BIPRU 10.5 Limits on exposures and large exposures

A large exposure of a firm means its total exposure to a counterparty, connected counterparties or a group of connected clients, whether in the firm's non-trading book or trading book or both, which in aggregate equals or exceeds 10% of the firm's capital resources.

A firm must calculate its capital resources for the purposes of this chapter in accordance with GENPRU 2.2 (Capital resources) and BIPRU 10.5.3 R to BIPRU 10.5.5 R.

Subject to BIPRU 10.5.4 R, for the purposes of this chapter, a firm's capital resources mean capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions).

For the purposes of monitoring against the trading book limits and charge regime, as set out in BIPRU 10.5.11 R to BIPRU 10.5.22 R, and calculating a firm's CNCOM, a firm's capital resources may include tier three capital resources, in which case a firm's capital resources mean capital resources calculated at stage (T) of the capital resources table (Total capital after deductions).

A firm must not take into account the following items:

1. (1)

   surplus provisions (see GENPRU 2.2.190 R to GENPRU 2.2.193 R); or

2. (2)

   expected loss amounts and other negative amounts (see GENPRU 2.2.236 R); or

3. (3)

   securitisation positions (see GENPRU 2.2.237 R).

A firm must ensure that the total amount of its exposures to the following does not exceed 25% of its capital resources (as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R):

1. (1)

   a counterparty; or

2. (2)

   a group of connected clients; or

3. (3)

   its connected counterparties.

A firm must not incur large exposures which in total exceed 800% of its capital resources (as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R).

If a firm exceeds (or is aware that it will exceed) the limits in BIPRU 10.5.6 R or BIPRU 10.5.8 R it must notify the FSA without delay.

Exposures in a firm's trading book are exempt from the 25% and 800% limits in BIPRU 10.5.6 R and BIPRU 10.5.8 R if:

1. (1)

   the total amount of the exposures on the firm's non-trading book to the same counterparty or group of connected clients or to its connected counterparties does not exceed the limits laid down in those rules, calculated with reference to the definition of capital resources set out in BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R, so that the excess arises entirely on the trading book; and

2. (2)

   the firm meets the additional capital requirements relating to the concentration risk capital component (CNCOM) in relation to the relevant trading book exposures.

If a trading book concentration risk excess with respect to a counterparty or group of connected clients or to its connected counterparties has existed for 10 business days or less, the firm must ensure that the total amount of its trading book exposures to that counterparty or group of connected clients or to its connected counterparties does not exceed 500% of the firm's capital resources.

A firm must ensure that the total amount of its trading book concentration risk excesses that have persisted for more than 10 business days does not exceed 600% of its capital resources.

Within 30 business days of the end of each third Month, a firm must notify the FSA of all cases of trading book concentration risk excesses in that three Month period, giving the amount of the excess and the name of the counterparty.

A firm's CNCOM is the sum of its individual counterparty CNCOMs.

An individual counterparty CNCOMs is the amount a firm must calculate in accordance with BIPRU 10.5.20 R with respect to its exposures to a particular counterparty or a group of connected clients or to its connected counterparties.

A firm must calculate its individual counterparty CNCOM for its exposures to a counterparty or group of connected clients or to its connected counterparties as follows:

1. (1)

   break down its total exposure into its trading book and non-trading book components;

2. (2)

   calculate 25% of the firm's capital resources and deduct those parts of the total exposure which are in the non-trading book;

3. (3)

   if the non-trading book exposures deducted in (2) equal 25% of the firm's capital resources, steps (4), (5) and (6) do not apply and if so the trading book concentration risk excess means, with respect to a counterparty, a group of connected clients or its connected counterparties, all trading book exposures to that counterparty or group of connected clients or to its connected counterparties;

4. (4)

   if the total amount of the non-trading book exposures deducted in (2) is less than 25% of the firm's capital resources, a firm must allocate (in the order set out in (6)) trading book exposures to the unutilised portion of the 25% limit to that counterparty or counterparties or to its connected counterparties;

5. (5)

   no further trading book exposures can be allocated once the 25% limit has been reached; the remaining trading book exposures constitute the trading book concentration risk excess with respect to that counterparty or group of connected clients or to its connected counterparties;

6. (6)

   for the purposes of (4), a firm must allocate first the individual trading book exposures with the lowest capital requirements for specific risk under the market risk capital requirement and/or the lowest capital requirements under the counterparty risk capital component and allocate those trading book exposures with the highest capital requirements last;

7. (7)

   the individual counterparty CNCOM is the sum of the capital requirements for each individual exposure included in the trading book concentration risk excess in accordance with (8) and (9) (each such capital requirement being an individual CNCOM);

8. (8)

   if the trading book concentration risk excess has persisted for 10 business days or less (irrespective of the age of each component part), the individual CNCOMs must be calculated in accordance with this formula:

   each individual CNCOM = capital requirement referred to in (6) x 200%;

9. (9)

   if the trading book concentration risk excess has persisted for more than 10 business days (irrespective of the age of each component part), the individual CNCOMs must be calculated in accordance with this formula:

   each individual CNCOM = capital requirement referred to in (6) x appropriate percentage in BIPRU 10.5.21 R.

The appropriate percentage referred to in BIPRU 10.5.20 R (9) must be established in accordance with the following:

1. (1)

   the individual exposures included in the trading book concentration risk excess must be assigned to the bands in the first column of the table in BIPRU 10.5.22 R;

2. (2)

   the maximum amount that may be put in any band other than the last equals the percentage of the firm's capital resources in column 1 of that table;

3. (3)

   no amount may be allocated to the second or any later band unless the one before has been filled;

4. (4)

   exposures must be assigned to the bands in the order established by BIPRU 10.5.20 R (6); and

5. (5)

   for the purposes of (4), those exposures with the lowest capital requirements (as referred to in BIPRU 10.5.20 R (6)) must be assigned first and those with the highest last.