1This chapter applies to a BIPRU firm. It applies irrespective of whether the firm adopts the standardised approach or the IRB approach. If it adopts the IRB approach, it applies irrespective of whether the firm adopts the foundation IRB approach or the advanced IRB approach.

This chapter only applies to a UCITS investment firm with respect to its designated investment business. For this purpose scheme management activity is excluded from designated investment business.

Unless BIPRU 10.2.2 R applies, an exposure is any of the items included in BIPRU 3.2.9 R (Exposure classes for the purposes of the standardised approach) or the table in BIPRU 3.7.2 R (Classification of off-balance-sheet items for the purposes of the standardised approach), whether held in the trading book or the non-trading book, without application of the risk weight or degrees of risk there provided for.

An exposure does not include:

1. (1)

   an exposure which is entirely deducted from a firm'scapital resources;

2. (2)

   in the case of foreign currency transactions, exposures incurred in the ordinary course of settlement during the 48 hours following payment; or

3. (3)

   in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is earlier.

An individual counterparty may be a natural or legal person.

1. (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. (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. (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. (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. (5)

   Partial coverage must be treated in accordance with BIPRU 5 and, if applicable, BIPRU 4.10.

6. (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. (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.

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. (1)

   P is closely related to the firm; or

2. (2)

   P is an associate of the firm; or

3. (3)

   the same persons significantly influence the governing body of P and of the firm; or

4. (4)

   the firm has an exposure to P that was not incurred for the clear commercial advantage of the firm or the firm'sgroup and which is not on an arm's length basis.

A firm's total exposure to a counterparty must be calculated by summing its exposures to that counterparty, including both trading bookexposures and non-trading bookexposures.

A firm'stotal 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 bookexposures and non-trading bookexposures.

A firm'stotal exposure to connected counterparties must be calculated by summing its exposures to all the firm'sconnected counterparties, including both trading bookexposures and non-trading bookexposures.

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.

Unless specifically mentioned, BIPRU 10.4 applies both to non-trading book and trading bookexposures.

For the purpose of calculating the value of an exposure, exposures are divided into counterparty exposures and issuerexposures.

When calculating a firm'stotal exposure to a counterparty it must sum the counterparty exposures and the issuerexposures to that counterparty.

The issuerexposure to an individual counterparty must be calculated by summing the following items:

1. (1)

   the excess where positive of the firm's long positions over its short positions in all the CRD financial instruments issued by the counterparty in question, in accordance with BIPRU 10.4.28 R (Further details about the calculation of issuer exposures: Establishing the net position in the non-trading book) and BIPRU 10.4.30 R (Further details about the calculation of issuer exposures: Establishing the net position in the trading book); and

2. (2)

   the firm'snet underwriting exposure to that counterparty.

An issuerexposure to a person in the non-trading book does not include an exposure that gives rise to a counterparty exposure to that person.

For the purposes of BIPRU 10.4.5 R (1), a firm may, when calculating its net position in CRD financial instruments in the non-trading book, include counterparty exposures excluded from the issuer exposure calculation under BIPRU 10.4.6 R. However any counterparty exposure used in this way is still subject to the provisions of this chapter about counterparty exposures.

To the extent that BIPRU 10.4 does not otherwise explain what positions are included in BIPRU 10.4.5 R (1) or how to calculate a net position for the purpose of BIPRU 10.4.5 R (1), a firm must apply the provisions of the applicable standard market risk PRR rules or the ones that would apply if the position were in the trading book.

A firm must not offset exposures in the non-trading book and trading book against each other for the purpose of calculating an issuer exposure except to the extent allowed by the standard market risk PRR rules.

For the purposes of this chapter, the counterparties with respect to an exposure falling into BIPRU 10.4.5 R (1) are the persons who are or would be treated as an obligor under the standard market risk PRR rules in question.

