Related provisions for IFPRU 6.3.12

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IFPRU 8.1.1RRP
(1) This section applies to an IFPRU investment firm.(2) This section does not apply to an exempt IFPRU commodities firm if the conditions in (2) are met.(3) The conditions are:(a) article 498 of the EU CRR (Exemptions for commodities dealers) applies to it;(b) the exempt IFPRU commodities firm is not a member of a FCAconsolidation group or non-EEA sub-group;(c) each investment firm in the group that the exempt IFPRU commodities firm belongs to meets the conditions in article
IFPRU 8.1.2GRP
This section contains:(1) rules that exercise the discretion afforded to the FCA as competent authority under article 18 of the EU CRR (Methods of prudential consolidation); and(2) guidance on the criteria that the FCA will take into account when considering whether to grant a permission to a firm on a case-by-case basis for the individual consolidation method under article 9 of the EUCRR (Individual consolidation method).
IFPRU 8.1.3RRP
(1) In carrying out the calculations for the purposes of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation), a firm must include the relevant proportion of an undertaking with whom it has:(a) a consolidation Article 12(1) relationship; or(b) an article 18(6) relationship. (2) In (1), the relevant proportion is such proportion (if any) as stated in a requirement imposed on the firm.[Note: article 18(3) and (6) of the EU CRR]
IFPRU 8.1.4RRP
In carrying out the calculations for the purposes of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation), a firm (for whom the FCA is the consolidating supervisor) must include the proportion according to the share of capital held of participations in institutions and financial institutions managed by an undertaking included in the consolidation together with one or more undertakings not included in the consolidation, where those undertakings' liability is limited
IFPRU 8.1.5RRP
In carrying out the calculations for the purposes of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation), a firm (for whom the FCA is the consolidating supervisor) must carry out a full consolidation of any undertaking with whom it has an article 18(5) relationship.[Note: article 18(5) of the EU CRR]
IFPRU 8.1.6GRP
Article 9(2) of the EU CRR (Individual consolidation method) requires a firm, which is a parent institution, to demonstrate fully to the FCA, as competent authority, that there are no material practical or legal impediments to the prompt transfer of own funds of the subsidiary referred to in article 9(1) of the EUCRR, or repayment of liabilities when due by that subsidiary to the firm.
IFPRU 8.1.7GRP
The FCA will assess an application for individual consolidation against articles 9 and 396(2) (Compliance with large exposure requirements) of the EU CRR 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 EU CRR, consistent with the previous solo consolidation regime.
IFPRU 8.1.8GRP
When making its assessment, the FCA will consider whether any minority interest may represent an impediment of any kind to the prompt transfer of own funds or repayment of liabilities from the subsidiary to the parent undertaking. To reassure the FCA, the parent institution should demonstrate that any minority interest in a subsidiary will not result in the potential blocking or delay of prompt transfer of own funds or repayment of liabilities. Therefore, it may be possible for
IFPRU 8.1.9GRP
The FCA will consider the non-exhaustive criteria below when determining whether the condition in article 9(2) of the EU CRR is met:(1) the speed with which funds can be transferred or liabilities repaid to the firm and the simplicity of the method for the transfer or repayment; (2) whether there are any interests other than those of the firm in the subsidiary and what impact those other interests may have on the firm's control over the subsidiary and the ability of the firm to
IFPRU 8.1.10GRP
The FCA will assess applications to exclude entities from the scope of prudential consolidation against article 19(2) of the EU CRR on a case-by-case basis. The FCA will only grant this treatment with respect to undertakings where one of the conditions in article 19(2) is met. The FCA will still make a judgement as to whether it is appropriate to grant this treatment even where one of the conditions in article 19(2) is met.
IFPRU 8.1.11GRP
Article 19(2) of the EU CRR allows the consolidating supervisor to decide in the following cases that an institution, financial institution or ancillary servicesundertaking which is a subsidiary or in which a participation is held need not be included in the consolidation in the following cases:(1) where the undertaking concerned is situated in a third country where there are legal impediments to the transfer of necessary information;(2) where the undertaking concerned is of negligible
IFPRU 8.1.14GRP
Article 113(6) of the EU CRR (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 EU CRR then fully exempts such exposures from the large exposures limit stipulated in article 395(1) of the EUCRR (Limits to large exposures).
IFPRU 8.1.15GRP
The FCA will assess core UK group applications against article 113(6) on a case-by-case basis. The FCA expects to approve this treatment for core UK groupundertakings if the conditions stipulated in article 113(6) 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 113(6) are met. It is the FCA's intention to continue to apply a high level of scrutiny to applications under
IFPRU 8.1.18GRP
For the purpose of article 113(6)(e) of the EU CRR, for an undertaking that is a firm, the requirement for the prompt transfer of funds refers to own funds in excess of the capital and financial resources requirements to which it is subject under the regulatory system.
IFPRU 8.1.19GRP
When demonstrating how article 113(6)(e) of the EU CRR is met, the FCA considers that, for a counterparty which is not a firm, the application should include a legally binding agreement between the firm and the counterparty. This agreement will be to promptly, on demand, by the firm increase the firm'sown funds by an amount required to ensure that the firm complies with the provisions contained in Part Two of the EU CRR (Own funds) and any other requirements relating to capital
IFPRU 8.1.21GRP
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 EU CRR (Limits to large exposures).
IFPRU 4.8.1GRP
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 EU CRR.
IFPRU 4.8.2GRP
For the purpose of this section, references to EAD refer to both direct estimates of EAD and CFs, unless specified otherwise (see article 151 of the EU CRR).
IFPRU 4.8.7GRP
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 EU CRR, estimates must be derived using both historical experience and empirical evidence, and must not be based purely on judgemental consideration.
IFPRU 4.8.12GRP
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
IFPRU 4.8.15GRP
The FCA considers that the use of momentum approaches in both of the ways outlined above is acceptable in principle as an alternative to direct estimation of conversion factors (see article 4(56) of the EU CRR).
IFPRU 4.8.16GRP
In cases where firms estimate conversion factors (CFs) directly using a reference data set that includes a significant number of high CFs as a result of very low undrawn limits at the observation date, the FCA expects firms to:(1) investigate the distribution of realised CFs in the reference data set;(2) base the estimated CF on an appropriate point along that distribution, that results in the choice of a CF appropriate for the exposures to which it is being applied and consistent
IFPRU 4.8.22GRP
The FCA expects firms to investigate how their EAD estimates are impacted by exposures that are in excess of limits at either the observation date (if in the reference data set) or at the current reporting date (for the existing book to which estimates need to be applied). Unless a momentum approach is being used, exposures in excess of limit should be excluded from the reference data set (as the undrawn limit is negative and nonsensical answers would result from their inclusion).
