BIPRU applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

Subject to BIPRU 1.1.7 R, a BIPRU firm means a firm that is:[deleted]

1. (1)

   a building society; or

2. (2)

   a bank; or

3. (3)

   a full scope BIPRU investment firm; or

4. (4)

   a BIPRU limited licence firm; or

5. (5)

   a BIPRU limited activity firm.

None of the following is a BIPRU firm and each of the following is excluded from each of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3) to BIPRU 1.1.6R (5) and BIPRU 1.1.18 R (2) to (4):

1. (1)

   an incoming EEA firm;

2. (2)

   an incoming Treaty firm;

3. (3)

   any other overseas firm;

4. (4)

   an ELMI;

5. (5)

   an insurer; and

6. (6)

   an ICVC.

A firm falling within BIPRU 1.1.6 R (3) to BIPRU 1.1.6R (5) is a BIPRU investment firm. A BIPRU investment firm includes a UCITS investment firm that is not excluded under BIPRU 1.1.7 R.

A limited activity firm means (as specified by Article 20(3) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that satisfies the following conditions:

1. (1)

   it meets the criteria in (a) or the criteria in (b):

   1. (a)

      it deals on own account only:

      1. (i)

         for the purpose of fulfilling or executing a client order; or

      2. (ii)

         for the purpose of gaining entrance to a clearing and settlement system or a recognised investment exchange or designated investment exchange when acting in an agency capacity or executing a client order; or

   2. (b)

      it satisfies the following conditions:

      1. (i)

         it does not hold client money or securities in relation to investment services that it provides and is not authorised to do so;

      2. (ii)

         the only investment service3it undertakes is dealing on own account;

         3
      3. (iii)

         it has no external customers in relation to investment services it provides; and

      4. (iv)

         the execution and settlement of its transactions in relation to investment services it provides takes place under the responsibility of a clearing institution and are guaranteed by that clearing institution;

2. (2)

   (in the case of a CAD investment firm that is a BIPRU investment firm) its base capital resources requirement is €730,000;

3. (3)

   (in the case of a CAD investment firm that is an EEA firm) it is subject to the CRD implementation measures of its Home State for Article 9 of the Capital Adequacy Directive (Initial capital requirement of €730,000); and

4. (4)

   (in the case of any other CAD investment firm) its base capital resources requirement would be €730,000 if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14 R (3)(b).

A limited licence firm means (as specified by Article 20(2) of the Capital Adequacy Directive (Exemptions from operational risk)) a CAD investment firm that is not authorised to:

1. (1)

   deal on own account; or

2. (2)

   provide the investment services of underwriting or placing financial instruments (as referred to in point 63 of Section A of Annex I of MiFID3) on a firm commitment basis.

   33

A CAD full scope firm means a CAD investment firm that is not a limited activity firm or a limited licence firm.

1. (1)

   In accordance with Article 3(1)(b) of the Capital Adequacy Directive, a person is a CAD investment firm if it falls into (2) or (3).

2. (2)

   A person whose head office is in an EEA State is a CAD investment firm if it is an investment firm that is subject to the requirements imposed by MiFID3 but excludes the following:

   3
   1. (a)

      a bank, a building society or an ELMI;

   2. (b)

      a credit institution;

   3. (c)

      a local; and

   4. (d)

      an exempt CAD firm.

3. (3)

   An investment firm whose head office is not in an EEA State is a CAD investment firm if it would have fallen into (2) if:

   1. (a)

      its head office had been in an EEA State; and

   2. (b)

      it had carried on all its business in the EEA and had obtained whatever authorisations for doing so are required under MiFID3.

      3

In accordance with Article 3(1)(b)(iii) of the Capital Adequacy Directive (Definitions), an exempt CAD firm means an investment firm that satisfies the following conditions:

1. (1)

   it would have been a CAD investment firm if exempt CAD firms were not excluded from the definition; and

2. (2)

   it is only authorised to provide the service of investment advice and/or2 receive and transmit2 orders from investors (as referred to in Section A of Annex I of MiFID3) without in both cases22 holding money or securities belonging to its clients and which2 for that reason may not at any time place itself in debit with its2 clients.

