Related provisions for BIPRU 7.3.41

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BIPRU 7.10.4GRP
The aim of the VaR model approach is to enable a firm with adequate risk management systems to be subject to a PRR requirement that is more closely aligned with the risks to which it is subject than the PRR requirements generated by the standard market risk PRR rules. This provides a firm with an incentive to measure market risks as accurately and comprehensively as possible. It is crucial that those responsible for managing market risk at a firm should be aware of the assumptions
BIPRU 7.10.19GRP
In accordance with BIPRU 7.10.18R (1) a VaR model permission will set out the risk categories that it covers, which are expected to be one or more of the following types:(1) interest rate general market risk;(2) interest rate specific risk (in conjunction with interest rate general market risk);(3) equitygeneral market risk;(4) equityspecific risk (in conjunction with equitygeneral market risk);(5) CIU risk;(6) foreign currency risk; and(7) commodity risk.
BIPRU 7.10.25GRP
The appropriate regulator accepts that the scope and nature of VaR models varies across firms. This means that different firms are likely to calculate different estimates of market risk for the same portfolio. Systematic differences are due to length of data series, choice of methodology (historical or Monte Carlo simulation or variance-covariance method or a hybrid of these), differences in aggregating risks within and across broad risk factors, the treatment of options and other
BIPRU 7.10.38GRP
Subject to BIPRU 7.10.53R (Model standards: Materiality), a VaR model should capture and accurately reflect all material risks arising on the underlying portfolio on a continuing basis insofar as those risks are within the scope of the VaR model permission. This should encompass general market risk and, to the extent that this comes within the scope of the VaR model permission, specific risk. A firm should ensure that the VaR model has sufficient risk factor granularity to be
BIPRU 7.10.39RRP
In the case of general market risk and risks with respect to which the standard market risk PRR rules do not distinguish between general market risk and specific risk, a firm'sVaR model must capture a sufficient number of risk factors in relation to the level of activity of the firm and in particular the risks set out in BIPRU 7.10.40R - BIPRU 7.10.44R.
BIPRU 7.10.45GRP
(1) This paragraph contains guidance on the inclusion of CIUs in a VaR model.(2) The appropriate regulator may allow all types of CIU to be included within the scope of a firm'sVaR model permission.(3) BIPRU 7.10 does not distinguish between specific risk and general market risk for positions in CIUs. Therefore even if specific risk is not otherwise included within the scope of a firm'sVaR model permission, a firm should be able to demonstrate that its VaR model captures specific
BIPRU 7.10.55BRRP
3The incremental risk charge must cover all positions which are subject to a capital charge for interest-rate specific risk in accordance with the firm'sVaR model permission, except securitisationpositions and nth-to-default credit derivatives. Where permitted by its VaR model permission, a firm may choose consistently to include all listed equity positions and derivativespositions based on listed equities for which that inclusion is consistent with how the firm internally measures
BIPRU 7.10.61GRP
A firm'sVaR model output should be an integral part of the process of planning, monitoring and controlling a firm'smarket risk profile. The VaR model should be used in conjunction with internal trading and exposure limits. The links between these limits and the VaR model should be consistent over time and understood by senior management. The firm should regard risk control as an essential aspect of the business to which significant resources need to be devoted.
BIPRU 7.10.75RRP
At least once a year, a firm must conduct, as part of its regular internal audit process, a review of its risk management process. This review must include both the activities of the business trading units and of the independent risk control unit, and must be undertaken by suitably qualified staff independent of the areas being reviewed. This review must consider, at a minimum:(1) the adequacy of the documentation of the risk management system and process;(2) the organisation
BIPRU 7.10.100RRP
The profit and loss figure3 for a particular business day is the firm's actual profit or loss for that day in respect of the trading activities within the scope of the firm'sVaR model permission, adjusted by stripping out:3(1) fees and commissions;(2) brokerage;(3) additions to and releases from reserves which are not directly related to market risk (e.g. administration reserves); and(4) any inception profit exceeding an amount specified for this purpose in the firm'sVaR model
BIPRU 7.10.133GRP
A VaR model permission will modify GENPRU 2.1.52 R (Calculation of the market risk capital requirement) to provide that a firm should calculate its market risk capital requirement in accordance with BIPRU 7.10 to the extent set out in the VaR model permission.
BIPRU 7.10.136RRP
(1) This rule applies to a position of a type that comes within the scope of a firm'sVaR model permission.(2) Subject to BIPRU 7.10.136A R, if, 3where the standard market risk PRR rules apply, a position is subject to a PRR charge and the firm'sVaR model permission says that it covers the risks to which that PRR charge relates, the firm must, for those risks, calculate the PRR for that position under the VaR model approach rather than under the standard market risk PRR rules.3(3)
3A firm must calculate the market risk capital requirement for securitisation positions and positions in the correlation trading portfolio in accordance with the standard market risk PRR rules, with the exception of those positions subject to the all price risk measure.
BIPRU 7.10.138RRP
(1) If a firm calculates its market risk capital requirement using a combination of the standard market risk PRR rules and either the VaR model approach or the VaR model approach with the CAD 1 model approach the PRR from each method must be added together.(2) A firm must take appropriate steps to ensure that all of the approaches are applied in a consistent manner.
