Related provisions for IFPRU 4.8.16

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To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004 (From field only).

The FCA considers that a firm may provide own estimates of exposure at default (EAD) in place of the own estimates of conversion factors (CFs) that it is permitted or required to provide under article 151 of the UK CRR2.
The FCA expects firms using own estimates of EAD to have done the following in respect of EAD estimates:(1) applied EAD estimates at the level of the individual facility;(2) where there is a paucity of observations, ensured that all EAD estimates are cautious, conservative and justifiable. In accordance with article 179(1)(a) of the UK CRR2, estimates must be derived using both historical experience and empirical evidence, and must not be based purely on judgemental consideration.
The FCA expects the time horizon for additional drawings to be the same as the time horizon for defaults. This means that EAD estimation need cover only additional drawings that might take place in the next year, such that:(1) no own funds requirements need be held against facilities, or proportions of facilities that cannot be drawn down within the next year; and(2) where facilities can be drawn down within the next year, firms may, in principle, reduce their estimates to the
Exposures include not only principal amounts borrowed under facilities but also interest accrued which will fluctuate between payment dates. To ensure proper coverage of interest, the FCA expects firms to take the following approach:(1) accrued interest to date should be included in current exposure for performing exposures;(2) firms may choose whether estimated increases in accrued interest up to the time of default should be included in LGD or EAD;(3) in the estimation of EAD,
The FCA considers that there is scope within the UK CRR2 for a firm to recognise on-balance sheet netting (including in respect of cross-currency balances) through EAD as an alternative to LGD1 in cases where a firm meets the general conditions for on-balance1 sheet netting, as set out in article 205 of1 the UK CRR2. 11
Firms are reminded that, since the basis of EAD estimation is that default by the borrower is expected to take place in a one-year time horizon and quite possibly in downturn conditions, the FCA expects any reduction in their CF in anticipation of syndication to take account of this scenario (see article 4(56) of the UK CRR2).
IFPRU 4.12.10GRP
Notification under IFPRU 4.12.1 G should include sufficient information to enable the FCA to assess whether the possible reduction in RWEA which would be achieved by the securitisation is justified by a commensurate transfer of credit risk to third parties. The FCA expects this to include the following:(1) details of the securitisation positions, including rating, exposure value and RWEA broken down by securitisation positions sold and retained;(2) key transaction documentation
IFPRU 4.12.42GRP
Where a firm achieves significant risk transfer for a particular transaction, the FCA expects it to continue to monitor risks related to the transaction to which it may still be exposed. The firm should consider capital planning implications of securitised assets returning to its balance sheet. The UK CRR3 requires a firm to conduct regular stress testing of its securitisation activities and off-balance sheet exposures. The stress tests should consider the firm-wide impact of
The FCA will assess an application for individual consolidation against articles 9 and 396(2) (Compliance with large exposure requirements) of the UK CRR2 on a case-by-case basis. The FCA will assess whether it is still appropriate to permit the treatment if doing so risks conflict with its statutory objectives. The FCA will apply a high level of scrutiny to applications under article 9 of the UK CRR2, consistent with the previous solo consolidation regime.
Article 113(6) of the UK CRR2 (Intra-group credit risk exemption) permits a firm, subject to conditions, to apply a 0% risk-weighting for exposures to certain entities within its FCAconsolidation group, namely its parent undertaking, its own subsidiaries and subsidiaries of its parent undertaking. Article 400(1)(f) of the UK CRR2 then fully exempts such exposures from the large exposures limit stipulated in article 395(1) of the UK CRR2 (Limits to large exposures).
The FCA will expect a firm to which this section applies not to use any member of its core UK group (which is not a firm) to route lending or to have exposures to any third party in excess of the limits stipulated in article 395(1) of the UK CRR2 (Limits to large exposures).
To ensure that estimates of LGDs take into account the most up-to-date experience, the FCA expects a firm to take account of data for relevant incomplete workouts (ie, defaulted exposures for which the recovery process is still in progress, with the result that the final realised losses in respect of those exposures are not yet certain) (see article 179(1)(c) of the UK CRR2).
To ensure that sovereign LGD models are sufficiently conservative in view of the estimation error that may arise from the lack of data on losses to sovereigns, the FCA expects a firm to apply a 45% LGD floor to each unsecured exposure in the sovereign asset class (see article 179(1)(a) of the UK CRR2).
To ensure that its LGD estimates are oriented towards downturn conditions, the FCA expects a firm to have a process through which it:(1) identifies appropriate downturn conditions for each IRB exposure class within each jurisdiction;(2) identifies adverse dependencies, if any, between default rates and recovery rates; and(3) incorporates adverse dependencies, if identified, between default rates and recovery rates in the firm's estimates of LGD in a manner that meets the requirements
The FCA expects a firm using advanced IRB approaches to have done the following in respect of wholesale LGD estimates:(1) applied LGD estimates at transaction level;(2) ensured that all LGD estimates (both downturn and non-downturn) are cautious, conservative and justifiable, given the paucity of observations. Under article 179(1)(a) of the UK CRR2, estimates must be derived using both historical experience and empirical evidence, and not be based purely on judgemental consideration.
