Related provisions for SYSC 19D.3.28

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BIPRU 3.4.1RRP
Without prejudice to BIPRU 3.4.2 R to BIPRU 3.4.9 R, exposures to central governments and central banks must be assigned a 100% risk weight.[Note: BCD Annex VI Part 1 point 1]
BIPRU 3.4.2RRP
Subject to BIPRU 3.4.4 R, exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.3 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 2]
BIPRU 3.4.3RRP
This table belongs to BIPRU 3.4.2 R.Credit quality step123456Risk weight0 %20 %50 %100 %100 %150 %
BIPRU 3.4.4RRP
Exposures to the European Central Bank must be assigned a 0% risk weight.[Note: BCD Annex VI Part 1 point 3]
BIPRU 3.4.6RRP
When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA assign a risk weight which is lower than that indicated in BIPRU 3.4.1 R to BIPRU 3.4.3 R to exposures to their central government and central bank denominated and funded in the domestic currency, a firm may risk weight such exposures in the same manner.[Note: BCD Annex VI Part 1 point 5]
BIPRU 3.4.7RRP
An export credit agency credit assessment may be recognised by a firm for the purpose of determining the risk weight to be applied to an exposure under the standardised approach if either of the following conditions is met:(1) the credit assessment is a consensus risk score from export credit agencies participating in the OECD "Arrangement on Guidelines for Officially Supported Export Credits"; or(2) the export credit agency publishes its credit assessments, and the export credit
BIPRU 3.4.8RRP
Exposures for which a credit assessment by an export credit agency is recognised for risk weighting purposes must be assigned a risk weight according to the table in BIPRU 3.4.9 R.[Note: BCD Annex VI Part 1 point 7]
BIPRU 3.4.10RRP
Without prejudice to BIPRU 3.4.15 R to BIPRU 3.4.19 R:(1) a firm must risk weightexposures to regional governments and local authorities in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R and BIPRU 3.4.19A R; and8(2) the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.[Note: BCD Annex VI Part 1 point 8]
BIPRU 3.4.11RRP
(1) Exposures to regional governments and local authorities must be assigned a risk weight according to the credit quality step to which exposures to the central government of the jurisdiction in which the regional government or local authority is established are assigned in accordance with the table in BIPRU 3.4.12 R.(2) Exposures to an unrated regional government or local authority must not be assigned a risk weight lower than that applied to exposures to its central government.[Note:
BIPRU 3.4.12RRP
This table belongs to BIPRU 3.4.11 R.Credit quality step to which central government is assigned123456Risk weight of exposure20%50%100%100%100%150%
BIPRU 3.4.13RRP
For exposures to regional governments and local authorities established in countries where the central government is unrated, the risk weight must be not more than 100%.[Note: BCD Annex VI Part 1 point 27]
BIPRU 3.4.14RRP
For exposures to regional governments and local authorities with an original effective maturity of three months or less, the risk weight must be 20%.[Note: BCD Annex VI Part 1 point 28]
BIPRU 3.4.16GRP
The appropriate regulator will include a regional government or local authority in the list in BIPRU 3 Annex 2 R where there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the specific revenue-raising powers of the regional government or local authority, and the existence of specific institutional arrangements the effect of which is to reduce the risk of default.[Note: BCD Annex VI Part 1 point
BIPRU 3.4.19RRP
When competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA treat exposures to regional governments and local authorities as exposures to their central government, a firm may risk weightexposures to such regional governments and local authorities in the same manner.[Note: BCD Annex VI Part 1 point 11]
BIPRU 3.4.19ARRP
8Without prejudice to BIPRU 3.4.17 R to BIPRU 3.4.19 R, an exposure to a regional government or local authority of an EEA State denominated and funded in the domestic currency of that regional government or local authority must be assigned a risk weight of 20%.[Note:BCD Annex VI Part 2(b)]
BIPRU 3.4.21RRP
Without prejudice to BIPRU 3.4.22 R to BIPRU 3.4.26 R, exposures to administrative bodies and non-commercial undertakings must be assigned a 100% risk weight.[Note:BCD Annex VI Part 1 point 12]
BIPRU 3.4.22RRP
Without prejudice to BIPRU 3.4.23 R to BIPRU 3.4.26 R, exposures to public sector entities must be assigned a 100% risk weight.[Note: BCD Annex VI Part 1 point 13]
BIPRU 3.4.24RRP
In exceptional circumstances a firm may treat an exposure to a public sector entity established in the United Kingdom as an exposure to the central government of the United Kingdom if there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the existence of an appropriate guarantee by the central government.[Note: BCD Annex VI Part 1 point 15]
BIPRU 3.4.25RRP
Where a competent authority of another EEA State implements points 14 or 15 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to treat exposures to public sector entities as exposures to institutions or as exposures to the central government of the EEA State concerned, a firm may risk weightexposures to the relevant public sector entities in the same manner.[Note: BCD Annex VI Part 1 point 16]
BIPRU 3.4.26RRP
When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA, treat exposures to public sector entities as exposures to institutions, a firm may risk weightexposures to the relevant public sector entities in the same manner.[Note: BCD Annex VI Part 1 point 17]
BIPRU 3.4.28RRP
An exposure to a multilateral development bank listed in point (a)9 of the definition in the Glossary must be assigned a 0% risk weight.[Note: BCD Annex VI Part 1 point 20]9
BIPRU 3.4.30RRP
Exposures to the following international organisations must be assigned a 0% risk weight:(1) the EU;55(2) the International Monetary Fund; and(3) the Bank for International Settlements.[Note: BCD Annex VI Part 1 point 22]
BIPRU 3.4.32RRP
Without prejudice to BIPRU 3.4.33 R to BIPRU 3.4.47 R, exposures to financial institutions authorised and supervised by the competent authorities responsible for the authorisation and supervision of credit institutions and subject to prudential requirements equivalent to those applied to credit institutions must be risk weighted as exposures to institutions.[Note: BCD Annex VI Part 1 point 24]
BIPRU 3.4.33RRP
Exposures to an unrated institution must not be assigned a risk weight lower than that applied to exposures to its central government.[Note: BCD Annex VI Part 1 point 25]
BIPRU 3.4.34RRP
Exposures to institutions with a residual maturity of more than three months 6for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.35 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 29]
BIPRU 3.4.35RRP
This table belongs to BIPRU 3.4.34 R.Credit quality step123456Risk weight20%50%50%100%100%150%
BIPRU 3.4.36RRP
Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions must be assigned a risk weight of 50%.[Note: BCD Annex VI Part 1 point 30]
BIPRU 3.4.37RRP
Exposures to an institution with a residual maturity of three months or less 6for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.38 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 31]
BIPRU 3.4.38RRP
This table belongs to BIPRU 3.4.37 R.Credit quality step123456Risk weight20%20%20%50%50%150%
BIPRU 3.4.39RRP
Without prejudice to BIPRU 3.4.33 R, exposures to unrated institutions having an original effective maturity of three months or less must be assigned a 20% risk weight[Note: BCD Annex VI Part 1 point 32]
BIPRU 3.4.43GRP
2BIPRU 3 Annex 4 G2 contains a flow diagram guide to determining the risk weight to be applied to short-term exposures to institutions according to whether a short-term credit assessment is available.
BIPRU 3.4.44RRP
A firm may assign to an exposure to an institution formed under the law of the United Kingdom of a residual maturity of 3 months or less denominated and funded in pounds sterling a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.5 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of the United Kingdom.[Note: BCD Annex VI Part 1 point 37]
BIPRU 3.4.45RRP
(1) Where a competent authority of another EEA State implements point 37 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to allow the treatment in that point, a firm may assign to the relevant national currency exposures the risk weight permitted by that CRD implementation measure.(2) When the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the EEA assigns
BIPRU 3.4.46RRP
No exposures of a residual maturity of 3 months or less denominated and funded in the national currency of the borrower may be assigned a risk weight less than 20%.[Note: BCD Annex VI Part 1 point 38]
BIPRU 3.4.48RRP
Where an exposure to an institution is in the form of minimum reserves required by the European Central Bank or by the central bank of an EEA State to be held by the firm, a firm may assign the risk weight that would be assigned to exposures to the central bank of the EEA State in question provided:(1) the reserves are held in accordance with Regulation (EC) No. 1745/2003 of the European Central Bank of 12 September 2003 or a subsequent replacement regulation or in accordance
BIPRU 3.4.50RRP
Exposures for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.51 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 41]
BIPRU 3.4.51RRP
This table belongs to BIPRU 3.4.50 R.Credit quality step123456Risk weight20%50%100%100%150%150%
BIPRU 3.4.52RRP
Unrated exposures must be assigned a 100% risk weight or the risk weight of its central government, whichever is the higher.[Note: BCD Annex VI Part 1 point 42]
BIPRU 3.4.53RRP
Exposures that comply with the criteria listed in BIPRU 3.2.10 R must be assigned a risk weight of 75%. However a firm may treat such an exposure under BIPRU 3.2.24 R (100% risk weight).[Note: BCD Annex VI Part 1 point 43]
BIPRU 3.4.55RRP
Without prejudice to BIPRU 3.4.56 R to BIPRU 3.4.94 R, exposures fully secured by real estate property must be assigned a risk weight of 100%.[Note: BCD Annex VI Part 1 point 44]
BIPRU 3.4.56RRP
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure fully and completely secured, to the satisfaction of the firm, by mortgages on residential property which is or shall be occupied or let by the owner or the beneficial owner in the case of personal investment companies must be assigned a risk weight of 35%.[Note: BCD Annex VI Part 1 point 45]
BIPRU 3.4.56BGRP
(1) 4This paragraph provides guidance on BIPRU 3.4.56A R.(2) For the purposes of BIPRU 3.4.56A R (2), a firm may use the FTSE UK gilt 10-year yield index which the Council of Mortgage Lenders makes available to its members.(3) If a firm offers a variable interest rate on a lifetime mortgage, it should calculate an average interest rate in a way which is consistent with the calculation of the discount rate.(4) To determine the projected number of years to maturity of the exposure,
BIPRU 3.4.57RRP
Exposures fully and completely secured, to the satisfaction of the firm, by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential property which is or shall be occupied or let by the owner must be assigned a risk weight of 35%.[Note: BCD Annex VI Part 1 point 46]
BIPRU 3.4.58RRP
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure to a tenant under a property leasing transaction concerning residential property under which the firm is the lessor and the tenant has an option to purchase, must be assigned a risk weight of 35% provided that the firm is satisfied that the exposure of the firm is fully and completely secured by its ownership of the property.[Note: BCD Annex VI Part 1 point 47]
BIPRU 3.4.60RRP
(1) In the exercise of its judgement for the purposes of BIPRU 3.4.56 R to BIPRU 3.4.58 R, a firm may be satisfied only if the conditions in (2) to (6) are met.(2) The value of the property does not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macroeconomic factors affect both the value of the property and the performance of the borrower.(3) The risk of the borrower does not materially depend upon the performance
BIPRU 3.4.63RRP
If a CRD implementation measure of another EEA State exercises the discretion in point 49 of Part 1 of Annex VI of the Banking Consolidation Directive to dispense with the condition corresponding to BIPRU 3.4.60 R (3) (The risk of the borrower should not materially depend upon the performance of the underlying property or project) , a firm may apply a risk weight of 35% to such exposures fully and completely secured by mortgages on residential property situated in that EEA State.[Note:
BIPRU 3.4.68GRP
For the purposes of BIPRU 3.4.66 R (1)(a), the monitoring of property values should be an inherent part of risk managing and tracking the portfolio. The requirement to monitor property values does not include the physical assessment of each property in the portfolio.
BIPRU 3.4.75GRP
A firm may deal with the risk that insurance on properties taken as protection may be inadequate by taking out insurance at the level of the portfolio.