IFPRU 4.8.23GRP
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,
IFPRU 4.8.24GRP
The FCA considers that there is scope within the EU CRR 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-balance1sheet netting, as set out in article 205 of1 the EU CRR.11
IFPRU 4.8.25GRP
For the CF on undrawn limits, this may be applied on the basis of the net limit, provided the conditions in the EU CRR for the use of net limits are met. However, firms are reminded that the purpose of the measure is to estimate the amount that would be outstanding in the event of a default. This implies that their ability, in practice, to constrain the drawdown of credit balances will be particularly tested. Moreover, the FCA expects the appropriate conversion factor to be
IFPRU 4.8.26GRP
The lower the net limit as a percentage of gross limits or exposures, the greater will be the need on the part of the firm to ensure that it is restricting exposures below net limits in practice and that it will be able to continue to do so should borrowers encounter difficulties. The application of a zero net limit is acceptable in principle but there is, consequently, a very high obligation on the firm to ensure that breaches of this are not tolerated (see article 166(3) of
IFPRU 4.8.28GRP
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 EU CRR).
IFPRU 4.4.1GRP
In order to be able to determine that the requirements in article 144(1) of the EU CRR have been met, the FCA would typically have the high-level expectations set out in this section.
IFPRU 4.4.6GRP
A firm should have clear and documented standards and policies about the use of data in practice (including information technology standards) which should, in particular, cover the firm's approach to the following:(1) data access and security;(2) data integrity, including the accuracy, completeness, appropriateness and testing of data; and(3) data availability.[Note: article 144(1)(a) of the EU CRR)
IFPRU 4.4.7GRP
For the FCA to be satisfied that a firm documents its ratings systems appropriately, in accordance with article 144(1)(e) of the EU CRR, it would expect a firm to be able to demonstrate that it has an appropriate policy for any ratings system in relation to:(1) any deficiencies caused by its not being sensitive to movements in fundamental risk drivers or for any other reason;(2) the periodic review and action in the light of such review;(3) providing appropriate internal guidance
IFPRU 4.4.8GRP
To be satisfied that the requirements in article 179(1) of the EU CRR are met, the FCA expects a firm to collect data on what it considers to be the main drivers of the risk parameters of probability of default (PD), loss given default (LGD), conversion factors (CFs) and expected loss (EL) for each group of obligors or facilities, to document the identification of the main drivers of risk parameters, and be able to demonstrate that the process of identification is reasonable and
IFPRU 4.4.9GRP
In its processes for identifying the main drivers of risk parameters, the FCA expects that a firm should set out its reasons for concluding that the data sources chosen provide in themselves sufficient discriminative power and accuracy and why additional potential data sources do not provide relevant and reliable information that would be expected materially to improve the discriminative power and accuracy of its estimates of the risk parameter in question. This process need not
IFPRU 4.4.10GRP
To demonstrate that rating systems provide for meaningful assessment, the FCA expects that a firm's documentation relating to data should include clear identification of responsibility for data quality. A firm should set standards for data quality, aim to improve them over time and measure its performance against those standards. Furthermore, a firm should ensure that its data is of high enough quality to support its risk management processes and the calculation of its own funds
IFPRU 4.4.11GRP
Further detail of standards that the FCA would expect a firm to meet when it assesses compliance with article 174 of EU CRR are set out in the sections on probability of default (PD), loss given default (LGD) and exposure at default (EAD).
IFPRU 4.4.12GRP
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 EU CRR).
IFPRU 4.4.13GRP
To estimate PDs that are long run averages of one-year default rates for obligor grades or pools, the FCA expects a firm to estimate expected default rates for the grade/pool over a representative mix of good and bad economic periods, rather than simply taking the historic average of default rates actually incurred by the firm over a period of years. The FCA expects that a long run estimate would be changed when there is reason to believe that the existing long run estimate is
IFPRU 4.4.14GRP
To demonstrate compliance with article 144(1) of the EU CRR, the FCA expects a firm to take into account the following factors in understanding differences between their historic default rates and their PD estimates, and in adjusting the calibration of their estimates as appropriate:(1) the rating philosophy of the system and the economic conditions in the period over which the defaults have been observed;(2) the number of defaults, as a low number is less likely to be representative
IFPRU 4.4.15GRP
The FCA expects a firm that is unable to produce a long run estimate, as described above, to consider what action it would be appropriate for it to take to comply with article 180(1)(a) of the EU CRR. In some circumstances, it may be appropriate for a firm to need to amend its rating system so that the PD used as an input into the IRB own funds requirement is an appropriately conservative estimate of the actual default rate expected over the next year. However, such an approach
IFPRU 4.4.16GRP
In accordance with articles 181(1)(b) and 182(1)(b) of the EU CRR, where the estimates appropriate for an economic downturn are more conservative than the long run average, the FCA expects the estimate for each of these parameters to represent the LGD or CF expected, weighted by the number of defaults, over the downturn period. Where this is not the case, the FCA expects the estimate to be used to be the expected LGD or CF, weighted by the number of defaults, over a representative
IFPRU 4.4.17GRP
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 EU CRR).
IFPRU 4.12.1RRP
(1) A firm must notify the FCA that it is relying on the deemed transfer of significant credit risk under article 244(2)2 of the EU CRR (Traditional securitisation) or article 245(2)2 of the EU CRR (Synthetic securitisation), including when this is for the purposes of article 337(5) of the EU CRR, no later than one month after the date of the transfer.(2) The notification in (1) must include sufficient information to allow the FCA to assess whether the possible reduction in risk-weighted
IFPRU 4.12.3GRP
The significant risk transfer requirements in articles 2442 (Traditional securitisation) or 2452 (Synthetic securitisation) of the EU CRR provide three options for a firm to demonstrate how it transfers significant credit risk for any given transaction:(1) the originator does not retain more than 50% of the risk-weighted exposure amounts of mezzanine securitisation positions (as defined in article 242(18) of the EU CRR)2, where these are:(a) securitisation positions to which
IFPRU 4.12.8GRP
A firm seeking to achieve capital relief by deducting or applying a 1250% risk weight where permitted under articles 244 or 2452 of the EU CRR does not need to make the notification in IFPRU 4.12.1 R.1 However, in such cases, a firm should consider whether the characteristics of the transaction are such that the FCA would reasonably expect prior notice of it.1
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 4.12.13GRP
A firm may apply for permissions under articles 2442 (Traditional securitisation) or 2452 (Synthetic securitisation) of the EU CRR to consider significant risk transfer to have been achieved without needing to rely on options (1) or (2). The scope of such permission may1be defined to cover a number of transactions or an individual transaction.1
IFPRU 4.12.24GRP
An originator must transfer a significant amount of credit risk associated with securitisedexposures to third parties to be able to apply the securitisation risk weights set out in Part Three, Title II, Chapter 5 of the EU CRR (Securitisation), and any associated reduction in own funds requirements must be matched by a commensurate transfer of risk to third parties.