BIPRU 7.10.139GRP
An example of the effect of BIPRU 7.10.138R is that where a firm normally calculates the PRR for a particular portfolio using a VaR model, a firm should not switch to the standard market risk PRR rules purely to achieve a more attractive PRR.
BIPRU 7.10.143RRP
If a firm'sVaR model permission covers interest rate general market risk but not interest rate specific risk, the firm must calculate the interest rate PRR so far as it relates to interest rate specific risk in accordance with the standard market risk PRR rules except that the firm must not use the basic interest rate PRR calculation in BIPRU 7.3.45R (Basic interest rate calculation for equity instruments).
BIPRU 7.10.144RRP
If a firm'sVaR model permission covers equitygeneral market risk but not equityspecific risk, the firm must calculate the equity PRR so far as it relates to equityspecific risk in accordance with the standard market risk PRR rules except that the PRR for equityspecific risk must be calculated under the standard equity method.
BIPRU 7.2.1RRP
(1) A firm must calculate its interest rate PRR under BIPRU 7.2 by:(a) identifying which positions must be included within the interest rate PRR calculation;(b) deriving the net position in each debt security in accordance with BIPRU 7.2.36R-BIPRU 7.2.41R;(c) including these net positions in the interest rate PRR calculation for general market risk and the interest rate PRR calculation for specific risk; and(d) summing all PRRs calculated for general market risk and specific risk.(2)
BIPRU 7.2.2GRP
The interest rate PRR calculation divides the interest rate risk into the risk of loss from a general move in market interest rates, and the risk of loss from an individual debt security's price changing for reasons other than a general move in market interest rates. These are called general market risk and specific risk respectively.
BIPRU 7.2.10GRP
BIPRU 7.2.11 R - BIPRU 7.2.35R convert the instruments listed in the table in BIPRU 7.2.4R into notional positions in:(1) the underlying debt security, where the instrument depends on the price (or yield) of a specific debt security; or(2) notional debt securities to capture the pure interest rate risk arising from future payments and receipts of cash (including notional payments and receipts) which, because they are designed to represent pure general market risk (and not specific
BIPRU 7.2.16RRP
The notional debt securities in BIPRU 7.2.14R are 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.
BIPRU 7.2.17GRP
The 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. BIPRU 7.2.16R requires a firm to select the highest percentages even where 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.
BIPRU 7.2.46RRP
A debt security issued by a non-qualifying issuer must receive a specific risk position risk adjustment of 8% or 12% according to the table in BIPRU 7.2.44R. However a firm must apply a higher specific risk position risk adjustment to such a debt security and/or not recognise offsetting for the purposes of defining the extent of general market risk between such a security and any other debt securities to the extent that doing otherwise would not be a prudent treatment of specific
BIPRU 7.2.52RRP
A firm must calculate the general market risk portion of the interest rate PRR for each currency using either:(1) the interest rate simplified maturity method;(2) the interest rate maturity method; or(3) the interest rate duration method.
BIPRU 7.2.54RRP
A firm must not use the interest rate duration method for index-linked securities. Instead, these securities must:(1) be attributed a coupon of 3%; and(2) be treated separately under either the interest rate simplified maturity method or the interest rate maturity method.
BIPRU 7.2.55GRP
The interest rate simplified maturity method weights individual net positions to reflect their price sensitivity to changes in interest rates. The weights are related to the coupon and the residual maturity of the instrument (or the next interest rate re-fix date for floating rate items).
BIPRU 7.2.56RRP
Under the interest rate simplified maturity method, the portion of the interest rate PRR for general market risk equals the sum of each individual net position (long or short) multiplied by the appropriate position risk adjustment in the table in BIPRU 7.2.57R. A firm must assign its net positions to the appropriate maturity bands in the table in BIPRU 7.2.57R on the basis of residual maturity in the case of fixed-rate instruments and on the basis of the period until the interest
BIPRU 7.2.57RRP
Table: general market risk Position Risk AdjustmentsThis table belongs to BIPRU 7.2.56R.ZoneMaturity bandposition risk adjustmentCoupon of 3% or moreCoupon of less than 3%One0 ≤ 1 month0 ≤ 1 month0.00%> 1 ≤ 3 months> 1 ≤ 3 months0.20%> 3 ≤ 6 months> 3 ≤ 6 months0.4%> 6 ≤ 12 months> 6 ≤ 12 months0.7%Two> 1 ≤ 2 years> 1.0 ≤ 1.9 years1.25%> 2 ≤ 3 years> 1.9 ≤ 2.8 years1.75%> 3 ≤ 4 years> 2.8 ≤ 3.6 years2.25%Three> 4 ≤ 5 years> 3.6 ≤ 4.3 years2.75%> 5 ≤ 7 years> 4.3 ≤ 5.7 years3.25%>
BIPRU 7.2.58GRP
The interest rate maturity method builds on the interest rate simplified maturity method by partially recognising offsetting positions. BIPRU 7.2.61G provides an illustration of the interest rate maturity method.