   223222

1. (1)

   A BIPRU limited licence firm means a limited licence firm that falls into (4).

2. (2)

   A BIPRU limited activity firm means a limited activity firm that falls into (4).

3. (3)

   A full scope BIPRU investment firm means a CAD full scope firm that falls into (4).

4. (4)

   A limited licence firm, limited activity firm or CAD full scope firm falls into (4) if:

   1. (a)

      it is a firm; and

   2. (b)

      its head office is in the United Kingdom and it is not otherwise excluded from the definition of BIPRU firm under BIPRU 1.1.7 R.

BIPRU investment firm are divided into the following classes for the purposes of the calculation of the base capital resources requirement and for the purpose of any other provision of the Handbook that applies this classification:

1. (1)

   a UCITS investment firm;

2. (2)

   a BIPRU 50K firm;

3. (3)

   a BIPRU 125K firm; and

4. (4)

   a BIPRU 730K firm.

A BIPRU 125K firm means a BIPRU investment firm that satisfies the following conditions:

1. (1)

   it does not:

   1. (a)

      deal on own account; or

   2. (b)

      underwrite issues of financial instruments (as referred in Section A of Annex I of MiFID3) on a firm commitment basis;

      3
2. (2)

   it holds clients' money or securities in relation to investment services it provides or is authorised to do so;

3. (3)

   it offers one or more of the following services (all as referred to in Section A of Annex I of MiFID3):

   3
   1. (a)

      reception and transmission of investors' orders for financial instruments; or

   2. (b)

      the execution of investors' orders for financial instruments; or

   3. (c)

      the management of individual portfolios of investments in financial instruments;

      3
4. (4)

   it is not a UCITS investment firm and;3

   3
5. (5)

   it does not operate a multilateral trading facility.3

A BIPRU 50K firm means a BIPRU investment firm that satisfies the following conditions:

1. (1)

   it satisfies the conditions in BIPRU 1.1.19 R (1)and (3);

2. (2)

   it does not hold clients' money or securities in relation to investment services it provides and it is not authorised to do so;

   3
3. (3)

   it is not a UCITS investment firm; and3

   3
4. (4)

   it does not operate a multilateral trading facility.3

A BIPRU investment firm that is not a UCITS investment firm, a BIPRU 50K firm or a BIPRU 125K firm is a BIPRU 730K firm.A BIPRU investment firm that operates a multilateral trading facility is a BIPRU 730K firm.3

A firm also falls into one of the categories of BIPRU investment firm listed in BIPRU 1.1.6 R (3)to (5) or BIPRU 1.1.18 R if its Part IV permission contains a requirement that it comply with the rules in GENPRU and BIPRU applicable to that category of firm. If a firm is subject to such a requirement and it would otherwise also fall into another category of BIPRU investment firm it does not fall into that other category.

1. (1)

   Dealing on own account means (for the purpose of GENPRU and BIPRU) the service of dealing in any financial instruments for own account as referred to in point 33 of Section A of Annex I 3to MiFID3, subject to (2) and (3).

   333
2. (2)

   In accordance with Article5(2) of the Capital Adequacy Directive (Definition of dealing on own account), a CAD investment firm that executes investors' orders for financial instruments and holds such financial instruments for its own account does not for that reason deal on own account if the following conditions are met:

   1. (a)

      such position only arise as a result of the CAD investment firm's failure to match investors' orders precisely;

   2. (b)

      the total market value of all such positions is no higher than 15% of the CAD investment firm'sinitial capital;

   3. (c)

      (in the case of a BIPRU investment firm) it complies with the main BIPRU firm Pillar 1 rules and BIPRU 10 (Concentration risk);

   4. (d)

      (in the case of a CAD investment firm that is an EEA firm) it complies with the CRD implementation measures of its Home State for Articles 18 and 20 (Minimum capital requirements) and 28 (Large exposures) of the Capital Adequacy Directive;

   5. (e)

      (in the case of any other CAD investment firm) it would comply with the rules in (2)(c) if it had been a BIPRU investment firm on the basis of the assumptions in BIPRU 1.1.14 R (3)(a) and BIPRU 1.1.14R (3)(b); and

   6. (f)

      such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.