IFPRU 4.12.27GRP
(1) If a firm is found to have provided support to a securitisation, the expectation that the firm will provide future support to its securitisations is increased. The FCA will take account of this increased expectation in future assessments of commensurate risk transfer to that firm.(2) The FCA expects securitisation documentation to make clear, where applicable, that repurchase of securitisation positions by the originator beyond its contractual obligations is not mandatory
IFPRU 4.12.32GRP
Article 238 of the EU CRR (Maturity of credit protection) requires maturity to be assessed in considering significant risk transfer. When considering the effective maturity of synthetic securitisations, the FCA expects a firm to consider whether the transaction contained an option to terminate the protection at the discretion of the protection buyer.
IFPRU 4.12.35GRP
When risk transfer transactions are structured as a group of linked transactions rather than a single transaction, the FCA expects the aggregate effect of linked transactions to comply with the EU CRR. The FCA expects firms to ensure that analysis of risk transfer incorporates all linked transactions, particularly if certain transactions within a group of linked transactions are undertaken at off-market rates.
IFPRU 4.12.37GRP
To ensure continued appropriateness, the FCA expects firms to update the opinions of qualified legal counsel, required by the EU CRR, as necessary to ensure their continuing validity. For example, an opinion may need to be updated if relevant statutory provisions are amended, or where a new decision or judgment of a court has a bearing on the continuing validity of counsel's opinion.
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 EU CRR 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 stressed
IFPRU 4.7.3GRP
The FCA expects a firm to justify any low LGD estimates using analysis on volatility of sources of recovery, notably on collateral, and cures (see IFPRU 4.7.5 G). This includes:(1) recognising that the impact of collateral volatility on low LGDs is asymmetric, as surpluses over amounts owed need to be returned to borrowers and that this effect may be more pronounced when estimating downturn, rather than normal period LGDs; and(2) recognising the costs and discount rate associated
IFPRU 4.7.4GRP
To ensure that the impact of collateral volatility is taken into account, the FCA expects a firm's LGD framework to include non-zero LGD floors which are not solely related to administration costs (see article 179(1)(f) of the EU CRR).
IFPRU 4.7.5GRP
Where a firm wishes to include cures in its LGD estimates, the FCA expects it to do this on a cautious basis, with reference to both its current experience and how this is expected to change in downturn conditions. In particular, this involves being able to articulate clearly both the precise course of events that will allow such cures to take place and any consequences of such actions for other elements of its risk quantification. For example:(1) where cures are driven by the
IFPRU 4.7.6GRP
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 EU CRR).
IFPRU 4.7.7GRP
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 EU CRR).
IFPRU 4.7.10GRP
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
IFPRU 4.7.12GRP
If a firm intends to use a discount rate that does not take full account of the uncertainty in recoveries, the FCA expects it to be able to explain how it has otherwise taken into account that uncertainty for the purposes of calculating LGDs. This can be addressed by adjusting cash flows to certainty-equivalents or by using a discount rate that embodies an appropriate risk premium for defaulted assets, or by a combination of the two (see article 5(2) of the EU CRR).
IFPRU 4.7.13GRP
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 EU CRR, estimates must be derived using both historical experience and empirical evidence, and not be based purely on judgemental consideration.
IFPRU 4.7.17GRP
Where an independent calculation approach is adopted for the calculation of unexpected loss on defaulted assets, the FCA expects a firm to ensure that estimates are at least equal, at a portfolio level, to a 100% risk weight, ie,1 8% capital requirement on the amount outstanding net of provisions (see article 181(1)(h) of the EU CRR).
IFPRU 4.7.19GRP
The FCA expects a firm to take into account the effect of assets being substantially used as collateral for other obligations estimating LGDs for borrowers for which this is the case. The FCA expects a firm not to use unadjusted data sets that ignore this impact, and note that it is an estimate for downturn conditions that is normally required. In the absence of relevant data to estimate this effect, conservative LGDs potentially of 100% are expected to be used (see articles
IFPRU 8.2.1RRP
This section applies to an IFPRU investment firm, unless it is an exempt IFPRU commodities firm to which article 493 of the EU CRR applies.
IFPRU 8.2.3GRP
This section contains the rules that exercise the discretion afforded to the FCA as competent authority under article 400(2)(c) and (3) of the EU CRR (Large exposures: exemptions). The FCA does not intend to exercise its discretion for any of the other exemptions in article 400(2).
IFPRU 8.2.4GRP
Article 400(2) of the EU CRR permits the FCA to fully or partially exempt exposures incurred by a firm to intra-group undertakings that meet the specified criteria from the limit stipulated in article 395(1) of the EU CRR in relation to a firm's group of connected clients that represent its wider group. The FCA will consider exempting non-trading book and trading book exposures to intra-group undertakings if specified conditions throughout IFPRU 8.2 are met.
IFPRU 8.2.5GRP
The FCA expects that applications for exemptions under article 400(2)(c) of the EU CRR will be for firms established in the UK where the intra-group undertakings to which they have exposures meet the criteria for the core UK group in article 113(6) of the EU CRR, except for article 113(6)(d) (established in the same EEA State as the firm).
IFPRU 8.2.6RRP
A firm with a non-core large exposures grouppermission may (in line with that permission) exempt, from the application of article 395(1) of the EU CRR (Limits to large exposures), exposures, including participations or other kinds of holdings, incurred by a firm to:(1) its parent undertaking; or(2) other subsidiary undertakings of that parent undertaking; or(3) its own subsidiary undertakings;in so far as those undertakings are covered by the supervision on a consolidated basis
IFPRU 8.2.7RRP
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
IFPRU 8.2.8RRP
A firm may calculate limits in IFPRU 8.2.7 R after taking into account the effect of credit risk mitigation in line with articles 399 to 403 of the EU CRR.
IFPRU 8.2.10RRP
(1) Core UK groupeligible capital is equal to the sum of the following amounts for each member of the core UK group and the firm (the sub-group):(a) for ultimate parent undertaking of the sub-group, the amount calculated in line with article 6 of the EUCRR (or other prudential requirements that apply);(b) for any other member of the sub-group, the amount calculated in line with article 6 of the EUCRR (or other prudential requirements that apply) less the book value of the sub-group's
IFPRU 8.2.11GRP
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.
