Related provisions for INSPRU 7.1.5
1 - 20 of 112 items.
This section also implements minimum EC standards for the composition of capital resources required to be held by a BIPRU firm. In particular it implements Articles 56 – 61, Articles 63 – 64, Article 66 and Articles 120 – 122 of the Banking Consolidation Directive (2006/48/EC) and Articles 12 – 16, Article 17 (in part), Article 22(1)(c) (in part) and paragraphs 13 - 15 of Part B of Annex VII of the Capital Adequacy Directive (2006/49/EC).
This table belongs to GENPRU 2.2.5 GTopicLocation of textApplication and purpose of the rules in this sectionGENPRU 2.2.1 R to GENPRU 2.2.4 GBIPRU firms that only have simple types of capital resources (simple capital issuers)GENPRU 2.2.7 GPrinciples underlying the definition of capital resourcesGENPRU 2.2.8 GWhich method of calculating capital resources applies to which type of firmGENPRU 2.2.17 R to GENPRU 2.2.19 RPurpose of the limits on the use of different forms of capitalGENPRU
Parts of this section are irrelevant to a BIPRU firm whose capital resources consist of straightforward capital instruments. Therefore the FSA's Personal handbooks facility available on its website allows a BIPRU firm to screen out those parts of this section that are not relevant to a simple capital issuer.2
The FSA has divided its definition of capital into categories, or tiers, reflecting differences in the extent to which the capital instruments concerned meet the purpose and conform to the characteristics of capital listed in GENPRU 2.2.9 G. The FSA generally prefers a firm to hold higher quality capital that meets the characteristics of permanency and loss absorbency that are features of tier one capital. Capital instruments falling into core tier one capital can be included
Tier one capital typically has the following characteristics:(1) it is able to absorb losses;(2) it is permanent;(3) it ranks for repayment upon winding up, administration or similar procedure after all other debts and liabilities; and(4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.
Tier two capital includes forms of capital that do not meet the requirements for permanency and absence of fixed servicing costs that apply to tier one capital. Tier two capital includes, for example:(1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred – for example, cumulative preference shares); only perpetual capital instruments may be included in upper tier
Tier three capital consists of forms of capital conforming least well to the characteristics of capital listed in GENPRU 2.2.9 G: either subordinated debt of short maturity (upper tier three capital) or net trading book profits that have not been externally verified (lower tier three capital).
Deductions should be made at the relevant stage of the calculation of capital resources to reflect capital that may not be available to the firm or assets of uncertain value (for example, holdings of intangible assets and assets that are inadmissible for an insurer., or, in the case of a bank or building society, where that firm has made investments in a subsidiary undertaking or in another financial institution or in respect of participations that it holds).
A firm must calculate its capital resources in accordance with the version of the capital resources table applicable to the firm, subject to the capital resources gearing rules. The version of the capital resources table that applies to a firm is specified in the table in GENPRU 2.2.19 R.
GENPRU 2.2.19 R sets out three different methods of calculating capital resources for BIPRU investment firms. The differences between the three methods relate to whether and how material holdings and illiquid assets are deducted when calculating capital resources. The method depends on whether a firm has an investment firm consolidation waiver. If a firm does have such a waiver, it should deduct illiquid assets, own groupmaterial holdings and certain contingent liabilities. If
As the various components of capital differ in the degree of protection that they offer the firm and its customers and consumers, restrictions are placed on the extent to which certain types of capital are eligible for inclusion in a firm'scapital resources. These rules are called the capital resources gearing rules.
A firm may include in a lower stage of capital, capital resources which are eligible for inclusion in a higher stage of capital if the capital resources gearing rules would prevent the use of that capital in that higher stage of capital. However:(1) the capital resources gearing rules applicable to that lower stage of capital apply to higher stage of capital included in that lower stage of capital; and(2) (subject to GENPRU 2.2.26 R) the rules in GENPRU governing the eligibility
Tier one capital and tier two capital are the only type of capital resources that a BIPRU firm may use for the purpose of meeting:(1) the credit risk capital component;(2) the operational risk capital requirement;(3) the counterparty risk capital component; and(4) the base capital resources requirement.
GENPRU 2.2.44 R (and the capital resources gearing rules that relate to it) also applies for the purposes of any other requirement in the Handbook for which it is necessary to calculate the capital resources of a BIPRU firm, except for the purposes described in GENPRU 2.2.47 R and except as may otherwise be stated in the relevant part of the Handbook.
For the purpose of GENPRU 2.2.44 R:(1) the amount of the items which may be included in a BIPRU firm'stier two capital resources must not exceed the amount calculated at stage F of the calculation in the capital resources table (Total tier one capital after deductions); and(2) the amount of the items which may be included in a BIPRU firm'slower tier two capital resources must not exceed 50% of the amount calculated at stage F of the calculation in the capital resources table.
For the purposes of meeting:(1) the market risk capital requirement; (2) the concentration risk capital component; and(3) the fixed overheads requirement (where applicable);a BIPRU firm may only use the following parts of its capital resources:(4) tier one capital to the extent that it is not required to meet the requirements in GENPRU 2.2.44 R (GENPRU 2.2.48 R explains how to calculate how much tier one capital is required to meet the requirements in GENPRU 2.2.44 R);(5) tier
The amount of tier one capital and tier two capital that is not used to meet the requirements in GENPRU 2.2.44 R as referred to in GENPRU 2.2.47R (4) and (5)(5) is equal to the amount calculated at stage N of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) less the parts of the capital resources requirement deducted immediately after stage N of the capital resources table (the parts of the capital resources requirements
For the purpose of meeting the requirements in GENPRU 2.2.47R (1) to GENPRU 2.2.47R (3) and subject to GENPRU 2.2.50 R, a BIPRU firm must not include any item in either:(1) its tier two capital resources falling within GENPRU 2.2.47R (6) (excess tier two capital); or(2) its upper tier three capital resources;to the extent that the sum of (1) and (2) would exceed 250% of the amount resulting from the following calculation:(3) calculate the amount at stage F of the calculation in
This table belongs to GENPRU 2.2.51 GDescription of the stage of the capital resources calculationStage in the capital resources tableAmount (£)Total tier one capital after deductions (excluding innovative tier one instruments – see GENPRU 2.2.53 G)Stage F80Total tier two capital (including innovative tier one instruments– see GENPRU 2.2.53 G)Stage K80DeductionsStage M(20)Total tier one capital and tier two capital after deductionsStage N140Upper tier three capital (this example
This table belongs to GENPRU 2.2.55 GDescription of the stage of the capital resources calculationStage in the capital resources tableAmount (£)Total tier one capital and tier two capital after deductionsStage N140Credit, operational, and counterparty1 risk requirement(100)Tier one capital and tier two capital available to meet market risk requirement40Tier three capitalStage Q50Total capital available to meet market risk requirement90Market risk requirement(90)Market risk requirement
In this example it is assumed that the maximum possible amount of tier one capital is carried forward to meet the market risk requirement. There are other options as to the allocation of tier one capital and tier two capital to the credit, operational, and counterparty1 risk requirement.1In order to calculate the relevant tier one capital for the upper tier three gearing limit in accordance with GENPRU 2.2.49 R it is first necessary to allocate tier one capital and tier two capital
The explanation for GENPRU 2.2.60 R can be found in GENPRU 2.2.43 G (Base capital resources requirement). In brief the reason is that the base capital resources requirement is not in practice meant to act as an additional capital resources requirement. It is meant to act as a floor to the capital resources requirement.
A firm may not include a capital instrument in its tier one capital resources unless it complies with the following conditions:(1) it is included in one of the categories in GENPRU 2.2.63 R;(2) it complies with the conditions set out in GENPRU 2.2.64 R;(3) i t is not excluded under GENPRU 2.2.65 R (Connected transactions); and(4) it is not excluded by any of the rules in GENPRU 2.2.
The categories referred to in GENPRU 2.2.62R (1) are:(1) permanent share capital;(2) eligible partnership capital;(3) eligible LLP members' capital;(4) sole trader capital;(5) a perpetual non-cumulative preference share;(6) (in the case of a building society) PIBS; and(7) an innovative tier one instrument.