BIPRU 3.4.82GRP
(1) The application of BIPRU 3.4.81 R may be illustrated by an example. If a firm has a mortgage exposure of £100,000 secured on residential property in the United Kingdom that satisfies the criteria listed in BIPRU 3.4.56 R to BIPRU 3.4.80 R and the value of that property is £100,000, then £80,000 of that exposure may be treated as fully and completely secured and risk weighted at 35%. The remaining £20,000 may be risk weighted at 75% provided the exposure meets the criteria
BIPRU 3.4.85RRP
For the purposes of BIPRU 3.4.56 R or BIPRU 3.4.58 R, where the residential property in question is situated in the territory of a third-country competent authority that is not listed as equivalent for credit risk in BIPRU 8 Annex 3 R:(1) a firm must not treat an exposure as fully and completely secured by the residential property in question unless the value of the property exceeds the exposures by a substantial margin, which must be at least 20%;(2) the firm must apply a risk
BIPRU 3.4.90RRP
Exposures fully and completely secured by shares in Finnish housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of offices or other commercial premises may be assigned a risk weight of 50%.[Note: BCD Annex VI Part 1 point 52]
BIPRU 3.4.96RRP
Without prejudice to the provisions contained in BIPRU 3.4.97 R to BIPRU 3.4.101 R, the unsecured part of any item that is past due for more than 90 days (irrespective of the amount of that item or of the unsecured portion of that item) must be assigned a risk weight of:(1) 150% if value adjustments are less than 20% of the unsecured part of the exposure gross of value adjustments; and(2) 100% if value adjustments are no less than 20% of the unsecured part of the exposure gross
BIPRU 3.4.99RRP
Exposures indicated in BIPRU 3.4.56 R to BIPRU 3.4.63 R (Exposures secured by mortgages on residential property) must be assigned a risk weight of 100% net of value adjustments if they are past due for more than 90 days. If value adjustments are no less than 20% of the exposure gross of value adjustments, the risk weight to be assigned to the remainder of the exposure is 50%.[Note: BCD Annex VI Part 1 point 64]
BIPRU 3.4.100GRP
The application of BIPRU 3.4.96 R and BIPRU 3.4.99 R may be illustrated on the basis of a £110,000 loan on a property valued at £100,000, where £80,000 of the loan is secured and £30,000 of the exposure is unsecured and provisions of £20,000 are taken:(1) Option 1 (application of BIPRU 3.4.96 R):(a) provision of £20,000 taken on £80,000 secured exposure;(b) provision exceeds 20%, so the firm should risk weight the remaining £60,000 secured exposure at 50%;(c) the risk weight to
BIPRU 3.4.101RRP
Exposures indicated in BIPRU 3.4.89 R to BIPRU 3.4.94 R (Exposures secured by mortgages on commercial real estate) must be assigned a risk weight of 100% if they are past due for more than 90 days.[Note: BCD Annex VI Part 1 point 65]
BIPRU 3.4.102RRP
Non past due items to be assigned a 150% risk weight under BIPRU 3.4 and for which value adjustments have been established may be assigned a risk weight of:(1) 100% if value adjustments are no less than 20% of the exposure value gross of value adjustments; and(2) 50%, if value adjustments are no less than 50% of the exposure value gross of value adjustments.[Note: BCD Annex VI Part 1 point 67]
BIPRU 3.4.103RRP
BIPRU 3.4.104 R sets out the treatment to be accorded to items belonging to regulatory high-risk categories.
BIPRU 3.4.104RRP
Exposures listed in BIPRU 3 Annex 3 R must be assigned a risk weight of 150%.[Note: BCD Annex VI Part 1 point 66]
BIPRU 3.4.105GRP
For the purposes of point 66 of Part 1 of Annex VI of the Banking Consolidation Directive, the exposures listed in BIPRU 3 Annex 3 R are in the view of the appropriate regulator associated with particularly high risk.
BIPRU 3.4.107RRP
(1) Covered bonds means covered bonds as defined in paragraph (1) of the definition in the glossary (Definition based on Article 22(4) of the UCITS Directive) and collateralised by any of the following eligible assets:(a) exposures to or guaranteed by central governments, central bank, public sector entities, regional governments and local authorities in the EEA;(b) (i) exposures to or guaranteed by non-EEA central governments, non-EEAcentral banks, multilateral development banks,
BIPRU 3.4.110RRP
Covered bonds must be assigned a risk weight on the basis of the risk weight assigned to senior unsecured exposures to the credit institution which issues them. The following correspondence between risk weights applies:(1) if the exposures to the institution are assigned a risk weight of 20%, the covered bond must be assigned a risk weight of 10%;(2) if the exposures to the institution are assigned a risk weight of 50%, the covered bond must be assigned a risk weight of 20%;(3)
BIPRU 3.4.111RRP
Risk weightedexposure amounts for securitisation positions must be determined in accordance with BIPRU 9.[Note: BCD Annex VI Part 1 point 72]
BIPRU 3.4.112RRP
Exposures to institutions where BIPRU 3.4.34 R to BIPRU 3.4.39 R apply, and exposures to corporates6 for which a short-term credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.113 R in accordance with the mapping by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI
BIPRU 3.4.115RRP
Without prejudice to BIPRU 3.4.116 R to BIPRU 3.4.125 R, exposures in CIUs must be assigned a risk weight of 100%.[Note: BCD Annex VI Part 1 point 74]
BIPRU 3.4.116RRP
Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.117 R in accordance with the assignment by the appropriate regulator in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 75]
BIPRU 3.4.117RRP
Table: Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is availableThis table belongs to BIPRU 3.4.116 R.Credit quality step123456Risk weight20%50%100%100%150%150%
BIPRU 3.4.118RRP
Where a firm considers that a position in a CIU is associated with particularly high risks it must assign that position a risk weight of 150%.[Note: BCD Annex VI Part 1 point 76]
BIPRU 3.4.119GRP
A firm should consider a CIU as being high risk where there is no external credit assessment from an eligible ECAI and where the CIU has specific features (such as high levels of leverage or lack of transparency) that prevent it from meeting the eligibility criteria laid out in BIPRU 3.4.121 R.
BIPRU 3.4.120GRP
Other examples of high risk CIUs are: one in which a substantial element of the CIU's property is made up of items that would attract a risk weight of over 100%; or one whose mandate (as referred to in BIPRU 3.4.124 R) would permit it to invest in a substantial amount of such items.
BIPRU 3.4.121RRP
Where BIPRU 3.4.116 R does not apply, a firm may determine the risk weight for a CIU as set out in BIPRU 3.4.123 R to BIPRU 3.4.125 R, if the following eligibility criteria are met:(1) one of the following conditions is satisfied:(a) the CIU is managed by a company which is subject to supervision in an EEA State; or(b) the following conditions are satisfied:(i) the CIU is managed by a company which is subject to supervision that is equivalent to that laid down in EU5 law; and5(ii)
BIPRU 3.4.123RRP
Where a firm is aware of the underlying exposures of a CIU, it may look through to those underlying exposures in order to calculate an average risk weight for the CIU in accordance with the standardised approach.[Note: BCD Annex VI Part 1 point 79]
BIPRU 3.4.124RRP
Where a firm is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for the CIU in accordance with the standardised approach subject to the following rules: it will be assumed that the CIU first invests, to the maximum extent allowed under its mandate, in the standardised credit risk exposure classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment limit
BIPRU 3.4.125RRP
A firm may rely on a third party to calculate and report, in accordance with the methods set out in BIPRU 3.4.123 R to BIPRU 3.4.124 R, a risk weight for the CIU provided that the correctness of the calculation and report is adequately ensured.[Note: BCD Annex VI Part 1 point 81]
BIPRU 3.4.127RRP
Tangible assets within the meaning of Article 4(10) of the Bank Accounts Directive must be assigned a risk weight of 100%.[Note: BCD Annex VI Part 1 point 82]
BIPRU 3.4.128RRP
Prepayments and accrued income for which a firm is unable to determine the counterparty in accordance with the Bank Accounts Directive, must be assigned a risk weight of 100%.[Note: BCD Annex VI Part 1 point 83]
BIPRU 3.4.130RRP
Holdings of equity and other participations except where deducted from capital resources must be assigned a risk weight of at least 100%.[Note: BCD Annex VI Part 1 point 86]
BIPRU 3.4.131RRP
Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities must be assigned a 0% risk weight.[Note: BCD Annex VI Part 1 point 87]
BIPRU 3.4.132RRP
In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight must be that assigned to the assets in question and not to the counterparties to the transactions.[Note: BCD Annex VI Part 1 point 88]
BIPRU 3.4.133RRP
Where a firm provides credit protection for a number of exposures under terms that the nth default among the exposures triggers payment and that this credit event terminates the contract, and where the product has an external credit assessment from an eligible ECAI the risk weights prescribed in BIPRU 9 must be assigned. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket must be aggregated, excluding n-1 exposures, up to a
BIPRU 3.4.134RRP
The exposure value for leases must be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. an option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in BIPRU 5.7.1 R (Eligibility), regarding the eligibility of protection providers as well as the minimum requirements for recognising other types of guarantees
IFPRU 2.2.1RRP
A firm must, at all times, maintain overall financial resources and internal capital, including own funds and liquidity resources which are adequate both as to amount and quality to ensure there is no significant risk that its liabilities cannot be met as they fall due.
IFPRU 2.2.3GRP
The effective management of prudential risk relies on the adequacy of a firm's financial resources, systems and controls. These need to be assessed in relation to all the activities of the firm and the risks to which they give rise, and so this chapter applies to a firm for the whole of its business. For a collective portfolio management investment firm, this means that this section also applies to its activities in relation to the management of AIFs and/or UCITS.
IFPRU 2.2.6GRP
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.
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 2.2.14RRP
As part of its obligations under the overall Pillar 2 rule, a firm must :(1) make an assessment of the firm-wide impact of the risks identified in line with that rule, to which end a firm must aggregate the risks across its various business lines and units, taking appropriate account of the correlation between risks; (2) take into account the stress tests that the firm is required to carry out as follows: (a) (for a significant IFPRU firm) under the general stress and scenario
IFPRU 2.2.15GRP
Certain risks, such as systems and controls weaknesses, may not be adequately addressed by, for example, holding additional capital and a more appropriate response would be to rectify the weakness. In such circumstances, the amount of financial resources required to address these risks might be zero. However, a firm should consider whether holding additional capital might be an appropriate response until the identified weaknesses are rectified. A firm, should, in line with IFPRU
IFPRU 2.2.21RRP
A firm must address and control, by means which include written policies and procedures, residual risk (see IFPRU 2.2.8 R (2) and IFPRU 2.3.41 G). [Note: article 80 of CRD]
IFPRU 2.2.22RRP
A firm must address and control, by means which include written policies and procedures, the concentration risk arising from:(1) exposures to each counterparty, including central counterparties, groups of connected counterparties and counterparties in the same economic sector, geographic region or from the same activity or commodity;(2) the application of credit risk mitigation techniques; and(3) risks associated with large indirect credit exposures, such as a single collateral
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 2.2.24RRP
A firm must evaluate and address through appropriate policies and procedures the risks arising from securitisation transactions in relation to which a firm is investor, originator or sponsor, including reputational risks, to ensure, in particular, that the economic substance of the transaction is fully reflected in risk assessment and management decisions.[Note: article 82(1) of CRD]
IFPRU 2.2.27RRP
A firm must take measures against the risk of a shortage of liquidity if the short position falls2 due before the long position.[Note: article 83(2) of CRD]
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 2.2.30RRP
A firm must implement systems to identify, evaluate and manage the risk arising from potential changes in interest rates that affect a firm's non-trading activities.[Note: article 84 of CRD]
IFPRU 2.2.31RRP
(1) As part of its obligations under the overall Pillar 2 rule, a firm must carry out an evaluation of its exposure to the interest-rate risk arising from its non-trading activities.(2) The evaluation under (1) must cover the effect of a sudden and unexpected parallel change in interest rates of 200 basis points in both directions.(3) A firm must immediately notify the FCA if any evaluation under this rule suggests that, as a result of the change in interest rates described in
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 2.2.35RRP
A firm must address the risk of excessive leverage in a precautionary manner by taking due account of potential increases in that risk caused by reductions of the firm'sown funds through expected or realised losses, depending on the applicable accounting rules. To that end, a firm must be able to withstand a range of different stress events with respect to the risk of excessive leverage.[Note: article 87(2) 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 2.2.42GRP
For the purpose of IFPRU 2.2.37 R (5), a firm should consider whether the nature of the major sources of risks identified by it, in line with IFPRU 2.2.7 R (2) (Main requirement relating to risk strategies, processes and systems), and their possible impact on its financial resources suggest that such tests and analyses should be carried out more frequently. For instance, a sudden change in the economic outlook may prompt a firm to revise the parameters of some of its stress tests
IFPRU 2.2.52RRP
(1) This rule relates to the assessment of the amounts, types and distribution of financial resources, own funds 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 IFPRU 2.2.14 R (3)(b) 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 the
IFPRU 2.2.53RRP
(1) A firm must allocate the total amount of financial resources, own funds and internal capital identified as necessary under the overall Pillar 2 rule (as applied on a consolidated basis) between different parts of the FCA consolidation group. IFPRU 2.2.11 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 of the risks to which the group
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 2.2.58RRP
The risk control rules apply to a firm on an individual basis whether or not they also apply to the firm on a consolidated basis.[Note: article 109(1) of CRD]
IFPRU 2.2.59RRP
Where a firm is a member of a FCA consolidation group or a non-EEA sub-group, the firm must ensure that the risk management processes and internal control mechanisms at those levels comply with the obligations set out in the risk control rules on a consolidated basis (or a sub-consolidated basis).[Note: article 109(2) of CRD]
IFPRU 2.2.63RRP
When the overall financial adequacy rule applies on a consolidated basis or sub-consolidated basis, the firm must ensure that at all times its FCA consolidation group maintains overall financial resources and internal capital, including own funds and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that the liabilities of any members of its FCA consolidation group cannot be met as they fall due.