BIPRU 7.2.59RRP
Under the interest rate maturity method, the portion of the interest rate PRR for general market risk is calculated as follows:(1) Step 1: each net position is allocated to the appropriate maturity band in the table in BIPRU 7.2.57R and multiplied by the corresponding position risk adjustment;(2) Step 2: weighted long and short positions are matched within:(a) the same maturity band;(b) the same zone (using unmatched positions from (a)); and(c) different zones (using unmatched
BIPRU 7.2.60GRP
The table in BIPRU 7.2.57R distinguishes between debt securities with a coupon of less than 3% and those with coupon in excess of 3%. However, this does not mean that the firm has to do a separate general market risk calculation for each; it merely ensures that when allocating debt securities to a particular band, their coupons are taken into account as well as their maturities. So for example, a 21 year 6% debt security falls into the same band as an 11 year 2% debt security.
BIPRU 7.2.61GRP
This paragraph sets out an example of a calculation under the interest rate maturity method. In this example, a firm with a £ sterling base currency is processing its euro denominated positions.
BIPRU 7.2.62GRP
The interest rate duration method produces a more accurate measure of interest rate risk than the maturity methods but it is also more complex to calculate.
BIPRU 7.2.64RRP
Under the interest rate duration method, the portion of the interest rate PRR for general market risk is calculated as follows:(1) Step 1: allocate each net position to the appropriate duration zone in the table in BIPRU 7.2.65R and multiply it by:(a) its modified duration (using the formula in BIPRU 7.2.63R); and(b) the appropriate assumed interest rate change in the table in BIPRU 7.2.65R;(2) Step 2: match weighted long and short positions:(a) within zones; and(b) across zones
BIPRU 7.2.65RRP
Table: Assumed interest rate change in the interest rate duration methodThis table belongs to BIPRU 7.2.64RZoneModified DurationAssumed interest rate change(percentage points)10 ≤ 12 months1.002> 12 months ≤ 3.6 years0.853> 3.6 years0.70
BIPRU 7.2.66RRP
If a firm uses the interest rate duration method it must do so on a consistent basis.
BIPRU 7.3.1RRP
(1) A firm must calculate its equity PRR by:(a) identifying which positions must be included within the PRR calculation (see BIPRU 7.3.2R);(b) deriving the net position in each equity in accordance with BIPRU 7.3.23R;(c) including each of those net positions in either the simplified equity method (see BIPRU 7.3.29R) or, subject to BIPRU 7.3.27R, the standard equity method (see BIPRU 7.3.32R); and(d) summing the PRR on each net position as calculated under the simplified equity
BIPRU 7.3.20GRP
The interest rate leg of an equityswap is included in a firm'sinterest rate PRR calculation (see the table in BIPRU 7.2.4R (Table: Instruments which result in notional positions)) unless it is treated under BIPRU 7.3.45R.
BIPRU 7.3.31GRP
The standard equity method divides the risk of loss from a firm'sequitypositions into the risk of loss from a general move in a country's equity market and the risk of loss from an individual equity's price changing relative to that country's equity market. These are called general market risk and specific risk respectively.
BIPRU 7.3.32RRP
Under the standard equity method, a firm must:(1) group equitypositions into country portfolios as follows:(a) a position in an individual equity belongs to:(i) the country it is listed in;(ii) any of the countries it is listed in, if more than one; or(iii) the country it was issued from, if unlisted;(b) a position in an equity basket or index that is treated under BIPRU 7.3.15R(2), is allocated to one or more country portfolios based on the countries to which the underlying equities
BIPRU 7.3.40RRP
Under the standard equity method, a firm must apply approach one, as set out in BIPRU 7.3.41R, to each country portfolio (or part portfolio) unless the conditions in BIPRU 7.3.42R(3) are met, in which case the firm may instead apply approach two, as set out in BIPRU 7.3.42R, to the relevant country portfolios (or part portfolios).
BIPRU 7.3.42RRP
(1) Under approach two as referred to in BIPRU 7.3.40R, the PRR for general market risk is calculated using the following formula:(2) In the formula in (1) CPi denotes the net value of ith country portfolio (converted to the firm'sbase currency using current spot foreign currency rates).(3) The conditions referred to in BIPRU 7.3.40R that must be met for a firm to be able to use approach two as referred to in BIPRU 7.3.40R are as follows:(a) at least four country portfolios are
BIPRU 7.3.43GRP
In order to meet BIPRU 7.3.42R(3)(d), it is likely that part of a country portfolio will have to be excluded from approach two under BIPRU 7.3.42R (and therefore included in approach one under BIPRU 7.3.41R), even if that country portfolio meets BIPRU 7.3.42R(3)(a) - (c).
BIPRU 7.3.44GRP
A basic interest rate PRR calculation is included in BIPRU 7.3 for a firm that does not wish to use the calculation in BIPRU 7.2 (Interest rate PRR). However, it tends to result in higher charges than the methods in BIPRU 7.2, largely because the interest rate PRR is calculated on each notional equityposition separately and then summed without offsetting long and short positions.
BIPRU 7.3.45RRP
This rule applies to a firm that does not include a forward, future, option or swap on an equity, basket of equities or equity index in the calculation of its interest rate PRR calculation under BIPRU 7.2 (Interest rate PRR). However it does not apply to cliquet as defined in BIPRU 7.6.18R (Table: Option PRR: methods for different types of option). A firm must calculate the interest rate PRR for a position being treated under this rule as follows:(1) multiply the market value
BIPRU 7.3.46GRP
Cliquets on equities, baskets of equities or equity indices do not attract an interest rate PRR. BIPRU 7.3.45R excludes them from the basic interest rate PRR calculation and the table in BIPRU 7.2.4R (Table: Instruments which result in notional positions) excludes them from the scope of the interest rate PRR calculation in BIPRU 7.2 (Interest rate PRR).