An item of capital does not qualify for inclusion as tier one capital if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could result in that item of capital no longer displaying all of the characteristics set out in GENPRU 2.2.64R (1) to GENPRU 2.2.64R (9).
A firm may include a term in a tier one instrument allowing the firm to redeem it before the date in GENPRU 2.2.70R (2)(a) if the following conditions are satisfied:(1) the other conditions in GENPRU 2.2.70 R are met;(2) the circumstance that entitles the firm to exercise that right is a change in law or regulation in any relevant jurisdiction or in the interpretation of such law or regulation by any court or authority entitled to do so;(3) it would be reasonable for the firm
A firm must not redeem any tier one instrument that it has included in its tier one capital resources unless it has notified the FSA of its intention at least one month before it becomes committed to do so. When giving notice, the firm must provide details of its position after such redemption in order to show how it will:77(1) meet its capital resources requirement;7 and(2) 7have sufficient financial resources to meet the overall financial adequacy rule.
(1) This rule applies to a tier one instrument, tier two instrument or tier three instrument (instrument A) that under its terms is exchanged for or converted into another instrument or is subject to a similar process.(2) This rule also applies to instrument A if under its terms it is redeemed out of the proceeds of the issue of new securities.(3) If the instrument with which instrument A is replaced is included in the same stage of capital or a higher stage of capital as instrument
A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in GENPRU 2.2):(1) (in the case of a firm that is a company as defined in the Companies Act 1985 or the Companies (Northern Ireland) Order 1986)it is "called-up share capital" within the meaning given to that term in that Act or, as the case may be, that Order; or(2) (in the case of a building society) it is a "deferred share" as defined in the Building
Permanent share capital means an item of capital which (in addition to satisfying GENPRU 2.2.64 R) meets the following conditions:(1) it is:(a) an ordinary share; or(b) a members' contribution; or(c) part of the initial fund of a mutual; (2) any coupon on it is not cumulative, the firm is under no obligation to pay a coupon in any circumstances and the firm has the right to choose the amount of any coupon that it pays; and(3) the terms upon which it is issued do not permit redemption
(1) Negative amounts, including any interim net losses (but in the case of a BIPRU investment firm, only material interim net losses), must be deducted from profit and loss account and other reserves.(2) For these purposes material interim net losses mean unaudited interim losses arising from a firm'strading book and non-trading book business which exceed 10% of the sum of its capital resources calculated at stages A (Core tier one capital) and B (Perpetual non-cumulative preference
(1) This rule applies to trading book valuation adjustments or reserves referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G (Valuation adjustments and reserves). It applies to a BIPRU firm.(2) When valuation adjustments or reserves give rise to losses of the current financial year, a firm must treat them in accordance with GENPRU 2.2.85 R.(3) Valuation adjustments or reserves which exceed those made under the accounting framework to which a firm is subject must be treated in accordance
3Each firm must assess for itself when, in its particular circumstances, dividends are foreseeable. A dividend is foreseeable at the latest: (1) in the case of an interim dividend, when it is declared by the directors; or(2) in the case of a final dividend, when the directors approve the dividend to be proposed at the annual general meeting.
In the case of a BIPRU firm which is the originator of a securitisation, net gains arising from the capitalisation of future income from the securitised assets and providing credit enhancement to positions in the securitisation must be excluded from profit and loss account and other reserves.
Eligible partnership capital means a partners' account:(1) into which capital contributed by the 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;2(b) the partnership is wound up or2 otherwise dissolved; or22(c) the BIPRU firm
Eligible LLP members' capital means a members' account:(1) into which capital contributed by the members is paid; and(2) from which under the terms of the limited liability partnership agreement an amount representing capital may be withdrawn by a member only if:(a) he ceases to be a member and an equal amount is transferred to another such account by his former fellow members or any person replacing him as a member; 2(b) the limited liability partnership is wound up or2 otherwise
A BIPRU firm that is a partnership or a limited liability partnership may not include eligible partnership capital or eligible LLP members' capital in its tier one capital resources unless (in addition to GENPRU 2.2.62 R (General conditions relating to tier one capital)) it complies with GENPRU 2.2.83R (2) (Coupons should not be cumulative or mandatory). However GENPRU 2.2.64R (3) (Redemption) is replaced by GENPRU 2.2.93 R or GENPRU 2.2.94 R.
The items permanent share capital and share premium account (which form part of core tier one capital) and perpetual non-cumulative preference shares (which forms stage B of the capital resources table) do not apply to a BIPRU firm that is a partnership or a limited liability partnership.
A BIPRU firm which is a partnership or limited liability partnership must deduct at stage E of the calculation in the capital resources table (Deductions from tier one capital) the amount by which the aggregate of the amounts withdrawn by its partners or members exceeds the profits of that firm. Amounts of eligible partnership capital or eligible LLP members' capital repaid in accordance with GENPRU 2.2.93 R or GENPRU 2.2.94 R are not included in this calculation.
(1) A firm must include share premium account relating to the issue of a share forming part of its core tier one capital in its core tier one capital.(2) A firm must include share premium account relating to the issue of a share forming part of another tier of capital in that other tier.(3) A firm that is incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986may include its share premium account as core tier one capital notwithstanding (2) to
(1) GENPRU 2.2.123 R - GENPRU 2.2.137 R apply to capital of a firm if:(a) either or both of the conditions in (2) are satisfied; and(b) any of the SPVs referred to in (2) is a subsidiary undertaking of the firm.(2) The conditions referred to in (1) are:(a) that capital is issued to an SPV; or(b) the subscription for the capital issued by the firm is funded directly or indirectly by an SPV.(3) A BIPRU firm may not include capital coming within this rule in its capital resources
4GENPRU 2.2.129R (2) and GENPRU 2.2.131 R allow a firm to replace the capital issued by the SPV with a tier one instrument that is not an innovative tier one instrument or that is an innovative tier one instrument provided that:(1) it is only being classified as such because it is or may become subject to a step-up, and(2) the terms of the original instrument issued by the SPV included a step-up.In all other respects, the innovative tier one instrument issued by the firm must
The capital which the firm seeks to include in its capital resources under GENPRU 2.2.124R (3)(a) must satisfy the following conditions:(1) it meets the conditions for inclusion in tier one capital (subject to GENPRU 2.2.130 R);(2) its first call date (if any) must not arise before that on the instrument issued by the SPV; and(3) its terms relating to repayment must be the same as those of the instrument issued by the SPV.
(1) This rule deals with any transaction:(a) under which an SPV directly or indirectly funds the subscription for capital issued by the firm as described in GENPRU 2.2.124 R; or(b) that is directly or indirectly funded by a transaction in (1)(a).(2) Each undertaking that is a party to a transaction to which this rule applies (other than the firm) must be a subsidiary undertaking of the firm.(3) Each SPV that is a party to a transaction to which this rule applies must comply with
The purpose of GENPRU 2.2.133 R is to deal with a capital-raising under which the capital raised by a special purpose vehicle is passed through a number of undertakings before it is invested in the firm. If the capital resources of the firm fall below, or are likely to fall below, its capital resources requirement the firm should replace the capital issued by that first special purpose vehicle with a tier one instrument directly issued by the firm which complies with GENPRU 2.2.129R
A firm which satisfies the conditions for the inclusion of capital set out in GENPRU 2.2.124 R, must, in addition, if that transaction is in any respect unusual, notify the FSA at least one Month in advance of the date on which the firm intends to include that capital in its capital resources.
(1) This rule applies to a potential tier one instrument if:(a) it is redeemable by the firm (ignoring GENPRU 2.2.77 R (Meaning of redemption));(b) it provides that if the issuer does not exercise that right or does not do so in specified circumstances the issuer must or may have to redeem it in whole or in part through the issue of shares eligible for inclusion in the firm'stier one capital resources or the instrument converts or may convert into such shares; and(c) GENPRU 2.2.77
In GENPRU 2.2.138 R to GENPRU 2.2.142 R, the conversion ratio means the ratio of:(1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to(2) one unit of the original capital item.
