BIPRU 10.3 Identification of counterparties

Examples of a counterparty include:

1. (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. (2)

   where the firm is providing a guarantee, the person guaranteed;

3. (3)

   for a derivatives contract, the person with whom the contract was made;

4. (4)

   for exchange traded contracts novated through a central clearing mechanism, that central clearing mechanism;

5. (5)

   where a bill held by a firm has been accepted by a credit institution, the acceptor; and

6. (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.

1. (1)

   1If a firm treats an exposure to a counterparty as guaranteed, or secured by collateral issued, by a third party for the purposes of BIPRU 5 (Credit risk mitigation), it should apply the same approach on a consistent basis when identifying a counterparty for the purposes of this chapter.

2. (2) 1

   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.

3. (3) 1

   Where the guarantee is denominated in a currency different from that in which the exposure is denominated, the provisions on the treatment of currency mismatch for unfunded credit protection in BIPRU 5.7 (Unfunded credit protection) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the calculation of the amount of the exposure deemed to be covered.

   [Note: BCD Article 117(2)(a)]

4. (4)

   1Where there is a mismatch between the maturity of the exposure and the maturity of the protection provided by guarantee, BIPRU 5.8 (Maturity mismatches) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the treatment for mismatch.

   [Note: BCD Article 117(2)(b)]

5. (5)

   1For the purpose of BIPRU 10.3.3R (1), where there is a mismatch between the maturity of the exposure and the maturity of the protection provided by collateral, BIPRU 5.8.7 R (Valuation of protection: Transactions subject to funded credit protection - financial collateral simple method) requires that the collateral must not be recognised.

   [Note: BCD Article 117(1) second paragraph]

6. (6)

   1In relation to a guarantee, BIPRU 5.7 (Unfunded credit protection) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) are applicable for the treatment of partial coverage.

   [Note: BCD Article 117(2)(c)]

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. (1)

   undertakings in the same group;

2. (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. (3)

   companies having common directors or management; and

4. (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.

The Committee of European Banking Supervisors (CEBS) has issued guidelines in relation to the definition of a group of connected clients, in particular with reference to the concepts of control and economic interconnection. These guidelines can be found at: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-the-revised-large-exposures-reg.aspx- Part I .

When considering whether the treatment described in BIPRU 10.3.12 G1 is misleading, factors a firm should consider include:

1. (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. (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. (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. (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. (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. (2)

   the management role of A where A is also a director of the firm; and

3. (3)

   whether the exposure would be subject to the firm's usual monitoring and recovery procedures if repayment difficulties emerged.

2The Committee of European Banking Supervisors (CEBS) has issued guidelines in relation to the treatment for large exposures purposes of schemes with exposures to underlying assets. These guidelines can be found at: http://www.c-ebs.org/Publications/Standards-Guidelines/CEBS-Guidelines-on-the-revised-large-exposures-reg.aspx - Part II.