BIPRU 10.3 Identification of counterparties
An individual counterparty may be a natural or legal person.
Examples of a counterparty include:
- (1)
the customer or borrower; this includes governments, local authorities, public sector entities, individual trusts, corporations, unincorporated businesses (whether as sole traders or partnerships) and non-profit making bodies;
- (2)
where the firm is providing a guarantee, the person guaranteed;
- (3)
for a derivatives contract, the person with whom the contract was made;
- (4)
for exchange traded contracts novated through a central clearing mechanism, that central clearing mechanism;
- (5)
where a bill held by a firm has been accepted by a credit institution, the acceptor; and
- (6)
where a firm is funding the activities of a company that trades on an exchange (whether as principal or on behalf of clients), that company.
Identification of counterparties for guaranteed exposures
- (1)
Where an exposure to a counterparty is guaranteed by a third party, a firm may treat the exposure as an exposure to the third party and not to the counterparty.
- (2)
In deciding whether or not to treat the exposure as an exposure to the third party a firm must ensure that the identification of counterparties for concentration risk purposes is applied in a consistent manner.
- (3)
Where the guarantee is denominated in a currency different from that in which the exposure is denominated, the amount of the exposure deemed to be covered must be calculated in accordance with the provisions on the treatment of currency mismatch for unfunded credit protection in BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation).
- (4)
A mismatch between the maturity of the exposure and the maturity of the protection must be treated in accordance with the provisions on the treatment for maturity mismatch in BIPRU 5 and, if applicable, BIPRU 4.10.
- (5)
Partial coverage must be treated in accordance with BIPRU 5 and, if applicable, BIPRU 4.10.
- (6)
A guarantee may only be treated in accordance with (1) if the firm complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 and, if applicable, BIPRU 4.10for the purposes of calculating risk weighted exposure amounts.
- (7)
For the purpose of this rule, guarantee includes a credit derivative recognised under BIPRU 5 and, if applicable, BIPRU 4.10, other than a credit linked note.
An example of the eligibility requirements and other minimum requirements set out in BIPRU 5 as referred to in BIPRU 10.3.3 R (6) is the requirement for a legal review in BIPRU 5.2.3 R.
Groups of connected clients
The Glossary defines a group of connected clients.
Relationships between individual counterparties which might be considered to constitute a single risk for the purposes of the definition of group of connected clients include:
- (1)
undertakings in the same group;
- (2)
companies whose ultimate owner (whether wholly or significantly) is the same individual or individuals, and which do not have a formal group structure;
- (3)
companies having common directors or management; and
- (4)
counterparties linked by cross guarantees
The FSA would not regard the normal business relationships between companies which are competitors, and to which none of the relationships listed in BIPRU 10.3.6 G apply, as falling within the definition of group of connected clients.
Connected counterparties
For the purposes of BIPRU 10, and in relation to a firm, a connected counterparty means another person ('P') to whom the firm has an exposure and who fulfils at least one of the following conditions:
- (1)
P is closely related to the firm; or
- (2)
- (3)
the same persons significantly influence the governing body of P and of the firm; or
- (4)
the firm has an exposure to P that was not incurred for the clear commercial advantage of the firm or the firm's group and which is not on an arm's length basis.
Exposures to counterparties, groups of connected clients and connected counterparties
A firm's total exposure to a counterparty must be calculated by summing its exposures to that counterparty, including both trading book exposures and non-trading book exposures.
A firm's total exposure to a group of connected clients must be calculated by summing its exposures to the individual persons within that group of connected clients, including both trading book exposures and non-trading book exposures.
A firm's total exposure to connected counterparties must be calculated by summing its exposures to all the firm's connected counterparties, including both trading book exposures and non-trading book exposures.
Exposures to trustees
If a firm has an exposure to a person ('A') when A is acting on his own behalf, and also an exposure to A when A acts in his capacity as trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or a similar fund (a "fund), the firm may treat the latter exposure as if it was to the fund, unless such a treatment would be misleading.
When considering whether the treatment described in BIPRU 10.3.12 R is misleading, factors a firm should consider include:
- (1)
the degree of independence of control of the fund, including the relation of the fund's board and senior management to the firm or to other funds or to both;
- (2)
the terms on which the counterparty, when acting as trustee, is able to satisfy its obligation to the firm out of the fund of which it is trustee;
- (3)
whether the beneficial owners of the fund are connected to the firm, or related to other funds managed within the firm's group, or both; and
- (4)
for a connected counterparty, whether the exposure arises from a transaction entered into on an arm's length basis.
In deciding whether a transaction is at arm's length for the purposes of BIPRU 10.3.8 R (4) and , BIPRU 10.3.13 G (4), the following factors should be taken into account:
- (1)
the extent to which the person to whom the firm has an exposure ('A') can influence the firm's operations, through e.g. the exercise of voting rights;
- (2)
the management role of A where A is also a director of the firm; and
- (3)
whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.