(1) A firm may not include in its tier one capital resources a tier one instrument that is or may be subject to a step-up that does not meet the definition of moderate in the press release of the Basle Committee on Banking Supervision of 27th October 1998 called "Instruments eligible for inclusion in Tier 1 capital".(2) For the purpose of (1) the words in that press release "than, at national supervisory discretion, either" are replaced by "than the higher of the following two
The effect of GENPRU 2.2.147 R is that for inclusion in tier one capital resources, step-ups in instruments should be moderate. A moderate step-up for these purposes is one which results in an increase over the initial rate that is no greater than the higher of the following two amounts:(1) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis; or(2) 50% of the initial credit spread, less the swap spread between the initial index
A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:(1) the claims of the creditors must rank behind those of all unsubordinated creditors;(2) the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm and any such event of default must not prejudice the subordination in (1);(3) to the fullest extent permitted under the
A capital instrument may be included in a firm'stier two capital resources even though the remedies available to the subordinated creditor go beyond those referred to in GENPRU 2.2.159R (3), if the following conditions are satisfied:(1) those remedies are not available for failure to pay any amount of principal, interest or expenses or in respect of any other payment obligation; and(2) those remedies do not in substance amount to remedies to recover payment of the amounts in
GENPRU 2.2.159R (3) allows a capital instrument to form part of the tier two capital resources even though the laws of the relevant jurisdiction do not allow remedies to be limited in the way described there. For example it is not possible to limit certain remedies in the case of an issue in the United States that is SEC-registered and subject to the provisions of the Trust Indenture Act.
A tier two instrument may be redeemable at the option of the firm, but any term of the instrument providing for the firm to have the right to exercise such an option must not provide for that right to be exercisable earlier than the fifth anniversary of the date of issue of the instrument.
A capital instrument must (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) meet the following conditions before it can be included in a firm'supper tier two capital resources:(1) it must have no fixed maturity date;(2) the terms of the instrument must provide for the firm to have the option to defer any coupon on the debt, except that the firm need not have that right in the case of a coupon payable in the form of an item
(1) The purpose of GENPRU 2.2.177R (2) is to ensure that a firm which issues an item of capital with a coupon retains flexibility over the payments of such coupon and can preserve cash in times of financial stress. However, a firm may include, as part of the capital instrument terms, a right to make payments of a coupon mandatory if an item of capital becomes ineligible to form part of its capital resources (for example, through a change in the relevant rules) and the firm has
A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:(1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or(2) do constitute such a liability but the terms of the instrument are such that:(a) any such liability is not relevant for the purposes of deciding whether:(i) the firm is, or is likely to become, unable to pay its debts; or(ii)
A firm may not include an upper tier two instrument in its upper tier two capital resources unless it has obtained a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the criteria in GENPRU 2.2.177R (3) and GENPRU 2.2.180 R (Loss absorption) are met. This rule does not apply to a perpetual cumulative preference share.
A BIPRU firm which adopts the standardised approach to credit risk may include general/collective provisions in its tier two capital resources only if:(1) they are freely available to the firm;(2) their existence is disclosed in internal accounting records; and(3) their amount is determined by the management of the firm, verified by independent auditors and notified to the FSA.
The value of general/collective provisions which a firm may include in its tier two capital resources as referred to in GENPRU 2.2.187 R may not exceed 1.25% of the sum of the following:(1) the sum of the market risk capital requirement and the operational risk capital requirement (if applicable), multiplied by a factor of 12.5; and(2) the sum of risk weighted assets under the standardised approach for credit risk.
A firm may include a capital instrument in its lower tier two capital resources if (in addition to meeting the requirements of the rules about eligibility for inclusion in tier two capital) either the holder has no right to repayment or it satisfies either of the following conditions:(1) it has an original maturity of at least five years; or(2) it is redeemable on notice from the holder, but the period of notice of repayment required to be given by the holder is five years or
A firm may include perpetual capital instruments that do not meet the conditions in GENPRU 2.2.177 R (Eligibility conditions for upper tier two capital) in lower tier two capital resources if they meet the general conditions described in GENPRU 2.2.159 R (General conditions for eligibility as tier two capital instruments).
(1) For the purposes of calculating the amount of a lower tier two instrument which may be included in a firm'scapital resources:(a) in the case of an instrument with a fixed maturity date, in the final five years to maturity; and(b) in the case of an instrument with or without a fixed maturity date but where five years' or more notice of redemption or repayment has been given, in the final five years to the date of redemption or repayment;the principal amount must be amortised
GENPRU 2.2.198 R to GENPRU 2.2.201 R apply to a tier one instrument, tier two instrument or tier three instrument of a firm that is treated as a liability under the accounting framework to which it is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) (a "debt instrument").
A firm must recognise for the purpose of this section any effect that changes in exchange rates or interest rates have on a debt instrument (as defined in GENPRU 2.2.198 R) under the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied).
A firm must recognise, in accordance with GENPRU 2.2.201 R, the effect of a foreign currency hedge on a debt instrument (as defined in GENPRU 2.2.198 R) denominated in a foreign currency or of an interest rate hedge on a fixed rate coupon debt instrument if:(1) the accounting framework to which the firm is subject as referred to in GENPRU 1.3.4 R (General requirements: accounting principles to be applied) provides for a fair value hedge accounting relationship between a liability
The relevant capital resources of a firm mean for the purposes of this rule the sum of the amount of capital resources calculated at stages L (Total tier one capital plus tier two capital) and Q (Total tier three capital) of the calculation in the capital resources table as adjusted in accordance with the following:(1) the firm must not take into account the items referred to in any of the following:(a) GENPRU 2.2.190 R to GENPRU 2.2.193 R (surplus provisions); or(b) GENPRU 2.2.236
(1) This paragraph gives guidance on how the calculation under GENPRU 2.2.214R (1) should be carried out where an insurance undertaking is accounted for using the embedded value method.(2) On acquisition, any "goodwill" element (that is, the difference between the acquisition value according to the embedded value method and the actual investment) should be deducted from tier one capital resources.(3) The embedded value should be deducted from the total of tier one capital resources
For the purpose of the rules in this section about connected lending of a capital nature and in relation to a bank, a connected party means another person ("P") who fulfils at least one of the following conditions and is not solo-consolidated with the bank under BIPRU 2.1 (Solo consolidation):(1) P is closely related to the bank; or(2) P is an associate of the bank; or(3) the same persons significantly influence the governing body of P and the bank.
For the purpose of GENPRU 2.2.224 R, in relation to a person ("P") to which a bank has an exposure when P is acting on his own behalf and also an exposure to P when P acts in his capacity as a trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or similar fund (a "fund") the bank may choose to treat this latter exposure as an exposure to the fund, unless such treatment would be misleading.
A loan may initially fall outside the definition of connected lending of a capital nature but later fall into it. For example, if the initial lending to a connected party is subsequently downstreamed to another connected party the relationship between the bank and the ultimate borrower may be such that, looking at the arrangements as a whole, the undertaking to which the bank lends is able to regard the loan to it as being capable of absorbing losses.
A BIPRU firm calculating risk weighted exposure amounts under the IRB approach or the standardised approach to credit risk must deduct from its capital resources the exposure amount of securitisation positions which receive a risk weight of 1250% under BIPRU 9 (Securitisation), unless the firm includes the securitisation positions in its calculation of risk weighted exposure amounts (see BIPRU 9.10 (Reduction in risk-weighted exposure amounts)).
(1) The treatment in the capital resources table of the deductions in GENPRU 2.2.238 R only has effect for the purpose of the capital resources gearing rules.(2) In other cases (3) and (4) apply.(3) A BIPRU firm making the deductions described in GENPRU 2.2.238 R must deduct 50% of the total amount of those deductions at stage E (Deductions from tier one capital) and 50% at stage J (Deductions from tier two capital) of the calculation in the capital resources table after the application
A BIPRU firm may include subordinated debt in its upper tier three capital resources only if:(1) it has an original maturity of at least two years or is subject to at least two years' notice of repayment; and(2) payment of interest or principal is permitted only if, after that payment, the firm'scapital resources would be not less than its capital resources requirement.