IFPRU 8.2.13RRP
A firm may only make use of the exemptions provided in this section where the following conditions are met:(1) the specific nature of the exposure, the counterparty or the relationship between the firm and the counterparty eliminate or reduce the risk of the exposure; and(2) any remaining concentration risk can be addressed by other equally effective means, such as the arrangements, processes and mechanisms in article 81 of CRD (Concentration risk).[Note: article 400(3) of the
SUP 16.12.3-AGRP
(1) 45Investment firms subject to the EU CRR should refer to any relevant technical standards to determine their specific reporting obligations, as those obligations may extend beyond those specified in this chapter.(2) Where a firm submits a data item pursuant any applicable provision of the EU CRR any data item with the same name and purpose does not have to be submitted again regardless of RAG.45
SUP 16.12.3-BGRP
45In relation to an investment firm subject to the EU CRR, where an expression appearing in italics in this chapter is also used in the EU CRR, the italicised expression:(1) has the same meaning as the corresponding expression used in the EU CRR; or(2) is interpreted in the context of the risk or requirement in the EU CRR that corresponds to the risk or requirement referred to in the italicised expression.
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 16.12.12RRP
The applicable reporting frequencies for data items referred to in SUP 16.12.4 R2 are set out in the table below according to firm type. Reporting frequencies are calculated from a firm'saccounting reference date, unless indicated otherwise.45Data ItemIFPRU 730K firmIFPRU 125K firm and collective portfolio management investment firmIFPRU 50K firmBIPRU firmUK consolidation group or defined liquidity groupFirm other than BIPRU firms or IFPRU investment firmsCOREP/FINREPRefer to
SUP 16.12.13RRP
The applicable due dates for submission referred to in 11SUP 16.12.4 R112 are set out in the table below. The due dates are the last day of the periods given in the table below following the relevant reporting frequency period set out in SUP 16.12.12 R, unless indicated otherwise.1313Data itemDailyWeeklyMonthly18Quarterly18Half yearly18Annual1845COREP/FINREPRefer to EU CRR and applicable technical standards88Solvency statement3 monthsFSA00120 business days30 business days (note
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 16.12.16RRP
The applicable reporting frequencies for data items referred to in SUP 16.12.15 R2 are set out in the table below according to firm type. Reporting frequencies are calculated from a firm'saccounting reference date, unless indicated otherwise.45Data itemFirms' prudential categoryIFPRU 730K firmIFPRU 125K firm and collective portfolio management investment firmIFPRU 50K firmBIPRU firmUK consolidation group or defined liquidity groupFirmother than BIPRU firms or IFPRU investment
SUP 16.12.17RRP
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 given in the table below following the relevant reporting frequency period set out in SUP 16.12.16 R, unless indicated otherwise.1313Data item18DailyWeeklyMonthly18Quarterly 18Half yearly18Annual1845COREP/FINREPRefer to EU CRR and applicable technical standardsSolvency statement3 monthsFSA00120 business days30 business days (note 2);
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 16.12.23ARRP
The applicable reporting frequencies for data items referred to in SUP 16.12.22A R are set out in the table below. Reporting frequencies are calculated from a firm'saccounting reference date, unless indicated otherwise.4545Data itemFrequencyUnconsolidated BIPRU investment firm and IFPRU investment firmSolo consolidated BIPRU investment firm andIFPRU investment firmUK Consolidation Group or defined liquidity groupAnnual regulated business revenue up to and including £5 millionAnnual
SUP 16.12.24ARRP
45The 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 given in the table below following the relevant reporting frequency period set out in SUP 16.12.23A R, unless indicated otherwise.Data ItemDailyWeeklyMonthlyQuarterlyHalf yearlyAnnualCOREP/FINREPRefer to EU CRR and applicable technical standardsSolvency statement3 monthsFSA00120 business days30 business days (note 1); 45 business
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
SUP 16.12.26RRP
The applicable reporting frequencies for data items referred to in SUP 16.12.25A R are set out according to the type of firm2 in the table below. Reporting frequencies are calculated from a firm'saccounting reference date, unless indicated otherwise.45Data itemFirms' prudential categoryIFPRU 730K firmIFPRU 125K firmIFPRU 50K firmBIPRU firmUK consolidation group or defined liquidity groupFirms other than BIPRU firms or IFPRU investment firmsCOREP/FINREPRefer to EU CRR and applicable
SUP 16.12.27RRP
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 given in the table below following the relevant reporting frequency period set out in SUP 16.12.26 R, unless indicated otherwise13.Data item18DailyWeeklyMonthly18Quarterly18Half yearly18Annual1845COREP/FINREPRefer to EU CRR and applicable technical standardsAnnual reconciliation80 business daysSolvency statement3 monthsFSA00120 business
IFPRU 4.3.1GRP
Responsibility for ensuring that internal models are appropriately conservative and that approaches are compliant with the EU CRR rests with the firm itself.
IFPRU 4.3.2GRP
A significant IFPRU firm should consider developing internal credit risk assessment capacity and to increase use of the internal ratings based approach for calculating own funds requirements for credit risk where its exposures are material in absolute terms and where it has at the same time a large number of material counterparties. This provision is without prejudice to the fulfilment of criteria laid down in Part Three, Title I, Chapter 3, Section 1 of the EU CRR (IRB approach).[Note:
IFPRU 4.3.4GRP
Article 20(6) of the EU CRR states that, where the IRB approach is used on a unified basis by those entities which fall within the scope of article 20(6) (EEA group), the FCA is required to permit certain IRB requirements to be met on a collective basis by members of that group. In particular, the FCA considers that, where a firm is reliant upon a rating system or data provided by another member of its group, it will not meet the condition that it is using the IRB approach on
IFPRU 4.3.7GRP
Where a firm seeks to demonstrate to the FCA that the effect of its non-compliance with the requirements of Part Three, Title II Chapter 3 of the EU CRR (Internal ratings based approach) is immaterial under article 146(b) of the EU CRR (Measures to be taken where the requirements cease to be met), the FCA expects the firm to have taken into account all instances of non-compliance with the requirements of the IRB approach and to have demonstrated that the overall effect of non-compliance
IFPRU 4.3.8GRP
(1) Where the firm's rating systems are used on a unified basis under article 20(6) of the EU CRR, the FCA considers that the governance requirements in article 189 of the EU CRR can only be met if the subsidiaries have delegated to the governing body or designated committee of the EEA parent institution, EEA parent financial holding company or EEA parent mixed financial holding company responsibility for approval of the firm's rating systems.(2) The FCA expects an appropriate
IFPRU 4.3.10GRP
(1) The FCA may permit the exemption of exposures to sovereigns and institutions under article 150(1)(a) and (b) of the EU CRR 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
IFPRU 4.3.14GRP
Where a firm wishes to permanently apply the Standardised Approach to exposures to connected counterparties in accordance with article 150(1)(e) of the EU CRR, 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
IFPRU 4.3.16GRP
(1) Article 154(4)(d) of the EU CRR (Risk-weighted1 exposure amounts for retail exposures) specifies that, for an exposure to be treated as a qualifying revolving retail exposure (QRRE), it needs to exhibit relatively low volatility of loss rates. A firm should assess the volatility of loss rates for the QRRE portfolio relative to the volatilities of loss rates of other relevant types of retail exposures for these purposes. Low volatility should be demonstrated by reference to
IFPRU 4.3.17GRP
The FCA expects a firm to ensure that all documentation relating to its rating systems (including any documentation referenced in this chapter or required by the EU CRR that relate to the IRB approach) is stored, arranged and indexed in such a way that it could make them all, or any subset thereof, available to the FCA immediately on demand or within a short time thereafter.