IFPRU 2.2.66GRP
Scenario analysis typically refers to a wider range of parameters being varied at the same time. Scenario analyses often examine the impact of adverse events on the firm's financial position, for example, simultaneous movements in a number of risk categories affecting all of a firm's business operations, such as business volumes, investment values and interest rate movements.
IFPRU 2.2.68GRP
One of the main purposes 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.
IFPRU 2.2.69GRP
Both stress testing and scenario analyses are forward-looking analysis techniques which seek to anticipate possible losses that might occur if an identified risk crystallises. In applying them, a firm should decide how far forward to look. This should depend upon:(1) how quickly it would be able to identify events or changes in circumstances that might lead to a risk crystallising resulting in a loss; and(2) after it has identified the event or circumstance, how quickly and effectively
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 2.2.75GRP
A firm may consider scenarios in which expected future profits will provide capital reserves against future risks. However, it would only be appropriate to take into account profits that can be foreseen with a reasonable degree of certainty as arising before the risk against which they are being held could possibly arise. In estimating future reserves, a firm should deduct future dividend payment estimates or other forms of profits distribution2 from projections of future pro
IFPRU 2.2.76GRP
(1) Stress and scenario analyses should, in the first instance, be aligned with the risk appetite of the firm, as well as the nature, scale and complexity of its business and of the risks that it bears. The calibration of the stress and scenario analyses should be reconciled to a clear statement setting out the premise upon which the firm's internal capital assessment under the overall Pillar 2 rule is based.(2) In identifying adverse circumstances and events in line with IFPRU
IFPRU 2.2.77GRP
A firm should use the results of its stress testing and scenario analysis not only to assess capital needs, but also to decide if measures should be put in place to minimise the adverse effect on the firm if the risk covered by the stress or scenario test actually materialises. Such measures might be a contingency plan or might be more concrete risk mitigation steps.
IFPRU 2.2.82GRP
A firm is expected to determine where the scope of any stress test impacts upon its pension obligation risk and estimate how the relevant measure of pension obligation risk will change in that scenario. For example, in carrying out stress tests under IFPRU 2.2.37 R, a firm must consider how a stress scenario, such as an economic recession, would impact on the firm's current obligations towards its pension scheme and any potential increase in those obligations. Risks such as interest-rate
IFPRU 2.2.84GRP
A firm should carry out analyses only to a degree of sophistication and complexity which is commensurate with the materiality of its pension risks.
IFPRU 2.2.87GRP
A firm should satisfy itself that the systems (including IT) of the FCA consolidation group or the non-EEA sub-group of which it is a member are sufficiently sound to support the effective management and, where applicable, the quantification of the risks that could affect the FCA consolidation group or the non-EEA sub-group, as the case may be.
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 7.1.1GRP
1SYSC 4.1.1 R requires a firm to have effective processes to identify, manage, monitor and report the risks it is or might be exposed to.3
SYSC 7.1.2RRP
A UCITS investment firm19 must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.19
SYSC 7.1.2AGRP
3Other firms should take account of the risk management policies and procedures rule (SYSC 7.1.2 R) as if it were guidance (and as if should appeared in that rule19 instead of must) as explained in SYSC 1 Annex 1 3.3 R(1)19. 4
SYSC 7.1.2BGRP
10A management company should be aware that COLL 6.11 contains requirements implementing article 12 of the UCITS implementing Directive in relation to risk control and internal reporting that will apply to it.
SYSC 7.1.2CGRP
14Full-scope UK AIFMs should be aware that FUND 3.7 and articles 38 to 47 of the AIFMD level 2 regulation contain further requirements in relation to risk management.
SYSC 7.1.3RRP
A UCITS investment firm19 must adopt effective arrangements, processes and mechanisms to manage the risk relating to the firm's activities, processes and systems, in light of that level of risk tolerance.19
SYSC 7.1.4RRP
The management body13 of a common platform firm must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.[Note: 13article 76(1) of CRD]1313
SYSC 7.1.4AGRP
For a common platform firm included within the scope of SYSC 20 (Reverse stress testing), the strategies, policies and procedures for identifying, taking up, managing, monitoring and mitigating the risks to which the firm is or might be exposed include conducting reverse stress testing in accordance with SYSC 20. A common platform firm which falls outside the scope of SYSC 20 should consider conducting reverse stress tests on its business plan as well. This would further senior
SYSC 7.1.4BGRP
6Other firms should take account of the risk management rules (SYSC 7.1.3 R and SYSC 7.1.4 R) as if they were guidance (and as if "should" appeared in those rules19 instead of "must") as explained in SYSC 1 Annex 1 3.3 R(1)19.
SYSC 7.1.5RRP
A UCITS investment firm19 must monitor the following:(1) the adequacy and effectiveness of the firm's risk management policies and procedures;(2) the level of compliance by the firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with SYSC 7.1.3 R;(3) the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant
SYSC 7.1.6RRP
A UCITS investment firm19 must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of the investment services and activities undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:(1) implementation of the policies and procedures referred to in SYSC 7.1.2 R to SYSC 7.1.5 R; and(2) provision of reports and
SYSC 7.1.7RRP
Where a UCITS investment firm19 is not required under SYSC 7.1.6 R to maintain a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and are consistently effective.19
SYSC 7.1.7AGRP
3Other firms should take account of the risk management rules (SYSC 7.1.5 R to SYSC 7.1.7 R) as if they were guidance (and as if should appeared in those rules19 instead of must) as explained in SYSC 1 Annex 1 3.3 R(1)19. 4
SYSC 7.1.7BGRP
In setting the method of determining the remuneration of employees involved in the risk management function:(1) firms that SYSC 19D applies to will also need to comply with the dual-regulated firms Remuneration Code; and(2) firms that the remuneration part of the PRA Rulebook applies to will also need to comply with it.16513138
SYSC 7.1.7BAGRP
14In setting the method of determining the remuneration of employees involved in the risk management function full-scope UK AIFMs will need to comply with the AIFM Remuneration Code.
SYSC 7.1.7BBGRP
15In setting the method of determining the remuneration of employees involved in the risk management function, BIPRU firms will also need to comply with the BIPRU Remuneration Code.
SYSC 7.1.7BCGRP
In setting the method of determining the remuneration of employees involved in the risk management function, firms that SYSC 19A applies to will also need to comply with the Remuneration Code.
SYSC 7.1.7CGRP
7Firms should also consider the additional guidance on risk-centric governance arrangements for effective risk management contained in SYSC 21.
SYSC 7.1.8GRP
2(1) [deleted]1313(2) The term 'risk management function' in SYSC 7.1.6 R and SYSC 7.1.7R, and for a common platform firm in article 23(2) of the MiFID Org Regulation,19 refers to the generally understood concept of risk assessment within a firm, that is, the function of setting and controlling risk exposure.32917(3) For a firm that is not an SMCR firm20, the risk management function is not a controlled function itself, but is part of the systems and controls function or the PRA's
SYSC 7.1.15RRP
A BIPRU firm must implement systems to evaluate and manage the risk arising from potential changes in interest rates as they affect a BIPRUfirm's non-trading activities.15
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 7.1.19RRP
(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 7.1.20RRP
13In order to assist in the establishment of sound remuneration policies and practices, the risk committee must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration system take into consideration risk, capital, liquidity and the likelihood and timing of earnings.[Note: article 76(4) of CRD]
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
SYSC 7.1.23GRP
(1) 17This guidance is relevant to an SMCR banking firm20 that has appointed a head of the risk management function.(2) Taking account of the nature, scale and complexity of its activities, the firm should have appropriate procedures to ensure that the removal or any other disciplinary sanctioning of the head of the risk management function does not undermine the independence of the risk management function.(3) It will be appropriate, in many cases, for the procedures in (2) to include
BIPRU 13.5.2RRP
(1) When a financial derivative instrument transaction with a linear risk profile stipulates the exchange of a financial instrument for a payment, the payment Part is referred to as the payment leg.(2) Transactions that stipulate the exchange of payment against payment consist of two payment legs.(3) The payment legs consist of the contractually agreed gross payments, including the notional amount of the transaction.(4) A firm may disregard the interest rate risk from payment
BIPRU 13.5.3RRP
(1) Transactions with a linear risk profile with equities (including equity indices), gold, other precious metals or other commodities as the underlying financial instruments must be mapped to a risk position in the respective equity (or equity index) or commodity (including gold and other precious metals) and an interest rate risk position for the payment leg.(2) If the payment leg is denominated in a foreign currency, it must be additionally mapped to a risk position in the
BIPRU 13.5.4RRP
(1) Transactions with a linear risk profile with a debt instrument as the underlying instrument must be mapped to an interest rate risk position for the debt instrument and another interest rate risk position for the payment leg.(2) Transactions with a linear risk profile that stipulate the exchange of payment against payment, including foreign exchange forwards, must be mapped to an interest rate risk position for each of the payment legs.(3) If the underlying debt instrument
BIPRU 13.5.5RRP
A firm must calculate the risk position of the transaction or instrument in column 1 of the table in BIPRU 13.5.6 R in accordance with column 2 of that table.
