss. To the extent that certain profit and loss elements are not updated every day (for example, certain reserve calculations), the documentation should clearly set out how such elements are included in the profit and loss series.

Planned changes to the VaR model

MIFIDPRU 4.12.54 G

1Under MIFIDPRU 4.12.6R, a firm must provide the FCA with details of any significant planned changes to the VaR model before those changes are implemented. This must include detailed information about the nature of the change, including an estimate of the impact on VaR numbers and the incremental risk charge. Material changes to internal models or material extensions to the use of internal models will require prior approval from the FCA.

Bias from overlapping intervals for 10-day VaR and stressed VaR

MIFIDPRU 4.12.55 G

1The use of overlapping intervals of 10-day holding periods for article 365 of the UK CRR (VaR and sVaR calculation) introduces an autocorrelation into the data that would not exist should truly independent 10-day periods be used. This may give rise to an under-estimation of the volatility and the VaR at the 99% confidence level. To obtain clarity on the materiality of the bias, a firm should measure the bias arising from the use of overlapping intervals for 10-day VaR and sVaR when compared to using independent intervals. A report on the analysis, including a proposal for a multiplier on VaR and sVaR to adjust for the bias, should be submitted to the FCA for review and approval.

Stressed VaR calculation

MIFIDPRU 4.12.56 G

1Under article 365 of the UK CRR (VaR and sVaR calculation), a firm that uses an internal model for calculating its K-NPR requirement must calculate, at least weekly, a sVaR of their current portfolio. The FCA would expect a sVaR internal model to contain the features in MIFIDPRU 4.12.57G to MIFIDPRU 4.12.60G before the FCA will grant permission to use the relevant model.

Quantile estimator

MIFIDPRU 4.12.57 G

1A firm should calculate the sVaR measure to be greater than or equal to the average of the second and third worst loss in a 12-month time series comprising of 250 observations. The FCA expects, as a minimum, that a corresponding linear weighting scheme should be applied if the firm uses a larger number of observations.

Meaning of ‘period of significant financial stress relevant to the institution’s portfolio’

MIFIDPRU 4.12.58 G

1A firm should ensure that the sVaR period chosen is equivalent to the period that would maximise VaR, given the firm’s portfolio. A stressed period should be identified at each legal entity level at which capital is reported. Therefore, group level sVaR measures should be based on a period that maximises the group level VaR, whereas entity level sVaR should be based on a period that maximises VaR for that entity.

Antithetic data

MIFIDPRU 4.12.59 G

1The firm should consider whether the use of antithetic data in the calculation of the sVaR measure is appropriate to the firm’s portfolio. The firm should provide a justification to the FCA for using or not using antithetic data as part of an application to use an internal model.

Absolute and relative shifts

MIFIDPRU 4.12.60 G

1In its application to use an internal model, the firm should explain the reasons for the choice of absolute or relative shifts for both VaR and sVaR methodologies. In particular, the firm should evidence the statistical processes driving the risk factor changes for both VaR and sVaR.

MIFIDPRU 4.12.61 R

1A firm that uses an internal model must submit the following information to the FCA on a quarterly basis:

  1. (1)

    analysis to support the equivalence of the firm’s current approach to a VaR-maximising approach on an ongoing basis;

  2. (2)

    the reasons for the selection of key major risk factors used to find the period of significant financial stress;

  3. (3)

    a summary of ongoing internal monitoring of stressed period selection for the current portfolio;

  4. (4)

    analysis to support capital equivalence of upscaled 1-day VaR and sVaR measures to corresponding full 10-day VaR and sVaR measures;

  5. (5)

    a graphed history of sVaR/VaR ratio;

  6. (6)

    analysis to demonstrate accuracy of partial revaluation approaches specifically for sVaR purposes (for firms using revaluation ladders or spot/vol-matrices), including a review of the ladders/matrices or spot/vol-matrices, ensuring that they are extended to include wider shocks to risk factors that occur in stress scenarios; and

  7. (7)

    minutes of risk committee meetings or other evidence of governance and senior management oversight of sVaR methodology.

MIFIDPRU 4.12.62 G

1Under article 372 of the UK CRR (Requirement to have an internal IRC model), a firm that uses an internal model for calculating own funds requirements for specific risk of traded debt instruments must also have an internal incremental default and migration risk (IRC) model in place to capture the default and migration risk of its trading book positions that are incremental to the risks captured by its VaR model. When the FCA considers a firm’s application for permission to use an IRC internal model under MIFIDPRU 4.12.4R, it expects that the matters in MIFIDPRU 4.12.63G to MIFIDPRU 4.12.65G will be included to demonstrate compliance with the standards in article 372.

Basis risks for migration

MIFIDPRU 4.12.63 G

1The FCA expects the IRC model to capitalise pre-default basis risk. In this respect, the model should reflect that in periods of stress the basis could widen substantially. The firm should disclose to the FCA its material basis risks that are incremental to those already captured in existing market risk capital measures (VaR-based and others). This must take into account actual close-out periods during periods of illiquidity.

Price/spread change model

MIFIDPRU 4.12.64 G

1The price/spread change model used to capture the profit and loss impact of migration should calibrate spread changes to long-term averages of differences between spreads for relevant ratings. These should either be conditioned on actual rating events, or use the entire history of spreads regardless of migration. Point-in-time estimates are not acceptable, unless the firm can demonstrate that they are as conservative as long-term averages.

Dependence of the recovery rate on the economic cycle

MIFIDPRU 4.12.65 G

1To achieve a soundness standard comparable to those under the Internal Ratings Based (IRB) approach, loss given default (LGD) estimates should reflect the economic cycle. Therefore, the FCA expects a firm to incorporate dependence of the recovery rate on the economic cycle into the IRC model. If the firm uses a conservative parameterisation to comply with the IRB standard of the use of downturn estimates, the firm should submit evidence of this in its quarterly reporting to the FCA. A firm should note that for trading portfolios that contain long and short positions, downturn estimates will not be a conservative choice in all cases.

Permission to use sensitivity models to calculate interest rate risk on derivative instruments

MIFIDPRU 4.12.66 R
  1. (1)

    1A firm must obtain prior permission from the FCA to use a sensitivity model in accordance with article 331(1) of the UK CRR to calculate the interest rate risk for positions in:

    1. (a)

      derivative instruments under articles 328 to 330 of the UK CRR; or

    2. (b)

      any bond which is amortised over its residual life, rather than via one final payment of principal.

  2. (2)

    To obtain the permission in (1), a firm must:

    1. (a)

      where the permission relates to one or more of the derivative instruments in (1)(a), mark to market the instruments and manage the interest rate risk on the instruments on a discounted cash flow basis;

    2. (b)

      complete the form in MIFIDPRU 4 Annex 6R and submit it using the online notification and application system; and

    3. (c)

      in its application under (b), demonstrate to the satisfaction of the FCA that:

      1. (i)

        the model generates positions that have the same sensitivity to interest rate changes as the underlying cash flows; and

      2. (ii)

        the sensitivity in (i) is assessed with reference to independent movements in sample rates across the yield curve, with at least one sensitivity point in each of the maturity bands set out in Table 2 in article 339 of the UK CRR.

  3. (3)

    Where a firm has been granted permission to apply a sensitivity model under this rule, any relevant positions must be included in the firm’s calculation of its general risk of debt instruments for its K-NPR requirement.

MIFIDPRU 4.13 K-CMG requirement

MIFIDPRU 4.13.1 R
  1. (1)

    1Subject to (2), the K-CMG requirement applies to a MIFIDPRU investment firm for portfolios for which the firm has been granted a K-CMG permission.

  2. (2)

    A MIFIDPRU investment firm must include a position specified in MIFIDPRU 4.11.8R within the calculation of its K-NPR requirement if that position:

    1. (a)

      is included in a portfolio for which the firm has been granted a K-CMG permission;

    2. (b)

      is a proprietary position of the firm that results from a trade that has settled;

    3. (c)

      is not included in the calculation of the required margin under the margin model of the clearing member or authorised central counterparty in MIFIDPRU 4.13.9R(2)(b); and

    4. (d)

      is not a position to which the clearing member or authorised central counterparty has applied a “haircut” of the type specified in MIFIDPRU 4.13.6R(2).

MIFIDPRU 4.13.2 G

1 MIFIDPRU 4.13.1R(2) is intended to cover the risks arising from proprietary trades that form part of a portfolio for which a firm has a K-CMG permission. Where trades have settled, the resulting proprietary position of the firm may no longer be included within the margin requirement calculated by the clearing member or authorised central counterparty for that portfolio and therefore would not contribute to the firm’s K-CMG requirement. The firm should therefore include these positions within its calculation of the K-NPR requirement to take account of the resulting market risk. For these purposes, a firm is not required to apply this approach to a position that results from client servicing.