IFPRU 4.6.5GRP
Article 169(3) of the EU CRR allows the use of direct estimates of PDs, although such a measure could be assessed over a variety of different time horizons which the EU CRR does not specify. Accordingly, the FCA considers that it acceptable in principle to use methodologies of this type in lieu of estimation of long-run averages for the grade/pool/score of the underlying rating system, where the following conditions are met. Meeting these conditions requires a firm using the
IFPRU 4.6.8GRP
Accordingly, the FCA expects a firm using a variable scalar approach should adopt a PD that is the long-run default rate expected over a representative mix of good and bad economic periods, assuming that the current lending conditions including borrower mix and attitudes and the firm's lending policies remain unchanged. If the relevant lending conditions or policies change, then the FCA would expect the long-run default rate to change (see article 180(1)(a), (b) and (2)(a) of
IFPRU 4.6.13GRP
Segmentation should be done on the basis of the main drivers of both willingness and ability to pay. In the context of residential mortgages, an example of the former is the amount of equity in the property and an example of the latter is the ratio of debt to income. The FCA expects a firm to:(1) incorporate an appropriate number of drivers of risk within the segmentation to maximise the accuracy of the system;(2) provide detailed explanations supporting its choices of drivers,
IFPRU 4.6.22GRP
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 EU CRR, 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.
IFPRU 4.6.23GRP
The FCA expects the PD of a residential mortgage would typically be lower than the PD of an unsecured loan to the same borrower (see article 178(1) of the EU CRR).
IFPRU 4.6.24GRP
Where a firm chooses to apply the definition of default at the level of an individual credit facility, in accordance with article 178(1) of the EU CRR, and a customer has defaulted on a facility, then default on that facility is likely to influence the PD assigned to that customer on other facilities. The FCA expects a firm to take this into account in its estimates of PD (see article 178(1) of the EU CRR).
IFPRU 4.6.29GRP
The FCA expects a firm using a rating agency grades as the primary driver in its IRB models to be able to demonstrate (and document) compliance with the following criteria:(1) the firm has its own internal rating scale;(2) the firm has a system and processes in place that allow it to continuously collect and analyse all relevant information, and the 'other relevant information' considered by the firm in accordance with article 171(2) of the EU CRR reflects the information collected
IFPRU 4.6.31GRP
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
IFPRU 4.6.32GRP
The FCA expects a firm to take into account only defaults that occurred during periods that are relevant to the validation under the EU CRR of the model or other rating system in question when determining whether there are 20 defaults or fewer.
IFPRU 6.3.1GRP
Article 363 of the EU CRR (Permission to use internal models) states that permission for an institution to use internal models to calculate own funds requirements is subject to competent authorities verifying compliance with:(1) the general requirements;(2) requirements particular to specific risk modelling; and(3) requirements for an internal model for incremental default and migration risk.
IFPRU 6.3.3GRP
A firm should be able to demonstrate that it meets the risk management standards in article 368 of the EU 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.
IFPRU 6.3.5GRP
A firm should ensure that the data series used by its VaR model is reliable. Where a reliable data series is not available, proxies or any other reasonable value-at-risk measurement may be used when the firm demonstrates that the requirements of article 367(2)(e) of the EU CRR (Requirements for risk measurement) are met. A firm should demonstrate that the technique is appropriate and does not materially understate the modelled risks
IFPRU 6.3.17GRP
In accordance with article 363(3) of the EU CRR (Permission to use internal models), the FCA expects a firm to provide and discuss with us details of any significant planned changes to the VaR model before those changes are implemented. These details must include detailed information about the nature of the change, including an estimate of the impact on VaR numbers and the incremental risk charge.
IFPRU 6.3.18GRP
The use of overlapping intervals of 10-day holding periods for article 365 of the EU CRR (VaR and stressed VaR 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
IFPRU 6.3.19GRP
Article 365 of the EU CRR requires a firm that uses an internal model for calculating its own funds requirement to calculate, at least weekly, a stressed VaR (sVaR) of their current portfolio. When the FCA considers a firm's application to use a sVaR internal model it would expect the features in IFPRU 6.3.20 G to IFPRU 6.3.24 G to be present prior to permission being granted, as indicative that the conditions for granting permission have been met.
IFPRU 6.3.25GRP
Article 372 of the EU CRR (Requirement to have an internal IRC model) requires a firm that use an internal model for calculating own funds requirements for specific risk of traded debt instruments to 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 to use an IRC internal
IFPRU 3.2.2GRP
This chapter:(1) contains the rules that exercise the discretion afforded to the FCA as competent authority under article 89 of the EUCRR; (2) contains the guidance in relation to articles 4(1)(126) and 28 of the EUCRR; and(3) contains the rules on notification to the FCA of intended issuance, or amendment to, own funds instruments and specified terms that meet the conditions for qualification as own funds.
IFPRU 3.2.3RRP
In respect of the qualifying holdings described in article 89(1) and (2) of the EUCRR, a firm must, in accordance with article 89(3) of the EUCRR, comply with the requirement in article 89(3)(a) of the EUCRR.
IFPRU 3.2.4GRP
For the purposes of article 4(1)(126) (Definition of synthetic holding) and Part Two (Own funds) of the EUCRR, the FCA considers the holdings described in IFPRU 3.2.5 G to be examples of indirect or synthetic holdings by an IFPRU investment firm of own common equity tier 1 instruments.
IFPRU 3.2.10RRP
A firm must notify the FCA of the following:(1) its intention; or(2) the intention of another member of its group that is not a firm, but is included in the supervision on a consolidated basis of the firm;to issue a capital instrument that it believes will qualify under the EUCRR as own funds other than a common equity tier 1 capital at least one month before the intended date of issue.