BIPRU 13.5.6RRP
This table belongs to BIPRU 13.5.5 R.Transaction or instrumentCalculation of size of risk positionTransaction with linear risk profile except for debt instruments.The effective notional value (market price multiplied by quantity) of the underlying financial instruments (including commodities) converted to the firm's domestic currency.Debt instruments and payment legs.The effective notional value of the outstanding gross payments (including the notional amount) converted to the
BIPRU 13.5.7RRP
A firm may use the following formulae to determine the size and sign of a risk position:(1) for all instruments other than debt instruments:effective notional value, or delta equivalentnotional value = pref((V)/(p))where:(a) Pref = price of the underlying instrument, expressed in the reference currency;(b) V = value of the financial instrument (in the case of an option this is the option price; in the case of a transaction with a linear risk profile this is the value of the underlying
BIPRU 13.5.8RRP
For the determination of risk positions, a firm must treat collateral received from a counterparty like a claim on the counterparty under a derivative contract (long position) that is due today, while collateral posted must be treated as an obligation to the counterparty (short position) that is due today.[Note: BCD Annex III Part 5 point 10]
BIPRU 13.5.9RRP
A firm must apply the CCR mark to market method to transactions with a non-linear risk profile or for payment legs and transactions with debt instruments as underlying if:(1) the firm does not have a CAD 1 model permission or a VaR model permission; or(2) where the firm does have a CAD 1 model permission or a VaR model permission but cannot determine the delta or the modified duration, respectively, with its CAD 1 model permission or VaR model permission.[Note: BCD Annex III Part
BIPRU 13.5.11RRP
A firm must group the risk positions into hedging sets and, for each hedging set, compute the absolute value amount of the sum of the resulting risk positions. This sum is termed the net risk position and is represented by:((i)(RPTij) - (l)(RPClj))in the formulae set out in BIPRU 13.5.24 R.[Note: BCD Annex III Part 5 point 12]
BIPRU 13.5.12RRP
For interest rate risk positions from money deposits received from the counterparty as collateral, from payment leg and from underlying debt instruments, to which according to the table in BIPRU 7.2.44R1 a capital charge of 1.60% or less applies, there are six hedging sets for each currency, as set out in the table in BIPRU 13.5.13 R. Hedging sets are defined by a combination of the criteria maturity and referenced interest rates.[Note: BCD Annex III Part 5 point 13]
BIPRU 13.5.13RRP
This table belongs to BIPRU 13.5.12 R:Government referenced interest ratesNon-government referenced interest ratesMaturity<= 1 year<= 1 yearMaturity>1 <= 5 years>1 <= 5 yearsMaturity> 5 years> 5 years[Note: BCD Annex III Part 5 Table 4]
BIPRU 13.5.14RRP
For interest rate risk positions from underlying debt instruments or payment legs for which the interest rate is linked to a reference interest rate that represents a general market interest level, the remaining maturity is the length of the time interval up to the next re-adjustment of the interest rate. In all other cases, it is the remaining life of the underlying debt instrument, or in the case of a payment leg the remaining life of the transaction.[Note: BCD Annex III Part
BIPRU 13.5.15RRP
There is one hedging set for each issuer of a reference debt instrument that underlies a credit default swap.Nth to default basket credit default swaps must be treated as follows:2(1) 2the size of a risk position in a reference debt instrument in a basket underlying an nth to default credit default swap is the effective notional value of the reference debt instrument, multiplied by the modified duration of the nth to default derivative, with respect to a change in the credit spread
BIPRU 13.5.16RRP
Underlying financial instruments other than debt instruments must be assigned by a firm to the same respective hedging sets only if they are identical or similar instruments. In all other cases a firm must assign them to separate hedging sets.[Note: BCD Annex III Part 5 point 17 (part)]
BIPRU 13.5.18RRP
(1) For interest rate risk positions from money deposits that are posted with a counterparty as collateral when that counterparty does not have debt obligations of low specific risk outstanding and from underlying debt instruments, to which according to the table in BIPRU 7.2.44 R1 a capital charge of more than 1.60% applies, there is one hedging set for each issuer.(2) When a payment leg emulates such a debt instrument, there is also one hedging set for each issuer of the reference
BIPRU 13.5.22RRP
This table belongs to BIPRU 13.5.21 R.Hedging set categoriesCCR Multiplier (CCRM)(1)Interest Rates0.2%(2)Interest Rates for risk positions from a reference debt instrument that underlies a credit default swap and to which a capital charge of 1.60%, or less, applies under BIPRU 7.2.44 R1.0.3%(3)Interest Rates for risk positions from a debt instrument or reference debt instrument to which a capital charge of more than 1.60% applies under BIPRU 7.2.44 R.0.6%(4)Exchange Rates2.5%(5)Electric
BIPRU 13.5.25RRP
A firm must determine the exposure value net of collateral, as follows:exposure value = *max(CMV-CMC;(j)((i)(RPTij)-(l)(RPClj))*CCRMj)where:CMV = current market value of the portfolio of transactions within the netting set with a counterparty gross of collateral.That is, where:CMV = (i)(CMVi)where:CMVi = the current market value of transaction i;CMC = the current market value of the collateral assigned to the netting set.That is, where:CMC = (l)(CMCl)whereCMCl = the current market
BIPRU 13.5.28GRP
A worked example showing a US Dollar (USD)-based firm, single counterparty, single netting set, Risk-positions RPij by hedging sets j is set out in BIPRU 13 Annex 1 G
IFPRU 4.12.2GRP
An originator of securitisations is able to use the securitisation risk weights (and not calculate own funds requirements on the assets underlying its securitisation) in either of the following cases:(1) the firm transfers significant credit risk associated with the securitisedexposures to third parties; or(2) the firm deducts from common equity tier 1 capital or applies a 1250% risk weight to all positions it holds in the securitisation.
IFPRU 4.12.6GRP
For IFPRU 4.12.3 G (3) (option 3), the1FCA intends to grant permission for an originator to make its own assessment of significant risk transfer only where it is satisfied that:1(1) in every relevant case, the reduction in own funds requirements achieved would be justified by a commensurate transfer of risk to third parties;(2) the firm has adequate internal risk management2 policies and methodologies 2to assess the transfer of risk; and(3) such transfer of risk to third parties
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 4.12.16GRP
To assess a firm's ability to use its own policies and methodologies for assessing significant risk transfer, the FCA's permission reviews will focus on:(1) the firm's understanding of the risk of any potential transactions within permission scope, including for potential underlying assets, securitisation structures and other relevant factors that affect the economic substance of risk transfer;(2) the governance around significant risk transfer assessment (including sign-off procedures)
IFPRU 4.12.17GRP
The information the FCA expects a firm to provide in a permission application includes the following:(1) details of the firm's governance processes for significant risk transfer, including details of any relevant committees and the seniority and expertise of key persons involved in sign-off;(2) a copy of the firm's significant risk transfer policy, including details of the significant risk transfer calculation policies, methodologies and any models used to assess risk transfer
IFPRU 4.12.19GRP
Multiple transaction permissions can be expected to be granted for a period of one year. The FCA's review of permission renewal will focus on any changes to the firm's significant risk transfer policies and methodologies since the previous review.
IFPRU 4.12.26GRP
As part of a firm's ongoing consideration of risk transfer, the FCA expects it to consider the support it has provided to securitisation transactions.
IFPRU 4.12.30GRP
However, there comes a point at which the premium payable for the protection can reduce significantly the actual economic risk that is transferred from the protection buyer to protection seller. A premium payable of 100% of the protection amount could leave the protection buyer in a position over the life of the transaction that was no better than if protection had not been purchased.
IFPRU 4.12.33GRP
The FCA considers the following to be examples of features which generally indicate a positive incentive to call or, at least, to constitute grounds for discussion with the FCA prior to the conclusion of the transaction:(1) the transaction contains terms, such as payments at maturity or payments upon early termination or significant premiums, which may reduce risk transfer;(2) the transaction includes a requirement for the protection buyer to incur additional costs or obligations
IFPRU 4.12.34GRP
Significant risk transfer is an ongoing requirement. Accordingly, the FCA expects firms to ensure that any reduction in own funds requirements achieved through securitisation continues to be matched by a commensurate transfer of risk throughout the life of the transaction. The FCA expects firms to take a substance over form approach to assessing significant risk transfer. Firms should be able to demonstrate that the capital relief post-transaction adequately captures the economic
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 4.12.38GRP
The FCA expects relevant senior management of a firm to be appropriately engaged in the execution of securitisation transactions that lead to a reduction in RWEA where the firm is providing or purchasing structured trades.
IFPRU 4.12.39GRP
The FCA does not operate a pre-approval process for transactions. The FCA expects a firm to discuss with its supervisor at any early stage securitisation transactions that are material or have complex features. Where a firm claims a regulatory capital reduction from securitisation transactions in its disclosures to the market, the FCA expects such disclosures to include caveats making clear the risk of full or partial re-characterisation where this risk is material in the light
IFPRU 4.12.41GRP
The FCA will seek to ensure that the securitisation framework is not used to undermine or arbitrage other parts of the prudential framework. For other similar credit protection arrangements (eg, those subject credit risk mitigation or trading book requirements), the impact of certain features (such as significant premiums or call options) may cast doubt on the extent of risk transferred and the resulting capital assessment. Features which result in inadequate own funds requirements
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
BIPRU 3.6.1RRP
The use of ECAI credit assessments for the calculation of a firm'srisk weighted exposure amounts must be consistent and in accordance with BIPRU 3.61. Credit assessments must not be used selectively.[Note: BCD Article 83(1)]
BIPRU 3.6.2RRP
Where the appropriate regulator's recognition of an ECAI is not limited to its solicited credit assessments, a firm may use an unsolicited credit assessment of an eligible ECAI for the calculation of a firm'srisk weighted exposure amounts.[Note: BCD Article 83(2)]
BIPRU 3.6.4RRP
A firm may nominate one or more eligible ECAIs to be used for the determination of risk weights to be assigned to asset and off-balance sheet items.[Note: BCD Annex VI Part 3 point 1]
BIPRU 3.6.8RRP
If only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment must be used to determine the risk weight for that item.[Note: BCD Annex VI Part 3 point 5]
BIPRU 3.6.9RRP
If two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated item, the higher risk weight must be applied.[Note: BCD Annex VI Part 3 point 6]
BIPRU 3.6.10RRP
If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights must be referred to. If the two lowest risk weights are different, the higher risk weight must be assigned. If the two lowest risk weights are the same, that risk weight must be assigned.[Note: BCD Annex VI Part 3 point 7]
BIPRU 3.6.11RRP
(1) If a firm has decided to make use of the credit assessments of export credit agencies, when risk weightingexposures to central governments or central banks, if two or more credit assessments are available to a firm from export credit agencies or if credit assessments are available to a firm from both nominated ECAIs and export credit agencies, the firm must adopt the approach in this rule.(2) If two credit assessments are available and correspond to different risk weights
BIPRU 3.6.13RRP
Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment must be used if it produces a higher risk weight than would otherwise be the case or if it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects
BIPRU 3.6.20RRP
A credit assessment that refers to an item denominated in the obligor's domestic currency cannot be used to derive a risk weight for another exposure on that same obligor that is denominated in a foreign currency.[Note: BCD Annex VI Part 3 point 16]
BIPRU 3.6.21RRP
Notwithstanding BIPRU 3.6.20 R, when an exposure arises through a firm's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency item may be used for risk weighting purposes.[Note: BCD Annex VI Part 3 point 17]
BIPRU 7.11.3RRP
(1) When calculating the PRR of the protection seller, unless specified differently by other rules and subject to (2), the notional amount of the credit derivative contract must be used. For the purpose of calculating the specific riskPRR charge, other than for total return swaps, the maturity of the credit derivative contract is applicable instead of the maturity of the obligation.4(2) When calculating the PRR of the protection seller, a firm may choose to replace the notional
BIPRU 7.11.5RRP
A credit default swap does not create a position for general market risk. For the purposes of specific risk, a firm must record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt security, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in zero-specific-risk
BIPRU 7.11.6RRP
A single name credit linked note creates a long position in the general market risk of the note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need
BIPRU 7.11.7RRP
In addition to a long position in the specific risk of the issuer of the note, a multiple name credit linked note providing proportional protection creates a position in each reference entity, with the total notional amount of the contract assigned across the positions according to the proportion of the total notional amount that each exposure to a reference entity represents. Where more than one obligation of a reference entity can be selected, the obligation with the highest
BIPRU 7.11.8RRP
Where a multiple name credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need only be recorded.
BIPRU 7.11.9RRP
A first-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity. If the size of the maximum credit event payment is lower than the PRR requirement under the method in the first sentence of this rule, the maximum payment amount may be taken as the PRR requirement for specific risk.
BIPRU 7.11.10RRP
A second-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity less one (that with the lowest specific riskPRR requirement). If the size of the maximum credit event payment is lower than the PRR requirement under the method in the first sentence of this rule, this amount may be taken as the PRR requirement for specific risk.
BIPRU 7.11.11RRP
Ifan nth-to-default4 derivative is externally rated and meets the conditions for a qualifying debt security, then the protection seller need only calculate one specific risk charge reflecting the rating of the derivative. The specific risk charge must be based on the securitisationPRAs in BIPRU 7.2 as applicable.44
BIPRU 7.11.12ARRP
3Where a firm obtains credit protection for a number of reference entities underlying a credit derivative under the terms that the first default among the assets will trigger payment and that this credit event will terminate the contract, the firm may off-set specific risk for the reference entity to which the lowest specific risk percentage charge among the underlying reference entities applies according to the Table in BIPRU 7.2.44R.[Note:CAD Annex I point 8.B]
BIPRU 7.11.13RRP
(1) BIPRU 7.11.14R - BIPRU 7.11.17R relate to specific riskPRR for trading bookpositions hedged by credit derivatives for the purposes of the calculation of the securities PRR.(2) A firm may take an allowance for protection provided by credit derivatives for the purposes in (1) in accordance with the principles set out in the rules referred to in (1).(3) [deleted]44
BIPRU 7.11.14RRP
(1) A firm may take full allowance when the value of two legs always move in the opposite direction and broadly to the same extent.(2) This will be the case in the following situations:(a) the two legs consist of completely identical instruments; or(b) a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e., the cash position).(3) The maturity of the swap itself
BIPRU 7.11.15RRP
An 80% offset may be applied when the value of two legs always move in the opposite direction and where there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure. In addition, key features of the credit derivative contract must not cause the price movement of the credit derivative materially to deviate from the price movements of the cash position. To the extent
BIPRU 7.11.17RRP
In all situations not falling under BIPRU 7.11.14 R - BIPRU 7.11.16 R, a firm must assess a specific riskPRR charge against both sides of the positions.