Table: Application of tier two capital rules to tier three debtThis table belongs to GENPRU 2.2.244 RTier two capital ruleAdjustmentGENPRU 2.2.159 R (General conditions for eligibility as tier two capital)The references in GENPRU 2.2.159R (5) (Capital must not become repayable prior to stated maturity date except in specified circumstances) to repayment at the option of the holder are replaced by a reference to GENPRU 2.2.242R (1) (Upper tier three capital should have maturity
Trading book profits and losses, other than those losses to which GENPRU 2.2.86R (2) (Valuation adjustment and reserves) refers, originating from valuation adjustments or reserves as referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G (Valuation adjustments or reserves) must be included in the calculation of net interim trading book profits and be added to or deducted from tier three capital resources.
Trading book valuation adjustments or reserves as referred to in GENPRU 1.3.29 R to GENPRU 1.3.35 G which exceed those made under the accounting framework to which a firm is subject must be treated in accordance with GENPRU 2.2.248 R if not required to be treated under GENPRU 2.2.86R (2).
Illiquid assets means illiquid assets including(1) tangible fixed assets (except land and buildings if they are used by a firm as security for loans, but this exclusion is only up to the value of the principal outstanding on the loans); or(2) any holdings in the capital resources of credit institutions or financial institutions, except to the extent that:(a) they have already been deducted as a material holding; or(b) they are shares which are included in a firm'strading book
(1) The excess trading book position is the excess of:(a) a bank or building society's aggregate net long (including notional) trading bookpositions in shares, subordinated debt or any other interest in the capital of credit institutions or financial institutions;over;(b) 25% of that firm'scapital resources calculated at stage T (Total capital after deductions) of the capital resources table (calculated before deduction of the excess trading book position).(2) Only the excess
The standard market risk PRR rules apply for establishing what is a net position and the amount and value of that position for the purposes of GENPRU 2.2.264 R, ignoring rules which would otherwise exclude such positions from BIPRU 7.2 (Interest rate PRR) or BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives) on the basis that they are to be deducted from a bank or building society'scapital resources, or for any other reason.
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, capital resources and internal capital that it considers adequate to cover the nature and level of the risks to which it is or might be exposed (GENPRU 1.2.30 R to GENPRU 1.2.41 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
Where a firm is a member of a group, it should base its ICAAP on the consolidated financial position of the group. The group assessment should include information on diversification benefits and transferability of resources between members of the group and an apportionment of the capital required by the group as a whole to the firm (GENPRU 1.2.44 G to GENPRU 1.2.56 G (Application of GENPRU 1.2 on a solo and consolidated basis: Processes and tests)). A firm may, instead of preparing
The SREP is a process under which the FSA:(1) reviews the arrangements, strategies, processes and mechanisms implemented by a firm to comply with GENPRU, BIPRU and SYSC and with requirements imposed by or under the 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 of the risks
As part of its SREP, the FSA will consider whether the amount of capital which a firm should hold to meet its CRR in GENPRU 2.1 (Calculation of capital resources requirements) is sufficient for that firm to comply with the overall financial adequacy rule. Where the amount of capital which the FSA considers a firm should hold is not the same as that which results from a firm'sICAAP, the FSA expects to discuss any such difference with that firm. Where necessary, the FSA may consider
If a firm considers that ICG given to it is inappropriate to its circumstances it should, consistent with Principle 11 (relations with regulators), inform the FSA that it disagrees with that guidance. The FSA may reissue individual capital guidance if after discussion with the firm the FSA concludes that the amount of capital that the firm should hold to meet the overall financial adequacy rule is different from the amount initially suggested by the FSA.
If, after discussion, the FSA and a firm still do not agree on an adequate level of capital, the FSA may consider using its powers under section 45 of the Act to vary on its own initiative a firm'sPart IV permission so as to require it to hold capital in accordance with the FSA's view of the capital necessary to comply with the overall financial adequacy rule. SUP 7 provides further information about the FSA's powers under section 45.
If the FSA gives individual capital guidance to a firm, the FSA will state what amount and quality of capital the FSA considers the firm needs to hold in order to comply with the overall financial adequacy rule. It will generally do so by saying that the firm should hold capital resources of an amount at least equal to a specified percentage of that firm'scapital resources requirement
(1) Individual capital guidance may refer to two types of capital resources.(2) The first type is referred to as general capital. It refers to total tier one capital resources and tier two capital resources after deductions.(3) The second type is referred to as total capital. It refers to total tier one capital resources, tier two capital resources and tier three capital resources after deductions.
(1) Individual capital guidance may also be given with respect to group capital resources. This paragraph explains how such guidance should be interpreted unless the individual capital guidance specifies another interpretation.(2) If BIPRU 8.2.1 R (General consolidation rule for a UK consolidation group) applies to the firm the guidance relates to its UK consolidation group. If BIPRU 8.3.1 R (General consolidation rule for a non-EEA sub-group) applies to the firm the guidance
A firm's continuing to hold capital in accordance with its individual capital guidance and its ability to carry on doing so is a fundamental part of the FSA's supervision of that firm. Therefore if a firm'scapital resources have fallen, or are expected to fall, below the level advised in individual capital guidance, then, consistent with Principle 11 (Relations with regulators), a firm should inform the FSA of this fact as soon as practicable, explaining why this has happened
(1) This paragraph applies to a firm whose activities are simple.(2) In carrying out its ICAAP it could:(a) identify and consider that firm's largest losses over the last 3 to 5 years and whether those losses are likely to recur;(b) prepare a short list of the most significant risks to which that firm is exposed;(c) consider how that firm would act, and the amount of capital that would be absorbed, in the event that each of the risks identified were to materialise;(d) consider
In relation to a firm whose activities are moderately complex, in carrying out its ICAAP, BIPRU 2.2.25 G (3) to (4) apply. In addition, it could:(1) having consulted the management in each major business line, prepare a comprehensive list of the major risks to which the business is exposed;(2) estimate, with the aid of historical data, where available, the range and distribution of possible losses which might arise from each of those risks and consider using shock stress tests
(1) A firm may take into account factors other than those identified in the overall Pillar 2 rule when it assesses the level of capital it wishes to hold. These factors might include external rating goals, market reputation and its strategic goals. However, a firm should be able to distinguish, for the purpose of its dialogue with the FSA, between capital it holds in order to comply with the overall financial adequacy rule and to meet the risks set out in the overall Pillar 2
A firm'sCRR, being risk-sensitive, may vary as business cycles and economic conditions fluctuate over time. A deterioration in business or economic conditions could require a firm to raise capital or, alternatively, to contract its businesses, at a time when market conditions are most unfavourable to raising capital. Such an effect is known as procyclicality.
A firm with an IRB permission must ensure that there is no significant risk that it will not be able to meet its capital resource requirements for credit risk under GENPRU 2.1 (Calculation of capital resources requirements) at all times throughout an economic cycle, including the capital resources requirements for credit risk indicated by any stress test carried out under BIPRU 4.3.39 R to BIPRU 4.3.40 R (Stress tests used in assessment of capital adequacy for a firm with an IRB
If BIPRU 2.2.41 R applies to a firm on a consolidated basis the following adjustments are made to BIPRU 2.2.41 R in accordance with the general principles of BIPRU 8 (Group risk - consolidation):(1) references to capital resources are to the consolidated capital resources of the firm'sUK consolidation group or, as the case may be, its non-EEA sub-group; and(2) references to the capital requirements in GENPRU 2.1 (Calculation of capital resources requirements) are to the consolidated
If a firm's current available capital resources are less than the capital resources requirement indicated by the stress test that need not be a breach of BIPRU 2.2.41 R. The firm may wish to set out any countervailing effects and off-setting actions that can be demonstrated to the satisfaction of the FSA as being likely to reduce the difference referred to in the first sentence. The FSA is only likely to consider a demonstration of such actions as credible if those actions are
The countervailing factors and off-setting actions that a firm may rely on as referred to in BIPRU 2.2.44 G include, but are not limited to, projected balance sheet shrinkage, growth in capital resources resulting from retained profits between the date of the stress test and the projected start of the economic downturn, the possibility of raising new capital in a downturn, the ability to reduce dividend payments or other distributions, and the ability to allocate capital from
The FSA expects an asset manager to consider the impact of economic factors on its ability to meet its liabilities as they fall due. An asset manager should therefore develop scenarios which relate to its strategic and business plan. An asset manager might therefore consider:(1) the effect of a market downturn affecting both transaction volumes and the market values of assets in its funds; in assessing the impact of such a scenario, an asset manager may consider the extent to
(1) A securities firm may consider the impact of the situations listed in (a) to (c) on its capital levels when assessing its exposure to concentration risk:(a) the potential loss that could arise from large exposures to a single counterparty;(b) the potential loss that could arise from exposures to large transactions or to a product type; and(c) the potential loss resulting from a combination of events such as a sudden increase in volatility leaving a hitherto fully-margined
(1) A securities firm should also consider the impact of external factors on the levels of capital it needs to hold. Scenarios covering such external factors should relate to its strategy and business plan. A securities firm might wish to consider the questions in (2) to (7).(2) Whether it plans to participate in a one-off transaction that might strain temporarily or permanently its capital.(3) Whether the unevenness of its revenue suggests that it should hold a capital buffer.