BIPRU 8.7.1GRP
The calculation of the consolidated capital resources requirement of a firm's UK consolidation group or non-EEA sub-group involves taking the individual components that make up the capital resources requirement on a solo basis and applying them on a consolidated basis. Those components are the capital charge for credit risk (the credit risk capital requirement), the capital charge for market risk (the market risk capital requirement)4 and the fixed overheads requirement.
BIPRU 8.7.2GRP
Each of the capital charges in BIPRU 8.7.1 G, as applied on a consolidated basis, is called a consolidated requirement component. The name of each consolidated requirement component reflects the solo capital charge on which it is based. Solo capital charges are called risk capital requirements. Thus for example the consolidated requirement component for market risk is called the consolidated market risk requirement. The calculation of the consolidated market risk requirement is
BIPRU 8.7.9GRP
A firm may make the choice between an aggregation and a line by line approach differently for each consolidated requirement component. So for example a firm may decide to calculate the consolidated market risk requirement on an aggregation basis and the consolidated fixed overheads requirement on a line by line basis.
BIPRU 8.7.10RRP
A firm must calculate the consolidated capital resources requirement of its UK consolidation group or non-EEA sub-group as the higher of the following consolidated requirements components:33(1) the sum of the consolidated credit risk requirement and the consolidated market risk requirement; and3(2) the consolidated fixed overheads requirement. 3
BIPRU 8.7.12RRP
Table: Capital charges relating to consolidated requirement componentsThis table belongs to BIPRU 8.7.11 RConsolidated requirement componentRules on which the consolidated requirement component are based (the applicable risk capital requirement)Consolidated credit risk requirementCredit risk capital requirementConsolidated fixed overheads requirementFixed overheads requirementConsolidated market risk requirementMarket risk capital requirement3
BIPRU 8.7.15GRP
The provisions of this section on credit risk and market risk restrict the choice given by BIPRU 8.7.13 R in certain circumstances.
BIPRU 8.7.24RRP
For the purposes of calculating the consolidated market risk requirement of a UK consolidation group or non-EEA sub-group, a firm must apply BIPRU 1.2.3 R (Definition of the trading book) and BIPRU 1.2.17 R (Size thresholds for the purposes of the definition of the trading book) to the whole UK consolidation group or non-EEA sub-group as if the group were a single undertaking.
BIPRU 8.7.25RRP
A firm may not apply the second method in BIPRU 8.7.13R (3) (accounting consolidation for the whole group) or apply accounting consolidation to parts of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a) for the purposes of the calculation of the consolidated market risk requirement unless the group or sub-group and the undertakings in that group or sub-group satisfy the conditions in this rule. Instead the firm must use the
BIPRU 13.6.25RRP
A firm must compute effective EPE by estimating expected exposure (EEt) as the average exposure at future date t, where the average is taken across possible future values of relevant market risk factors. The model estimates EE at a series of future dates t1, t2, t3, etc.[Note: BCD Annex III Part 6 point 7 third part]
BIPRU 13.6.35ARRP
3Where appropriate, volatilities and correlations of market risk factors used in the joint simulation of market risk and credit risk must be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an economic downturn.[Note: BCD Annex III Part 6 point 14]
BIPRU 13.6.43RRP
(1) A firm's risk management policies must take account of market risk, liquidity risk, and legal and operational risk that can be associated with CCR.(2) The firm must not undertake business with a counterparty without assessing its creditworthiness and must take due account of settlement and pre-settlement credit risk.(3) These risks must be managed as comprehensively as practicable at the counterparty level (aggregating CCRexposures with other credit exposures) and at the firm-wide
BIPRU 13.6.57RRP
(1) A firm must stress test its CCRexposures, including jointly stressing market risk and credit risk factors.(2) In its stress tests of CCR, a firm must consider concentration risk (to a single counterparty or groups of counterparties), correlation risk across market risk and credit risk, and the risk that liquidating the counterparty's positions could move the market.(3) In its stress tests a firm must also consider the impact on its own positions of such market moves and integrate
BIPRU 13.6.58RRP
A firm must give due consideration to exposures that give rise to a significant degree of general wrong-way risk.[Note: BCD Annex III Part 6 point 34]
BIPRU 13.6.59RRP
A firm must have procedures in place to identify, monitor and control cases of specific wrong-way risk, beginning at the inception of a transaction and continuing through the life of the transaction.[Note: BCD Annex III Part 6 point 35]
BIPRU 13.6.61RRP
A firm must ensure that:(1) the model employs current market data to compute current exposures;(2) when using historical data to estimate volatility and correlations, at least three years of historical data are used and updated quarterly or more frequently if market conditions warrant;(3) the data covers a full range of economic conditions, such as a full business cycle;(4) a unit independent from the business unit validates the price supplied by the business unit;(5) the data
BIPRU 13.6.64RRP
A firm must monitor the appropriate risks and have processes in place to adjust its estimation of EPE when those risks become significant. This includes the following:(1) the firm must identify and manage its exposures to specific wrong-way risk;(2) for exposures with a rising risk profile after one year, the firm must compare on a regular basis the estimate of EPE over one year with EPE over the life of the exposure; and(3) for exposures with a residual maturity below one year,
BIPRU 13.6.67RRP
(1) A firm'sCCR internal model method model must meet the validation requirements in (2) to (8).(2) The qualitative validation requirements set out in BIPRU 7.10 must be met.(3) Interest rates, foreign currency rates, equity prices, commodities, and other market risk factors must be forecast over long time horizons for measuring CCRexposure. The performance of the forecasting model for market risk factors must be validated over a long time horizon.(4) The pricing models used to
BIPRU 7.7.4RRP
A firm may rely on a third party to calculate and report PRR capital requirements for position risk (general market risk and specific risk) for positions in CIUs falling within BIPRU 7.7.9R and BIPRU 7.7.11R, in accordance with the methods set out in BIPRU 7.7, provided that the correctness of the calculation and the report is adequately ensured.