A counterparty exposure means, with respect to the non-trading book, any exposure as defined in BIPRU 10.2 (Identification of exposures) held in the non-trading book.

A counterparty exposure means, with respect to the trading book, any exposure as defined in BIPRU 10.2 (Identification of exposures) due to the transactions, agreements and contracts referred to in BIPRU 14.2.2 R (List of trading bookexposures that give rise to a counterparty risk credit charge) and held in the trading book, including credit derivatives.

Subject to BIPRU 10.4.23 R to BIPRU 10.4.24 R, the value of a firm'scounterparty exposures, whether in its non-trading book or its trading book, is the amount at risk calculated in line with GENPRU 1.3 (Valuation).

A firm must calculate the value of its counterparty exposures in its trading book in the manner laid down in BIPRU 14 (Capital requirements for settlement and counterparty risk) for the calculation of exposure values. For these purposes the reference in BIPRU 14.2.11 R (How to calculate exposure values and risk weighted exposure amounts for the purpose of calculating the counterparty risk capital component) to the provisions of the IRB approach does not apply.

Counterparty exposures arising from financial derivative instruments must be calculated in accordance with one of the methods set out in BIPRU 13 (Financial derivatives, SFTs and long settlement transactions). For the purposes of this chapter, BIPRU 13.6.6 R (Scope of CCR internal model method) also applies.

A firm must not offset exposures in the non-trading book and trading book for the purpose of calculating counterparty exposures except to the extent permitted under the standardised approach or, if applicable, the IRB approach.

For the purposes of this chapter, the counterparty with respect to a counterparty exposure is the person who would be treated as the person to which the firm has the exposure under the standardised approach or, if applicable, the IRB approach.

BIPRU 10.4.28 R to BIPRU 10.4.42 R apply to issuerexposures arising under BIPRU 10.4.5 R (1).

A firm must calculate the value of an exposure to the issuer of a CRD financial instrument which is held in the firm'snon-trading book as the sum of the excess, where positive, of the book value of all long positions over all short positions (the net long position), for each identical CRD financial instrument issued by that issuer.

For the purposes of BIPRU 10.4.28 R, short positions in one CRD financial instrument may be used to offset long positions in a non-identical CRD financial instrument issued by the same issuer if both the CRD financial instrument are denominated in the same currency, and:

1. (1)

   where both the CRD financial instrument are fixed rate, they are within the same residual maturity time band, one year or less, or over one year; or

2. (2)

   where both the CRD financial instrument are index linked, they are within the same residual maturity time band referred to in (1); or

3. (3)

   both the CRD financial instrument are floating rate.

A firm must calculate the value of an exposure to the issuer of a CRD financial instrument which is held in the firm'strading book by calculating the excess of the current market value of all long positions over all short positions in all the CRD financial instruments issued by that issuer.

For the purposes of BIPRU 10.4.28 R and BIPRU 10.4.30 R, the short positions must be netted against the long positions in CRD financial instruments with the highest specific risk PRAs.

A firm must not offset an exposure to one issuer against an exposure to another issuer (whether in the trading book or the non-trading book) even where:

1. (1)

   the issuers are a group of connected clients; and

2. (2)

   the exposures are non-identical exposures which meet the conditions in BIPRU 10.4.29 R.

A firm must include as a long position a commitment by it to buy:

1. (1)

   a debt security or an equity at a future date; and

2. (2)

   under a note issuance facility, at the request of the issuer, a security which is unsold on the issue date.

A firm must include as a short position a commitment by it to sell a debt security or an equity at a future date.

Where the equity leg of an equity swap is based on the change in value of an individual equity, it must be treated as giving rise to an exposure to the issuer of the equity.

When determining its exposure to an issuer arising from an option, a firm must value an option as the amount of principal underlying the option.