A securities firm may also want to assess the impact of its internal credit limits on its levels of capital. For instance, a firm whose internal procedures authorise dealing without cash in the account or without pre-set dealing limits might consider more capital is required than if it operated stricter internal credit limits.
As the various components of capital differ in the degree of protection that they offer, the capital resources gearing rules as applied on a consolidated basis place restrictions on the extent to which certain types of capital are eligible for inclusion in a UK consolidation group or non-EEA sub-group'sconsolidated capital resources. GENPRU 2.2.25 R (Limits on the use of different forms of capital: Use of higher tier capital in lower tiers) also applies.
The prohibition in GENPRU 2.2 (Capital resources) on including innovative tier one capital in tier one capital for the purposes of meeting capital resources requirements applies under this section. However GENPRU 2.2.27 R (innovative tier one capital may be included in lower stages of capital when excluded from tier one capital) also applies. So, for example, a firm should not include consolidated indirectly issued capital in tier one capital but should generally include it as
For the purposes of this chapter, GENPRU 2.2.123 R to GENPRU 2.2.137 R (Indirectly issued tier one capital (BIPRU firm only)) do not apply. A firm may only include consolidated indirectly issued capital in consolidated capital resources (whether as a minority interest or otherwise) in accordance with this section.
Consolidated indirectly issued capital means any capital instrument issued by a member of the UK consolidation group or non-EEA sub-group where:(1) some or all of the following conditions are satisfied:(a) that capital is issued to an SPV; or(b) that capital is issued by an SPV; or(c) the subscription for the capital issued by the member of the group in question is funded directly or indirectly by an SPV; and(2) any of the SPVs referred to in (1) is a member of the UK consolidation
A firm may only include consolidated indirectly issued capital in the consolidated capital resources of its UK consolidation group or non-EEA sub-group if:(1) it is issued by an SPV that is a member of the UK consolidation group or non-EEA sub-group to persons who are not members of the UK consolidation group or non-EEA sub-group; and(2) the conditions in BIPRU 8.6.16 R to BIPRU 8.6.18 R are satisfied.
Consolidated indirectly issued capital that is eligible for inclusion in the consolidated capital resources of a UK consolidation group or non-EEA sub-group may only be included as a minority interest created by the capital instrument issued by the SPV referred to in BIPRU 8.6.13 R. If it is eligible, it is innovative tier one capital.
The SPV referred to in BIPRU 8.6.13 R must satisfy the conditions in GENPRU 2.2.127 R (Conditions that an SPV has to satisfy if indirectly issued capital is to be included in capital resources on a solo basis) as modified by the following:(1) references in GENPRU 2.2.127R (1) to being controlled by the firm are to being controlled by a member of the firm'sUK consolidation group or non-EEA sub-group as the case may be; and(2) references to the firm'sgroup are to the firm'sUK consolidation
The capital issued by the SPV referred to in BIPRU 8.6.13 R must satisfy the conditions in GENPRU 2.2.129 R (Conditions that capital issued by an SPV has to satisfy if indirectly issued capital is to be included in capital resources on a solo basis) as modified by the following:(1) references to the firm'sgroup are to the firm'sUK consolidation group or non-EEA sub-group as the case may be;(2) the substitution obligation in GENPRU 2.2.129R (2) need not be the firm's but may apply
The SPV referred to in BIPRU 8.6.13 R must invest the funds raised from the issue of capital by the SPV by subscribing for capital resources issued by an undertaking that is a member of the UK consolidation group or non-EEA sub-group. Those capital resources must satisfy the following conditions:(1) those capital resources must at least comply with the requirements for lower tier two capital; and(2) the first call date or fixed maturity date (if any) of those capital resources
A firm must comply with the requirements set out in GENPRU 2.2.135R (Notifying the FSA of unusual transactions in relation to indirectly issued capital) and GENPRU 2.2.137 R (Contents of marketing documents in relation to indirectly issued capital) in relation to consolidated indirectly issued capital included in consolidated capital resources.
Risks may be addressed through holding capital to absorb losses that unexpectedly materialise. The ability to pay liabilities as they fall due also requires liquidity. Therefore, in assessing the adequacy of a firm's financial resources, both capital and liquidity needs should be considered. A firm should also consider the quality of its financial resources such as the loss-absorbency of different types of capital and the time required to liquidate different types of asset. SYSC
A firm must have in place sound, effective and complete processes, strategies and systems:(1) to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources, capital resources 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; and(c) the risk that the firm might not be able to meet its CRR in the future; and(2)
In the overall Pillar 2 rule , internal capital refers to the financial resources of a firm which it treats as being held against the risks listed in the overall Pillar 2 rule. The obligation in that rule to assess the distribution of such capital refers, in relation to a firm making an assessment on a solo basis, for example, to the need to take account of circumstances where part of a firm's financial resources are held by a branch of that firm which are subject to restrictions
As part of its obligations under GENPRU 1.2.30R (1) (Main requirement relating to risk processes, strategies and systems), a firm must identify separately the amount of tier one capital, tier two capital, tier three capital, other capital eligible to form part of its capital resources and each category of capital (if any) that is not eligible to form part of its capital resources which it considers adequate for the purposes described in GENPRU 1.2.30R (1).
The processes and systems required by the overall Pillar 2 rule must:(1) include an assessment of how itintends to deal with each of the major sources of risk identified in accordance with GENPRU 1.2.30R (2); and(2) take into account the impact of diversification effects and how such effects are factored into the firm's systems for measuring risks.
(1) In accordance with the general principles in GENPRU 1.2.48 R and BIPRU 8 (Group risk – consolidation), for the purpose of the ICAAP rules as they apply on a consolidated basis:(a) the firm must ensure that the relevant group as defined in (2) have the processes, strategies and systems required by the overall Pillar 2 rule;(b) the risks to which the overall Pillar 2 rule and the general stress and scenario testing rule refer are those risks as they apply to each member of the
(1) This rule relates to the assessment of the amounts, types and distribution of financial resources, capital resources and internal capital (referred to in this rule as "resources") under the overall Pillar 2 rule as applied on a consolidated basis and to the assessment of diversification effects as referred to in GENPRU 1.2.37R (2) as applied on a consolidated basis.(2) A firm must be able to explain how it has aggregated the risks referred to in the overall Pillar 2 rule and
(1) A firm must allocate the total amount of financial resources, capital resources and internal capital identified as necessary under the overall Pillar 2 rule (as applied on a consolidated basis) between different parts of the relevant group (as defined in GENPRU 1.2.49 R). GENPRU 1.2.36 R (Identifying different tiers of capital) does not apply to this allocation.(2) The firm must carry out the allocation in (1) in a way that adequately reflects the nature, level and distribution
A firm must also allocate the total amount of financial resources, capital resources and internal capital (referred to in this rule as "resources") identified as necessary under the overall Pillar 2 rule as applied on a consolidated basis between each firm which is a member of the relevant group (as defined in GENPRU 1.2.49 R) on the following basis:(1) the amount allocated to each firm must be decided on the basis of the principles in GENPRU 1.2.52R (2); and(2) if the process
Where a firm assesses the adequacy of its CRR in its particular circumstances in accordance with BIPRU 2.2 (Internal capital adequacy standards) and INSPRU 7.1 (Individual capital assessment) as a basis for deciding what financial resources are adequate, it should include this in the documentation produced in accordance with GENPRU 1.2.60 R.