MIFIDPRU 4.13.3 G

1In an application for a K-CMG permission, a firm must identify each portfolio for which it wishes to calculate a K-CMG requirement.

MIFIDPRU 4.13.4 R

1 MIFIDPRU 4.11.8R(2) includes positions held outside the trading book that give rise to foreign exchange or commodities risk. The FCA considers that it is unlikely that such positions would be eligible for a K-CMG permission. Therefore, even if the FCA has granted a K-CMG permission in relation to all portfolios in the firm’s trading book, a firm may need to calculate a K-NPR requirement in relation to positions it holds outside of the trading book.

MIFIDPRU 4.13.5 R

1The K-CMG requirement of a MIFIDPRU investment firm must be calculated using the following formula:

K-CMG requirement = TM * 1.3

where TM is the third highest amount of total margin as calculated under MIFIDPRU 4.13.6R required from the firm on a daily basis over the preceding 3 months.

MIFIDPRU 4.13.6 R

1For the purposes of MIFIDPRU 4.13.5R, the total margin must be calculated as the sum of the following in relation to all clearing members and to the extent that MIFIDPRU 4.13.9R(2)(c)(i) applies, all authorised central counterparties:

  1. (1)

    the amount of margin required by the margin model referenced in MIFIDPRU 4.13.9R(2)(e); plus

  2. (2)

    the value of any “haircut” applied by the clearing member or authorised central counterparty to positions included in the portfolio that represent settled trades and which the clearing member or authorised central counterparty is treating as collateral to secure the present or future obligations of the MIFIDPRU investment firm.

MIFIDPRU 4.13.7 G

1 MIFIDPRU 4.13.6R requires a MIFIDPRU investment firm to determine the amount of margin that is required under the relevant margin model of each clearing member (or, for a self-clearing firm, of each authorised central counterparty) for portfolios in respect of which the firm has been granted a K-CMG permission. For these purposes, the clearing member’s (or, where applicable, authorised central counterparty’s) margin model must satisfy the criteria in MIFIDPRU 4.13.14R. The effect of MIFIDPRU 4.13.6R is that if, notwithstanding the requirement under the margin model, the MIFIDPRU investment firm agrees with the clearing member or authorised central counterparty to provide a different amount of margin, it is the amount required under the model that must be used for the purposes of calculating the firm’s K-CMG requirement and not the amount of margin that is actually provided by the firm. This ensures that the firm’s K-CMG requirement is not artificially reduced by commercial negotiations that may result in the clearing member or authorised central counterparty accepting a lower amount of margin than the model requires.

MIFIDPRU 4.13.8 G

1The calculation in MIFIDPRU 4.13.5R means that for each trading day during the calculation period, the firm must calculate the total combined margin in accordance with MIFIDPRU 4.13.6R provided to all clearing members in aggregate in respect of the relevant portfolios. The K-CMG requirement is then calculated on the basis of the third highest daily aggregate amount.

MIFIDPRU 4.13.9 R

1To obtain a K-CMG permission for a portfolio, a firm must:

  1. (1)

    complete the application form in MIFIDPRU 4 Annex 7R and submit it using the online notification and application system;

  2. (2)

    in the application, demonstrate to the satisfaction of the FCA that:

    1. (a)

      the firm is not part of a group containing a credit institution;

    2. (b)

      the clearing and settlement of the transactions in the relevant portfolio take place under the responsibility of a clearing member of an authorised central counterparty;

    3. (c)

      the clearing member in (b) is one of the following:

      1. (i)

        a MIFIDPRU investment firm (which may be the firm itself, where it is self-clearing);

      2. (ii)

        a UK credit institution;

      3. (iii)

        a designated investment firm;

      4. (iv)

        a third country investment firm; or

      5. (v)

        a credit institution established in a third country;

    4. (d)

      transactions in the relevant portfolio are either:

      1. (i)

        centrally cleared in an authorised central counterparty; or

      2. (ii)

        settled on a delivery-versus-payment basis under the responsibility of the clearing member in (b);

    5. (e)

      the firm is required to provide total margin calculated on the basis of a margin model that satisfies the criteria in MIFIDPRU 4.13.14R and is operated by:

      1. (i)

        where the clearing member in (b) (where applicable, including the firm itself) is a MIFIDPRU investment firm or a third country investment firm, the authorised central counterparty in (b); or

      2. (ii)

        in any other case, the relevant clearing member in (b);

    6. (f)

      the reasons for the firm’s choice of calculating a K-CMG requirement for the portfolio have been clearly documented and approved by the firm’s management body or risk management function; and

    7. (g)

      the choice of the portfolio to be subject to a K-CMG requirement has not been made with a view to engaging in regulatory arbitrage between the K-NPR requirement and the K-CMG requirement in a disproportionate or prudentially unsound manner.

MIFIDPRU 4.13.10 R
  1. (1)

    1A firm that has been granted a K-CMG permission for a portfolio must notify the FCA immediately if it becomes aware that any of the conditions in MIFIDPRU 4.13.9R are no longer met in relation to the portfolio.

  2. (2)

    The notification in (1) must be made using the form in MIFIDPRU 4 Annex 8R and submitted via the online notification and application system.

MIFIDPRU 4.13.11 G

1The FCA may revoke a K-CMG permission for a portfolio where one or more of the conditions in MIFIDPRU 4.13.9R is no longer met in relation to that portfolio. The FCA may review the appropriateness of any K-CMG permissions as part of any SREP it undertakes in relation to the firm in accordance with MIFIDPRU 7.

MIFIDPRU 4.13.12 R

1A firm that is an indirect client of a clearing member may obtain a K-CMG permission if:

  1. (1)

    the indirect clearing arrangement satisfies all of the conditions in MIFIDPRU 4.13.9R and both the clearing member and the client of the clearing member that is providing clearing services to the firm are entities that are listed in MIFIDPRU 4.13.9R(2)(c); and

  2. (2)

    the FCA is satisfied that the relevant arrangement does not result in undue risks.

MIFIDPRU 4.13.13 R
  1. (1)

    1A firm that is relying on a K-CMG permission must ensure that:

    1. (a)

      the individuals in the firm who are responsible for the firm’s risk management function, or for the oversight of that function, have a reasonable understanding of the operation of the margin model referred to in MIFIDPRU 4.13.9R(2)(e); and

    2. (b)

      the firm integrates this understanding of the margin model into its ICARA process for the purposes of considering whether:

      1. (i)

        the resulting K-CMG requirement is sufficient to cover the relevant risks to which the firm is exposed; and

      2. (ii)

        the K-CMG permission remains appropriate in relation to the portfolio(s) for which it was granted.

  2. (2)

    For the purposes of (1), a firm may use suitable advice or analysis provided by an appropriate third party, but the firm is responsible for ensuring that the individuals in (1)(a) have the necessary knowledge and understanding of the margin model.

  3. (3)

    An appropriate third party under (2) includes:

    1. (a)

      a suitably qualified professional adviser;

    2. (b)

      the relevant clearing member; or

    3. (c)

      another undertaking within the same investment firm group as the firm where individuals within that undertaking have the requisite knowledge and understanding of the margin model.

MIFIDPRU 4.13.14 R
  1. (1)

    1The criteria referred to in MIFIDPRU 4.13.9R(2)(e) are that:

    1. (a)

      the margin requirements are sufficient to cover losses that may result from at least 99% of the exposures movements over an appropriate time horizon with at least a two-business day holding period; and

    2. (b)

      the margin model used by the clearing member or authorised central counterparty to call the margin is always designed to achieve a level of prudence similar to that required in the provisions on margin requirements in article 41 of EMIR.

  2. (2)

    If the parameters of a margin model operated by a clearing member or authorised central counterparty do not meet the criteria in (1)(a), those criteria shall nonetheless be deemed to be met if:

    1. (a)

      an adjustment mechanism is applied to produce an alternative margin requirement; and

    2. (b)

      the alternative requirement in (a) is at least equivalent to the margin requirement that would be produced by a margin model that meets the criteria in (1)(a).

  3. (3)

    An adjustment mechanism under (2) may be applied by either of the following, provided that the conditions in (4) are met:

    1. (a)

      the relevant clearing member; or

    2. (b)

      the MIFIDPRU investment firm that has been granted the relevant K-CMG permission.

  4. (4)

    The conditions are that the MIFIDPRU investment firm that has been granted the relevant K-CMG permission:

    1. (a)

      can provide to the FCA upon request a reasonable explanation of the adjustment that has been applied under (2); and

    2. (b)

      monitors and reviews the effectiveness of the adjustment mechanism on an ongoing basis as part of its ICARA process.