BIPRU 7.7.5RRP
Without prejudice to other provisions in BIPRU 7.7, a position in a CIU is subject to a collective investment undertaking PRR (general market risk and specific risk) of 32%. Without prejudice to provisions in BIPRU 7.5.18R (Foreign currency PRR for CIUs) or, if the firm has a VaR model permission, BIPRU 7.10.44R (Commodity risks and VaR models) taken together with BIPRU 7.5.18R, where the modified gold treatment set out in those rules is used, a position in a CIU is subject to
BIPRU 7.7.9RRP
(1) Where a firm is aware of the underlying investments of the CIU on a daily basis the firm may look through to those underlying investments in order to calculate the securities PRR for position risk (general market risk and specific risk) for those positions in accordance with the methods set out in the securities PRR requirements or, if the firm has a VaR model permission, in accordance with the methods set out in BIPRU 7.10 (Use of a Value at Risk Model).(2) Under this approach,
BIPRU 7.7.10RRP
(1) A firm may calculate the securities PRR for position risk (general market risk and specific risk) for positions in CIUs in accordance with the methods set out in the securities PRR requirements or, if the firm has a VaR model permission, in accordance with the methods set out in BIPRU 7.10 (Use of a Value at Risk Model), to assumed positions representing those necessary to replicate the composition and performance of the externally generated index or fixed basket of equities
BIPRU 7.7.11RRP
Where a firm is not aware of the underlying investments of the CIU on a daily basis, the firm may calculate the securities PRR for position risk (general market risk and specific risk) in accordance with the methods set out in the securities PRR requirements, subject to the following conditions:(1) it must be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting the highest securities PRR for position risk (general market
GENPRU 2.2.47RRP
For the purposes of meeting:(1) the market risk capital requirement; and22(2) [deleted]22(3) the fixed overheads requirement ;16a BIPRU firm may only use the following parts of its capital resources:(4) tier one capital to the extent that it is not required to meet the requirements in GENPRU 2.2.44 R (GENPRU 2.2.48 R explains how to calculate how much tier one capital is required to meet the requirements in GENPRU 2.2.44 R);(5) tier two capital to the extent that it:(a) comes
GENPRU 2.2.56GRP
This table belongs to GENPRU 2.2.55 GDescription of the stage of the capital resources calculationStage in the capital resources tableAmount (£)Total tier one capital and tier two capital after deductionsStage N140Credit and counterparty1 risk requirement16(100)Tier one capital and tier two capital available to meet market risk requirement40Tier three capitalStage Q50Total capital available to meet market risk requirement90Market risk requirement(90)Market risk requirement met
GENPRU 2.2.57GRP
The gearing limit in GENPRU 2.2.49 R (Combined tier two and tier three limits) requires that the upper tier three capital used to meet the market risk requirement does not exceed 250% of the relevant1tier one capital1.
GENPRU 2.2.58GRP
In this example it is assumed that the maximum possible amount of tier one capital is carried forward to meet the market risk requirement. There are other options as to the allocation of tier one capital and tier two capital to the credit and counterparty1 risk requirement.1In order to calculate the relevant tier one capital for the upper tier three gearing limit in accordance with GENPRU 2.2.49 R it is first necessary to allocate tier one capital and tier two capital to the individual
GENPRU 2.2.188RRP
The value of general/collective provisions which a firm may include in its tier two capital resources as referred to in GENPRU 2.2.187 R may not exceed 1.25% of the sum of the following:(1) 22 the market risk capital requirement22multiplied by a factor of 12.5; and(2) the sum of risk weighted assets under the standardised approach for credit risk.
GENPRU 2.2.260RRP
Illiquid assets means illiquid assets including(1) tangible fixed assets (except land and buildings if they are used by a firm as security for loans, but this exclusion is only up to the value of the principal outstanding on the loans); or(2) any holdings in the capital resources of credit institutions or financial institutions, except to the extent that:(a) they have already been deducted as a material holding; or(b) they are shares which are included in a firm'strading book
GENPRU 2.2.265RRP
The standard market risk PRR rules apply for establishing what is a net position and the amount and value of that position for the purposes of GENPRU 2.2.264 R, ignoring rules which would otherwise exclude such positions from BIPRU 7.2 (Interest rate PRR) or BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives) on the basis that they are to be deducted from a bank or building society'scapital resources, or for any other reason.