BIPRU 7.11.20RRP
The specific risk portion of the interest rate PRR for credit derivatives in the trading book4 must be calculated in accordance withBIPRU 7.2.43 R to BIPRU 7.2.46A G (Specific risk calculation), BIPRU 7.2.48A R to BIPRU 7.2.48K R (Specific risk: securitisations and re-securitisations), BIPRU 7.2.48L R (Specific risk: Correlation trading portfolio), BIPRU 7.2.49 R to BIPRU 7.2.51 G (Definition of a qualifying debt security)4 and the other provisions of BIPRU 7.11, as applicabl
BIPRU 7.11.63GRP
If a firm recognises profits on a non-accrual basis it should consider whether the capital requirements for its credit derivatives business adequately cover the risk that any recognised profit may not be achieved due to a credit event occurring. This includes positions for which the firm may have a perfect hedge in place.
BIPRU 7.9.2GRP
The purpose of BIPRU 7.9 is to provide guidance on the appropriate regulator's policy for granting CAD 1 model waivers under section 138A of the Act (Modification or waiver of rules). The policy recognises that CAD 1 models may vary across firms but, as a minimum, the appropriate regulator will need to be satisfied:(1) about the quality of the internal controls and risk management relating to the model (see BIPRU 7.9.19G - BIPRU 7.9.23G for further details);(2) about the quality
BIPRU 7.9.12GRP
As part of the model review process, the following may be reviewed: organisational structure and personnel; details of the firm's market position in the relevant products; profit and risk information; valuation and reserving policies; operational controls; IT systems; model release and control procedures; risk management and control framework; risk appetite and limit structure and future developments relevant to model recognition.
BIPRU 7.9.13GRP
The appropriate regulator will normally require meetings with senior management and staff from the front office, financial control, risk management, operations, systems development, information technology and audit areas.
BIPRU 7.9.19GRP
A firm with a complex portfolio is expected to demonstrate more sophistication in its modelling and risk management than a firm with a simple portfolio.
BIPRU 7.9.20GRP
A firm should be able to demonstrate that the risk management standards set out in BIPRU 7.9 are satisfied by each legal entity with respect to which the CAD 1 model approach is being used (even though they are expressed to refer only to a firm). This is particularly important for subsidiary undertakings in groups subject to matrix management where the business lines cut across legal entity boundaries.
BIPRU 7.9.21GRP
(1) A firm should have a conceptually sound risk management system which is implemented with integrity and should meet the minimum standards set out in this paragraph.(2) A firm should have a risk control unit that is independent of business trading units and reports directly to senior management. The unit should be responsible for designing and implementing the firm's risk management system. It should produce and analyse daily reports on the risks run by the business and on the
BIPRU 7.9.22GRP
In assessing whether the risk management and control framework is implemented with integrity, the appropriate regulator will consider the IT systems used to run the CAD 1 model and associated calculations. The assessment will include, where appropriate:(1) feeder systems; risk aggregation systems; the integrity of the data (i.e. whether it is complete, coherent and correct); reconciliations and checks on completeness of capture; and(2) system development, change control and documentation;
BIPRU 7.9.24GRP
A firm should take appropriate steps to ensure that its CAD 1 model captures and produces an accurate measure of the risks inherent in the portfolio covered by the CAD 1 model. These risks may include, but are not limited to, gamma, vega and rho.
BIPRU 7.9.38GRP
A firm may offset gamma and vega exposures arising from the products listed in BIPRU 7.9.37G (5) where it can demonstrate that it trades different types of interest rate-related options as a portfolio and takes steps to control the basis risk between different types of implied volatility. To the extent that this is the case an individual matrix is not required for each of the products listed in BIPRU 7.9.37G (5) and a combined scenario matrix may be used.
BIPRU 7.9.41GRP
Once the effect of delta has been removed from the matrix, the values left in the matrix relate to gamma and vega risk. A firm'sPRR in relation to gamma and vega risk on the individual option is the absolute of the most negative cell in the scenario matrix produced. Where all cells are positive the PRR is zero. The total PRR for the gamma and vega risk on the portfolio of options is a simple sum of the individual requirements. This amount should then be fed into a firm'sPRR c
BIPRU 7.9.43GRP
In using the scenario matrix approach, none of the steps followed will take specific account of a firm's exposure to rho risk. Where a firm can demonstrate that for interest rate-related options the rho sensitivity is effectively included in the delta sensitivities produced, there is no separate capital requirement relating to rho. For all other options except commodity options, a firm should calculate a rho sensitivity ladder by currency using its CAD 1 model and either feed
BIPRU 7.9.50GRP
Sensitivity figures calculated by a firm using an interest rate pre-processing model are usually produced in the format of a net sensitivity by maturity bucket or by discrete gridpoint. These maturity buckets or gridpoints should then be allocated to the 15 bands set out in BIPRU 7.9.49G. The number of maturity buckets or gridpoints used to represent a yield curve can be referred to as granularity. The granularity should always be adequate to capture the material curve risk in
GENPRU 1.2.12GRP
Adequate financial resources and adequate systems and controls are necessary for the effective management of prudential risks. This section therefore has requirements relating to both of these topics.
GENPRU 1.2.15GRP
This section also has rules requiring a firm to identify and assess risks to its being able to meet its liabilities as they fall due, how it intends to deal with those risks, and the amount and nature of financial resources that the firm considers necessary. GENPRU 1.2.60 R provides that a firm should document that assessment. The FCA15 will review that assessment as part of its own assessment of the adequacy of a firm's capital under its supervisory review and evaluation process
GENPRU 1.2.30RRP
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)
GENPRU 1.2.31RRP
(1) This rule defines some of the terms used in the overall Pillar 2 rule.(2) Residual risk means the risk that credit risk mitigation techniques used by the firm prove less effective than expected.(3) Securitisation risk includes the risk that the capital resources held by a firm in respect of assets which it has securitised are inadequate having regard to the economic substance of the transaction, including the degree of risk transfer achieved.(4) Business risk means any risk
GENPRU 1.2.32GRP
(1) This paragraph gives guidance on some of the terms used in the overall Pillar 2 rule.(2) Insurance risk refers to the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.(3) Interest rate risk in the non-trading book is explained in BIPRU 2.3 (Interest rate risk in the non-trading book).(4) In a narrow sense, business risk is the risk to a firm that it suffers losses because its income falls or is volatile relative to its fixed cost base.
GENPRU 1.2.34GRP
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
GENPRU 1.2.35RRP
The processes, strategies and systems required by the overall Pillar 2 rule must be comprehensive and proportionate to the nature, scale and complexity of the firm's activities.
GENPRU 1.2.37RRP
The processes and systems required by the overall Pillar 2 rule must:(1) include an assessment of how the firm6intends to deal with each of the major sources of risk identified in accordance with GENPRU 1.2.30R (2); 66(2) take into account the impact of diversification effects and how such effects are factored into the firm's systems for measuring and managing risks; and66(3) 6include an assessment of the firm-wide impact of the risks identified in accordance with GENPRU 1.2.30R
GENPRU 1.2.38GRP
Certain risks such as systems and controls weaknesses may not be adequately addressed by, for example, holding additional capital and a more appropriate response would be to rectify the weakness. In such circumstances, the amount of financial resources required to address these risks might be zero. However, a firm should consider whether holding additional capital might be an appropriate response until the identified weaknesses are rectified. A firm, should, in accordance with
GENPRU 1.2.39RRP
A firm must:(1) carry out regularly the assessments required by the overall Pillar 2 rule; and(2) carry out regularly assessments of the processes, strategies and systems required by the overall Pillar 2 rule to ensure that they remain compliant with GENPRU 1.2.35 R.
GENPRU 1.2.40GRP
A firm should carry out assessments of the sort described in the overall Pillar 2 rule and GENPRU 1.2.39 R at least annually, or more frequently if changes in the business, strategy, nature or scale of its activities or operational environment suggest that the current level of financial resources is no longer adequate. The appropriateness of the internal process, and the degree of involvement of senior management in the process, will be taken into account by the FCA15 when reviewing
GENPRU 1.2.75GRP
(1) [deleted]66(2) Stress and scenario analyses should, in the first instance, be aligned with the risk appetite of the firm, as well as the nature, scale and complexity of its business and of the risks that it bears. The6 calibration of the 6stress and scenario analyses should be reconciled to a clear statement setting out the premise upon which the firm's internal capital assessment under the overall Pillar 2 rule is based.66(3) [deleted]66(4) In identifying adverse circumstances
GENPRU 1.2.76GRP
A firm should use the results of its stress testing and scenario analysis not only to assess capital needs, but also to decide if measures should be put in place to minimise the adverse effect on the firm if the risk covered by the stress or scenario test actually materialises. Such measures might be a contingency plan or might be more concrete risk mitigation steps.
GENPRU 1.2.83AGRP
6A firm is expected to determine where the scope of any stress test impacts upon its pension obligation risk and estimate how the relevant measure of pension obligation risk will change in the scenario in question. For example, in carrying out stress tests under GENPRU 1.2.42 R a firm must consider how a stress scenario, such as an economic recession, would impact on the firm's current obligations towards its pension scheme and any potential increase in those obligations. Risks
GENPRU 1.2.86GRP
A firm should carry out analyses only to a degree of sophistication and complexity which is commensurate with the materiality of its pension risks.
GENPRU 1.2.88GRP
6A firm should include in the written record referred to in GENPRU 1.2.60 R a description of the broad business strategy of the UK consolidation group or the non-EEA sub-group of which it is a member, the group’s view of its principal risks and its approach to measuring, managing and controlling the risks. This description should include the role of stress testing, scenario analysis and contingency planning in managing risk at the solo and consolidated level.14
BIPRU 7.10.55GRP
A firm is expected ultimately to move towards full revaluation of option positions. For portfolios containing path dependent options, an instantaneous price shock applied to a static portfolio will be acceptable provided that the risks not captured by such an approach are not material. Where a risk is immaterial and does not justify further capital resources, that immaterial risk should still be documented.
BIPRU 7.10.55ORRP
3A firm's approach for incremental risk charge must be consistent with the firm's internal risk management methodologies for identifying, measuring, and managing trading risks.
BIPRU 7.10.55RRRP
3A firm may use an approach for incremental risk charge that does not comply with all the requirements in BIPRU 7.10.55A R to BIPRU 7.10.55P R, only if:(1) such an approach is consistent with the firm's internal methodologies for identifying, measuring, and managing risks; and(2) the firm can demonstrate that its approach results in a capital requirement that is at least as high as it would be if based on an approach in full compliance with the requirements in BIPRU 7.10.55A R
BIPRU 7.10.57GRP
A firm should be able to demonstrate that it meets the risk management standards set out in the VaR model permission on a legal entity basis. This is particularly important for a subsidiary undertaking in a group subject to matrix management where the business lines cut across legal entity boundaries.
BIPRU 7.10.58RRP
A firm must have a conceptually sound risk management system surrounding the use of its VaR model that is implemented with integrity and that in particular meet the qualitative standards set out in BIPRU 7.10.59R - BIPRU 7.10.82R.
BIPRU 7.10.59RRP
A firm must base its model PRR calculation on the output of the VaR model which is used for its internal risk management rather than one developed specifically to calculate its PRR.
BIPRU 7.10.62RRP
A firm must have a risk control unit which is independent from business trading units and which reports directly to senior management. It:(1) must be responsible for designing and implementing the firm's risk management system;(2) must produce and analyse daily reports on the output of the VaR model and on the appropriate measures to be taken in terms of the trading limits; and(3) conduct the initial and on-going validation of the VaR model.
BIPRU 7.10.63RRP
A firm'sgoverning body and senior management must be actively involved in the risk control process, and the daily reports produced by the risk control unit must be reviewed by a level of management with sufficient authority to enforce both reductions of positions taken by individual traders as well as in the firm's overall risk exposure.
BIPRU 7.10.65RRP
A firm must have sufficient numbers of staff skilled in the use of sophisticated models in the trading, risk control, audit and back office areas.
BIPRU 7.10.70RRP
Adequate procedures must be in place to ensure that model changes are validated before being introduced.