MIFIDPRU 4.13.15 G
  1. (1)

    1MIFIDPRU 4.13.14R(2) permits the output of a margin model of a clearing member or authorised central counterparty to be adjusted to meet the criteria in MIFIDPRU 4.13.14R(1)(a). The adjustment is used solely to determine the K-CMG requirement of a firm. It does not affect the actual amount of margin that the clearing member or authorised central counterparty will receive from the firm, which will continue to be determined by the underlying (unadjusted) model.

  2. (2)

    For example, the clearing member’s or authorised central counterparty’s original margin model may produce margin requirements that are sufficient to cover losses that may result from at least 95% of the exposures movements over a two-business day holding period. This would not meet the minimum criteria in MIFIDPRU 4.13.14R(1)(a). To determine the firm’s K-CMG requirement, the output of that model may be adjusted to produce a requirement that would cover losses that may result from at least 99% of the exposures movements over that same holding period. If the conditions in MIFIDPRU 4.13.14R(3) and (4) are satisfied, the minimum criteria in MIFIDPRU 4.13.14R(1)(a) will be deemed to be met when the adjustment is applied. This is the case even though the actual margin received by the clearing member or authorised central counterparty is determined by the underlying (unadjusted) model.

MIFIDPRU 4.13.16 G

1Where the margin model of a clearing member uses parameters that are more conservative than the minimum criteria in MIFIDPRU 4.13.14R(1), the output of the model may be adjusted downwards under MIFIDPRU 4.13.14R(2) to produce margin requirements that are consistent with the minimum criteria. The requirements in MIFIDPRU 4.13.14R(3) and (4) still apply to a downwards adjustment. A firm is not required to apply a downwards adjustment to a more conservative model.

MIFIDPRU 4.13.17 G

1The FCA will consider whether the firm’s reasons for choosing a K-CMG requirement under MIFIDPRU 4.13.9R(2)(f) have taken adequate account of the nature of, and risks arising from, the firm’s trading activities, including whether:

  1. (1)

    the main activities of the firm are essentially trading activities that are subject to clearing and margining under the responsibility of a clearing member; and

  2. (2)

    other activities performed by the firm are immaterial in comparison to those main activities.

MIFIDPRU 4.13.18 G
  1. (1)

    1For the purposes of MIFIDPRU 4.13.9R(2)(g), the fact that a K-CMG permission for a portfolio may result in a K-CMG requirement that is lower than the equivalent K-NPR requirement for that portfolio does not automatically mean that the choice to apply a K-CMG requirement has been made with a view to engaging in regulatory arbitrage in a disproportionate or prudentially unsound manner.

  2. (2)

    When considering whether the condition in MIFIDPRU 4.13.9R(2)(g) is satisfied, a firm should consider whether the K-CMG requirement that would result from the relevant K-CMG permission more closely reflects the underlying economic risk of the relevant portfolio when compared with the equivalent K-NPR requirement for the same portfolio.

  3. (3)

    The FCA considers that even in circumstances where the K-CMG requirement is considerably lower than the equivalent K-NPR requirement, this does not automatically prevent a firm from meeting the conditions for a K-CMG permission. A significant difference between the two requirements may result from the calculation of the K-CMG requirement being better adapted for capturing the economic risks of the particular portfolio in question. For example, the margin model underlying the K-CMG requirement may have been specifically designed for firms that specialise in trading that type of portfolio. A firm that is applying for a K-CMG permission should provide a clear explanation of how the conditions in MIFIDPRU 4.13.9R(2) are satisfied for the portfolio. The firm should keep the appropriateness of a K-CMG permission under regular review as part of its ICARA process.

MIFIDPRU 4.13.19 R
  1. (1)

    1Except where (2) applies, a firm that has a K-CMG permission for a portfolio must calculate a K-CMG requirement for that portfolio for a continuous period of at least 24 months from the date that the permission is granted.

  2. (2)

    The requirement in (1) does not apply if:

    1. (a)

      the FCA revokes the relevant K-CMG permission in relation to that portfolio on its own initiative in the circumstances described in MIFIDPRU 4.13.11G; or

    2. (b)

      the business strategy or operations of the trading desk with responsibility for the portfolio have changed to such an extent that it has become a different trading desk.

MIFIDPRU 4.13.20 R
  1. (1)

    1Where a firm that has been granted a K-CMG permission in relation to a portfolio subsequently chooses to calculate a K-NPR requirement for that portfolio, the firm must submit the notification in (2) to the FCA before the firm begins to calculate the K-NPR requirement.

  2. (2)

    The notification in (1) must:

    1. (a)

      confirm that the requirement in MIFIDPRU 4.13.19R(1) has been met in relation to the portfolio, or that the circumstance in MIFIDPRU 4.13.19R(2)(b) applies;

    2. (b)

      specify the date on which the K-CMG permission should cease to apply to the firm; and

    3. (c)

      be made using the form in MIFIDPRU 4 Annex 9R and submitted using the online notification and application system.

MIFIDPRU 4.13.21 G

1Where a firm has submitted a notification in MIFIDPRU 4.13.20R(2), the FCA will not normally grant another K-CMG permission for the same portfolio until at least 24 months after the previous K-CMG permission ceased to apply.

MIFIDPRU 4.14 K-TCD requirement

MIFIDPRU 4.14.1 R
  1. (1)

    1The K-TCD requirement of a MIFIDPRU investment firm is an amount equal to the sum of the TCD own funds requirement for all transactions specified in (2).

  2. (2)

    This rule applies to the transactions in MIFIDPRU 4.14.3R where the transactions:

    1. (a)

      are recorded in the trading book of a firm dealing on own account (whether for itself or on behalf of a client); or

    2. (b)

      in the case of the transactions specified in MIFIDPRU 4.14.3R(2)-(7), are carried out by a firm that has the necessary permissions to deal on own account.

MIFIDPRU 4.14.2 G
  1. (1)

    1The effect of MIFIDPRU 4.14.1R(2)(b) is that where a firm is authorised to deal on own account, it must include in the calculation of its K-TCD requirement any transactions specified in MIFIDPRU 4.14.3R(2)-(7). This applies even if the firm’s involvement in the transaction does not constitute dealing on own account and the transaction may not be recorded in its trading book.

  2. (2)

    A firm that is not authorised to deal on own account is not subject to the K-TCD requirement under MIFIDPRU 4.14.1R, even if it is involved in a transaction that would otherwise fall within MIFIDPRU 4.14.3R(2)-(7).

Transactions to which K-TCD applies

MIFIDPRU 4.14.3 R

1Subject to MIFIDPRU 4.14.5R, the transactions to which MIFIDPRU 4.14.1R applies are as follows:

  1. (1)

    derivative contracts listed in Annex II to the UK CRR, with the exception of the following:

    1. (a)

      derivative contracts directly or indirectly cleared through a CCP, where all of the following conditions are met:

      1. (i)

        the positions and assets of the firm related to the contracts are distinguished and segregated, at the level of both the clearing member and the CCP, from the position and assets of the clearing member and the other clients of that clearing member and, as a result of that distinction and segregation, those positions and assets are bankruptcy remote under applicable law in the event of default or insolvency of the clearing member or one or more of its other clients;

      2. (ii)

        the legal requirements applicable to or binding the clearing member facilitate the transfer of the client’s positions relating to the contracts and of the corresponding collateral to another clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing member; and

      3. (iii)

        the firm has obtained an independent, written and reasoned legal opinion that concludes that, in the event of a legal challenge, the firm would bear no losses on account of the insolvency of its clearing member or of any of its clearing member’s clients;

    2. (b)

      exchange-traded derivative contracts; and

    3. (c)

      derivative contracts held for hedging a position of the firm resulting from an activity outside the trading book;

  2. (2)

    long settlement transactions;

  3. (3)

    repurchase transactions;

  4. (4)

    securities or commodities lending or borrowing transactions;

  5. (5)

    margin lending transactions;

  6. (6)

    any other types of securities financing transactions; and

  7. (7)

    credits and loans referred to in the activity in point 2 of paragraph 1 of Part 3A of Schedule 2 to the Regulated Activities Order, if the firm is:

    1. (a)

      executing the trade in the name of the client; or

    2. (b)

      receiving and transmitting the order without executing it.

MIFIDPRU 4.14.4 R

1A derivative contract that is directly or indirectly cleared through an authorised central counterparty is deemed to meet the conditions in MIFIDPRU 4.14.3R(1)(a).

MIFIDPRU 4.14.5 R

1The K-TCD requirement does not apply to transactions with the following counterparties:

  1. (1)

    central governments and central banks, where the underlying exposures would receive a 0% risk weight under article 114 of the UK CRR;

  2. (2)

    multilateral development banks listed in article 117(2) of the UK CRR; or

  3. (3)

    international organisations listed in article 118 of the UK CRR.