In assessing whether the external data used by a firm to build models is representative of its actual obligors or exposures, the FCA expects a firm to consider whether this data is appropriate to its own experience and whether adjustments are necessary (see article 174 of the UK CRR1).
To demonstrate that a rating system provides for a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk, the FCA expects a firm would have regard to the sensitivity of the rating to movements in fundamental risk drivers, in assigning exposures to grades or pools within a rating system (see article 171 of the UK CRR1).
This section contains the rules that exercise the discretion afforded to the FCA as competent authority under article 400(2)(c) and (3) of the UK CRR2 (Large exposures: exemptions). The FCA does not intend to exercise its discretion for any of the other exemptions in article 400(2).
Article 400(2) of the UK CRR2 permits the FCA to fully or partially exempt exposures incurred by a firm to intra-group undertakings that meet the specified criteria from the limit stipulated in article 395(1) of the UK CRR2 in relation to a firm's group of connected clients that represent its wider group. The FCA will consider exempting non-trading book and trading book exposures to intra-group undertakings if specified conditions throughout IFPRU 8.2 are met.
A firm may only make use of the non-core large exposure group exemption where the following conditions are met: (1) the total amount of the non-trading book exposures from the firm to its non-core large exposures group does not exceed 100% of the firm'seligible capital; or (if the firm has a core UK grouppermission) the total amount of non-trading book exposures from its core UK group (including the firm) to its non-core large exposures group does not exceed 100% of the core
The FCA will assess core UK group and non-core large exposure group applications against article 400(2)(c) on a case-by-case basis. The FCA will only approve this treatment for non-core large exposure group undertakings where the conditions in article 400(2)(c) are met. A firm should note that the FCA will still make a wider judgement whether it is appropriate to grant this treatment even where the conditions in article 400(2)(c) are met.
Where the FCA has published evidence showing that a well-developed and long-established residential property market is present in that territory with loss rates which do not exceed the limits in article 125(3) of the UK CRR4 (Exposures fully and completely secured by mortgages on residential property), a firm does not need to meet the condition in article 125(2)(b) of the UK CRR4 in order to consider an exposure, or any part of an exposure, as fully and completely secured for
For the purposes of articles 124(2) and 126(2) of the UK CRR4, and in addition to the conditions in those regulations, a firm may only treat exposures as fully and completely secured by mortgages on commercial immovable property located in the UK1 in line with article 126 where annual average losses stemming from lending secured by mortgages on commercial property in the UK did not exceed 0.5% of risk-weighted exposure amounts over a representative period. A firm must calculate
Where an exposure is denominated in a currency other than the euro, the FCA expects a firm to use appropriate and consistent exchange rates to determine compliance with relevant thresholds in the UK CRR3. Accordingly, a firm should calculate the euro equivalent value of the exposure for the purposes of establishing compliance with the aggregate monetary limit of €1 million for retail exposures using a set of exchange rates the firm considers to be appropriate. The FCA expects
The FCA expects a firm with exposure to a lifetime mortgage to inform the FCA of the difference in the own funds requirements on those exposures under the UK CRR4 and the credit risk capital requirement that would have applied under BIPRU 3.4.56A R.The FCA will use this information in its consideration of relevant risks in its supervisory assessment of the firm (see articles 124, 125 and 208 of the UK CRR4).
When determining the portion of a past due item that is secured, the FCA expects the secured portion of an exposure covered by a mortgage indemnity product that is eligible for credit risk mitigation purposes under Part Three, Title II, Chapter 4 of the UK CRR4 (Credit risk mitigation) to qualify as an eligible guarantee (see article 129(2) of the UK CRR4).
When determining whether exposures in the form of units or shares in a CIU are associated with particularly high risk, the FCA expects the following features would be likely to give rise to such risk:(1) an absence of external credit assessment of such CIU from an ECAI recognised under article 132(2) of the UK CRR4 (Items representing securitisation positions) and where such CIU has specific features (such as high levels of leverage or lack of transparency) that prevent it from
(1) The FCA may permit the exemption of exposures to sovereigns and institutions under article 150(1)(a) and (b) of the UK CRR3 respectively only if the number of material counterparties is limited and it would be unduly burdensome to implement a rating system for such counterparties.(2) The FCA considers that the 'limited number of material counterparties' test is unlikely to be met if for the UK group total outstandings to 'higher risk' sovereigns and institutions exceed either
Where a firm wishes to permanently apply the Standardised Approach to exposures to connected counterparties in accordance with article 150(1)(e) of the UK CRR3, the FCA would normally expect to grant permission to do so only if the firm had a policy that provided for the identification of connected counterparties exposures that would be permanently exempted from the IRB approach and also identified connected counterparty exposures (if any) that would not be permanently exempted
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:

89Description of data item

Firms’ prudential category and applicable data item (note 1)

MIFIDPRU investment firms

Firms subject to IPRU(INV)

Chapter 13

Firms that are also in one or more of RAGs 2 to 6 and not subject to IPRU(INV)

Chapter 13

Solvency statement

No standard format

(note 2)

Balance sheet


(note 3)

Section A RMAR

Income statement


(note 3)

Section B RMAR

Capital adequacy


(notes 3 and 6)

Section D1 RMAR (note 9)


MIF002 (notes 3, 4 and 6)

Metrics monitoring


(notes 3 and 6)

Concentration risk



(notes 3, 5 and 6)

Concentration risk



(notes 3, 5 and 6)

Group capital test


(notes 6 and 8)

ICARA assessment questionnaire


(note 6)

Supplementary capital data for collective portfolio management investment firms


(note 10)

Professional indemnity insurance (note 11)90

Section E RMAR

Section E RMAR

Section E RMAR

Threshold conditions

Section F RMAR

Training and competence

Section G RMAR

Section G RMAR

Section G RMAR

COBS data

Section H RMAR

Section H RMAR

Section H RMAR

Client money and client assets

Section C RMAR

Section C RMAR

Fees and levies

Section J RMAR

Section J RMAR

Adviser charges

Section K RMAR (note 7)

Section K RMAR (note 7)

Section K RMAR (note 7)

Note 1

When submitting the completed data item required, a firm (except a MIFIDPRU investment firm in relation to an item reported under MIFIDPRU 9) must use the format of the data item set out in SUP 16 Annex 24R, or SUP 16 Annex 18AR in the case of the RMAR. Guidance notes for completion of the data items are contained in SUP 16 Annex 25, or SUP 16 Annex 18BG in the case of the RMAR.