A firm must treat:

1. (1)

   a written put option as a long position in the underlying security valued at the strike price or the market price of the underlying security, whichever is lower;

2. (2)

   a purchased put option as a short position in the underlying security valued at the strike price or the market price of the underlying security, whichever is lower; and

3. (3)

   a purchased call option as a long position in the underlying security equal to the book value of the option provided that the contract has been given a book value in the firm's accounts.

1. (1)

   This rule applies in relation to an option if a firm:

   1. (a)

      has a CAD 1permission;

   2. (b)

      the scope of the CAD 1waiver covers that option; and

   3. (c)

      the CAD 1permission is for a CAD 1 model for option risk aggregation as described in BIPRU 7.9.7 G (Types of CAD 1 model).

2. (2)

   This rule also applies in relation to an option if a firm:

   1. (a)

      has a VaR model permission; and

   2. (b)

      the scope of the VaR model permission covers that option.

3. (3)

   A firm may take as the exposure value of an option the delta weighted value of the notional underlying the option calculated using the models described in (1) and (2), to the extent that those values are relevant for the calculations in BIPRU 10.4.37 R.

Subject to BIPRU 10.4.42 R, a firm must treat an index or basket of debt securities or equities as giving rise to a series of exposures to the issuers of the underlying securities or equities in accordance with the provisions of BIPRU 7.2 (Interest rate PRR) or BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives).

A qualifying equity index does not generate an exposure of the type described in BIPRU 10.4.41 R.

A firm with securities financing transactions in its trading book or its non-trading book must calculate its exposure to:

1. (1)

   the issuer of the security it has sold in a repurchase agreement; and

2. (2)

   the counterparty to the securities financing transaction (subject to BIPRU 10.3.3 R (Identification of counterparties for guaranteed exposures) and BIPRU 10.6 (Exemptions)).

Subject to BIPRU 10.4.45 R, when calculating an exposure, a firm must include accrued interest and dividends due.

A firm may use the following method of calculating the total amount of a firm'sexposures in the non-trading book to a counterparty, connected counterparties or a group of connected clients as an alternative to that in BIPRU 10.4.44 R:

1. (1)

   if the total amount of the exposures is less than 20% of the firm'scapital resources (ignoring accrued interest), the accrued interest element need not be included in the calculation of the amount of the exposures in the non-trading book; and

2. (2)

   if the total amount of the exposures (ignoring accrued interest) is more than 20% (but less than 25%) of the firm's capital resources, the firm must be able to demonstrate that the total amount of the exposures, including the accrued interest element, meet the limits in BIPRU 10.5 (Limits on exposures and large exposures) and that it meets any related CNCOM.

A firm must not incur an exposure to an undisclosed counterparty unless:

1. (1)

   it has satisfied itself that it will continue to meet the limits in BIPRU 10.5 (Limits on exposures and large exposures) for non-trading bookexposures and trading bookexposures and will continue to meet any CNCOM; and

2. (2)

   it has made and retained a record of the steps it has taken to comply with (1).

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'scapital 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'sCNCOM, a firm'scapital resources may include tier three capital resources, in which case a firm'scapital 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'snon-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 bookexposures.

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 bookexposures to that counterparty or group of connected clients or to its connected counterparties does not exceed 500% of the firm'scapital 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'sCNCOM 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'scapital resources and deduct those parts of the total exposure which are in the non-trading book;

3. (3)

   if the non-trading bookexposures deducted in (2) equal 25% of the firm'scapital 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 bookexposures to that counterparty or group of connected clients or to its connected counterparties;

4. (4)

   if the total amount of the non-trading bookexposures deducted in (2) is less than 25% of the firm'scapital resources, a firm must allocate (in the order set out in (6)) trading bookexposures 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 bookexposures 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 bookexposures 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 bookexposures 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'scapital 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.

The exposures listed in BIPRU 10.6.3 R, whether trading bookexposures or non-trading bookexposures, 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'scapital resources;

3. (3)

   the total amount of the firm'sexposures to connected counterparties does not exceed 200% of the firm'scapital 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), provided that the exposures are to counterparties which are not connected counterparties:

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'scapital 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 (but not connected counterparties) 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 (but, subject to the firm'sIRB permission, not connected counterparties) 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).