Subject to GENPRU 1.2.76 G, the purpose of stress tests and scenario analyses under the general stress and scenario testing rule is to test the adequacy of overall financial resources. Scenarios need only be identified, and their impact assessed, in so far as this facilitates that purpose. In particular, the nature, depth and detail of the analysis depend, in part, upon the firm's capital strength and the robustness of its risk prevention and risk mitigation measures.
In determining whether it would have adequate financial resources in the event of each identified realistic adverse scenario, a firm should:(1) only include financial resources that could reasonably be relied upon as being available in the circumstances of the identified scenario; and(2) take account of any legal or other restriction on the use of financial resources.
If a firm has a current funding obligation in excess of normal contributions or there is a risk that such a funding obligation will arise then, when calculating available capital resources, it should reverse out any accounting deficit and replace this in its capital adequacy assessment with its best estimate, calculated in discussion with the scheme's actuaries or trustees, of the cash that will need to be paid into the scheme in addition to normal contributions over the foreseeable
Schedule to the Recognition Requirements Regulations, Paragraph 12(1) The [UK RIE] must have financial resources sufficient for the proper performance of its [ relevant functions] as a [UK RIE].(2) In considering whether this requirement is satisfied, the [FSA]must (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RIE's] connection with any person , and any activity carried on by the [UK RIE], whether or not it
In determining whether a UK recognised body has financial resources sufficient for the proper performance of its relevant functions, the FSA may have regard to:(1) the operational and other risks to which the UK recognised body is exposed;(2) if the UK recognised body acts as a central counterparty or otherwise guarantees the performance of transactions in specified investments, the counterparty and market risks to which it is exposed in that capacity; (3) the amount and composition
In assessing whether a UK recognised body has sufficient financial resources in relation to counterparty and market risks, the FSA may have regard to:(1) the amount and liquidity of its financial assets and the likely availability of liquid financial resources to the UK recognised body during periods of major market turbulence or other periods of major stress for the financial system; and(2) the nature and scale of the UK recognised body's exposures to counterparty and market
In assessing whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FSA may have regard to the extent to which, after allowing for the financial resources necessary to cover counterparty and market risks, the UK recognised body's financial resources are sufficient and sufficiently liquid:(1) to enable the UK recognised body to continue carrying on properly the regulated activities that it expects to carry on; and(2) to ensure
The FSA considers that a UK recognised body which (after allowing for the financial resources necessary to cover counterparty and market risks) has at any time:(1) liquid financial assets amounting to at least six months' operating costs; and (2) net capital of at least this amount; will, at that time, have sufficient financial resources to meet the recognition requirement unless there are special circumstances indicating otherwise.
The FSA recognises that UK recognised bodies may wish to satisfy the recognition requirements in different ways. The FSA does not prescribe any particular approach to calculating financial resources or to assessing their adequacy. It is willing to discuss with each UK recognised body the most appropriate way for it to meet the recognition requirement and each UK recognised body will need to be able to show the FSA that its financial resources are at all times sufficient to meet
Principle 4 requires a firm to maintain adequate financial resources. GENPRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. The adequacy of a firm'scapital resources needs to be assessed both by that firm and the FSA. Through its rules, the FSA sets minimum capital resources requirements for firms. It also reviews a firm's own assessment of its capital needs, and the processes and
This section sets capital resources requirements for a firm. GENPRU 2.2 (Capital resources) sets out how, for the purpose of meeting capital resources requirements, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are set out in GENPRU 1.3 (Valuation) and, for an insurer, INSPRU and, for a BIPRU firm, BIPRU.
(1) This section implements minimum EC standards for the capital resources required to be held by an insurer undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC), the Reinsurance Directive (2005/68/EC) or the First Non-Life Directive (1973/239/EEC) as amended.(2) This section also implements provisions of the Capital Adequacy Directive and Banking Consolidation Directive concerning the level of capital resources which a BIPRU firm is
For the purposes of GENPRU 2.1.9 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with GENPRU 2.1.13 R and the main BIPRU firm Pillar 1 rules (as applicable) at all times. This does not necessarily mean that a firm needs to measure the precise amount of its capital resources and its CRR on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time
The purpose of the base capital resources requirement for a BIPRU firm is to act as a minimum capital requirement or floor. It has been written as a separate requirement as there are restrictions in GENPRU 2.2 (Capital resources) on the types of capital that a BIPRU firm may use to meet the base capital resources requirement which do not apply to some other parts of the capital requirement calculation. In order to preserve the base capital resources requirement's role as a floor
This table belongs to GENPRU 2.1.47 RFirm categoryAmount: Currency equivalent ofBank€5 millionBuilding societyThe higher of €1 million and £1 millionBIPRU 730K firm€730,000BIPRU 125K firm€125,000BIPRU 50K firm€50,000UCITS investment firm€125,000 plus, if the funds under management exceed €250,000,000, 0.02% of the excess, subject to a maximum of €10,000,000.3
(1) A BIPRU firm must calculate its market risk capital requirement as the sum of:(a) the interest rate PRR (including the basic interest rate PRR for equity derivatives set out in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives));(b) the equity PRR;(c) the commodity PRR;(d) the foreign currency PRR;(e) the option PRR; and(f) the collective investment undertaking PRR.(2) Any amount calculated under BIPRU 7.1.9 R - BIPRU 7.1.13 R (Instruments for which
(1) This rule applies to a bank that meets the following conditions:(a) on 31 December 2006 it had the benefit of IPRU(BANK) rule 3.3.12 (Reduced minimum capital requirement for a bank that is a credit institution which immediately before 1 January 1993 was authorised under the Banking Act 1987);(b) the relevant amount (as referred to in IPRU(BANK) rule 3.3.12) applicable to it was below €5 million as at 31 December 2006; and(c) on 1 January 2007 it did not comply with the base
Where two or more banks merge, all of which individually have the benefit of GENPRU 2.1.60 R, the FSA may agree in certain circumstances that the base capital resources requirement for the bank resulting from the merger may be the sum of the aggregate capital resources of the merged banks, calculated at the time of the merger, provided this figure is less than €5 million.
There are two main aims in this section:(1) to enable firms to understand the issues which the FSA would expect to see assessed and the systems and processes which the FSA would expect to see in operation for ICAs by firms to be regarded as thorough, objective and prudent; and(2) to enable firms to understand the FSA's approach to assessing whether the minimum capital resources requirements of GENPRU 2.1 are appropriate and what action may be taken if the FSA concludes that those
Based upon this information and other information available to it, the FSA will consider whether the capital resources requirement applicable to the firm is appropriate. Where relevant, the firm'sECR will be a key input to the FSA's assessment of the adequacy of the firm'scapital resources. For firms carrying on general insurance business, the ECR is calculated in accordance with INSPRU 1.1.72C R. For realistic basis life firms, the ECR forms part of the CRR and is calculated
Firms that are required to calculate an ECR may wish to note that the ECR as calculated is based upon the assumptions that a firm's business is well diversified, well managed with assets matching its liabilities and good controls, and stable with no large, unusual, or high risk transactions. Firms may find it helpful to assess the extent to which their actual business differs from these assumptions and therefore what adjustments it might be reasonable to make to the CRR or ECR
Where a firm is carrying out an assessment in accordance with GENPRU 1.22 of the adequacy of its overall financial resources to cover the risk in the overall financial adequacy rule, that is, the risk of its being unable to meet its liabilities as they fall due2, the assessment of the adequacy of the firm's capital resources must:(1) reflect the firm's assets, liabilities, intra-group arrangements and future plans; (2) be consistent with the firm's management practice, systems
Where including new business would increase the capital resources by more than any increase in the capital required, or reduce the capital required by more than any reduction in available capital, new business should be excluded. To the extent that including new business increases the required capital, a firm should consider whether it is appropriate to include the additional amount within the ICA.