IFPRU 3.2.17RRP
A firm must notify the FCA of its intention, or the intention of another member of its group included in the supervision on a consolidated basis of the firm, to carry out any of the actions described in article 77 of the EUCRR (Conditions for reducing own funds) for an own funds instrument.
IFPRU 3.2.18GRP
A partner's account of a firm that is a partnership:(1) into which capital contributed by partners is paid; and(2) from which under the terms of the partnership agreement an amount representing capital may be withdrawn by a partner only if: (a) he ceases to be a partner and an equal amount is transferred to another such account by his former partners or any person replacing him as their partner; or(b) the partnership is wound up or otherwise dissolved; or(c) the firm has ceased
IFPRU 3.2.20GRP
When a collective portfolio management investment firm calculates the total risk exposure amount in article 92(3) of the EUCRR, the own funds requirements referred to in article 92(3)(a) (Risk-weighted1 exposure amount for credit risk and dilution risk) and article 92(3)(b) (Risk-weighted1 exposure amount for position risk) should include only those arising from its designated investment business. For this purpose, managing an AIF or managing a UCITS is excluded from designated
IFPRU 4.2.1RRP
For the purposes of article 115 of the EU CRR (Exposures to regional governments or local authorities), a firm may treat exposures to the following regional governments as exposures to the UK central government:(1) The Scottish Parliament;(2) The National Assembly for Wales; and(3) The Northern Ireland Assembly.
IFPRU 4.2.2GRP
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 EU CRR (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 EU CRR in order to consider an exposure, or any part of an exposure, as fully and completely secured for the
IFPRU 4.2.3RRP
For the purposes of articles 124(2) and 126(2) of the EU CRR, 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
IFPRU 4.2.5GRP
The FCA confirms that, in relation to the concessionary treatment set out in article 119(5) of the EU CRR, there are no financial institutions currently authorised and supervised by it (other than those to which the EU CRR applies directly) that are subject to prudential requirements that it considers to be comparable in terms of robustness to those applied to institutions under the EU CRR.[Note: article 119(5) of the EU CRR]
IFPRU 4.2.6GRP
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 EU CRR. 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 a
IFPRU 4.2.8GRP
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 EU CRR 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 EU CRR).
IFPRU 4.2.9GRP
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 EU CRR (Credit risk mitigation) to qualify as an eligible guarantee (see article 129(2) of the EU CRR).
IFPRU 4.2.10GRP
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 EU CRR (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
SYSC 7.1.-2GRP
19For a common platform firm:(1) the MiFID Org Regulation applies, as summarised in SYSC 1 Annex 1 3.2G, SYSC 1 Annex 1 3.2-AR and SYSC 1 Annex 1 3.2-BR; and(2) the rules and guidance apply as set out in the table below:SubjectApplicable rule or guidanceRisk assessmentSYSC 7.1.1GRisk management SYSC 7.1.4R, SYSC 7.1.4AGRisk control: remuneration SYSC 7.1.7BG, SYSC 7.1.7BBGRisk control: additional provisions SYSC 7.1.7CG, SYSC 7.1.8G, SYSC 7.1.9R to SYSC 7.1.16RAdditional rules
SYSC 7.1.16CRRP
15In SYSC 7.1.18 R a 'CRR firm' that is significant’ means a significantIFPRUfirm.
SYSC 7.1.17RRP
(1) 13The management body of a CRR firm has overall responsibility for risk management. It must devote sufficient time to the consideration of risk issues.(2) The management body of a CRR firm must be actively involved in and ensure that adequate resources are allocated to the management of all material risks addressed in the rules implementing the CRD and in the EU CRR as well as in the valuation of assets, the use of external ratings and internal models related to those risks.
SYSC 7.1.18RRP
(1) 13A CRR firm that is significant must establish a risk committee composed of members of the management body who do not perform any executive function in the firm. Members of the risk committee must have appropriate knowledge, skills and expertise to fully understand and monitor the risk strategy and the risk appetite of the firm.(2) The risk committee must advise the management body on the institution’s overall current and future risk appetite and assist the management body
SYSC 7.1.18AAGRP
15A CRR firm which is not a significant IFPRU firm may combine the risk committee with the audit committee.[Note: article 76(3) of CRD]
SYSC 7.1.19RRP
(1) 13A CRR firm must ensure that the management body in its supervisory function and, where a risk committee has been established, the risk committee have adequate access to information on the risk profile of the firm and, if necessary and appropriate, to the risk management function and to external expert advice.(2) The management body in its supervisory function and, where one has been established, the risk committee must determine the nature, the amount, the format, and the
SYSC 7.1.21RRP
(1) 13A CRR firm's risk management function (article 23 of the MiFID Org Regulation19) must be independent from the operational functions and have sufficient authority, stature, resources and access to the management body.(2) The risk management function must ensure that all material risks are identified, measured and properly reported. It must be actively involved in elaborating the firm's risk strategy and in all material risk management decisions and it must be able to deliver
SYSC 7.1.22RRP
13The head of the risk management function must be an independent senior manager with distinct responsibility for the risk management function. Where the nature, scale and complexity of the activities of the CRR firm do not justify a specially appointed person, another senior person within the firm may fulfil that function, provided there is no conflict of interest. The head of the risk management function must not be removed without prior approval of the management body and must
IFPRU 4.11.2GRP
As with all asset classes, firms should assess whether their IPRE model is EU CRR compliant and not whether it is the nearest they can get to compliance given the constraints imposed on their model development (eg, lack of data or resource constraints).
IFPRU 4.11.3GRP
Where material non-compliance is identified and cannot be remediated in a timely fashion, firms should adopt a compliant approach for calculating own funds requirements. In most cases, this is likely to be the slotting approach (see article 144(1) of the EU CRR).
IFPRU 4.11.8GRP
The FCA expects that firms will not be compliant with the calibration requirements relating to use of a long-run default rate, unless it can demonstrate that:(1) the internal data series is the longest relevant and accurate data series, on a EU CRR compliant definition of default, that is available;(2) the determination of long-run default rate includes reference to an appropriate source of downturn data (this may require the use of external data);(3) the relevance of any external
IFPRU 4.11.11GRP
Under article 144(1) of the EU CRR, all models, including those constructed from a theoretical basis without reference to any empirical default data (such as Monte-Carlo cash-flow simulation models), must meet the IRB requirements that are set out in Title II Chapter 3 of Part Three of the EU CRR (IRB approach).
IFPRU 4.11.14GRP
Because assumptions in the model build process are likely to materially impact the resulting PDs, the FCA would expect these choices to be clearly justified in the model documentation and to have been independently reviewed. To be satisfied that a firm is complying with article 176(1)(d) of the EU CRR, the FCA expects a firm to support justification for all assumptions with analysis of the sensitivity of the model outputs to changes in the assumptions.