Subject to BIPRU 10.11.1 R (Notification procedures for BIPRU 10.7 to BIPRU 10.10), a firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure to a concentration risk group counterparty provided that one or more of the following conditions is satisfied:

1. (1)

   the exposure has an original maturity of one year or less and it is incurred in the course of the firm carrying on a treasury role for other members of its group;

2. (2)

   the following conditions are satisfied:

   1. (a)

      the exposure is a cash loan to a parent undertaking of the firm or to another member of the firm'simmediate group;

   2. (b)

      (if the loan is to a member of the firm'simmediate group other than a parent undertaking of the firm) that member carries on a treasury role for the firm'sgroup;

   3. (c)

      the cash lent is surplus to the needs of the firm; and

   4. (d)

      the amount of the surplus fluctuates regularly; or

3. (3)

   the exposure arises from the firm or the counterparty operating a central risk management function for members of the firm'sgroup for exposures arising from derivatives.

The total amount of the exposures that a firm may treat as exempt under BIPRU 10.7.1 R must not exceed 50% of the firm's capital resources as set out in stage (N) of the capital resources table (Total tier one capital plus tier two capital after deductions).

Subject to BIPRU 10.11.1 R (Notification procedures for BIPRU 10.7 to BIPRU 10.10), a firm may treat as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures) an exposure in the form of a securities financing transaction provided that:

1. (1)

   the counterparty is a concentration risk group counterparty;

2. (2)

   the firm does not apply the CCR internal model method with respect to any securities financing transaction under this chapter;

3. (3)

   the exposure in question is collateralised by collateral whose value equals or exceeds 90% of the amount of the exposure; and

4. (4)

   (whether or not the firm uses the financial collateral comprehensive method1) the collateral is eligible under the financial collateral comprehensive method1 and the firm meets the other minimum requirements under BIPRU 5 (Credit risk mitigation) in relation to that collateral.

The level of collateralisation referred to in BIPRU 10.7.4 R (3) must be measured by reference to the gross amount of the exposure without taking into account the effects of netting and without applying volatility adjustments or adjustments for maturity mismatches under the financial collateral comprehensive method1.

A firm using the exemption in BIPRU 10.7.4 R must be able to demonstrate to the FSA:

1. (1)

   (if the firm has an CCR internal model method permission) any roll-out programme as referred to in BIPRU 13.6.13 R (Sequential implementation of the CCR internal model method) or any combination of the CCR internal model method with either or both of the CCR mark to market method or the CCR standardised method;

2. (2)

   the selection of counterparties for securities financing transactions; and

3. (3)

   the booking of its securities financing transactions and the way that it carries on its business with respect to them;

are not designed or chosen wholly or mainly with a view to coming within the limits in BIPRU 10.5 (Limits on exposures and large exposures) or reducing capital requirements applicable to the firm under the regulatory system through the use of that exemption.

This section applies to a firm if:

1. (1)

   it is a member of a UK integrated group; and

2. (2)

   it gives notice in accordance with BIPRU 10.11.1 R (Notification procedures for BIPRU 10.7 to BIPRU 10.10) that it will apply BIPRU 10.8.

If this section applies to a firm, it must apply this section to all exposures to all its concentration risk group counterparties and not just some of them.

An undertaking is a member of a firm'sUK integrated group if, in relation to the firm, that undertaking satisfies the following conditions:

1. (1)

   it is a concentration risk group counterparty;

2. (2)

   it is an institution, financial holding company, financial institution, asset management company or ancillary services undertaking;

3. (3)

   it is subject to the same risk evaluation, measurement and control procedures as the firm;

4. (4)

   it is established in the United Kingdom and either it is incorporated in the United Kingdom or (if that counterparty is of a type that falls within the scope of that Regulation) the centre of its main interests is situated within the United Kingdom within the meaning of the Council Regulation of 29 May 2000 on insolvency proceedings (Regulation 1346/2000/EC); and

5. (5)

   there is no current or foreseen material practical or legal impediment to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.