MIFIDPRU 4.14.6 R
  1. (1)

    1With the prior consent of the FCA, a firm may exclude transactions with the following counterparties from the calculation of its K-TCD requirement under MIFIDPRU 4.14.1R:

    1. (a)

      its parent undertaking;

    2. (b)

      its subsidiary;

    3. (c)

      a subsidiary of its parent undertaking; or

    4. (d)

      an undertaking with which the firm is linked by majority common management.

  2. (2)

    To obtain the FCA consent in (1), the firm must demonstrate all of the following to the satisfaction of the FCA:

    1. (a)

      the counterparty is subject to appropriate prudential requirements and is one of the following:

      1. (i)

        a credit institution;

      2. (ii)

        an investment firm; or

      3. (iii)

        a financial institution;

    2. (b)

      the counterparty is:

      1. (i)

        included in the same prudential consolidation group as the firm on a full basis in accordance with the UK CRR or the consolidation provisions in MIFIDPRU 2.5; or

      2. (ii)

        supervised along with the firm for compliance with the group capital test in MIFIDPRU 2.6;

    3. (c)

      the counterparty is subject to the same risk evaluation, measurement and control procedures as the firm;

    4. (d)

      the counterparty is established in the UK; and

    5. (e)

      there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities from the counterparty to the firm.

  3. (3)

    To apply for FCA consent under (1), a firm must complete the form in MIFIDPRU 4 Annex 10R and submit it using the online notification and application system.

Calculation of TCD own funds requirement

MIFIDPRU 4.14.7 R

1The TCD own funds requirement for each transaction or netting set must be calculated using the following formula:

TCD own funds requirement = α * EV * RF * CVA

where:

  1. (1)

    α = 1.2

  2. (2)

    EV = the exposure value calculated in accordance with MIFIDPRU 4.14.8R

  3. (3)

    RF = the risk factor applicable to the counterparty type as set out in the table in MIFIDPRU 4.14.29R

  4. (4)

    CVA = the credit valuation adjustment calculated in accordance with MIFIDPRU 4.14.30R

Exposure value

MIFIDPRU 4.14.8 R

1The exposure value must be calculated using the following formula:

Exposure value = Max (0; RC + PFE – C)

where:

  1. (1)

    RC = the replacement cost calculated in accordance with MIFIDPRU 4.14.9R (which may be a positive value, thereby increasing the exposure value, or a negative value, thereby decreasing the exposure value)

  2. (2)

    PFE = potential future exposure calculated in accordance with MIFIDPRU 4.14.10R

  3. (3)

    C = collateral as determined in accordance with MIFIDPRU 4.14.24R and MIFIDPRU 4.14.25R (which may be a positive value, thereby decreasing the exposure value, or a negative value, thereby increasing the exposure value)

Replacement cost

MIFIDPRU 4.14.9 R
  1. (1)

    1A firm must calculate the replacement cost for all transactions referred to in MIFIDPRU 4.14.3R.

  2. (2)

    The replacement cost must be determined as follows:

    1. (a)

      for derivative contracts, the replacement cost is the CMV;

    2. (b)

      for long settlement transactions, the replacement cost is the settlement amount of cash to be paid or to be received by the firm upon settlement, with a receivable being treated as a positive amount and a payment being treated as a negative amount;

    3. (c)

      unless (d) applies, for repurchase transactions and securities or commodities lending or borrowing transactions, the replacement cost is the amount of cash lent or borrowed, with cash lent by the firm being treated as a positive amount and cash borrowed by the firm being treated as a negative amount;

    4. (d)

      for securities financing transactions, where both legs of the transaction are securities, the replacement cost is the CMV of the security lent by the firm, increased by the corresponding volatility adjustment in MIFIDPRU 4.14.25R; and

    5. (e)

      for margin lending transactions and the credits and loans referred to in MIFIDPRU 4.14.3R(7), the replacement cost is the book value of the asset in accordance with the applicable accounting framework.

Potential future exposure

MIFIDPRU 4.14.10 R
  1. (1)

    1A firm is required to calculate potential future exposure (PFE) only for derivative contracts.

  2. (2)

    A firm must calculate the potential future exposure for derivative contracts in a netting set using one of the following approaches:

    1. (a)

      the hedging approach in MIFIDPRU 4.14.14R; or

    2. (b)

      the derivative netting ratio approach in MIFIDPRU 4.14.18R.

MIFIDPRU 4.14.11 R

1Where a single derivative contract cannot be allocated to a netting set with other derivative contracts, it must be treated as a separate netting set for the purposes of MIFIDPRU 4.14.10R.

MIFIDPRU 4.14.12 R

1A firm must apply its chosen approach under MIFIDPRU 4.14.10R:

  1. (1)

    continuously for at least 24 months; and

  2. (2)

    consistently across all its netting sets.

Potential future exposure: hedging approach

MIFIDPRU 4.14.13 G
  1. (1)

    1If a derivative contract has a negative replacement cost, a firm should still calculate a PFE in relation to that contract if it is possible for the replacement cost to become positive before the maturity date.

  2. (2)

    As the replacement cost of an individual written option can never be a positive amount, written options are exempt from the requirement to calculate a PFE, unless they are subject to netting with contracts other than written options for the purposes of calculating PFE in accordance with MIFIDPRU 4.14.14R and MIFIDPRU 4.14.16R.

  3. (3)

    If a written option is subject to netting for the purposes of calculating PFE, a firm may cap the PFE in relation to that option at an amount that would result in a replacement cost of zero.

MIFIDPRU 4.14.14 R
  1. (1)

    1For the purposes of calculating the PFE of derivative contracts included within a netting set under MIFIDPRU 4.14.16R, a firm must:

    1. (a)

      calculate the effective notional amount of each contract (EN) in accordance with MIFIDPRU 4.14.20R;

    2. (b)

      allocate each derivative contract to an asset class in accordance with (2) and (3); and

    3. (c)

      calculate a separate net notional amount for each asset class in (b) by netting the EN of all derivative contracts allocated to that asset class, with long positions to be treated as positive amounts and short positions to be treated as negative amounts.

  2. (2)

    Subject to (3), a firm must assign derivative contracts to separate asset classes as follows:

    1. (a)

      except as specified in (b) to (d), a derivative contract must be allocated to the relevant asset class specified in the table in MIFIDPRU 4.14.22R;

    2. (b)

      interest rate derivatives must be allocated to separate asset classes according to their currency;

    3. (c)

      foreign exchange derivatives must be allocated to separate asset classes according to each currency pair; and

    4. (d)

      derivative contracts falling within the “other” class in MIFIDPRU 4.14.22R may be allocated to the same class if their primary risk driver is identical, but otherwise must each be treated as a separate class.

  3. (3)

    Derivative contracts that would fall within a specific asset class under (2) must be allocated to a separate asset class if:

    1. (a)

      they reference the basis between two risk factors and are denominated in a single currency (i.e. they are basis transactions), in which case all basis transactions referencing that same pair of risk factors must be allocated to a separate asset class; or

    2. (b)

      they reference the volatility of a risk factor (i.e. they are volatility transactions), in which case all volatility transactions referencing that same risk factor must be allocated to a separate asset class.

MIFIDPRU 4.14.15 G
  1. (1)

    1MIFIDPRU 4.14.14R(2) defines the main asset classes to which derivative contracts should be assigned to calculate the potential future exposure of a netting set. For example, a single name equity derivative would be allocated to the equity single name asset class in MIFIDPRU 4.14.22R, while a credit derivative would be allocated to the credit asset class in that rule.

  2. (2)

    MIFIDPRU 4.14.14R(3) requires basis transactions or volatility swaps that would otherwise fall within one of the main asset classes in MIFIDPRU 4.14.14R(2) to be allocated to separate asset classes. The separate asset classes are defined according to the relevant risk factor or pair of risk factors.

  3. (3)

    For example, an equity index future on Equity Index A and another equity index future on Equity Index B would be allocated to the same asset class under MIFIDPRU 4.14.14R(2)(a), as they both fall within the asset class (i.e. equity indices) in MIFIDPRU 4.14.22R. However, a volatility swap that references Equity Index A must be allocated to a separate class under MIFIDPRU 4.14.14R(3)(b), but can be grouped with another volatility swap that also references Equity Index A (i.e. the same risk factor).

  4. (4)

    For derivative contracts relating to foreign exchange, a firm may net contracts relating to a currency pair (for example, USD/EUR) against contracts relating to the inverse pair (i.e. in this example, EUR/USD) by treating one pair as a long position and the inverse pair as a short position.