Note 2

Only applicable to a firm that is a sole trader or partnership. Where the firm is a partnership, this report must be submitted by each partner.

Note 3

A UK parent entity of an investment firm group to which consolidation applies under MIFIDPRU 2.5 must also submit this report on the basis of the consolidated situation.

Note 4

Does not apply to an SNI MIFIDPRU investment firm which has been granted an exemption from the liquidity requirements in MIFIDPRU 6.

Note 5

Only applicable to a non-SNI MIFIDPRU investment firm.

Note 6

Data items MIF001 – MIF007 must be reported in accordance with the rules in MIFIDPRU 9.

Note 7

This item only applies to firms that provide advice on retail investment products and P2P agreements.

Note 8

Only applicable to a parent undertaking to which the group capital test applies.

Note 9

Where a firm submits data items for both RAG 7 and RAG 9, the firm must complete Section D1.

Note 10

Only applicable to firms that are collective portfolio management investment firms.

Note 11

Only applicable to firms that are subject to an FCA requirement to hold professional indemnity insurance and are not MIFIDPRU investment firms.90

Where a firm has not chosen to apply the definition of default at the level of an individual credit facility in accordance with article 178(1) of the UK CRR1, the FCA expects it to ensure that the PD associated with unsecured exposures is not understated as a result of the presence of any collateralised exposures.
The FCA expects a firm to estimate PD for a rating system in line with this section where the firm's internal experience of defaults for that rating system was 20 defaults or fewer, and reliable estimates of PD cannot be derived from external sources of default data, including the use of market price-related data. In PD estimation for all exposures covered by the rating system, the FCA expects the firm to:(1) use a statistical technique to derive the distribution of defaults implied
The FCA expects that if a firm ordinarily assigns exposures in the corporate, institution or central government and central bank exposure classes to a member of a group, substantially on the basis of membership of that group and a common group rating, and the firm does so in the case of a particular obligor group, the firm should consider whether members of that group should be treated as a single obligor for the purpose of the definition of default in article 178(1) of the UK
Under article 178(1)(b)1 of the UK CRR2, the FCA is empowered to replace 90 days with 180 days in the days past due component of the definition of default for exposures secured by residential or SME commercial real estate in the retail exposure class, as well as exposures to public sector entities (PSEs).1
To be satisfied that a firm complies with the documentation requirements in article 175(3) of the UK CRR2, the FCA expects a firm should have a clear and documented policy for determining whether an exposure that has been in default should subsequently be returned to performing status (see article 175(3) of the UK CRR2).
IFPRU 4.11.19GRP
The FCA expects that a firm will1 be able to comply with certain other UK CRR2 requirements only where it can1demonstrate that:11(1) in relation to article 144(1)(e) of the UK CRR2, where more than one model is used, the rationale, and the associated boundary issues, is clearly articulated and justified and the criteria for assigning an asset to a rating model are objective and clear;(2) in relation to article 173(1)(c) of the UK CRR2, the firm has a process in place to ensure
(1) This guidance sets out the FCA's expectations for granting permission to a firm to use its own one-sided credit valuation adjustment internal models (an "internal CVA model") for the purpose of estimating the maturity factor "M", as proposed under article 162(2)(h) of the UK CRR1 (Maturity).(2) In the context of counterparty credit risk, the maturity factor "M" is intended to increase the own funds requirements to reflect potential higher risks associated with medium and long-term
(1) This guidance sets out the FCA's expectations for permitting a firm with the permission to use the Internal Model Method set out in Part Three, Title II, Chapter 6, Section 6 (Internal model method) and the permission to use an internal VaR model for specific risk set out in Part Three, Title IV, Chapter 5 (Use of internal models) associated with traded debt instruments to set to 1 the maturity factor "M" defined in article 162 of the UK CRR1. (2) In the context of counterparty
For purposes of repurchase transactions and securities lending or borrowing transactions, the FCA does not consider that there are any core market participants apart from those entities listed in article 227(3) of the UK CRR1.