In assessing the adequacy of a firm'scapital resources, the FSA draws on more than just a review of the submitted ICA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of any individual capital guidance to be given to a firm, the review of the firm'sICA along with the ARROW risk assessment and any other issues arising from day-to-day supervision will be considered.
A firm should not expect the FSA to accept as adequate any particular model that the firm develops or that the results from the model are automatically reflected in any individual capital guidance given to the firm for the purpose of determining adequate capital resources. However, the FSA will take into account the results of any sound and prudent model when giving individual capital guidance or considering applications for a waiver under section 148 of the Act of the capital
Where the FSA considers that a firm will not comply with GENPRU 1.2.26 R (adequate financial resources, including capital resources) by holding the capital resources required by GENPRU 2.1, the FSA may give the firmindividual capital guidance advising it of the amount and quality of capital resources which the FSA considers it needs to hold in order to meet that rule.
Each of the capital charges in BIPRU 8.7.1 G, as applied on a consolidated basis, is called a consolidated requirement component. The name of each consolidated requirement component reflects the solo capital charge on which it is based. Solo capital charges are called risk capital requirements. Thus for example the consolidated requirement component for market risk is called the consolidated market risk requirement. The calculation of the consolidated market risk requirement is
In general a firm should calculate each consolidated requirement component using the FSA'srules, even in the case of group members who are subject to the capital requirements of an overseas regulator. However this section sets out certain circumstances in which a firm may use the capital requirements of an overseas regulator.
A firm has a choice about how it should apply a risk capital requirement to the group. It may do this by treating the whole of the group as a single entity and applying the risk capital requirement to the group (a line by line approach), calculating a separate risk capital requirement for each group member (an aggregation approach) or a mixture of the two.
A firm must calculate a consolidated requirement component by applying the risk capital requirement applicable to that consolidated requirement component to the UK consolidation group or non-EEA sub-group in accordance with BIPRU 8.7.13 R. Except where BIPRU 8.7.34 R to BIPRU 8.7.38 R allow the requirements of another regulator to be used, the risk capital requirement must be calculated in accordance with the FSA'srules. The risk capital requirement applicable to a consolidated
Table: Capital charges relating to consolidated requirement componentsThis table belongs to BIPRU 8.7.11 RConsolidated requirement componentRules on which the consolidated requirement component are based (the applicable risk capital requirement)Consolidated credit risk requirementCredit risk capital requirementConsolidated fixed overheads requirementFixed overheads requirementConsolidated market risk requirementMarket risk capital requirementConsolidated operational risk requirementOperational
(1) A firm must calculate a consolidated requirement component by using one of the methods in this rule.(2) Under the first method a firm must:(a) apply the risk capital requirement set out in BIPRU 8.7.12 R to each undertaking in the UK consolidation group or non-EEA sub-group; and(b) add the risk capital requirements together.(3) Under the second method a firm must:(a) treat the whole UK consolidation group or non-EEA sub-group as a single undertaking; and(b) apply the risk
The credit risk capital requirement (on which the consolidated credit risk requirement is based) is split into threecapital charges. One relates to credit risk in the non-trading book (the credit risk capital component). One relates to credit risk in the trading book (the counterparty risk capital component). The third is a capital charge for exposures in the trading book that exceed the limits in BIPRU 10.5 (Limits on exposures and large exposures). This is called the concentration
In accordance with BIPRU 8.2.1 R and BIPRU 8.3.1 R (The basic consolidation rules for a UK consolidation group or non-EEA sub-group), a firm may exclude that part of the risk capital requirement that arises as a result of:(1) (in respect of the consolidated credit risk requirement) intra-group balances; or(2) (in respect of the consolidated operational risk requirement and consolidated fixed overheads requirement) intra-group transactions;with other undertakings in the UK consolidation
Since transactions may be structured in many different ways, the capital treatment of a position should be determined on the basis of its economic substance rather than merely its legal form. A firm should look to the economic substance of a transaction to determine whether the securitisation framework is applicable for purposes of determining regulatory capital. A firm should consult the FSA when there is uncertainty about whether a given transaction should be considered a s
The FSA expects an originator to continue to monitor any risks that it may be subject to when it has excluded the securitised exposures from its calculation of risk weighted exposure amounts. The originator should consider capital planning implications where risks may return and the impact that securitisation has on the quality of the remaining exposures held by the originator.
BIPRU 9 deals with:(1) requirements for originators and sponsors of securitisations of non-trading bookexposures; and(2) the calculation of risk weighted exposure amount for securitisation positions for the purposes of calculating either the credit risk capital component or the counterparty risk capital component.
The originator of a traditional securitisation may exclude securitisedexposures1 from the calculation of risk weighted exposure amounts and expected loss amounts if significant credit risk associated with the securitised exposures has been transferred to third parties and the transfer complies with the conditions in BIPRU 9.4.2 RBIPRU 9.4.10 R.[Note:BCD Annex IX Part 2 point 1 (part)]
Term trading-related repo-style transactions that a firm accounts for in its non-trading book may be included in the trading book for capital requirement purposes so long as all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are defined as those that meet the requirements of BIPRU 1.2.4 R, BIPRU 1.2.10 R and BIPRU 1.2.12 R, and both legs are in the form of either cash or securities includable in the trading book. Regardless
(1) An internal hedge is a position that materially or completely offsets the component risk element of a non-trading bookposition or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:(a) internal hedges must not be
All positions that are in a firm'strading book require capital to cover position risk and may require capital to cover counterparty credit risk and to cover large exposures. Counterparty credit risk in the trading book is dealt with by BIPRU 14 and capital for large exposures is covered by BIPRU 10.
(1) CASS 5.4 permits a firm, which has adequate resources, systems and controls, to declare a trust on terms which expressly authorise it, in its capacity as trustee, to make advances of credit to the firm'sclients. The client money trust required by CASS 5.4 extends to such debt obligations which will arise if the firm, as trustee, makes credit advances, to enable a client's premium obligations to be met before the premium is remitted to the firm and similarly if it allows claims
A firm may not handle client money in accordance with the rules in this section unless each of the following conditions is satisfied:(1) the firm must have and maintain systems and controls which are adequate to ensure that the firm is able to monitor and manage its client money transactions and any credit risk arising from the operation of the trust arrangement and, if in accordance with CASS 5.4.2 R a firm complies with both the rules in CASS 5.3 and CASS 5.4, such systems and
The deed (or equivalent formal document) referred to in CASS 5.4.6 R may provide that:(1) the firm, acting as trustee (or, in Scotland, as agent), has power to make advances or give credit to clients or insurance undertakings from client money, provided that it also provides that any debt or other obligation of a client or resulting obligation of an insurance undertaking, in relation to an advance or credit, is held on the same terms as CASS 5.4.7 R;(2) the benefit of a letter
A circular to shareholders about the approval of an employee'sshare scheme or long-term incentive scheme must:(1) include either the full text of the scheme or a description of its principal terms;(2) include, if directors of the listed company are trustees of the scheme, or have a direct or indirect interest in the trustees, details of the trusteeship or interest;(3) state that the provisions (if any) relating to:(a) the persons to whom, or for whom, securities, cash or other
(1) A circular to holders of listed securities convertible into shares reminding them of the times when conversion rights are exercisable must include:(a) the date of the last day for lodging conversion forms and the date of the expected sending of the certificates;(b) a statement of the market values for the securities on the first dealing day in each of the six months before the date of the circular and on the latest practicable date before sending the circular;(c) the basis
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.Data itemFirm's prudential categoryBIPRU 730K firmBIPRU 125K firm and UCITS investment firmBIPRU 50K firmConsolidatedBIPRU investment firmFirmother than BIPRU firmsAnnual accountsAnnuallyAnnuallyAnnuallyAnnually28Annual accounts of the mixed-activity
2The applicable reporting frequencies for submission of data items referred to in SUP 16.12.4 R are set out in the table below. Reporting frequencies are calculated from a firm'saccounting reference date, unless indicated otherwise.Annual accountsAnnuallyAnnual reconciliationAnnuallySolvency statementAnnuallyFSA029Quarterly8FSA030Quarterly8FSA031QuarterlyFSA032QuarterlyFSA033Quarterly8FSA034Quarterly8FSA035Quarterly8FSA036Quarterly58FSA039Half yearlyFSA040Quarterly35Section A
2The applicable data items referred to in SUP 16.12.4 R are set out according to type of firm in the table below:Description of data itemFirms prudential category and applicable data item (note 1)BIPRUFirmsother thanBIPRU firms730K125K50KIPRU(INV)Chapter 3IPRU(INV)Chapter 5IPRU(INV)Chapter 9IPRU(INV)Chapter 133UPRUAnnual accountsNo standard format8Annual accounts of the mixed-activity holding company (note 10)No standard formatSolvency statement (note 11)No standard formatNo standard
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.BIPRU 730K firmBIPRU 125K firmBIPRU 50K firmConsolidatedBIPRU investment firmFirms other than BIPRU firmsAnnual accountsAnnuallyAnnuallyAnnually Annually 28Annual accountsof the mixed-activity holding companyAnnuallyAnnuallyAnnuallyAnnuallySolvency
2The applicable data items, reporting frequencies and submission deadlines referred to in SUP 16.12.4 R are set out in the table below. Reporting frequencies are calculated from a firm'saccounting reference date, unless indicated otherwise. The due dates are the last day of the periods given in the table below following the relevant reporting frequency period.Description of data itemData item (note 1)FrequencySubmission deadlineAnnual regulated business revenue up to and including
The rules in GENPRU and BIPRU do not allow a firm that is a parent undertaking to incorporate the capital and requirements of a subsidiary undertaking in the calculation of that firm'scapital resources and capital resources requirement. A firm that wishes to incorporate a subsidiary undertaking for this purpose should therefore apply for a solo consolidation waiver.