3. (3)

   In accordance with Article 5(2) of the Capital Adequacy Directive, the holding of non-trading bookpositions in financial instruments in order to invest capital resources is not dealing on own account for the purposes referred to in BIPRU 1.1.18 R.

For the purposes of the definitions in BIPRU 1.1, a person does any of the activities referred to in BIPRU 1.1 if:

1. (1)

   it does that activity anywhere in the world; or

2. (2)

   if its permission includes that activity; or

3. (3)

   (in the case of an EEA firm) it is authorised by its Home State regulator to do that activity; or

4. (4)

   (if the carrying on of that activity is prohibited in a state or territory without an authorisation in that state or territory) that firm has such an authorisation.

For the purposes of the definitions in BIPRU 1.1, a person offers any of the services referred to in BIPRU 1.1.19 R (3)if:

1. (1)

   it offers that service anywhere in the world; or

2. (2)

   any of BIPRU 1.1.24 R (1) to BIPRU 1.1.24R (4) apply.

For the purposes of the definitions in BIPRU 1.1, a person has an authorisation to do any of the activities referred to in BIPRU 1.1 if any of BIPRU 1.1.24 R (2) to (4) apply.

This section applies to a BIPRU firm.

The trading book of a firm consists of all position in CRD financial instrument and commodities held either with trading intent or in order to hedge other elements of the trading book and which are either free of any restrictive covenants on their tradability or able to be hedged.

[Note: CAD Article 11(1)]

The term position includes proprietary positions and positions arising from client servicing and market making.

[Note: CAD Article 11(2) second sentence]

Term trading-related repo-style transactions that a firm accounts for in its non-trading book may be included in the trading book for capital requirement purposes so long as all such repo-style transactions are included. For this purpose, trading-related repo-style transactions are defined as those that meet the requirements of BIPRU 1.2.4 R, BIPRU 1.2.10 R and BIPRU 1.2.12 R, and both legs are in the form of either cash or securities includable in the trading book. Regardless of where they are booked, all repo-style transactions are subject to a non-trading book counterparty credit risk charge.

[Note: CAD Annex VII Part D point 4]

A CRD financial instrument means any contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another party.

[Note: CAD Article 3(1)(e)]

CRD financial instruments include both primary CRD financial instrument or cash instruments, and derivative CRD financial instruments the value of which is derived from the price of an underlying CRD financial instrument, a rate, an index or the price of another underlying item and include as a minimum the instruments specified in Section C of Annex I to the MIFID.

[Note: CAD Article 3(1) last paragraph]

Positions held with trading intent for the purpose of the definition of the trading book are those held intentionally for short-term resale and/or with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations.

[Note: CAD Article 11(2) first sentence]

Trading intent must be evidenced on the basis of the strategies, policies and procedures set up by the firm to manage the position or portfolio in accordance with BIPRU 1.2.12 R.

[Note: CAD 11(3)]

Positions/portfolios held with trading intent must comply with the following requirements:

1. (1)

   there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which must include the expected holding horizon;

2. (2)

   there must be clearly defined policies and procedures to monitor the position against the firm's trading strategy including the monitoring of turnover and stale position in the firm'strading book; and

3. (3)

   there must be clearly defined policies and procedures for the active management of the position, which must include the following:

   1. (a)

      position entered into on a trading desk;

   2. (b)

      position limits are set and monitored for appropriateness;

   3. (c)

      dealers have the autonomy to enter into/manage the position within agreed limits and according to the approved strategy;

   4. (d)

      positions are reported to senior management as an integral part of the firm's risk management process; and

   5. (e)

      positions are actively monitored with reference to market information sources and an assessment made of the marketability or hedge-ability of the position or its component risks, including the assessment of, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market.