IFPRU 4.11.18GRP
The FCA also expects that a firm will be compliant with the validation requirements only where1it can demonstrate that:11(1) appropriate stability metrics should be considered across a range of economic environments (ie, longest period possible including most recent data);(2) the tolerances for the degree of divergence, and associated actions for what should happen when they are not met, is pre-defined; and(3) subsections of portfolios by characteristics affecting risk profile,
IFPRU 4.11.19GRP
The FCA expects that a firm will1 be able to comply with certain other EU CRR requirements only where it can1demonstrate that:11(1) in relation to article 144(1)(e) of the EU CRR, 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 EU CRR, the firm has a process in place to ensure valuations
IFPRU 2.2.7RRP
A firm must have in place sound, effective and comprehensive strategies, processes and systems:(1) to assess and maintain, on an ongoing basis, the amounts, types and distribution of financial resources, own funds and internal capital that it considers adequate to cover:(a) the nature and level of the risks to which it is, or might be, exposed;(b) the risk in the overall financial adequacy rule;(c) the risk that the firm might not be able to meet the obligations in Part Three
IFPRU 2.2.18RRP
A firm must have internal methodologies that:(1) enable it to assess the credit risk of exposures to individual obligors, securities or securitisation positions and credit risk at the portfolio level;(2) do not rely solely or mechanistically on external credit ratings;(3) where its own funds requirements under Part Three of the EUCRR (Capital Requirements) are based on a rating by an ECAI or based on the fact that an exposure is unrated, enable the firm to consider other relevant
IFPRU 2.2.23RRP
In IFPRU 2.2.22 R, the processes, strategies and systems relating to concentration risk must include those necessary to ensure compliance with Part Four of the EU CRR (Large exposures).
IFPRU 2.2.28RRP
(1) A firm's financial resources and internal capital must be adequate for material market risk that are not subject to an own funds requirement under Part Three of the EUCRR (Capital Requirements).(2) A firm which has, in calculating own funds requirements for position risk in accordance with Part Three, Title IV, Chapter 2 of the EU CRR (Own funds requirements for position risk), netted off its positions in one or more of the equities constituting a stock-index against one
IFPRU 2.2.34RRP
(1) A firm must have policies and procedures in place for the identification, management and monitoring of the risk of excessive leverage.(2) Those policies and procedures must include, as an indicator for the risk of excessive leverage, the leverage ratio determined in accordance with article 429 of the EU CRR (Calculation of the leverage ratio) and mismatches between assets and obligations.[Note: article 87(1) of CRD]
IFPRU 2.2.37RRP
(1) As part of its obligation under the overall Pillar 2 rule, a firm that is a significant IFPRU firm must:(a) for the major sources of risk identified in line with IFPRU 2.2.7R(2), carry out stress tests and scenario analyses that are appropriate to the nature, scale and complexity of those major sources of risk and to the nature, scale and complexity of the firm's business; and(b) carry out the reverse stress testing under SYSC 20 (Reverse stress testing).(2) In carrying out
IFPRU 2.2.40GRP
In carrying out the stress tests and scenario analyses under IFPRU 2.2.37 R (1), a firm should also consider any impact of the adverse circumstances on its own funds. In particular, a firm should consider the capital ratios in article 92 of the EU CRR (Own funds requirements) where its common equity tier 1 capital and additional tier 1 capital is eroded by the event.
IFPRU 2.2.50RRP
If the ICAAPrules apply to a firm on a consolidated basis, the firm must carry out consolidation to the extent and in the manner prescribed in Part One, Title II, Chapter 2, section 2 of the EUCRR (Methods for prudential consolidation) and IFPRU 8.1(Prudential consolidation).
IFPRU 2.2.56GRP
The purpose of IFPRU 2.2.52 R to IFPRU 2.2.55 G is to enable the FCA to assess the extent, if any, to which a firm's assessment, calculated on a consolidated basis, is lower than it would be if each separate legal entity were to assess the amount of capital it would require to mitigate its risks (to the same level of confidence) were it not part of a group subject to consolidated supervision under Part One, Title II, Chapter 2 of the EUCRR (Prudential consolidation). The reason
IFPRU 2.2.70GRP
Where a firm is exposed to market risk, the time horizon over which stress tests and scenario analyses should be carried out will depend on, among other things, the maturity and liquidity of the positions stressed. For example, for the market risk arising from the holding of investments, this will depend upon:(1) the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily
IFPRU 2.2.73GRP
(1) In identifying an appropriate range of adverse circumstances and events in accordance with IFPRU 2.2.37 R (2):(a) a firm will need to consider the cycles it is most exposed to and whether these are general economic cycles or specific to particular markets, sectors or industries;(b) for the purposes of IFPRU 2.2.37 R (2)(a), the amplitude and duration of the relevant cycle should include a severe downturn scenario based on forward-looking hypothetical events, calibrated against
IFPRU 2.3.4GRP
The obligation to conduct an ICAAP includes requirements on a firm to: (1) carry out regularly assessments of the amounts, types and distribution of financial resources, own funds and internal capital that it considers adequate to cover the nature and level of the risks to which it is or might be exposed (IFPRU 2.2.1 R to IFPRU 2.2.6 G (the overall Pillar 2 rule and related rules)); (2) identify the major sources of risk to its ability to meet its liabilities as they fall due
IFPRU 2.3.7GRP
The FCA will review a firm'sICAAP, including the results of the firm's stress tests carried out under IFPRU and the EUCRR, as part of its SREP. Provided that the FCA is satisfied with the appropriateness of a firm's capital assessment, the FCA will take into account that firm'sICAAP and stress tests in its SREP. More material on stress tests for a firm with an IRB permission can be found in IFPRU 2.3.50 R to IFPRU 2.3.54 G.11
IFPRU 2.3.8GRP
The SREP is a process under which the FCA: (1) reviews the arrangements, strategies, processes and mechanisms implemented by a firm to comply with IFPRU, SYSC and with requirements imposed by or under the EUCRR and wider regulatory system and evaluates the risks to which the firm is, or might be, exposed;(2) determines whether the arrangements, strategies, processes and mechanisms implemented by the firm and the capital held by the firm ensures a sound management and coverage
IFPRU 2.3.10GRP
As part of its SREP, the FCA will consider whether the amount and quality of capital which a firm should hold to meet its own funds requirements in the EUCRR is sufficient for that firm to comply with the overall financial adequacy rule.