BIPRU 7.8.2RRP
A firm which underwrites or sub-underwrites an issue of securities must, for the purposes of calculating its market risk capital component1:(1) identify commitments to underwrite or sub-underwrite which give rise to an underwritingposition (see BIPRU 7.8.8R);(2) identify the time of initial commitment (see BIPRU 7.8.13R); and(3) calculate the net underwriting position (set out in BIPRU 7.8.17R), reduced net underwriting position or the net underwriting exposure.
BIPRU 7.8.27RRP
To calculate the reduced net underwriting position a firm must apply the reduction factors in the table in BIPRU 7.8.28R to the net underwriting position (calculated under BIPRU 7.8.17R) as follows:(1) in respect of debt securities, a firm must calculate two reduced net underwriting positions; one for inclusion in the firm'sinterest rate PRRspecific risk calculation (BIPRU 7.2.43R), the other for inclusion in its interest rate PRRgeneral market risk calculation (BIPRU 7.2.52R);
BIPRU 7.8.28RRP
Table: Net underwriting position reduction factorsThis table belongs to BIPRU 7.8.27RUnderwriting timelineDebtEquityGeneral market riskSpecific riskTime of initial commitment until working day 00%100%90%Working day 10%90%90%Working day 20%75%75%Working day 30%75%75%Working day 40%50%50%Working day 50%25%25%Working day 6 and onwards0%0%0%
BIPRU 7.8.38RRP
A firm must take reasonable steps to establish and maintain such systems and controls to monitor and manage its underwriting and sub-underwriting business as are appropriate to the nature, scale and complexity of its underwriting and sub-underwriting business. In particular, a firm must have systems to monitor and control its underwritingexposures between the time of the initial commitment and working day one in the light of the nature of the risks incurred in the markets in
BIPRU 7.11.4RRP
A total return swap creates a long position in the general market risk of the reference obligation and a short position in the general market risk of a zero-specific-risk security with a maturity equivalent to the period until the next interest fixing and which is assigned a 0% risk weight under the standardised approach to credit risk. It also creates a long position in the specific risk of the reference obligation.
BIPRU 7.11.5RRP
A credit default swap does not create a position for general market risk. For the purposes of specific risk, a firm must record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt security, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in zero-specific-risk
BIPRU 7.11.6RRP
A single name credit linked note creates a long position in the general market risk of the note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need
BIPRU 7.11.62GRP
BIPRU 7.11.5 R requires a firm to recognise any premiums payable or receivable under the contract as notional zero-specific-risk securities. These positions are then entered into the general market risk framework. As premium payments paid under such contracts are contingent on no credit event occurring, a credit event could significantly change the general market risk capital requirement. A firm should consider, under the overall Pillar 2 rule, whether this risk means that the
REC 2.3.3GRP
In determining whether a UK recognised body has financial resources sufficient for the proper performance of its relevant functions, the FCA5 may have regard to:5(1) the operational and other risks to which the UK recognised body is exposed;(2) if the UK recognised body guarantees the performance of transactions in specified investments, the counterparty and market risks to which it is exposed in that capacity; 5(3) the amount and composition of the UK recognised body's capital;(4)
REC 2.3.5GRP
In assessing whether a UK recognised body has sufficient financial resources in relation to counterparty and market risks, the FCA5 may have regard to:5(1) the amount and liquidity of its financial assets and the likely availability of liquid financial resources to the UK recognised body during periods of major market turbulence or other periods of major stress for the UK financial system;3 and(2) the nature and scale of the UK recognised body's exposures to counterparty and market
REC 2.3.6GRP
In assessing whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FCA5 may have regard to the extent to which, after allowing for the financial resources necessary to cover counterparty and market risks, the UK recognised body's financial resources are sufficient and sufficiently liquid:5(1) to enable the UK recognised body to continue carrying on properly the regulated activities that it expects to carry on; and(2) to
REC 2.3.11GRP
4For the purposes of REC 2.3, "eligible financial resources" should consist of liquid financial assets held on the balance sheet of a UK recognised body, including cash and liquid financial instruments where the financial instruments have minimal market and credit risk and are capable of being liquidated with minimal adverse price effect.
BIPRU 7.1.14RRP
(1) If a firm has a position:(a) in a PRR item in non-standard form; or(b) that is part of a non-standard arrangement; or(c) that, taken together with other positions (whether or not they are subject to PRRcharges under BIPRU 7), gives rise to a non-standard market risk;the firm must notify the appropriate regulator of that fact and of details about the position, PRR item, arrangements and type of risk concerned.(2) Except as (1) provides to the contrary, (1) applies to a position
BIPRU 7.1.15RRP
If a firm has a position or combination of positions falling into BIPRU 7.1.14R and the PRR relating to that position or positions materially underestimates the market risk incurred by the firm to which they give rise, the firm must calculate the PRR for that position or positions under BIPRU 7.1.13R.