   [Note: CAD Annex VII Part A]

Internal hedges may be included in the trading book, in which case BIPRU 1.2.14 R to BIPRU 1.2.16 R apply.

[Note: CAD Article 11(5)]

1. (1)

   An internal hedge is a position that materially or completely offsets the component risk element of a non-trading bookposition or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:

   1. (a)

      internal hedges must not be primarily intended to avoid or reduce capital requirements;

   2. (b)

      internal hedges must be properly documented and subject to particular internal approval and audit procedures;

   3. (c)

      the internal transaction must be dealt with at market conditions;

   4. (d)

      the bulk of the market risk that is generated by the internal hedge must be dynamically managed in the trading book within the authorised limits; and

   5. (e)

      internal transactions must be carefully monitored.

2. (2)

   Monitoring must be ensured by adequate procedures.

   [Note: CAD Annex VII Part C point 1]

The treatment referred to in BIPRU 1.2.14 R applies without prejudice to the capital requirements applicable to the "non-trading book leg" of the internal hedge.

[Note: CAD Annex VII Part C point 2]

Notwithstanding BIPRU 1.2.14 R to BIPRU 1.2.15 R, when a firm hedges a non-trading book credit risk exposure using a credit derivative booked in its trading book (using an internal hedge), the non-trading book exposure is not deemed to be hedged for the purposes of calculating capital requirements unless the firm purchases from an eligible third party protection provider a credit derivative meeting the requirements set out in BIPRU 5.7.13 R (Additional requirements for credit derivatives) with regard to the non-trading book exposure. Wheresuch third party protection is purchased and is recognised as a hedge of a non-trading book exposure for the purposes of calculating capital requirements, neither the internal nor external credit derivative hedge maybe included in the trading book for the purposes of calculating capital requirements.

[Note: CAD Annex VII Part C point 3]

1. (1)

   Subject to (3), a firm may calculate its capital requirements for its trading book business in accordance with the standardised approach to credit risk (or, if it has an IRB permission, the IRB approach) as it applies to the non-trading book where the size of the trading book business meets the following requirements:

   1. (a)

      the trading book business of the firm does not normally exceed 5% of its total business;

   2. (b)

      its total trading bookposition do not normally exceed €15 million; and

   3. (c)

      the trading book business of the firm never exceeds 6% of its total business and its total trading bookpositions never exceed €20 million.

2. (2)

   Subject to (3), if (1) applies, the following are disapplied:

   1. (a)

      the rules relating to the interest rate PRR, the equity PRR, the CIU PRR and the PRR calculated under BIPRU 7.11 (Credit derivatives in the trading book);

   2. (b)

      the rules relating to the option PRR (but only in relation to positions which under BIPRU 7.6.5 R (Table: Appropriate calculation for an option or warrant) may be subject to one of the other PRR charges listed in (2)(a) or which would be subject to such a PRR charge if BIPRU 7.6.5 R did not require an option PRR to be calculated);

   3. (c)

      BIPRU 7.10 (Use of a Value at Risk Model) so far as BIPRU 7.10 relates to the risks covered by the requirements in (a) and (b); and

   4. (d)

      BIPRU 14 (Capital requirements for settlement and counterparty risk).

3. (3)

   If (1) applies, the following continue to apply:

   1. (a)

      the rules relating to the commodity PRR and the foreign currency PRR;

   2. (b)

      the rules relating to the option PRR (so far as not disapplied under (2)(b);

   3. (c)

      BIPRU 7.10 (so far as not disapplied under (2)(c));

   4. (d)

      BIPRU 14.2.3 R to BIPRU 14.2.8 R (Credit derivatives); and

   5. (e)

      BIPRU 14.2.15 R to BIPRU 14.2.16 R (Collateral for repurchase transactions and other products).