BIPRU 7.10.72RRP
(1) A firm must frequently conduct a rigorous programme of stress testing. The results of these tests must be reviewed by senior management and reflected in the policies and limits the firm sets.(2) The programme must particularly address:(a) concentration risk;(b) illiquidity of markets in stressed market conditions;(c) one way markets;(d) event and jump to default risks;(e) non linearity of products;(f) deep out of the money positions;(g) positions subject to the gapping of
BIPRU 7.10.74RRP
A firm must have procedures to ensure that the valuation of assets and liabilities is appropriate, that valuation uncertainty is identified and appropriate reserving is undertaken where necessary.
BIPRU 7.10.75RRP
At least once a year, a firm must conduct, as part of its regular internal audit process, a review of its risk management process. This review must include both the activities of the business trading units and of the independent risk control unit, and must be undertaken by suitably qualified staff independent of the areas being reviewed. This review must consider, at a minimum:(1) the adequacy of the documentation of the risk management system and process;(2) the organisation
BIPRU 7.10.77GRP
In assessing the firm'sVaR model and risk management, the appropriate regulator has regard to the results of internal model validation procedures used by the firm to assess the VaR model.
BIPRU 7.10.84GRP
Stress testing is a way of identifying the risk to a firm posed by a breakdown of model assumptions or by low-probability events. Where stress tests reveal unacceptable vulnerability to a given set of circumstances, a firm should take prompt steps to manage those risks appropriately, for example by hedging against the outcome or reducing the size of the firm'sexposure.
BIPRU 7.10.86RRP
Stress testing must involve identifying market scenarios or other low probability events in all types of risks that generate the greatest losses on a firm's portfolio.
BIPRU 7.10.89RRP
A firm must have procedures to assess and respond to the results produced from stress testing. In particular, stress testing results must be:(1) used to evaluate its capacity to absorb such losses or identify steps to be taken to reduce risk; and(2) communicated routinely to senior management and periodically to the governing body.
SYSC 19D.3.2GRP
SYSC 12.1.13R(2)(dA) requires the firm to ensure that the risk management processes and internal control mechanisms at the level of any UK consolidation group or non-EEA sub-group of which a firm is a member, comply with the obligations in this section on a consolidated basis (or sub-consolidated basis). In the FCA’s view, the application of this section at group, parent undertaking and subsidiary undertaking levels in SYSC 19D.3.1R(1) is in line with article 109(2) of the CRD
SYSC 19D.3.7RRP
A firm must ensure that its remuneration policy is consistent with, and promotes, sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the firm.[Note: article 92(2)(a) of CRD]
SYSC 19D.3.12RRP
(1) A firm that is significant in terms of its size, internal organisation and the nature, the scope and the complexity of its activities must establish a remuneration committee. (2) A firm in (1) must ensure that:(a) the remuneration committee is constituted in a way that enables it to exercise competent and independent judgement on remuneration policies and practices and the incentives created for managing risk, capital and liquidity;(b) the chairman and the members of the remuneration
SYSC 19D.3.16ERP
(1) A firm's risk management and compliance functions should have appropriate input into setting the remuneration policy for other business areas. The procedures for setting remuneration should allow risk and compliance functions to have significant input into the setting of individual remuneration awards where those functions have concerns about the behaviour of the individuals concerned or the riskiness of the business undertaken.(2) Contravention of (1) may be relied on as
SYSC 19D.3.17RRP
A firm must ensure that the remuneration of the senior officers in risk management and compliance functions is directly overseen by the remuneration committee referred to in SYSC 19D.3.12R or, if such a committee has not been established, by the governing body in its supervisory function.[Note: article 92(2)(f) of CRD]
SYSC 19D.3.18GRP
(1) This Remuneration Principle is designed to manage the conflicts of interest which might arise if other business areas had undue influence over the remuneration of employees within control functions. Conflicts of interest can easily arise when employees are involved in the determination of remuneration for their own business area. Where these could arise, they need to be managed by having in place independent roles for control functions (including, notably, risk management
SYSC 19D.3.21RRP
A firm that benefits from exceptional government intervention must ensure that:(1) variable remuneration is strictly limited as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base and timely exit from government support;(2) it restructures remuneration in a manner aligned with sound risk management and long-term growth, including (when appropriate) establishing limits to the remuneration of members of its management body; and(2) no
SYSC 19D.3.23RRP
(1) A firm must ensure that any measurement of performance used to calculate variable remuneration components or pools of variable remuneration components: (a) includes adjustments for all types of current and future risks and takes into account the cost and quantity of the capital and the liquidity required; and (b) takes into account the need for consistency with the timing and likelihood of the firm receiving potential future revenues incorporated into current earnings. (2)
SYSC 19D.3.24GRP
(1) This Remuneration Principle stresses the importance of risk adjustment in measuring performance, and the importance within that process of applying judgment and common sense. The FCA expects that a firm will apply qualitative judgements and common sense in the final decision about the performance-related components of variable remuneration pools. (2) [deleted]1(3) We consider good practice in this area to be represented by those firms who provide a quantitative reference or
SYSC 19D.3.36RRP
A firm must ensure that the structure of an employee's remuneration is consistent with, and promotes, effective risk management.
SYSC 19D.3.40GRP
(1) The non-financial criteria in SYSC 19D.3.39R(1)(b) should include: 1(a) the extent of the employee’s adherence to effective risk management, and compliance with the regulatory system and with relevant overseas regulatory requirements; and1(b) metrics relating to conduct, which should comprise a substantial portion of the non-financial criteria. 1(2) Aligning variable awards to sustainable financial performance requires firms to make appropriate ex-ante adjustments to take
SYSC 19D.3.41GRP
Poor performance1, such as poor risk management or other behaviours contrary to firm values, can pose significant risks for a firm and non-financial metrics1 should override metrics of financial performance where appropriate1.
SYSC 19D.3.63ERP
(1) A firm should reduce unvested deferred variable remuneration when, as a minimum:(a) there is reasonable evidence of employee misbehaviour or material error; or(b) the firm or the relevant business unit suffers a material downturn in its financial performance; or(c) the firm or the relevant business unit suffers a material failure of risk management.(2) For performance adjustment purposes, awards of deferred variable remuneration made in shares or other non-cash instruments
SYSC 19D.3.64RRP
(1) A firm must make all reasonable efforts to recover an appropriate amount corresponding to some or all vested variable remuneration where either of the following circumstances arise during the period in which clawback applies (including any part of such period occurring after the relevant employment has ceased):(a) there is reasonable evidence of employee misbehaviour or material error; or(b) the firm or the relevant business unit suffers a material failure of risk management.(2)
BIPRU 8.7.2GRP
Each of the capital charges in BIPRU 8.7.1 G, as applied on a consolidated basis, is called a consolidated requirement component. The name of each consolidated requirement component reflects the solo capital charge on which it is based. Solo capital charges are called risk capital requirements. Thus for example the consolidated requirement component for market risk is called the consolidated market risk requirement. The calculation of the consolidated market risk requirement is
BIPRU 8.7.8GRP
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.
BIPRU 8.7.11RRP
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 appropriate regulator'srules. The risk capital requirement applicable
BIPRU 8.7.12RRP
Table: Capital charges relating to consolidated requirement componentsThis table belongs to BIPRU 8.7.11 RConsolidated requirement componentRules on which the consolidated requirement component are based (the applicable risk capital requirement)Consolidated credit risk requirementCredit risk capital requirementConsolidated fixed overheads requirementFixed overheads requirementConsolidated market risk requirementMarket risk capital requirement3
BIPRU 8.7.13RRP
(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
BIPRU 8.7.29RRP
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 the4consolidated fixed overheads requirement) intra-group transactions;with other undertakings in the UK consolidation group or non-EEA sub-group.
BIPRU 8.7.31GRP
If a firm is calculating a risk capital requirement for an undertaking that is not a BIPRU firm it should calculate it as if the undertaking were a BIPRU firm.
BIPRU 8.7.33GRP
A firm should not use an advanced prudential calculation approach for calculating a risk capital requirement unless this is permitted as explained in BIPRU 8.8 (Advanced prudential calculation approaches).
BIPRU 8.7.34RRP
A firm may calculate the risk capital requirement for an institution in the firm'sUK consolidation group or non-EEA sub-group that is an EEA firm in accordance with the CRD implementation measures in the EEA firm'sEEA State that correspond to the appropriate regulator'srules that would otherwise apply under this section if the institution is subject to those CRD implementation measures.
BIPRU 8.7.37RRP
(1) This rule applies if:(a) a firm is applying an accounting consolidation approach to part of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a); and(b) the part of the group in (a) constitutes the whole of a group subject to the consolidated capital requirements of a competent authority under the CRD implementation measures relating to consolidation under the Banking Consolidation Directive or the Capital Adequacy Directive.(2)
INSPRU 7.1.20GRP
For a firm to discharge its financial obligations to policyholders, it will incur certain expenses, including payments to the firm's own staff, contributions to any pension scheme and fees to outsourcing suppliers or service companies. All of these expenses, and risks associated with these payments, should be considered when carrying out the ICA. When considering the appropriate level of expenses in a projection, the firm should consider the acceptability of the service provided
INSPRU 7.1.27GRP
Firms should also consider whether their systems and controls provide sufficient information to permit senior management to identify the crystallisation of risks in a timely manner so as to provide them with the opportunity to respond and allow the firm to obtain the full value of the modelled management action. Firms should also analyse the wider implications of the management actions, particularly where they represent significant divergence from the business plan and use this
INSPRU 7.1.29GRP
The ICA should give the required level of confidence that the firm's liabilities to policyholders will be paid. The ICA should consider all material risks which may arise before the policyholder liabilities are paid (including those risks set out in GENPRU 1.2.30 R).
INSPRU 7.1.30GRP
Firms should not ignore risks simply because they relate to events that occur with an expected likelihood beyond the confidence level. However, the capital required in the face of these tail events may be reduced for the purpose of carrying out the ICA. For example, while an A-rated bond may be assumed not to default within the required confidence level, allowance should be made for the devaluation of that bond through a more likely downgrade or change in credit spreads or other
INSPRU 7.1.31GRP
Notwithstanding INSPRU 7.1.30 G, risks which have an immaterial effect on the firm's financial position or only occur with an extreme probability may be excluded from the ICA.
INSPRU 7.1.33GRP
The assets that a firm holds will include assets to back both the liabilities and any capital requirement. These assets carry risk, both in their own right and to the extent that they do not match the liabilities that they are backing. The risk associated with these assets should be considered over the full term for which the firm expects to carry the liabilities.
INSPRU 7.1.35GRP
If a firm summarises cash flows over part of the lifetime of the portfolio using a balance sheet but is exposed to risks which emerge after the balance sheet date, then these longer-dated risks may be captured by adjusting the assumptions used in the closing balance sheet.
INSPRU 7.1.38GRP
The methods and assumptions used in valuing the liabilities should contain no explicit margins for risk, nor should the approach be optimistic. The valuation of liabilities should be consistent with the valuation of assets. To the extent the market price includes an implicit allowance for risk, this should be included within the valuation.
INSPRU 7.1.40GRP
Approximate valuation methods may be used by the firm for minor lines of business or to capture less material types of risk. However, the firm should avoid methods which under-estimate the risk in aggregate.
INSPRU 7.1.46GRP
In determining the strength of the ICA, a firm should consider all risks in aggregate making appropriate allowance for diversification such that the assessment meets the required confidence level overall. The firm should be able to describe and explain each of the main diversification benefits allowed for.
INSPRU 7.1.47GRP
For risks that can be observed to crystallise over a short period of the order of a year, the confidence level may be measured with reference to the probability distribution for the impact of the risks over one year. For example, catastrophic events such as hurricanes can be measured in this way by estimating the ultimate capital cost.
INSPRU 7.1.48GRP
For risks that are not observable over a short period (such as long-tailed liability business or annuitant mortality), the confidence level may be measured with reference to the probability distribution for the emergence of that risk over the lifetime of the liabilities.