BIPRU 7.1.19GRP
3This paragraph gives guidance in relation to the stress testing programme that a firm must carry out in relation to its trading bookpositions.(1) The frequency of the stress testing of trading bookpositions should be determined by the nature of the positions.(2) The stress testing should include shocks which reflect the nature of the portfolio and the time it could take to hedge out or manage risks under severe market conditions.(3) The firm should have procedures in place to
IFPRU 6.1.2GRP
This chapter:(1) implements article 101 of CRD; (2) contains the rule that exercises the discretion afforded to the FCA as competent authority under article 327(2) of the EU CRR; and(3) contains the guidance for market risk.
IFPRU 6.1.4RRP
A firm which has a permission to use internal models in accordance with Part Three, Title IV, Chapter 5 of the EU CRR (Own funds requirements for market risk):(1) must identify any material risk, or risks that when considered in aggregate are material, which are not captured by those models; (2) must ensure that it holds own funds to cover those risk(s) in addition to those required to meet its own funds requirement calculated in accordance with Part Three, Title IV, Chapter 5
IFPRU 6.1.17GRP
A significant IFPRU firm should consider developing internal specific risk assessment capacity and to increase use of internal models for calculating own funds requirements for specific risk of debt instruments in the trading book, together with internal models to calculate own funds requirements for default and migration risk where its exposures to specific risk are material in absolute terms and where it holds a large number of material positions in debt instruments of different
IFPRU 6.2.1GRP
Article 331(2) of the EU CRR (Interest rate risk in derivative instruments) states 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
IFPRU 6.2.5GRP
Notional 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.
IFPRU 6.2.6GRP
The 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 where 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.
BIPRU 7.6.8RRP
Table: Appropriate position risk adjustmentThis table belongs to BIPRU 7.6.7RUnderlying positionAppropriate position risk adjustmentEquityThe position risk adjustment applicable to the underlying equity or equity index in the table in BIPRU 7.3.30R (Simplified equity method)Interest rateThe sum of the specific risk position risk adjustment (see BIPRU 7.2.43R to BIPRU 7.2.51G (Specific risk calculation)) and the general market risk position risk adjustment (as set out in BIPRU
BIPRU 7.6.13RRP
Table: Derived positionsThis table belongs to BIPRU 7.6.9RUnderlyingOption (or warrant)Derived positionEquityOption (warrant) on a single equity or option on a future/forward on a single equityA notional position in the actual equity underlying the contract valued at the current market price of the equity.Option (warrant) on a basket of equities or option on a future/forward on a basket of equitiesA notional position in the actual equities underlying the contract valued at the
BIPRU 7.6.14RRP
A firm may treat (for the purpose of calculating an option PRR under BIPRU 7.6) an option strategy listed in the table in BIPRU 7.6.15R as the single position in a notional option specified against that strategy in the table in BIPRU 7.6.15R, if:(1) each element of the strategy is transacted with the same counterparty;(2) the strategy is documented as a single structure;(3) the underlying for each part of the composite position (including any actual holding of the underlying)
BIPRU 7.6.15RRP
Table: Option strategiesThis table belongs to BIPRU 7.6.14ROption strategy (and an example)Notional option (and rule it must be treated under)Bull Spread(e.g. buy 100 call and sell 101 call)One purchased option(treat under BIPRU 7.6.20R)Bear Spread(e.g. sell 100 put and buy 101 put)One written option(treat under BIPRU 7.6.21R)Synthetic Long Call(e.g. long underlying and buy 100 put)One purchased option(treat under BIPRU 7.6.20R or BIPRU 7.6.24R)Synthetic Short Call(e.g. short
SUP 16.12.9RRP
2The applicable data items referred to in SUP 16.12.4 R are set out according to type of firm in the table below.11The applicable reporting frequencies for submission of data items and periods referred to in SUP 16.12.4 R are set out in the table below and are calculated from a firm'saccounting reference date, unless indicated otherwise.The applicable due dates for submission referred to in SUP 16.12.4 R are set out in the table below. The due dates are the last day of the periods
SUP 16.12.11RRP
The applicable data items referred to in SUP 16.12.4 R are set out according to firm type in the table below:Description of data item45Firms' prudential category and applicable data items(note 1)IFPRU investment firms and BIPRU firmsFirmsother thanBIPRU firms or IFPRU investment firmsIFPRUBIPRUIPRU(INV)Chapter 3IPRU(INV)Chapter 5IPRU(INV)Chapter 9IPRU(INV)Chapter 1338Solvency statementNo standard format (note 11)No standard format (note 20)No standard format (note 11)38Balance
SUP 16.12.15RRP
The applicable data items referred to in SUP 16.12.4 R are set out76 according to firm type76 in the table below: 48Description of data itemFirms' prudential category and applicable data items (note 1)IFPRU investment firms and BIPRU firmsFirms other than BIPRU firms or IFPRU investment firmsIFPRUBIPRUIPRU(INV) Chapter 3IPRU(INV) Chapter 5IPRU(INV) Chapter 9IPRU(INV) Chapter 11 (collective portfolio management firms only)IPRU(INV) Chapter 1248IPRU(INV) Chapter 1338Solvency statement(Note
SUP 16.12.22ARRP