  5. (5)

    For interest rate derivative contracts that have multiple legs, the firm should add together the notional amounts of the positive (receive) and negative (pay) legs, after adjusting for the duration and the supervisory delta in accordance with the calculation of the effective notional amount in MIFIDPRU 4.14.20R. The net amount should then be included in the calculation of PFE.

MIFIDPRU 4.14.16 R

1For the purposes of MIFIDPRU 4.14.10R(2)(a), a firm must calculate the potential future exposure of derivative contracts included within a netting set by:

  1. (1)

    multiplying the absolute value of the net notional amount under MIFIDPRU 4.14.14R(1)(c) for each asset class within the netting set by the supervisory factor for that asset class specified in MIFIDPRU 4.14.22R;

  2. (2)

    adding together the product of the calculation in (1) for all asset classes within the netting set; and

  3. (3)

    multiplying the sum under (2) by:

    1. (a)

      0.42, for netting sets of transactions with financial or non-financial counterparties for which, if required, collateral is exchanged bilaterally with the counterparty in accordance with the conditions laid down in article 11 of EMIR; or

    2. (b)

      1, for other netting sets.

Potential future exposure: derivative netting ratio approach

MIFIDPRU 4.14.17 G
  1. (1)

    1If a derivative contract has a negative replacement cost, a firm should still calculate a potential future exposure (PFE) in relation to that contract if it is possible for the replacement cost to become positive before the maturity date.

  2. (2)

    As the replacement cost of an individual written option can never be a positive amount, written options are exempt from the requirement to calculate a PFE, unless they are subject to netting with contracts other than written options for the purposes of calculating PFE in accordance with MIFIDPRU 4.14.18R.

MIFIDPRU 4.14.18 R

1A firm must calculate a net potential future exposure for each netting set using the following formula:

MIFIDPRU_4_14_18

where:

  1. (1)

    PFEnet = the net potential future exposure for the netting set;

  2. (2)

    PFEgross = the sum of the potential future exposure of all derivative contracts included in the netting set, calculated by multiplying the absolute value of the effective notional amount of each derivative contract (as calculated in accordance with MIFIDPRU 4.14.20R) by the relevant supervisory factor for the corresponding asset class specified in MIFIDPRU 4.14.22R;

  3. (3)

    RCnet = the sum of the replacement cost (as determined in accordance with MIFIDPRU 4.14.9R) of all transactions included in the netting set, unless that sum is a negative amount, in which case RCnet is zero; and

  4. (4)

    RCgross = the sum of the replacement cost (as determined in accordance with MIFIDPRU 4.14.9R) of all transactions included in the netting set that have a positive CMV.

MIFIDPRU 4.14.19 R

1For the purposes of MIFIDPRU 4.14.10R(2)(b), the potential future exposure for the derivative contracts included within a netting set is the product of multiplying PFEnet (as determined in accordance with MIFIDPRU 4.14.18R) by:

  1. (1)

    0.42, for netting sets of transactions with financial or non-financial counterparties for which, if required, collateral is exchanged bilaterally with the counterparty in accordance with the conditions laid down in article 11 of EMIR; or

  2. (2)

    1, for other netting sets.

Effective notional amount

MIFIDPRU 4.14.20 R
  1. (1)

    1The effective notional amount is calculated as follows:

    Effective notional amount = N * D * SD

    1. (a)

      N = the notional amount, determined in accordance with (2);

    2. (b)

      D = the duration, calculated in accordance with (3); and

    3. (c)

      SD = the supervisory delta, calculated in accordance with (5).

  2. (2)

    The notional amount, unless clearly stated and fixed until maturity, is determined as follows:

    1. (a)

      for foreign exchange derivative contracts:

      1. (i)

        if one leg of the contract is in the domestic currency, the notional amount is the notional amount of the foreign currency leg of the contract, converted into the domestic currency;

      2. (ii)

        if both legs of the contract are denominated in currencies other than the domestic currency, the notional amount of each leg must be converted into the domestic currency and the leg with the larger value in the domestic currency is the notional amount; and

      3. (iii)

        the term “domestic currency”, when used in this rule, refers to the currency in which the firm reports to the FCA;

    2. (b)

      for equity and commodity derivatives contracts and emissions allowances and derivatives thereof, the notional amount is the product of the market price of one unit of the instrument and the number of units referenced by the trade;

    3. (c)

      for transactions with multiple pay-offs that are state contingent including digital options or target redemption forwards, a firm must calculate the notional amount for each state and use the largest resulting calculation;

    4. (d)

      where the notional is a formula of market values, the firm must use the CMVs to determine the trade notional amount;

    5. (e)

      for variable notional swaps such as amortising and accreting swaps, a firm must use the average notional over the remaining life of the swap as the trade notional amount;

    6. (f)

      leveraged swaps must be converted to the notional amount of the equivalent unleveraged swap so that where all of the rates in a swap are multiplied by a factor, the stated notional amount is multiplied by the factor on the interest rates to determine the notional amount; and

    7. (g)

      for a derivative contract with multiple exchanges of principal, the stated notional amount must be multiplied by the number of exchanges of principal in the derivative contract to determine the notional amount.

  3. (3)

    The duration must be determined in accordance with the following:

    1. (a)

      for all derivative contracts other than interest rate contracts and credit derivative contracts, the duration is 1;

    2. (b)

      for interest rate contracts and credit derivative contracts, the duration is determined in accordance with the following formula in which the time to maturity is specified in years:

      Duration = (1 – exp (-0.05 * time to maturity)) / 0.05

  4. (4)

    The maturity of a contract must be determined as follows:

    1. (a)

      for an option, the maturity is the latest contractual exercise date as specified by the contract;

    2. (b)

      for a derivative contact that is structured such that on specified dates, any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity is the time until the next reset date;

    3. (c)

      for any other derivative contract, the maturity is the latest date on which the contract may still be executed; and

    4. (d)

      in each case, if the derivative contract references the value of another interest rate or credit instrument, the time period must be determined on the basis of that underlying instrument.

  5. (5)

    The supervisory delta must be determined as follows:

    1. (a)

      for options and swaptions, the firm may calculate the supervisory delta itself by using an appropriate model if:

      1. (i)

        the model the firm uses meets the minimum standards set out in MIFIDPRU 4.12.12G to MIFIDPRU 4.12.18G (Minimum standards for own estimates of delta), as modified by MIFIDPRU 4.14.21R, for each type of option or swaption for which it calculates delta;

      2. (ii)

        the firm has notified the FCA that the minimum standards in (i) are met before the firm begins to use its own estimates for the relevant supervisory delta; and

      3. (iii)

        the notification in (ii) is made using the form in MIFIDPRU 4 Annex 5R and submitted using the online notification and application system;

    2. (b)

      for transactions other than options and swaptions, or transactions in respect of which a firm is unable to use an appropriate model in accordance with (a), the supervisory delta is 1 or -1; and

    3. (c)

      in each case, the supervisory delta must reflect the relationship between the contract and the underlying, whereby a contract that increases exposure (by increasing RC) as the underlying increases shall have a positive supervisory delta, and a contract that decreases exposure (by decreasing RC) as the underlying increases shall have a negative supervisory delta.

MIFIDPRU 4.14.21 R
  1. (1)

    1When applying the minimum standards in MIFIDPRU 4.12.12G to MIFIDPRU 4.12.18G for the purposes of MIFIDPRU 4.14.20R(5)(a), the standards apply with the following modifications:

    1. (a)

      a reference to the “standardised approach” is a reference to the rules in this section relating to the calculation of the K-TCD requirement; and

    2. (b)

      a reference to the K-NPR requirement is a reference to the K-TCD requirement.

  2. (2)

    In addition to the minimum standards in MIFIDPRU 4.12.12G to MIFIDPRU 4.12.18G a firm must also confirm to the FCA that the relevant model estimates the rate of change of the value of the option for small changes in the market value of the underlying.

MIFIDPRU 4.14.22 R

1The supervisory factor for each asset class is set out in the following table:

Asset class

Supervisory factor

Interest rate

0.5%

Foreign exchange

4%

Credit

1%

Equity single name

32%

Equity index

20%

Commodity and emission allowance

18%

Other

32%

MIFIDPRU 4.14.23 R

1Transactions relating to gold or gold derivatives must be allocated to the foreign exchange asset class in MIFIDPRU 4.14.22R.

Value of collateral

MIFIDPRU 4.14.24 R
  1. (1)

    1This rule applies for the purposes of determining the value of C under MIFIDPRU 4.14.8R.

  2. (2)

    For the transactions specified in MIFIDPRU 4.14.3R(1), (5) and (7), the value of the C is the notional amount of collateral received by the firm, decreased in accordance with the relevant volatility adjustment specified in MIFIDPRU 4.14.25R.