BIPRU 11.5.1RRP
A firm must disclose its risk management objectives and policies for each separate category of risk, including the risks referred to under BIPRU 11.5.1 R to BIPRU 11.5.17 R. These disclosures must include:(1) the strategies and processes to manage those risks;(2) the structure and organisation of the relevant risk management function or other appropriate arrangements;(3) the scope and nature of risk reporting and measurement systems; and(4) the policies for hedging and mitigating
BIPRU 11.5.4RRP
A firm must disclose the following information regarding compliance with BIPRU 3, BIPRU 4, 5, BIPRU 7, 5 and the overall Pillar 2 rule:(1) a summary of the firm's approach to assessing the adequacy of its internal capital to support current and future activities;(2) for a firm calculating risk weighted exposure amounts in accordance with the standardised approach to credit risk, 8% of the risk weighted exposure amounts for each of the standardised credit risk exposure classes;(3)
BIPRU 11.5.6RRP
For equity exposures, the requirement under BIPRU 11.5.4 R (3) applies to:(1) each of the approaches ( the simple risk weight approach, the PD/LGD approach and the internal models approach) provided for in BIPRU 4.7.5 R to BIPRU 4.7.6 R, BIPRU 4.7.9 R to BIPRU 4.7.11 R, BIPRU 4.7.14 R to BIPRU 4.7.16 R, BIPRU 4.7.24 R to BIPRU 4.7.25 R;(2) exchange traded exposures, private equity exposures in sufficiently diversified portfolios, and other exposures;(3) exposures subject to supervisory
BIPRU 11.5.8RRP
A firm must disclose the following information regarding its exposure to credit risk and dilution risk:(1) the definitions for accounting purposes of past due and impaired;(2) a description of the approaches and methods adopted for determining value adjustments and provisions;(3) the total amount of exposures after accounting offsets and without taking into account the effects of credit risk mitigation, and the average amount of the exposures over the period broken down by different
BIPRU 11.5.11RRP
A firm calculating risk weighted exposure amounts for specialised lending exposures in accordance with BIPRU 4.5.8 R to BIPRU 4.5.10 R or equity exposures in accordance with BIPRU 4.7.9 R to BIPRU 4.7.10 R (the simple risk weight approach) must disclose the exposures assigned:(1) to each category of the table in BIPRU 4.5.9 R; or(2) to each risk weight mentioned in BIPRU 4.7.9 R to BIPRU 4.7.10 R.[Note: BCD Annex XII Part 2 point 8]
BIPRU 11.5.12RRP
A firm must disclose its capital resources requirements separately for each risk referred to in (1), (2) and (3):44(1) in respect of its trading-book business, its:(a) interest rate PRR;(b) equity PRR;1(c) option PRR;(d) collective investment schemesPRR;(e) counterparty risk capital component; and(f) [deleted]6(2) in respect of all of its business activities, its:(a) commodity PRR; and(b) foreign currency PRR; and41(3) its specific interest-rate risk of securitisation positions.4[Note:
BIPRU 11.5.13RRP
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 back-testing 2and validating the accuracy and consistency of the internal models and modelling processes;(d) 2for the capital charges calculated according to the incremental
BIPRU 11.5.16RRP
A firm must disclose the following information on its exposure to interest rate risk on positions not included in the trading book:(1) the nature of the interest rate risk and the key assumptions (including assumptions regarding loan prepayments and behaviour of non-maturity deposits), and frequency of measurement of the interest rate risk; and(2) the variation in earnings, economic value or other relevant measure used by the management for upward and downward rate shocks according
BIPRU 11.5.17RRP
A firm calculating risk weighted exposure amounts in accordance with BIPRU 9 or capital resource requirements according to BIPRU 7.2.48A R to BIPRU 7.2.48K R4 must disclose the following information, where relevant separately for its trading book and non-trading book:4(1) a description of the firm's objectives in relation to securitisation activity;(1A) the nature of other risks, including liquidity risk inherent in securitised assets;4(1B) the type of risks in terms of seniority
BIPRU 11.5.18RRP
3A firm must disclose the following information, including regular, at least annual, updates, regarding its remuneration policy and practices for those categories of staff whose professional activities have a material impact on its risk profile:(1) information concerning the decision-making process used for determining the remuneration policy, including if applicable, information about the composition and the mandate of a remuneration committee, the external consultant whose services
BIPRU 4.6.4GRP
(1) This paragraph sets out guidance on BIPRU 4.6.2 R so far as it relates to the boundary between retail exposures and corporate exposures.(2) In deciding what steps are reasonable for the purposes of BIPRU 4.6.2 R (1), a firm may take into account complexity and cost, as well as the materiality of the impact upon its capital calculation. A firm should be able to demonstrate to the appropriate regulator that it has complied with the obligation to take reasonable steps under BIPRU
BIPRU 4.6.6RRP
Rating systems must reflect both obligor and transaction risk, and must capture all relevant obligor and transaction characteristics.[Note:BCD Annex VII Part 4 point 13]
BIPRU 4.6.7RRP
The level of risk differentiation must ensure that the number of exposures in a given grade or pool is sufficient to allow for meaningful quantification and validation of the loss characteristics at the grade or pool level. The distribution of exposures and obligors across grades or pools must be such as to avoid excessive concentrations.[Note:BCD Annex VII Part 4 point 14]
BIPRU 4.6.8GRP
(1) This paragraph contains guidance on the level of differentiation referred to in BIPRU 4.6.7 R.(2) It is important that a firm achieves adequate segmentation to deliver robust estimates of LGD and conversion factors, as well as PD. Whether the focus should be more on exposure size or collateral type is a question of fact for the particular circumstances in which the assignment of exposures to grades or pools occurs. Typically the appropriate regulator would expect both to be
BIPRU 4.6.9RRP
A firm must be able to demonstrate to the appropriate regulator that the process of assigning exposures to grades or pools provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at grade or pool level.[Note:BCD Annex VII Part 4 point 15 (part)]
BIPRU 4.6.11RRP
(1) A firm must consider the following risk drivers when assigning exposures to grades or pools:(a) obligor risk characteristics;(b) transaction risk characteristics, including product or collateral types or both; and(c) delinquency.(2) In the case of (1)(b) a firm must explicitly address cases where several exposures benefit from the same collateral.(3) However:(a) a firm need not consider delinquency if this is compatible with its IRB permission; and(b) (in the case of a firm
BIPRU 4.6.26RRP
A firm must regard internal data for assigning exposures to grades or pools as the primary source of information for estimating loss characteristics. A firm may use external data (including pooled data) or statistical models for quantification provided a strong link can be demonstrated between:(1) the firm's process of assigning exposures to grades or pools and the process used by the external data source; and(2) the firm's internal risk profile and the composition of the external
BIPRU 4.6.27RRP
If a firm derives long run average estimates of PD and LGD for retail exposures from an estimate of total losses, and an appropriate estimate of PD or LGD, the process for estimating total losses must meet the minimum IRB standards1 for estimation of PD and LGD, and the outcome must be consistent with the concept of LGD as set out in BIPRU 4.3.99 R (Default weighted average).[Note:BCD Annex VII Part 4 point 70]
BIPRU 4.6.31RRP
Notwithstanding BIPRU 4.3.99 R (Default weighted average), LGD estimates may be derived from realised losses and appropriate estimates of PDs.[Note:BCD Annex VII Part 4 point 83]
BIPRU 4.6.37RRP
Notwithstanding BIPRU 4.3.128 R (Additional drawings), a firm may reflect future drawings either in its conversion factors or in its LGD estimates.[Note:BCD Annex VII Part 4 point 94]
BIPRU 4.6.41RRP
Subject to BIPRU 4.6.43 R and BIPRU 4.6.44 R, the risk weighted exposure amounts for retail exposures must be calculated according to the formulae in the table in BIPRU 4.6.42 R.[Note:BCD Annex VII Part 1 point 10 1st sentence]
BIPRU 4.6.42RRP
Table: Risk weighted exposure amounts for retail exposuresThis table belongs to BIPRU 4.6.41 RCorrelation (R)0.03 × (1 - EXP(-35*PD))/(1-EXP(-35)) + 0.16*[1-(1-EXP(-35*PD))/(1-EXP(-35))]Risk weight (RW)(LGD*N[(1-R)-0.5*G(PD)+(R/(1-R))0.5 *G(0.999)]-PD*LGD)* 12.5*1.06N(x)denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x).G(z)denotes
BIPRU 4.6.57RRP
The risk weighted exposure amount for each exposure to retail SME as defined in BIPRU 4.6.2 R which meets the requirements set out in BIPRU 4.4.83 R and BIPRU 4.4.85 R may be calculated according to BIPRU 4.4.79 R (Double default).[Note:BCD Annex VII Part 1 point 11]
BIPRU 2.2.5GRP
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
BIPRU 2.2.9GRP
The SREP is a process under which the appropriate regulator:(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
BIPRU 2.2.16GRP
If the appropriate regulator gives individual capital guidance to a firm, the appropriate regulator will state what amount and quality of capital the appropriate regulator 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 which is 3at least equal to a specified percentage of that firm'scapital resources requirement plus one or more static add-ons
BIPRU 2.2.21GRP
In the circumstance set out in BIPRU 2.2.20 G, the appropriate regulator may ask a firm for alternative or more detailed proposals and plans or further assessments and analyses of capital adequacy and risks faced by the firm. The appropriate regulator will seek to agree with the firm appropriate timescales and scope for any such additional work, in light of the circumstances which have arisen.
BIPRU 2.2.25GRP
(1) This paragraph applies to a small3firm whose activities are simple and primarily not credit-related.3(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
BIPRU 2.2.26GRP
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
BIPRU 2.2.29GRP
(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 appropriate regulator, between capital it holds in order to comply with the overall financial adequacy rule, capital that it holds as a capital
BIPRU 2.2.31GRP
A firm should assess its exposure to risks transferred through the securitisation of assets should those transfers fail for whatever reason. A firm should consider the effect on its financial position of a securitisation arrangement failing to operate as anticipated or of the values and risks transferred not emerging as expected.
BIPRU 2.2.32GRP
A firm should assess its exposure to residual risks that may result from the partial performance or failure of credit risk mitigation techniques for reasons that are unconnected with their intrinsic value. This could result from, for instance, ineffective documentation, a delay in payment or the inability to realise payment from a guarantor in a timely manner. Given that residual risks can always be present, a firm should assess the appropriateness of its CRR against its assumptions
BIPRU 2.2.45GRP
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
BIPRU 2.2.48GRP
(1) 66BIPRU 2.2.61 G to BIPRU 2.2.70 G set out guidance for:(a) 6[deleted]6(b) an asset management firm; and(c) a securities firm;whose activities are either simple or moderately complex.(2) BIPRU 2.2.49 G to BIPRU 2.2.70 G provide examples of the sorts of risks which such a firm might typically face and of stress tests or scenario analyses which it might carry out as part of its ICAAP.(3) The material on securities firms is also relevant to a commoditiesfirm.
BIPRU 2.2.66GRP
(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
SYSC 19C.3.2GRP
The effect of SYSC 12.1.13 R (2)(dA) and SYSC 12.1.15 R is that the firm is required to ensure that the risk management processes and internal control mechanisms at the level of any consolidation group or non-EEA sub-group of which a firm is a member comply with the obligations set out in this section on a consolidated (or sub-consolidated) basis.
SYSC 19C.3.4RRP
BIPRU Remuneration Code staff comprises categories of staff including senior management, risk-takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk-takers, whose professional activities have a material impact on the firm's risk profile.
SYSC 19C.3.7RRP
A firm must ensure that its remuneration policy is consistent with and promotes sound and effective risk management, and does not encourage risk-taking that exceeds the level of tolerated risk of the firm.
SYSC 19C.3.12RRP
(1) A firm that is significant in terms of its size, internal organisation and the nature, scope and complexity of its activities must establish a remuneration committee. (2) The remuneration committee must be constituted in a way that enables it to exercise competent and independent judgment on remuneration policies and practices and the incentives created for managing risk, capital and liquidity. (3) The chairman and the members of the remuneration committee must be members
SYSC 19C.3.15ERP
(1) A firm's risk management and compliance functions should have appropriate input into setting the remuneration policy for other business areas. The procedures for setting remuneration should allow risk and compliance functions to have significant input into the setting of individual remuneration awards where those functions have concerns about the behaviour of the individuals concerned or the riskiness of the business undertaken.(2) Contravention of (1) may be relied on as
SYSC 19C.3.16RRP
A firm must ensure that the remuneration of the senior officers in risk management and compliance functions is directly overseen by the remuneration committee referred to in SYSC 19C.3.12 R, or, if such a committee has not been established, by the governing body in its supervisory function.