2The applicable data items referred to in SUP 16.12.4 R are set out according to type of firm in the table below:45Description ofData itemFirms' prudential category and applicable data item (note 1)IFPRUBIPRU firmExempt CAD firmssubject toIPRU(INV)Chapter 13Firms(other thanexempt CAD firms) subject toIPRU(INV)Chapter 13Firmsthat are also in one or more ofRAGs1 to 6 and not subject toIPRU(INV)Chapter 13Solvency statementNo standard format (note 11)Balance SheetFSA001/FINREP (Notes
SUP 16.12.25ARRP
2The applicable data items referred to in SUP 16.12.4 R are set out according to type of firm in the table below:45Description of data itemFirms' prudential category and applicable data item(note 1)IFPRU investment firms and BIPRU firmsFirmsother thanBIPRU firms or IFPRU investment firmsIFPRUBIPRUIPRU(INV)Chapter 3IPRU(INV)Chapter 5IPRU(INV)Chapter 9IPRU(INV)Chapter 1338Solvency statement (note 11)No standard format38Balance sheetFSA001/FINREP (Notes 2 and 30)FSA001 (Note 2)FSA029FSA029FSA029Section
BIPRU 1.2.14RRP
(1) An internal hedge is a position that materially or completely offsets the component risk element of a non-trading bookposition or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:(a) internal hedges must not be
BIPRU 1.2.20GRP
As required by BIPRU 8.7.21 R (Special rules for the consolidated market risk requirement), a firm should consider whether it meets the threshold conditions in BIPRU 1.2.17 R on both an unconsolidated (or solo) basis and a consolidated basis. If a firm's trading activities on both an unconsolidated (or solo) basis and a consolidated basis are below the threshold size, it may be appropriate for the firm not to adopt the trading book treatment. However, even if the firm does not
BIPRU 1.2.21RRP
A firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.[Note: BCD Annex V, Part 7 point 10]
BIPRU 9.1.8AGRP
(1) The appropriate regulator expects firms to conduct regular stress testing in relation to their securitisation activities and off-balance sheet exposures. The stress tests should consider the firm-wide impact of those activities and exposures in stressed market conditions and the implications for other sources of risk, for example, credit risk, concentration risk, counterparty risk, market risk, liquidity risk and reputational risk. Stress testing of securitisation activities
BIPRU 9.1.10GRP
BIPRU 7 sets out the calculation of the market risk capital requirement for securitisation positions held in the trading book.
BIPRU 7.9.1GRP
A firm is required under GENPRU 2.1.52 R (Calculation of the market risk capital requirement) to calculate its market risk capital requirement using the rules in BIPRU 7. However, the appropriate regulator may at the firm's request modify GENPRU 2.1.52 R to allow the firm to calculate all or part of the PRR for the positions covered by that model by using a CAD 1 model (for options risk aggregation and/or interest rate pre-processing) or a VaR model (value at risk model) instead.
BIPRU 7.9.3GRP
BIPRU 7.9 also explains how the output from the CAD 1 model is fed into the market risk capital requirement calculation.
BIPRU 7.9.7GRP
Table: Types of CAD 1 modelThis table belongs to BIPRU 7.9.6GOptions risk aggregation modelsInterest rate pre-processing modelsBrief description and eligible instrumentsAnalyse and aggregate options risks for: interest rate options;equityoptions;foreign currencyoptions;commodity options; andCIUoptions.May be used to calculate duration weighted positions for: interest rate futures;forward rate agreements (FRAs);forward commitments to buy or sell debt securities;options, swaps or
COLL 5.3.7RRP
2An authorised fund manager must calculate the global exposure of any UCITS scheme it manages either as:(1) the incremental exposure and leverage generated through the use of derivatives and forward transactions (including embedded derivatives as referred to in COLL 5.2.19R (3A) (Derivatives: general)), which may not exceed 100% of the net value of the scheme property; or(2) the market risk of the scheme property.[Note: article 41(1) of the UCITS implementing Directive]
COLL 5.3.8RRP
(1) 2An authorised fund manager must calculate the global exposure of a UCITS scheme by using:(a) the commitment approach; or(b) the value at risk approach.(2) An authorised fund manager must ensure that the method selected in (1) is appropriate, taking into account:(a) the investment strategy pursued by the UCITS scheme;(b) the types and complexities of the derivatives and forward transactions used; and(c) the proportion of the scheme property comprising derivatives and forward
BIPRU 12.5.58GRP
The appropriate regulator regards as marketable those of a firm's assets that it is able to sell outright or repo. For liquidity management purposes, a firm would ordinarily expect to hold a stock of assets of this kind in order to reduce the likelihood that it may need to borrow unsecured at short notice. To the extent that these assets may behave differently under stress conditions than under normal financial conditions, a firm is subject to marketable assets risk.
BIPRU 12.5.59GRP
As a general proposition, the speed with which a firm may be able to realise a marketable asset, and the price impact of doing so, will depend to a significant extent on the volume of those assets which that firm wishes to realise and the market conditions prevailing at the time.
BIPRU 12.5.60GRP
The behaviour of a firm's marketable assets under conditions of stress is likely to depend on a number of different factors, including:(1) the depth and competitiveness of the market for the marketable asset in question, the size of the bid-offer spread, the presence of committed market-makers, the nature of the information available to potential counterparties, the degree of structural complexity of the assets in question and the assets eligibility in central bank market operations