A firm that has a solo consolidation waiver must incorporate in the calculation of its requirements under the main BIPRU firm Pillar 1 rulesand BIPRU 10 (Concentration risk requirement) each subsidiary undertaking to which the solo consolidation waiver applies. This does not apply to the base capital resources requirement.
A firm must be able to demonstrate fully to the FSA the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of the capital resources of the subsidiary undertaking referred to in BIPRU 2.1.19 R or repayment of liabilities when due by the subsidiary undertaking to the firm.
A firm must disclose the following information regarding the scope of application of the requirements of the Banking Consolidation Directive:(1) the name of the firm which is the subject of the disclosures;(2) an outline of the differences in the basis of consolidation for accounting and prudential purposes, with a brief description of the entities that are:(a) fully consolidated;(b) proportionally consolidated;(c) deducted from capital resources;(d) neither consolidated nor deducted;(3)
A firm must disclose the following information regarding its capital resources:(1) summary information on the terms and conditions of the main features of all capital resources items and components thereof;(2) tier one capital resources less any innovative tier one capital resources, with separate disclosure of all positive items and deductions;(3) the total amount (for the purposes of (3), the total amount must be stated gross of deductions) of:(a) tier two capital resources
The following information must be disclosed by a firm which calculates its market risk capital requirement using a VaR model:(1) for each sub-portfolio covered:(a) the characteristics of the models used;(b) a description of stress testing applied to the sub-portfolio;(c) a description of the approaches used for backtesting and validating the accuracy and consistency of the internal models and modelling processes;(2) the scope of the firm'sVaR model permission; and(3) a description
A firm must disclose the following information regarding the exposures in equities not included in the trading book:(1) the differentiation between exposures based on their objectives, including for capital gains relationship and strategic reasons, and an overview of the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation and any significant changes in these practices;(2) the balance sheet value, the fair value and,
(1) 3GENPRU 2 Annex 7 R (3) requires firms to consider first whether an asset is a derivative or quasi-derivative transaction notwithstanding that it is also capable of falling within one or more other categories in GENPRU 2 Annex 7 R (1). If it is a derivative or quasi-derivative transaction it is only admissible if it satisfies the conditions for it to be approved under INSPRU 3.2.5 R. Firms should be able to justify whether or not their assets are derivatives or quasi-derivatives.(2)
A derivative or quasi-derivative is held for the purpose of efficient portfolio management if the firm reasonably believes the derivative or quasi-derivative (either alone or together with any other covered transactions) enables the firm to achieve its investment objectives by one of the following (or, in relation to permitted links, in a manner which includes but is not limited to)1:(1) generating additional capital or income in one of the ways described in INSPRU 3.2.7 R; or(2)
The generation of additional capital or income falls within INSPRU 3.2.6R (1) where it arises from:(1) taking advantage of pricing imperfections in relation to the acquisition and disposal (or disposal and acquisition) of rights in relation to assets the same as, or equivalent to, admissible assets or permitted links1; or(2) receiving a premium for selling a covered call option or its equivalent, the underlying of which is an admissible asset or permitted link1, even if that additional
For the purposes of assessing adequate quality in INSPRU 3.2.38R (3), reference should be made to the criteria for credit risk loss mitigation set out in INSPRU 2.1.16 R. The valuation rules in GENPRU 1.3 apply for the purpose of determining the value of both collateral received, and the securities transferred, by the firm. In addition, where collateral takes the form of assets transferred, under the rules in GENPRU any such asset that is not an admissible asset (see GENPRU 2
Except where a rule in GENPRU, BIPRU or INSPRU makes different provision, GENPRU 1.3.4 R applies whenever a rule in GENPRU, BIPRU or INSPRU refers to the value or amount of an asset, liability, exposure, equity or income statement item, including:(1) whether, and when, to recognise or de-recognise an asset or liability;(2) the amount at which to value an asset, liability, exposure, equity or income statement item; and(3) which description to place on an asset, liability, exposure,
Wherever possible, a firm must use mark to market in order to measure the value of the investments and positions to which this rule applies under GENPRU 1.3.13 R and GENPRU 1.3.38 R to GENPRU 1.3.41 R. Marking to market is valuation (on at least a daily basis in the case of the trading book positions of a BIPRU firm) at readily available close out prices from independent sources.
In the case of the trading book positions of a BIPRU firm, while daily marking to market may be performed by dealers, verification of market prices and model inputs must be performed by a unit independent of the dealing room, at least monthly (or, depending on the nature of the market/trading activity, more frequently).
Adjustments to accounting values(1) For the purposes of GENPRU and BIPRU, the adjustments in (2) and (3) apply to values calculated pursuant to GENPRU 1.3.4 R in addition to those required by GENPRU 1.3.9 R to GENPRU 1.3.10 R.(2) A BIPRU firm must not recognise either:(a) the fair value reserves related to gains or losses on cash flow hedges of financial instruments measured at amortised cost; or(b) any unrealised gains or losses on debt instruments held in the available-for-sale
The risk weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in (1) to (4) must, unless deducted from capital resources, be calculated in accordance with the following provisions:(1) for exposures in the sovereign, institution and corporate IRB exposure class, BIPRU 4.4.57 R to BIPRU 4.4.60 R, BIPRU 4.4.79 R, BIPRU 4.5.8 R to BIPRU 4.5.10 R (for specialised lending exposures), BIPRU 4.9.3 R and BIPRU 4.8.16 R to BIPRU 4.8.17
A firm may carry out the adjustments under BIPRU 4.3.76 R (Adjustments to averages of historical experience) by adjusting the data from which estimates are made rather than by adjusting the estimates themselves if it can demonstrate that capital requirements are not underestimated as a result.
Estimation of PD through the use of a technique set out in BIPRU does not remove the need to make conservative adjustments, where necessary, related to the expected range of estimation errors so that capital requirements produced by the relevant model or other rating system are not understated.
(1) A firm using own estimates of conversion factors should take into account all facility types that may result in an exposure when an obligor defaults, including uncommitted facilities.(2) A firm should treat a facility as an exposure from the earliest date at which a customer is able to make drawings under it.(3) To the extent that a firm makes available multiple facilities, it should be able to demonstrate:(a) how it deals with the fact that exposures on one may become exposures