   [Note: CAD Article 18(2)]

In order to calculate the proportion that trading book business bears to total business for the purpose of BIPRU 1.2.17 R (1)(a) to BIPRU 1.2.17R (1)(c) the firm must refer to the size of the combined on- and off-balance-sheet business. For this purpose, debt instruments must be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and short positions must be summed regardless of their signs.

[Note: CAD Article 18(3)]

If a firm should happen for more than a short period to exceed either or both of the limits imposed in BIPRU 1.2.17 R (1)(a) and BIPRU 1.2.17R (1)(b) or either or both of the limits imposed in BIPRU 1.2.17 R (1)(c):

1. (1)

   BIPRU 1.2.17 R ceases to apply; and

2. (2)

   the firm must notify the FSA.

   [Note: CAD Article 18(4)]

A firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.

[Note: BCD Annex V, Part 7 point 10]

A firm must establish and maintain systems and controls to manage its trading book, in accordance with the trading book systems and controls rules, BIPRU 1.2.6 R (Definition of the trading book: Repos) and the overall financial adequacy rule to BIPRU 1.2.27 R (Trading book policy statements).

[Note: CAD Article 11(4)]

A firm must establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.

[Note: CAD Annex VII Part B point 1]

Systems and controls must include at least the following elements:

1. (1)

   documented policies and procedures for the process of valuation (including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures); and

2. (2)

   reporting lines for the department accountable for the valuation process that are clear and independent of the front office.

   [Note: CAD Annex VII Part B point 2]

The reporting line in relation to the matters covered by BIPRU 1.2.21 R to BIPRU 1.2.24 R must ultimately be to an executive director on the firm'sgoverning body.

[Note: CAD Annex VII Part B point 2 (last sentence)]

A firm must have clearly defined policies and procedures for determining which positions to include in the trading book for the purposes of calculating its capital requirements, consistent with the criteria set out in BIPRU 1.2.3 R to BIPRU 1.2.4 R, BIPRU 1.2.10 R to BIPRU 1.2.11 R, BIPRU 1.1.13 R and BIPRU 1.2.22 R and taking into account the firm's risk management capabilities and practices. Compliance with these policies and procedures must be fully documented and subject to periodic internal audit.

[Note: CAD Annex VII Part D point 1]

A firm must have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures must address:

1. (1)

   the activities the firm considers to be trading and as constituting part of the trading book for capital requirement purposes;

2. (2)

   the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;

3. (3)

   for positions that are marked-to-model, the extent to which the firm can:

   1. (a)

      identify all material risks of the position;

   2. (b)

      hedge all material risks of the position with instruments for which an active, liquid two-way market exists; and

   3. (c)

      derive reliable estimates for the key assumptions and parameters used in the model;

4. (4)

   the extent to which the firm can, and is required to, generate valuations for the position that can be validated externally in a consistent manner;

5. (5)

   the extent to which legal restrictions or other operational requirements would impede the firm's ability to effect a liquidation or hedge of the position in the short term;

6. (6)

   the extent to which the firm can, and is required to, actively risk manage the position within its trading operation; and

7. (7)

   the extent to which the firm may transfer risk or positions between the non-trading book and trading book and the criteria for such transfers.

   [Note: CAD Annex VII Part D point 2]

1. (1)

   The policies and procedures referred to in the overall financial adequacy rule and BIPRU 1.2.27 R must be recorded in a single written document. A firm may record those policies and procedures in more than one written document if the firm has a single written document that identifies:

   1. (a)

      all those other documents; and

   2. (b)

      the parts of those documents that record those policies and procedures.

2. (2)

   A trading book policy statement means the single document referred to in this rule.

1. (1)

   A firm must notify the FSA as soon as is reasonably practicable when it adopts a trading book policy statement.

2. (2)

   A firm must notify the FSA as soon as is reasonably practicable if the trading book policy statement is subject to significant changes.

This section of the Handbook applies to every BIPRU firm that wishes to apply for a permission to use any of the approaches set out in BIPRU 1.3.2 G.

A contravention of the rules in BIPRU does not give rise to a right of action by a private person under section 150 of the Act (and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action).