IFPRU 2.3.20GRP
Individual capital guidance may refer to two types of own funds:(1) General capital. It refers to total common equity tier 1 capital and additional tier 1 capital after applying deductions and prudential filters under the EUCRR.(2) Total capital. It refers to total common equity tier 1 capital, additional tier 1 capital and tier 2 capital after applying deductions and prudential filters under the EUCRR.
IFPRU 2.3.36GRP
(1) This paragraph applies to a proportional ICAAP in the case of a firm that is a significant IFPRU firm (see IFPRU 1.2.3 R) whose activities are complex.(2) A proportional approach to that firm'sICAAP should cover the matters identified in IFPRU 2.3.34 G and IFPRU 2.3.35 G, but is likely also to involve the use of models, most of which will be integrated into its day-to-day management and operation.(3) Models of the kind referred to in (2) may be linked to generate an overall
IFPRU 2.3.50RRP
A firm with an IRB permission must ensure that there is no significant risk of it being unable to meet its own funds requirements for credit risk under Part Three, Title II of the EU CRR (Capital requirements for credit risk) at all times throughout an economic cycle, including the own funds requirements for credit risk indicated by any stress test carried out under article 177 of the EU CRR (Stress tests used in assessment of capital adequacy for a firm with an IRB permission)
IFPRU 2.3.51RRP
IFPRU 2.3.50 R applies to a firm on an individual basis if Part Three, Title II, Chapter 3 of the EU CRR (IRB approach) applies to it on an individual basis and applies on a consolidated basis if the EU CRR1 does.1
IFPRU 2.3.52RRP
If IFPRU 2.3.50 Rapplies to a firm on a consolidated basis, the following adjustments are made to IFPRU 2.3.50 R in accordance with the general principles of Part One, Title II, Chapter 2 of the EU CRR (Prudential consolidation): (1) references to own funds are to the consolidated own funds of the firm's FCA consolidation group or, as the case may be, its non-EEA sub-group; and(2) references to the capital requirements in Part Three of the EU CRR (Capital requirements) are to
IFPRU 7.1.2GRP
This section contains rules that exercise the discretion afforded to the FCA as competent authority under article 6(4) of the EU CRR (Exemption for certain investment firms).
IFPRU 7.1.3GRP
The FCA's liquidity regime and liquidity reporting in BIPRU 12 (Liquidity standards) and SUP 16 (Reporting requirements) continue to apply to an IFPRU investment firm until the liquidity coverage requirement in article 412 of the EU CRR becomes applicable in 2015.
IFPRU 7.1.4GRP
Pending specification of a uniform definition under article 460 of the EU CRR (Liquidity) of high and extremely high liquidity and credit quality, a firm should be guided by BIPRU 12 (Liquidity standards) when complying with article 416 of the EU CRR (Reporting on liquid assets).
IFPRU 7.1.5RRP
For the purpose of article 6(4) of the EU CRR, a firm is exempt from compliance with the obligations in Part Six of the EU CRR (Liquidity) on an individual basis unless it meets both the following conditions:(1) it is an ILAS BIPRU firm; and(2) it is a significant IFPRU firm.
IFPRU 7.1.6RRP
For the purpose of article 11(3) of the EU CRR, a FCA consolidation group that meets the condition in IFPRU 7.1.7 R is exempt from compliance with the obligations in Part Six of the EU CRR (Liquidity) on a consolidated basis.
IFPRU 1.1.4GRP
(1) The purpose of IFPRU is to implement, in part, CRD and certain national discretions afforded to the FCA as competent authority under EU CRR.(2) Save as provided in the Glossary, any expression in the Handbook for the purpose of IFPRU which is defined or used in EU CRR shall have the meaning given by, or used in, those Regulations.
IFPRU 1.1.7GRP
In accordance with articles 95 and 96 of EU CRR, IFPRU investment firms are divided into the following categories:(1) full-scope IFPRU investment firm;(2) IFPRUlimited licence firm; and(3) IFPRUlimited activity firm.
IFPRU 1.1.12RRP
(1) For the purpose of IFPRU and the EU CRR, dealing on own account means the service of dealing in any financial instruments for own account as referred to in point 3 of Section A of Annex I to MiFID, subject to (2) and (3).(2) In accordance with article 29(2) of CRD (Definition of dealing on own account), an investment firm that executes investors' orders for financial instruments and holds such financial instruments for its own account does not, for that reason, deal on own
IFPRU 1.1.15GRP
For the purposes of the definitions in IFPRU and Part Three, Title I, Chapter 1, Section 2 of the EU CRR (Own funds requirements for investment firms with limited authorisation to provide investment services), a person does any of the activities referred to in IFPRU and the EU CRR if:(1) it does that activity anywhere in the world; or(2) its permission includes that activity; or(3) (for an EEA firm) it is authorised by its Home State regulator to do that activity; or(4) (if the
IFPRU 1.1.16GRP
For the purposes of the definitions in IFPRU and Part Three, Title I, Chapter 1, Section 2 of the EU CRR (Own funds requirements for investment firms with limited authorisation to provide investment services), a person offers any of the services referred to in articles 95 and 96 of the EU CRR (Own funds requirements for investment firms with limited authorisation to provide investment services) if:(1) it offers that service anywhere in the world; or(2) any of IFPRU 1.1.15 G(1)
IFPRU 1.1.17GRP
For the purposes of the definitions in IFPRU and Part Three, Title I, Chapter 1, Section 2 of the EU CRR (Own funds requirements for investment firms with limited authorisation to provide investment services), a person has an authorisation to do any of the activities referred to in articles 95 and 96 of the EU CRR (Own funds requirements for investment firms with limited authorisation to provide investment services) if any of IFPRU 1.1.15 G(1) to (4) apply.
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 6.1.3RRP
(1) Where a firm has a position in a financial instrument for which no treatment has been specified in the EU CRR, it must calculate its own funds requirement by applying the most appropriate requirement relating to positions that are specified in the EU CRR, if doing so is prudent and appropriate, and if the position is sufficiently similar to those covered by the relevant requirement.(2) A firm must document its policies and procedures for calculating own funds for such positions
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 6.1.15RRP
Under article 327(2) of the EU CRR (Netting), the netting of a convertible and an offsetting position in the underlying instrument is permitted.
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 4.5.1GRP
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 EU
IFPRU 4.5.3GRP
Under article 178(1)(b)1 of the EU CRR, 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
IFPRU 4.5.5GRP
The FCA expects that a credit obligation be considered as a distressed restructuring if an independent third party, with expertise in the relevant area, would not be prepared to provide financing on substantially the same terms and conditions (see article 178(2)(d) of the EU CRR).
IFPRU 4.5.6GRP
To be satisfied that a firm complies with the documentation requirements in article 175(3) of the EU CRR, 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 EU CRR).