  3. (3)

    Unless (4) applies, for the transactions specified in MIFIDPRU 4.14.3R(2), (3), (4) and (6), the value of the C is the sum of:

    1. (a)

      the CMV of the security leg; and

    2. (b)

      the net amount of collateral posted or received by the firm.

  4. (4)

    For securities financing transactions where both legs of the transaction are securities, the value of the C is the CMV of the security borrowed by the firm.

  5. (5)

    Where the firm is purchasing or has lent the security, the CMV of the security shall be treated as a negative amount and shall be decreased to a larger negative amount, using the volatility adjustment specified in MIFIDPRU 4.14.25R.

  6. (6)

    Where the firm is selling or has borrowed the security, the CMV of the security shall be treated as a positive amount and be decreased by the volatility adjustment specified in MIFIDPRU 4.14.25R.

  7. (7)

    Where different types of transactions are covered by a contractual netting agreement that meets the requirements in MIFIDPRU 4.14.28R(3), the applicable volatility adjustments in column C (volatility adjustment other transactions) of the table in MIFIDPRU 4.14.25R must be applied to the respective amounts calculated under (3)(a) and (b) on an issuer basis within each asset class.

  8. (8)

    Where there is a currency mismatch between the transaction and the collateral received or posted, an additional currency mismatch volatility adjustment of 8% shall apply.

MIFIDPRU 4.14.25 R
  1. (1)

    1A firm must apply the volatility adjustments in (2) to all transactions referred to in MIFIDPRU 4.14.3R.

  2. (2)

    Collateral for bilateral and cleared transactions shall be subject to volatility adjustments in accordance with the following table:

    (A)

    (B)

    (C)

    Asset class

    Volatility adjustment: repurchase transactions and securities lending and borrowing transactions

    Volatility adjustment: other transactions

    Debt securities issued by central governments or central banks

    ≤ 1 year

    0.707%

    1%

    > 1 year ≤ 5 year

    2.121%

    3%

    > 5 years

    4.243%

    6%

    Debt securities issued by other entities

    ≤ 1 year

    1.414%

    2%

    > 1 year ≤ 5 years

    4.243%

    6%

    > 5 years

    8.485%

    12%

    Securitisation positions (excluding re-securitisation positions)

    ≤ 1 year

    2.828%

    4%

    > 1 year ≤ 5 years

    8.485%

    12%

    > 5 years

    16.970%

    24%

    Listed equities and convertibles

    14.143%

    20%

    Other financial instruments (including re-securitisation positions) and commodities

    17.678%

    25%

    Gold

    10.607%

    15%

    Cash

    0%

    0%

MIFIDPRU 4.14.26 G

1The references to years in column A of the table in MIFIDPRU 4.14.25R are references to the remaining maturity of the relevant security or position.

MIFIDPRU 4.14.27 G

1The following is an example of how the volatility adjustment under MIFIDPRU 4.14.24R and MIFIDPRU 4.14.25R applies. A firm enters into an OTC derivative contract and receives collateral in the form of a debt security issued by a central bank with a maturity of 6 years. The notional value of the debt security is 100. MIFIDPRU 4.14.24R(2) requires the notional value of the collateral to be decreased by the applicable volatility adjustment. In accordance with the table in MIFIDPRU 4.14.25R, the relevant volatility adjustment is 6%. The resulting value of the collateral after the volatility adjustment has been applied is therefore 94.

Netting

MIFIDPRU 4.14.28 R

1For the purposes of calculating its K-TCD requirement, a firm may, in the following order:

  1. (1)

    first, treat perfectly matching contracts included in a netting agreement as if they were a single contract with a notional principal equivalent to the net receipts;

  2. (2)

    second, net other transactions subject to novation under which all obligations between the firm and its counterparty are automatically amalgamated in such a way that the novation legally substitutes one set single net amount for the previous gross obligations; and

  3. (3)

    third, net other transactions where the firm ensures that the following conditions have been met:

    1. (a)

      the transactions are covered by a netting contract with the counterparty, or by another agreement that creates a single legal obligation, such that the firm would have either a claim to receive, or obligation to pay, only the net sum of the positive and negative mark-to-market values of the individual transactions if a counterparty fails to perform due to any of the following:

      1. (i)

        default;

      2. (ii)

        bankruptcy;

      3. (iii)

        liquidation; or

      4. (iv)

        similar circumstances;

    2. (b)

      in the event of default of a counterparty, the netting contract does not contain any clause that permits a non-defaulting counterparty to make limited payments only, or no payments at all, to the estate of the defaulting party even if the defaulting party is a net creditor;

    3. (c)

      the firm has obtained an independent, written and reasoned legal opinion that, in the event of a legal challenge to the netting agreement, the firm’s claims and obligations would be equivalent to those referred to in (a) under each of the following legal regimes:

      1. (i)

        the law of the jurisdiction in which the counterparty is incorporated;

      2. (ii)

        if a foreign branch of a counterparty is involved, the law of the jurisdiction in which the branch is located;

      3. (iii)

        the law that governs the individual transactions included in the netting agreement; or

      4. (iv)

        the law that governs any contract or agreement necessary to effect the netting.

Risk factor

MIFIDPRU 4.14.29 R

1The risk factor for a counterparty is set out in the following table:

Counterparty type

Risk factor

Central governments, central banks and public sector entities

1.6%

Credit institutions and investment firms

1.6%

Other counterparties

8%

Credit valuation adjustment

MIFIDPRU 4.14.30 R
  1. (1)

    1For the purposes of this rule, the “credit valuation adjustment” (CVA) means an adjustment to the mid-market valuation of the portfolio of transactions with a counterparty that reflects the CMV of the credit risk of the counterparty to the firm, but does not reflect the CMV of the credit risk of the firm to the counterparty.

  2. (2)

    The CVA for all transactions is 1.5, except for the transactions in (3).

  3. (3)

    The CVA for the following transactions is 1:

    1. (a)

      the following transactions, if they do not exceed the clearing threshold specified in article 10(3) and (4) of EMIR:

      1. (i)

        transactions with non-financial counterparties (as defined in point (9) of article 2 of EMIR); or

      2. (ii)

        transactions with non-financial counterparties established in a third country;

    2. (b)

      intra-group transactions as provided for in article 3 of EMIR;

    3. (c)

      long settlement transactions;

    4. (d)

      securities financing transactions unless the FCA has notified the firm that the firm’s CVA risk exposures arising from those transactions are material; and

    5. (e)

      credits and loans referred to in MIFIDPRU 4.14.3R(7).

MIFIDPRU 4.15 K-DTF requirement

MIFIDPRU 4.15.1 R

1Subject to MIFIDPRU 4.15.11R, the K-DTF requirement of a MIFIDPRU investment firm is equal to the sum of:

  1. (1)

    0.1% of average DTF attributable to cash trades; and

  2. (2)

    0.01% of average DTF attributable to derivatives trades.

MIFIDPRU 4.15.2 G
  1. (1)

    1The definition of DTF includes transactions that a firm enters into when dealing on own account or when executing client orders in the firm’s own name.

  2. (2)

    A firm that has permission to operate an organised trading facility may engage in:

    1. (a)

      matched principal trading in certain types of financial instruments with client consent, in accordance with MAR 5A.3.5R(1); and/or

    2. (b)

      dealing on own account in illiquid sovereign debt instruments in accordance with MAR 5A.3.5R(2).

  3. (3)

    Where a firm engages in either activity in (2), it must include those transactions in the measurement of its DTF.

  4. (4)

    Except for the transactions in (2), DTF does not include orders that a firm handles in the course of operating an organised trading facility. However, DTF includes transactions entered into by a firm in its own name through an organised trading facility where the firm is not operating that organised trading facility.

MIFIDPRU 4.15.3 R

1A firm must calculate its K-DTF requirement on the first business day of each month.

MIFIDPRU 4.15.4 R
  1. (1)

    1A firm must calculate the amount of its average DTF as:

    1. (a)

      taking the total DTF as measured throughout each business day in each of the previous 9 months;

    2. (b)

      excluding the daily values for the most recent 3 months; and

    3. (c)

      calculating the arithmetic mean of the daily values for the remaining 6 months.

  2. (2)

    When measuring the value of DTF for a particular business day, a firm must convert any amounts in foreign currencies on that date into the firm’s functional currency.

  3. (3)

    For the purposes of the currency conversion in (2), a firm must:

    1. (a)

      determine the conversion rate by reference to an appropriate market rate; and

    2. (b)

      record the rate that was chosen.

MIFIDPRU 4.15.5 G
  1. (1)

    1The effect of MIFIDPRU 4.15.4R(2) is that when measuring the value of DTF at the end of each business day, a firm must apply the relevant conversion rate on that date to any amounts in foreign currencies forming part of the DTF attributable to that business day. The DTF for each preceding business day should continue to be measured by reference to the conversion rate that was applicable on that preceding day.

