BIPRU 10.6 Exemptions

The exposures listed in BIPRU 10.6.3 R, whether trading book exposures or non-trading book exposures, are exempt from the limits described in BIPRU 10.5 (Limits on exposures and large exposures), provided that the exposures are to counterparties which are not connected counterparties.

1. (1)

   In BIPRU 10.6.3 R and BIPRU 10.6.4 R, references to guarantees include credit derivatives recognised under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation), other than credit linked notes.

2. (2)

   BIPRU 10.3.3 R (6) (Compliance with minimum credit risk mitigation requirements) applies for the purpose of BIPRU 10.6.3 R and BIPRU 10.6.4 R.

The exposures referred to in BIPRU 10.6.1 R are as follows:

1. (1)

   asset items constituting claims on central governments or central banks which claims would unsecured receive a 0% risk weight under the standardised approach;

2. (2)

   asset items constituting claims on international organisations or multilateral development banks which claims would unsecured receive a 0% risk weight under the standardised approach;

3. (3)

   asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations or multilateral development banks, where unsecured claims on the entity providing the guarantee would receive a 0% risk weight under the standardised approach;

4. (4)

   other exposures attributable to, or guaranteed by, central governments, central banks, international organisations or multilateral development banks where unsecured claims on the entity to which the exposure is attributable or by which it is guaranteed would receive a 0% risk weight under the standardised approach;

5. (5)

   asset items constituting claims on and other exposures to central governments or central banks not within (1), which are denominated and, where applicable, funded in the national currencies of the borrowers;

6. (6)

   asset items constituting claims on and other exposures to institutions, with a maturity of one year or less, but not constituting such institutions' capital resources;

7. (7)

   asset items constituting claims on EEA States' regional governments andlocal authorities which claims would receive a 0% risk weight under the standardised approach;

8. (8)

   other exposures to or guaranteed by EEA States' regional governments andlocal authorities claims on which would receive a 0% risk weight under the standardised approach;

9. (9)

   asset items constituting claims and other exposures on recognised third country investment firms, recognised clearing houses, designated clearing houses, recognised investment exchanges and designated investment exchanges in CRD financial instruments, with a maturity of one year or less, but not constituting such institutions' capital resources;

10. (10)

    covered bonds within the meaning of the second paragraph of that definition;

11. (11)

    loans secured by mortgages on residential property and leasing transactions under which the lessor retains full ownership of the residential property leased for as long as the lessee has not exercised his option to purchase, in all cases up to 50% of the value of the residential property concerned;

12. (12)

    the following, where they would receive a 50% risk weight under the standardised approach, and only up to 50% of the value of the property concerned:

    1. (a)

       exposures secured by mortgages on offices or other commercial premises; and

    2. (b)

       exposures related to property leasing transactions concerning offices or other commercial premises; and

13. (13)

    bill endorsements on bills with a maturity of 1 year or less already endorsed by another firm.

For the purposes of BIPRU 10.6.3 R (11), the value of the property must be calculated on the basis of strict valuation standards laid down by law, regulation or administrative provisions. Valuation must be carried out at least once a year. For these purposes, residential property means a residence to be occupied or let by the borrower.

A firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a counterparty or to a group of connected clients if the following conditions are met:

1. (1)

   the parent undertaking of the firm guarantees that exposure;

2. (2)

   the total exposure to that counterparty or group of connected clients does not exceed 100% of the firm's capital resources;

3. (3)

   the total amount of the firm's exposures to connected counterparties does not exceed 200% of the firm's capital resources (any exposure treated as exempt under this rule or under BIPRU 10.6.7 R must be treated as being to the parent undertaking for the purpose of this paragraph (3) and included in the calculation of the limit in this paragraph (3));

4. (4)

   the firm complies with whichever of SYSC 3.1.1 R (Systems and controls) and SYSC 4.1.1 R (General organisational requirements) applies to it; and

5. (5)

   both the firm and the parent undertaking of the firm satisfy BIPRU 3.2.27 R (Consolidation condition relating to zero risk weights for intra-group exposures).

For the purposes of BIPRU 10.6.5 R, BIPRU 10.3.3 R (3) to (6) (Provisions relating to the treatment of guaranteed exposures) apply.

A firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a counterparty which is not a connected counterparty if the following conditions are met:

1. (1)

   the exposure is subject to a legally binding agreement by the parent undertaking of the firm that it will promptly on demand by the firm increase the firm's capital resources by:

   1. (a)

      an amount that is sufficient to reverse completely the effect of any loss the firm may sustain in connection with that exposure; or

   2. (b)

      the amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 and any other requirements relating to capital resources or concentration risk imposed on the firm by or under the regulatory system;

2. (2)

   the firm notifies the FSA in writing of its intention to enter into the agreement and of its terms at least one Month before the firm enters into it; and

3. (3)

   the conditions in BIPRU 10.3.3 R (6) (Compliance with minimum credit risk mitigation requirements) and BIPRU 10.6.5 R (2) to (5) are met.

A firm which uses the financial collateral simple method under the standardised approach may treat the following exposures as exempt from the limits described in BIPRU 10.5 (Limits on exposures and large exposures):

1. (1)

   asset items and other exposures secured by collateral in the form of debt securities issued by central governments, central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities, which securities constitute claims on their issuer which would receive a 0% risk weight under the standardised approach;

2. (2)

   asset items and other exposures secured by collateral in the form of cash deposits placed with the lending firm or with a credit institution which is the parent undertaking or a subsidiary undertaking of the lending firm;

3. (3)

   asset items and other exposures secured by collateral in the form of certificates of deposit issued by the lending firm or by a credit institution which is the parent undertaking or a subsidiary undertaking of the lending firm and lodged with either of them; and

4. (4)

   exposures secured by collateral in the form of securities other than those referred to in (1).