A firm must ensure that the rules listed in BIPRU 10.8.7 R are complied with on a consolidated basis in accordance with the following:

1. (1)

   the rules apply in relation to the firm'sUK integrated group rather than in relation to the firm;

2. (2)

   the rules apply in relation to exposures of members of the UK integrated group to members of the residual block; and

3. (3)

   the UK integrated group and the residual block must each be treated as a single undertaking.

The rules referred to in BIPRU 10.8.6 R are:

1. (1)

   BIPRU 10.5.6 R (25% non-trading book limit);

2. (2)

   BIPRU 10.5.11 R (trading book limits) other than BIPRU 10.5.11 R (2) (CNCOM);

3. (3)

   BIPRU 10.5.12 R (500% limit for trading book excess exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and

4. (4)

   BIPRU 10.7 (Treasury concession and intra-group securities financing transactions).

A firm may only treat an exposure as exempt under BIPRU 10.7.1 R (Treasury Concession) as applied under this section if the exposure is or (if that rule applied to the member of the UK integrated group in question) would be exempt under BIPRU 10.7.1 R on a solo basis. The following adjustments apply:

1. (1)

   the exposure must be to a concentration risk group counterparty; and

2. (2)

   the limit in BIPRU 10.7.2 R (Exemption limited to 50% of a firm'scapital resources) is calculated on a consolidated basis with respect to the UK integrated group.

A firm may only treat an exposure as exempt under BIPRU 10.7.4 R (Intra-group securities financing transactions) as applied under this section if the exposure is or (if that rule applied to the undertaking in question) would be exempt under BIPRU 10.7.4 R on a solo basis. BIPRU 10.7.6 R (Abuse of the exemption) continues to apply. The exemption is not available if the firm uses the CCR internal model method1 for securities financing transactions for the purpose of this chapter.

For the purposes of this section, a member of the residual block means, in relation to a firm and its UK integrated group, a concentration risk group counterparty of the firm which is not a member of the firm's UK integrated group.

For the purposes of this section, a firm must calculate the capital resources of the UK integrated group in accordance with GENPRU 3 Annex 1 R Part 2 (Method 2 of Annex I of the Financial Groups Directive (Deduction and aggregation Method)) and apply the limits set out in this section to those capital resources rather than the capital resources of the firm. For these purposes the definition of solo capital resources is adjusted so that the rules on which the calculation for each member of the UK integrated group is based are the ones that would apply under the procedure in BIPRU 8.6.6 R to BIPRU 8.6.9 R (Consolidated capital resources).

If this section applies to a firm, then subject to BIPRU 10.10 (Treatment of the trading book concentration risk excess under the integrated groups regime), it may, on a solo basis, treat an exposure to a concentration risk group counterparty as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures).

This section applies to a BIPRU firm if:

1. (1)

   it has a wider integrated group waiver; and

2. (2)

   it is a member of a UK integrated group and of a wider integrated group.

If this section applies, BIPRU 10.8 (UK Integrated Groups) does not apply.

If this section applies to a firm, it must apply it to all exposures to all its concentration risk group counterparties and not just some of them.

The wider integrated group of a firm consists of each concentration risk group counterparty of the firm that is not a member of the firm's UK integrated group but satisfies all the conditions for membership of the firm'sUK integrated group except for BIPRU 10.8.4 R (4) (Establishment in the United Kingdom).

For the purposes of this section, and in relation to a firm and its wider integrated group, a diverse block means all undertakings in the wider integrated group designated as a single diverse block by the applicable wider integrated grouppermission.

