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)]

4Where there is a relationship of control, there is a presumption of single risk unless shown otherwise.

1. (1)

   4In identifying a group of connected clients, a firm should consider both third party clients and counterparties that are, or may be, connected to the firm itself.

   4
2. (2)

   4Relationships between individual counterparties or between the firm and a counterparty which might be considered to constitute a single risk for the purposes of the definition of group of connected clients include:

   4
   1. (a)

      4undertakings in the same group;

   2. (b)

      companies whose ultimate owner (whether wholly or significantly) is the same individual or individuals, and which do not have a formal group structure;

   3. (c)

      companies having common directors or management;

   4. (d)

      where the same persons significantly influence the governing body of each of the undertakings;

   5. (e)

      where the firm has an exposure to an undertaking 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;

   6. (f)

      counterparties linked by cross guarantees;

   7. (g)

      where it is likely that the financial problems of one counterparty would cause difficulties for the other counterparty or counterparties in terms of full and timely repayment of liabilities;

   8. (h)

      where the funding problems of one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source, which may be the firm itself;

   9. (i)

      where counterparties rely on the firm for their main funding source, for example through explicit or implicit liquidity support or credit support; and

   10. (j)

       where the insolvency or default of one of them is likely to be associated with the insolvency or default of the other(s).

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.

1. (1)

   4The 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 .

2. (2)

   4In applying the CEBS guidelines in relation to counterparties that are connected to the firm itself, the FSA has issued guidance in respect of structured finance vehicles. This guidance can be found at http://www.fsa.gov.uk/library/policy/policy/2012/12-21.shtml.

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 counterparty that is connected to the firm itself,4 whether the exposure arises from a transaction entered into on an arm's length basis.

   4

In deciding whether a transaction is at arm's length for the purposes of BIPRU 10.3.6G (2)(f)4, BIPRU 10.3.13 G (4) and BIPRU 10.10A.1R (1)(d)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.