Cash received under a credit linked note issued by the firm and loans and deposits of a counterparty to or with the firm which are subject to an on-balance sheet netting agreement recognised under BIPRU 5 (Credit risk mitigation) must be treated as falling under BIPRU 10.6.9 R (2).

For the purposes of BIPRU 10.6.9 R (4), the securities used as collateral must be valued at market price, have a value that exceeds the exposures guaranteed, and be either traded or effectively negotiable and regularly quoted on a recognised investment exchange or a designated investment exchange. The excess value required must be 100%. It must, however, be 150% in the case of shares and 50% in the case of debt securities issued by institutions, EEA States' regional governments or local authorities other than those referred to in BIPRU 10.6.9 R (1), and in the case of debt securities issued by multilateral development banks other than those receiving a 0% risk weight under the standardised approach. Where there is a mismatch between the maturity of the exposure and the maturity of the credit protection, the collateral must not be recognised. Where the issuer of securities used as collateral is an institution, such collateral may not constitute the institution's capital resources.

A firm may only recognise collateral for the purpose of BIPRU 10.6.9 R if the collateral complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation) for the purposes of calculating risk weighted exposure amounts under the standardised approach using the financial collateral simple method or, if applicable, the method in BIPRU 5.5 (Other funded credit risk mitigation). In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral simple method or other applicable method.

A firm which uses the financial collateral comprehensive method under the standardised approach or the IRB approach (but not the advanced IRB approach) may calculate the value of its exposures to a counterparty or to a group of connected clients or to connected counterparties1 as being the fully-adjusted value of the exposures to the counterparty or group of connected clients calculated in accordance with the financial collateral comprehensive method under BIPRU 5 (Credit risk mitigation) and, if relevant, BIPRU 4.10 (The IRB approach: Credit risk mitigation), taking into account the credit risk mitigation, volatility adjustments and any maturity mismatch (E*) in accordance with those rules.

Where BIPRU 10.6.14 R applies, BIPRU 10.6.9 R does not apply.

A firm may only recognise collateral for the purpose of BIPRU 10.6.14 R if the collateral complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation) and, if relevant, BIPRU 4.10 (The IRB approach: Credit risk mitigation) for the purposes of calculating risk weighted exposure amounts under the standardised approach or, if applicable, the IRB approach using the financial collateral comprehensive method. In particular a firm may not recognise collateral for that purpose if it is not eligible under the financial collateral comprehensive method.

A firm that uses own estimates of LGDs and conversion factors under the IRB approach for an IRB exposure class may recognise the effects described in (1) in calculating the value of its exposures to a counterparty or to a group of connected clients or to connected counterparties1 for the purposes of BIPRU 10.5 (Limits on exposures and large exposures) if:

1. (1)

   the firm is able to satisfy the FSA that it can estimate the effects of financial collateral on its exposures separately from other LGD-relevant aspects;

2. (2)

   the firm is able to demonstrate the suitability of the estimates produced; and

3. (3)

   the firm's IRB permission specifically allows it.

If a firm that uses own estimates of LGDs and conversion factors under the IRB approach uses its own estimates of the effects of financial collateral on its exposures for large exposures purposes, it must do so on a consistent basis and on a basis consistent with the approach adopted in the calculation of capital requirements. In particular, this approach must be adopted for all exposures the nominal value of which would be a large exposure. A firm may only use one of BIPRU 10.6.14 R and BIPRU 10.6.17 R. A firm must be able to satisfy the FSA that it is complying with this rule.

A firm to which BIPRU 10.6.17 R applies must still report to the FSA the gross value of its exposures.

If a firm relies on BIPRU 10.6.17 R the recognition of credit protection is subject to the relevant requirements of the IRB approach.

A firm which calculates the value of its exposures in accordance with BIPRU 10.6.17 R must conduct periodic stress tests of its credit risk concentrations including in relation to the realisable value of any collateral taken.

The stress tests required by BIPRU 10.6.22 R must address:

1. (1)

   risks arising from potential changes in market conditions that could adversely impact the firm's adequacy of capital resources; and

2. (2)

   risks arising from the realisation of collateral in stressed situations.

A firm must be able to satisfy the FSA that the stress tests that the firm carries out in accordance with BIPRU 10.6.22 R are adequate and appropriate for the assessment of such risks.

In the event that a stress test carried out in accordance with BIPRU 10.6.22 R indicates a lower realisable value of collateral taken than would be permitted to be taken into account under BIPRU 10.6.17 R to BIPRU 10.6.21 R as appropriate, the value of collateral permitted to be recognised in calculating the value of exposures for the purposes of BIPRU 10.5 (Limits on exposures and large exposures) is the lower value.

A firm to which BIPRU 10.6.22 R applies must include in its strategy to address concentration risk:

1. (1)

   policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures;

2. (2)

   policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account under BIPRU 10.6.17 R to BIPRU 10.6.21 R; and

3. (3)

   policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, and in particular large indirect credit exposures (for example to a single issuer of securities taken as collateral).