  2. (2)

    For the purposes of MIFIDPRU 4.15.4R(3), where a firm is carrying out a conversion that involves sterling, the FCA considers that an example of an appropriate market rate would be the relevant daily spot exchange rate against sterling published by the Bank of England.

MIFIDPRU 4.15.6 R
  1. (1)

    1When measuring its DTF, a firm must use the sum of the absolute value of each buy order and sell order, as determined in accordance with this rule.

  2. (2)

    For cash trades relating to financial instruments, the value of the order is the amount paid or received on the trade.

  3. (3)

    For derivatives trades other than orders relating to interest rate derivatives, the value of the order is the notional amount of the contract, determined in accordance with MIFIDPRU 4.14.20R(2).

  4. (4)

    For orders relating to interest rate derivatives, the value of the order is the notional amount of the contract determined in accordance with MIFIDPRU 4.14.20R(2), adjusted in accordance with MIFIDPRU 4.15.8R.

MIFIDPRU 4.15.7 G

1For cash trades relating to exchange-traded options, the amount paid or received on the trade under MIFIDPRU 4.15.6R(2) is the premium paid for the option.

MIFIDPRU 4.15.8 R
  1. (1)

    1For the purposes of MIFIDPRU 4.15.6R(4), a firm must adjust the notional amount of an interest rate derivative by multiplying that notional amount by the duration.

  2. (2)

    For the purposes of (1), the duration must be determined in accordance with the following formula:

    Duration = time to maturity (in years) / 10

MIFIDPRU 4.15.9 G

1When measuring DTF for the purposes of MIFIDPRU 4.15.4R, a firm must include transactions executed by a firm in its own name either for itself or on behalf of a client.

MIFIDPRU 4.15.10 R
  1. (1)

    1This rule applies where a firm has had a daily trading flow for less than 9 months.

  2. (2)

    For the purposes of its calculation of average DTF under MIFIDPRU 4.15.4R, a firm must use the modified calculation in MIFIDPRU TP 4.11R(1) with the following adjustments:

    1. (a)

      in MIFIDPRU TP 4.11R(1)(b), n is the relevant number of months for which the firm has had a daily trading flow (with the month during which the firm begins that activity being counted as month zero); and

    2. (b)

      during month zero of the calculation, the firm must:

      1. (i)

        use a best efforts estimate of expected DTF for that month based on its projections when beginning the new activity; and

      2. (ii)

        use the estimate in (i) as its average DTF;

    3. (c)

      during month 1 of the calculation and each month thereafter, the firm must apply the approach in (a) using observed historical data from the preceding months;

    4. (d)

      the modified calculation ceases to apply on the date that falls 9 months after the date on which the firm first had a daily trading flow.

Adjusted coefficient in stressed market conditions

MIFIDPRU 4.15.11 R
  1. (1)

    1This rule applies where a firm’s measurement of its DTF under MIFIDPRU 4.15.4R includes a proportion of daily trading flow that occurred on a trading segment of a trading venue to which stressed market conditions (as defined in article 6 of the Market Making RTS) applied.

  2. (2)

    Where this rule applies, a firm may apply the following adjusted coefficients:

    1. (a)

      for cash trades, a coefficient determined in accordance with (3) instead of the relevant coefficient in MIFIDPRU 4.15.1R(1); or

    2. (b)

      for derivatives trades, a coefficient determined in accordance with (4) instead of the relevant coefficient in MIFIDPRU 4.15.1R(2).

  3. (3)

    For cash trades, the adjusted coefficient must be determined by using the following formula:

    CadjCash = C * (DTFexcl/DTFincl)

    where:

    1. (a)

      CadjCash = the adjusted coefficient in (2)(a);

    2. (b)

      C = the original coefficient in MIFIDPRU 4.15.1R(1);

    3. (c)

      DTFexcl = the average DTF of cash trades calculated in accordance with MIFIDPRU 4.15.4R, excluding the value of any cash trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that:

      1. (i)

        stressed market conditions began to apply; and

      2. (ii)

        stressed market conditions ceased to apply;

    4. (d)

      DTFincl = the average DTF of all cash trades calculated in accordance with MIFIDPRU 4.15.4R.

  4. (4)

    For derivative trades, the adjusted coefficient must be determined by using the following formula:

    CadjDer = C * (DTFexcl/DTFincl)

    where:

    1. (a)

      CadjDer = the adjusted coefficient in (2)(b);

    2. (b)

      C = the original coefficient in MIFIDPRU 4.15.1R(2);

    3. (c)

      DTFexcl = the average DTF of derivative trades calculated in accordance with MIFIDPRU 4.15.4R, excluding the value of any derivative trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that:

      1. (i)

        stressed market conditions began to apply; and

      2. (ii)

        stressed market conditions ceased to apply;

    4. (d)

      DTFincl = the average DTF of all derivative trades calculated in accordance with MIFIDPRU 4.15.4R.

MIFIDPRU 4.15.12 G
  1. (1)

    1MIFIDPRU 4.15.11R permits a firm to apply a reduced coefficient for the purposes of determining its K-DTF requirement where part of the firm’s average DTF for the relevant period is attributable to transactions that took place on a segment of a trading venue to which stressed market conditions applied. The relevant coefficient must be calculated separately for cash trades and derivative trades.

  2. (2)

    MIFIDPRU 4.15.11R permits a firm to substitute a reduced coefficient that applies to the firm’s average DTF for the relevant calculation period. The size of the reduction is proportional to the value of trades that were placed on a segment of a trading venue during stressed market conditions within the calculation period, relative to the overall value of trades entered into by the firm during that period.

MIFIDPRU 4.15.13 G
  1. (1)

    1The following is an example of how the adjusted coefficient in MIFIDPRU 4.15.11R applies.

  2. (2)

    A firm executes total cash trades in its own name worth £9,600m during the 6-month calculation period for determining average DTF under MIFIDPRU 4.15.4R(1)(c). That 6-month period includes 128 business days.

  3. (3)

    The total £9,600m of cash trades includes £375m of cash trades that were executed on trading venues during stressed market conditions (as defined in article 6 of the Market Making RTS).

  4. (4)

    In this example:

    DTFincl = £9,600m / 128 days = £75m

    DTFexcl = (£9,600m - £375m) / 128 days = £9,225m / 128 days = £72.07m

    C = 0.1%

    CadjCash = 0.1% x (72.07 / 75) = 0.1% x 0.961 = 0.0961%

  5. (5)

    To calculate its K-DTF requirement for this calculation period, the firm multiplies the full amount of its average DTF for the period by the adjusted coefficient (CadjCash). Therefore:

    K-DTF requirement for cash trades = £75m x 0.0961% = £72,075

MIFIDPRU 4 Annex 6R Application under MIFIDPRU 4.12.66R to use sensitivity models to calculate interest rate risk on derivative instruments

MIFIDPRU 4 Annex 6 R

1[Editor’s note: the form can be found at this address: MIFIDPRU4_Annex 6R_20220101.pdf]

MIFIDPRU 4 Annex 12G Guidance on the interaction between K-AUM and K-COH

MIFIDPRU 4 Annex 12.1 G
  1. (1)

    1This annex contains guidance on the interaction between the K-AUM requirement and the K-COH requirement in certain scenarios.

  2. (2)

    The scenarios contained in this annex are not intended to be exhaustive. MIFIDPRU investment firms should analyse any arrangement that is not covered by the guidance in this annex by reference to the rules and guidance in MIFIDPRU 4.7 (in relation to the K-AUM requirement) and MIFIDPRU 4.10 (in relation to the K-COH requirement). Firms should also refer to the guidance in MIFIDPRU 4.6.2G.

MIFIDPRU 4 Annex 12.2 G
  1. (1)

    1The following table indicates whether a MIFIDPRU investment firm is required to calculate a K-AUM requirement or a K-COH requirement in a particular scenario.

  2. (2)

    In the table, a reference to:

    1. (a)

      “DPM” is to the activity of discretionary portfolio management;

    2. (b)

      “IF1” is to the first MIFIDPRU investment firm;

    3. (c)

      “IF2” is to the second MIFIDPRU investment firm;

    4. (d)

      “IF3” is to the third MIFIDPRU investment firm;

    5. (e)

      a dash (-) indicates that there is no second MIFIDPRU investment firm involved in the relevant scenario;

    6. (f)

      “Yes” means that the relevant requirement applies to that activity; and

    7. (g)

      “No” means that the relevant requirement does not apply to that activity.