SYSC 19C.3.17GRP
(1) This Remuneration Principle is designed to manage the conflicts of interest which might arise if other business areas had undue influence over the remuneration of employees within control functions. Conflicts of interest can easily arise when employees are involved in the determination of remuneration for their own business area. Where these do arise they need to be managed by having in place independent roles for control functions (including, notably, risk management and
SYSC 19C.3.20RRP
A firm that benefits from exceptional government intervention must ensure that: (1) variable remuneration is strictly limited as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base and timely exit from government support;(2) it restructures remuneration in alignment with sound risk management and long-term growth, including when appropriate establishing limits to the remuneration of senior personnel; and(3) no variable remuneration
SYSC 19C.3.22RRP
(1) A firm must ensure that any measurement of performance used to calculate variable remuneration components or pools of variable remuneration components: (a) includes adjustments for all types of current and future risks, taking into account the cost and quantity of the capital and the liquidity required; and (b) takes into account the need for consistency with the timing and likelihood of the firm receiving potential future revenues incorporated into current earnings. (2) A
SYSC 19C.3.23GRP
(1) This Remuneration Principle stresses the importance of risk adjustment in measuring performance, and the importance of applying judgment and common sense. A firm should ask the risk management function to validate and assess risk-adjustment techniques and to attend a meeting of the governing body or remuneration committee for this purpose. (2) A number of risk-adjustment techniques and measures are available, and a firm should choose those that are most appropriate to its
SYSC 19C.3.35RRP
A firm must ensure that the structure of an employee'sremuneration is consistent with, and promotes, effective risk management.
SYSC 19C.3.37GRP
Non-financial performance metrics should form a significant part of the performance assessment process and should include adherence to effective risk management and compliance with the regulatory system and with relevant overseas regulatory requirements. Poor performance as assessed by non-financial metrics, such as poor risk management or other behaviours contrary to firm values, can pose significant risks for a firm and should, as appropriate, override metrics of financial performance.
SYSC 19C.3.52ERP
(1) A firm should reduce unvested deferred variable remuneration when, as a minimum: (a) there is reasonable evidence of employee misbehaviour or material error; or(b) the firm or the relevant business unit suffers a material downturn in its financial performance; or(c) the firm or the relevant business unit suffers a material failure of risk management.(2) For performance adjustment purposes, awards of deferred variable remuneration made in shares or other non-cash instruments
SYSC 19A.3.2GRP
SYSC 12.1.13 R (2)(dA) requires the firm to ensure that the risk management processes and internal control mechanisms at the level of any UK consolidation group or non-EEA sub-group of which a firm is a member comply with the obligations set out in this section on a consolidated (or sub-consolidated) basis. In the FCA’s6 view, the application of6 this section at group, parent undertaking and subsidiary undertaking levels in SYSC 19A.3.1R(1) is in line with6 article 109(2) of
SYSC 19A.3.7RRP
A firm must ensure that its remuneration policy is consistent with and promotes sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the firm.[Note:3article 92(2)(a) of CRD]3
SYSC 19A.3.12RRP
(1) A6firm that is significant in terms of its size, internal organisation and the nature, the scope and the complexity of its activities must establish a remuneration committee. 3(2) The remuneration committee must be constituted in a way that enables it to exercise competent and independent judgment on remuneration policies and practices and the incentives created for managing risk, capital and liquidity.(3) The chairman and the members of the remuneration committee must be
SYSC 19A.3.15ERP
(1) A firm's risk management and compliance functions should have appropriate input into setting the remuneration policy for other business areas. The procedures for setting remuneration should allow risk and compliance functions to have significant input into the setting of individual remuneration awards where those functions have concerns about the behaviour of the individuals concerned or the riskiness of the business undertaken.(2) Contravention of (1) may be relied on as
SYSC 19A.3.16RRP
A firm must ensure that the remuneration of the senior officers in risk management and compliance functions is directly overseen by the remuneration committee referred to in SYSC 19A.3.12 R, or, if such a committee has not been established, by the governing body in its supervisory function.[Note:3article 92(2)(f) of CRD]3
SYSC 19A.3.17GRP
(1) This Remuneration Principle is designed to manage the conflicts of interest which might arise if other business areas had undue influence over the remuneration of employees within control functions. Conflicts of interest can easily arise when employees are involved in the determination of remuneration for their own business area. Where these could arise they need to be managed by having in place independent roles for control functions (including, notably, risk management and
SYSC 19A.3.20RRP
A firm that benefits from exceptional government intervention must ensure that:(1) variable remuneration is strictly limited as a percentage of net revenues when it is inconsistent with the maintenance of a sound capital base and timely exit from government support;(2) it restructures remuneration in a manner aligned with sound risk management and long-term growth, including when appropriate establishing limits to the remuneration of3members of its management body; and3(3) no
SYSC 19A.3.23GRP
(1) This Remuneration Principle stresses the importance of risk adjustment in measuring performance, and the importance within that process of applying judgement6 and common sense. The FCA expects a6firm to apply qualitative judgements and common sense in6 the final decision about the performance-related components6 of variable remuneration pools6. (2) A number of risk-adjustment techniques and measures are available, and a firm should choose those most appropriate to its circumstances.
SYSC 19A.3.35RRP
A firm must ensure that the structure of an employee'sremuneration is consistent with and promotes effective risk management.
SYSC 19A.3.37GRP
(1) The non-financial criteria in SYSC 19A.3.36R(2) should include:6(a) the extent of the employee’s adherence to effective risk management, and compliance with the regulatory system and with relevant overseas regulatory requirements; and6(b) metrics relating to conduct, which should comprise a substantial portion of the non-financial criteria.6(2) Poor performance, such as poor risk management or other behaviours contrary to firm values, can pose significant risks for a firm
SYSC 19A.3.52ERP
(1) A firm should reduce unvested deferred variable remuneration when, as a minimum:(a) there is reasonable evidence of employee misbehaviour or material error; or(b) the firm or the relevant business unit suffers a material downturn in its financial performance; or(c) the firm or the relevant business unit suffers a material failure of risk management.(2) For performance adjustment purposes, awards of deferred variable remuneration made in shares or other non-cash instruments
BIPRU 9.12.2RRP
For a rated position or a position in respect of which an inferred rating may be used, the ratings based method must be used to calculate the risk weighted exposure amount.[Note:BCD Annex IX Part 4 point 38]
BIPRU 9.12.6RRP
Subject to any IRB permission of the type described in BIPRU 9.12.28 G, in the case of an originator or sponsor unable to calculate KIRB and which has not obtained approval to use the ABCP internal assessment approach, and in the case of other firms where they have not obtained approval to use the supervisory formula method or, for positions in ABCP programmes, the ABCP internal assessment approach, a risk weight of 1250% must be assigned to securitisation positions which are
BIPRU 9.12.8RRP
For an originator, a sponsor, or for other firms which can calculate KIRB, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to that which would produce an amount in respect of its credit risk capital requirement equal to the sum of 8% of the risk weighted exposure amount which would be produced if the securitised assets had not been securitised and were on the balance sheet of the firm plus the expected loss amounts of
BIPRU 9.12.10RRP
Under the ratings based method, the risk weighted exposure amount of a rated securitisation position4 or resecuritisation position4 must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment is associated as prescribed in BIPRU 9.12.11 R multiplied by 1.06.[Note:BCD Annex IX Part 4 point 46]44
BIPRU 9.12.11RRP
Table: This table belongs to BIPRU 9.12.10 R44Credit Quality StepSecuritisation positionsResecuritisation positionsCredit assessments other than short termShort-term credit assessmentsABCDE117%12%20%20%30%28%15%25%25%40%310%18%35%35%50%4212%20%40%65%520%35%60%100%635%50%100%150%7360%75%150%225%8100%200%350%9250%300%500%10425%500%650%11650%750%850%all other, unrated1250%[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: http://www.fca.org.uk/your-fca/documents/fsa-ecais-securitisation
BIPRU 9.12.20RRP
(1) If:(a) a firm'sIRB permission allows it to use this treatment; and(b) the conditions in (2)(16) are satisfied,a firm may attribute to an unrated position in an asset backed commercial paper programme a derived rating as laid down in (3).(2) Positions in the commercial paper issued from the programme must be rated positions.(3) Under the ABCP internal assessment approach, the unrated position must be assigned by the firm to one of the rating grades described in (5). The position
BIPRU 9.12.21RRP
Subject to any permission of the type described in BIPRU 9.12.28 G, under the supervisory formula method, the risk weight for a securitisation position must be the risk weight to be applied in accordance with BIPRU 9.12.22 R. However, the risk weight must be no less than 20% for resecuritisation positions and no less than 7% for all other securitisation positions.4[Note:BCD Annex IX Part 4 point 52]4
BIPRU 9.12.22RRP
(1) Subject to any permission of the type described in BIPRU 9.12.28 G, the risk weight to be applied to the exposure amount must be:12.5 (S[L+T] - S[L]) / T(2) The remaining provisions of this paragraph define the terms used in the formulae in (1) and (3).(3) 2(4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) In these expressions, Beta [x; a, b]refers to the cumulative beta distribution with parameters a and b evaluated at x.(16) T (the thickness of the tranche in which the
BIPRU 9.12.28GRP
(1) When it is not practical for the firm to calculate the risk weighted exposure amounts for the securitised exposures as if they had not been securitised and the position does not qualify for the ABCP internal assessment approach, a firm may apply to the appropriate regulator for a variation of its IRB permission under which, on an exceptional basis, it may temporarily apply the method in (2) for the calculation of risk weighted exposure amounts for an unratedsecuritisation
INSPRU 3.2.5RRP
For the purpose of PRA Rulebook: Non-Solvency II firms: Insurance Company – Capital Resources 136 (Admissible assets in insurance), and also in relation to permitted links,1 a derivative or quasi-derivative is approved if:(1) it is held for the purpose of efficient portfolio management (INSPRU 3.2.6 R to INSPRU 3.2.7 R) or reduction of investment risk (INSPRU 3.2.8 R to INSPRU 3.2.13 G);(2) it is covered (INSPRU 3.2.14 R to INSPRU 3.2.33 G); and(3) it is effected or issued:(a)
INSPRU 3.2.8RRP
A derivative or quasi-derivative is held for the purpose of reducing investment risk if the derivative or quasi-derivative (either alone or together with other fully covered transactions) reduces any aspect of investment risk without significantly increasing any other aspect of that risk.
INSPRU 3.2.9RRP
For the purposes of INSPRU 3.2.8 R, an increase in risk from a derivative or quasi-derivative is significant unless:(1) relative to any reduction in investment risk it is both small and reasonable; or(2) the risk is remote.
INSPRU 3.2.10GRP
INSPRU 3.2.8 R does not require that a derivative or quasi-derivative has no possible adverse consequences. Often a derivative or quasi-derivative is effected to protect against a severe adverse consequence that only arises in one circumstance. In all other circumstances it may itself lead to adverse consequences, even if only because it expires worthless resulting in the loss of the purchase price. Conversely a derivative or quasi-derivative may reduce risk in a wide range of
INSPRU 3.2.12RRP
For the purposes of INSPRU 3.2.8 R, investment risk is the risk that the assets held by a firm:(1) (where they are admissible assets held by the firm to cover its technical provisions) might not be:(a) of a value at least equal to the amount of those technical provisions as required by PRA Rulebook: Non-Solvency II firms: Insurance Company – Technical Provisions, 46; or(b) of appropriate safety, yield and marketability as required by PRA Rulebook: Non-Solvency II firms: Insurance
INSPRU 3.2.13GRP
In assessing whether investment risk is reduced, the impact of a transaction on both the assets and liabilities should be considered. In particular, where the amount of liabilities depends upon the fluctuations in an index or other factor, investment risk is reduced where assets whose value fluctuates in the same way match those liabilities. In appropriate circumstances this may include:(1) a derivative or quasi-derivative that is linked to the same index as the liabilities from
INSPRU 3.2.23GRP
The third purpose of cover is that it protects against the risk that the firm may not be able to deliver assets (including money in any currency) of the right type when the obligation falls due under the transaction. An obligation to deliver assets is covered only if the firm holds those assets or has entered into an offsetting transaction that would deliver those assets when needed. An obligation to pay money is offset only if the firm holds cash in the right currency, its equivalent
INSPRU 3.2.36ARRP
(1) 1For the purposes of the rules on permitted links, a stock lending transaction (including a repo transaction) is approved if:(a) the assets lent are permitted links;(b) the counterparty is an authorised person, an approved counterparty, a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America or a bank, or a branch of a bank, supervised, and authorised to deal in investments as principal, with respect to OTC derivatives