  3. IF1

    IF1 K-AUM

    IF1 K-COH

    IF2

    IF2 K-AUM

    IF2 K-COH

    1

    DPM, executes the resulting orders

    Yes

    No

    -

    -

    -

    2

    DPM, delegates DPM to IF2

    Yes

    No

    Undertakes delegated DPM and executes the resulting orders

    No

    Yes

    3

    DPM, delegates DPM to IF2. Receives orders back from IF2 to execute

    Yes

    No

    Undertakes delegated DPM and passes orders back to IF1 to execute

    No

    No

    4

    DPM, delegates DPM to IF2

    Yes

    No

    Undertakes delegated DPM and passes orders back to IF3 to execute No No

    No

    No

    5

    DPM, delegates DPM to IF2. Receives orders back from IF2 and passes them to IF3 to execute

    Yes

    No

    Undertakes delegated DPM and passes orders back to IF1

    No

    No

    6

    DPM, passes orders to IF2 for execution

    Yes

    No

    Executes orders on behalf of IF1

    No

    Yes

    7

    DPM, receives ongoing advice from IF2

    Yes

    No

    Gives ongoing advice on assets managed by IF1

    Yes

    No

    8

    Provides ongoing investment advice in relation to assets and executes resulting orders

    Yes

    No

    -

    -

    -

    9

    Provides ongoing investment advice in relation to assets, with orders executed by IF2

    Yes

    No

    Executes orders received from IF1 for execution

    No

    Yes

    10

    Provides “one-off” investment advice to a client. Any orders are passed to IF2 for execution

    No

    Yes

    Executes orders received from IF1 for execution

    No

    Yes

    11

    Provides “one-off” investment advice to a client. Executes any resulting orders

    No

    Yes

    -

    -

    -

    12

    Execution only of client orders

    No

    Yes

    -

    -

    -

    13

    Client orders received are passed to IF2 for execution

    No

    Yes

    Executes orders received from IF1 for execution

    No

    Yes

MIFIDPRU 4 Annex 13R K-NPR requirement - provisions on closely correlated currencies

1Application and purpose

13.1

R

This annex specifies currency pairs that may be treated as closely correlated for the purposes of article 354(1) of the UK CRR (as applied by MIFIDPRU 4.12.2R) when a MIFIDPRU investment firm or UK parent entity is calculating its K-NPR requirement.

13.2

R

The following table lists closely correlated currencies for the purposes of MIFIDPRU 4 Annex 13.1R:

Part 1

List of closely correlated currencies against the euro (EUR)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Czech koruna (CZK), British pound (GBP), Croatian kuna (HRK), Moroccan dirham (MAD), Romanian leu (RON).

Part 2

List of closely correlated currencies against the Arab Emirates dirham (AED)

Angolan kwanza (AOA), Canadian dollar (CAD), Chinese yuan (CNY), British pound (GBP), Hong Kong dollar (HKD), Lebanese pound (LBP), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 3

List of closely correlated currencies against the Albanian lek (ALL)

Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Czech koruna (CZK), Danish krone (DKK), Croatian kuna (HRK), Moroccan dirham (MAD), Romanian leu (RON), euro (EUR).

Part 4

List of closely correlated currencies against the Angolan kwanza (AOA)

Arab Emirates dirham (AED), Chinese yuan (CNY), Hong Kong dollar (HKD), Lebanese pound (LBP), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 5

List of closely correlated currencies against the Bosnia and Herzegovina mark (BAM)

Albanian lek (ALL), Bulgarian lev (BGN), Czech koruna (CZK), Danish krone (DKK), British pound (GBP), Croatian kuna (HRK), Moroccan dirham (MAD), Romanian leu (RON), euro (EUR).

Part 6

List of closely correlated currencies against the Bulgarian lev (BGN)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Czech koruna (CZK), Danish krone (DKK), British pound (GBP), Croatian kuna (HRK), Moroccan dirham (MAD), Romanian leu (RON), euro (EUR).

Part 7

List of closely correlated currencies against the Canadian dollar (CAD)

Arab Emirates dirham (AED), Hong Kong dollar (HKD), Macau pataca (MOP), Singapore dollar (SGD), Taiwanese dollar (TWD), US dollar (USD).

Part 8

List of closely correlated currencies against the Chinese yuan (CNY)

Arab Emirates dirham (AED), Angolan kwanza (AOA), British pound (GBP), Hong Kong dollar (HKD), Lebanese pound (LBP), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 9

List of closely correlated currencies against the Czech koruna (CZK)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Danish krone (DKK), Croatian kuna (HRK), Moroccan dirham (MAD), Romanian leu (RON), euro (EUR).

Part 10

List of closely correlated currencies against the Danish krone (DKK)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Czech koruna (CZK), British pound (GBP), Croatian kuna (HRK), Moroccan dirham (MAD), Romanian leu (RON), Singapore dollar (SGD).

Part 11

List of closely correlated currencies against the British pound (GBP)

Arab Emirates dirham (AED), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Chinese yuan (CNY), Danish krone (DKK), Hong Kong dollar (HKD), Croatian kuna (HRK), Lebanese pound (LBP), Moroccan dirham (MAD), Macau pataca (MOP), Singapore dollar (SGD), Taiwanese dollar (TWD), US dollar (USD), euro (EUR).

Part 12

List of closely correlated currencies against the Hong Kong dollar (HKD)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Canadian dollar (CAD), Chinese yuan (CNY), British pound (GBP), Lebanese pound (LBP), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 13

List of closely correlated currencies against the Croatian kuna (HRK)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Czech koruna (CZK), Danish krone (DKK), British pound (GBP), Moroccan dirham (MAD), Romanian leu (RON), Singapore dollar (SGD), euro (EUR).

Part 14

List of closely correlated currencies against the South Korean won (KRW)

Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Taiwanese dollar (TWD).

Part 15

List of closely correlated currencies against the Lebanese pound (LBP)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Chinese yuan (CNY), British pound (GBP), Hong Kong dollar (HKD), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 16

List of closely correlated currencies against the Moroccan dirham (MAD)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Czech koruna (CZK), Danish krone (DKK), British pound (GBP), Croatian kuna (HRK), Romanian leu (RON), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), euro (EUR).

Part 17

List of closely correlated currencies against the Macau pataca (MOP)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Canadian dollar (CAD), Chinese yuan (CNY), British pound (GBP), Hong Kong dollar (HKD), Lebanese pound (LBP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 18

List of closely correlated currencies against the Peruvian nuevo sol (PEN)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Chinese yuan (CNY), Hong Kong dollar (HKD), South Korean won (KRW), Lebanese pound (LBP), Macau pataca (MOP), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 19

List of closely correlated currencies against the Philippine peso (PHP)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Chinese yuan (CNY), Hong Kong dollar (HKD), South Korean won (KRW), Lebanese pound (LBP), Macau pataca (MOP), Malaysian Ringgit (MYR), Peruvian nuevo sol (PEN), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 20

List of closely correlated currencies against the Romanian leu (RON)

Albanian lek (ALL), Bosnia and Herzegovina mark (BAM), Bulgarian lev (BGN), Czech koruna (CZK), Danish krone (DKK), Croatian kuna (HRK), Moroccan dirham (MAD), euro (EUR).

Part 21

List of closely correlated currencies against the Singapore dollar (SGD)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Canadian dollar (CAD), Chinese yuan (CNY), Danish krone (DKK), British pound (GBP), Hong Kong dollar (HKD), Croatian kuna (HRK), South Korean won (KRW), Lebanese pound (LBP), Moroccan dirham (MAD), Macau pataca (MOP), Malaysian ringgit (MYR), Peruvian nuevo sol (PEN), Philippine peso (PHP), Thai baht (THB), Taiwanese dollar (TWD), US dollar (USD).

Part 22

List of closely correlated currencies against the Thai baht (THB)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Chinese yuan (CNY), Hong Kong dollar (HKD), Lebanese pound (LBP), Moroccan dirham (MAD), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Taiwanese dollar (TWD), US dollar (USD).

Part 23

List of closely correlated currencies against the Taiwanese dollar (TWD)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Canadian dollar (CAD), Chinese yuan (CNY), British pound (GBP), Hong Kong dollar (HKD), South Korean won (KRW), Lebanese pound (LBP), Moroccan dirham (MAD), Macau pataca (MOP), Malaysian Ringgit (MYR), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), US dollar (USD).

Part 24

List of closely correlated currencies against the US dollar (USD)

Arab Emirates dirham (AED), Angolan kwanza (AOA), Canadian dollar (CAD), Chinese yuan (CNY), British pound (GBP), Hong Kong dollar (HKD), Lebanese pound (LBP), Macau pataca (MOP), Peruvian nuevo sol (PEN), Philippine peso (PHP), Singapore dollar (SGD), Thai baht (THB), Taiwanese dollar (TWD).