For the purposes of this section, and in relation to a firm and its wider integrated group, a member of the residual block means a concentration risk group counterparty of the firm which is not a member of the firm'sUK integrated group or wider integrated group.

A firm to which this section applies must ensure that the rules listed in BIPRU 10.9.9 R are complied with on a consolidated basis on the following basis:

1. (1)

   the rules apply in relation to the firm'sUK integrated group rather than in relation to the firm;

2. (2)

   the rules apply in relation to exposures of the members of the UK integrated group to members of each of the following:

   1. (a)

      each diverse block; and

   2. (b)

      the residual block; and

3. (3)

   the UK integrated group, each diverse block and the residual block must each be treated as separate single undertakings.

The rules referred to in BIPRU 10.9.8 R are:

1. (1)

   BIPRU 10.5.6 R (25% non-trading book limit);

2. (2)

   BIPRU 10.5.11 R (trading book limits) other than BIPRU 10.5.11 R (2) (CNCOM);

3. (3)

   BIPRU 10.5.12 R (500% limit for trading book excess exposures) with the deletion of the time limit set out in BIPRU 10.5.12 R; and

4. (4)

   BIPRU 10.7 (Treasury concession and intra-group securities financing transactions).

BIPRU 10.8.10 R (Adjustments to the Treasury concession exemption) and BIPRU 10.8.11 R (Adjustments to the exemption for securities financing transactions) apply for the purposes of this section in the same way that they apply for the purposes of BIPRU 10.8 (UK Integrated Groups).

BIPRU 10.8.13 R (Calculation of capital resources for a UK integrated group) applies for the purposes of this section in the same way that it applies for the purposes of BIPRU 10.8 (UK Integrated Groups).

If this section applies to a firm, then subject to BIPRU 10.10 (Treatment of the trading book concentration risk excess under the integrated groups regime), it may, on a solo basis, treat an exposure to a concentration risk group counterparty as exempt from the limits in BIPRU 10.5 (Limits on exposures and large exposures).

BIPRU 10.10 applies to a firm applying the treatments set out in BIPRU 10.8 (UK Integrated Groups) or BIPRU 10.9 (Wider Integrated Group).

A firm must calculate the CNCOM that would have applied if BIPRU 10.5.11 R (2) (Additional capital requirements relating to the concentration risk capital component) applied in relation to the UK integrated group in question.

A firm must then calculate the percentage of the amount calculated under BIPRU 10.10.2 R which is attributable to exposures of the firm.

A firm must add the result of the calculation in BIPRU 10.10.3 R to the CNCOM applied to the firm on a solo basis in accordance with BIPRU 10.5.16 G to BIPRU 10.5.22 R (How to calculate the concentration risk capital component).

1. (1)

   A firm may not apply BIPRU 10.7 (Treasury concession and intra-group securities financing transactions) or BIPRU 10.8 (UK integrated groups) unless it has given one Month's prior notice to the FSA that it intends do so.

2. (2)

   The written notice referred to in (1) must explain how the firm meets the conditions for the application of the treatment in question and how it will ensure that it will still meet the requirements of BIPRU 10 on a continuing basis when using the relevant treatment.

3. (3)

   A firm may stop applying BIPRU 10.7 or BIPRU 10.8 if it has given one Month's prior notice to the FSA that it intends do so.

4. (4)

   If a firm stops applying BIPRU 10.7 or BIPRU 10.8 it may start to apply it again if it notifies the FSA under (1) that it intends do so.

5. (5)

   A firm need only give the FSA the notice required in (1) once rather than with respect to each exposure.

A firm must notify the FSA if it becomes aware that any exposure that it has treated as exempt under BIPRU 10.7 (Treasury concession and intra-group securities financing transactions) or any counterparty that it has been treating as a member of its UK integrated group or, if BIPRU 10.9 (Wider Integrated Group) applies, its wider integrated group has ceased to meet the conditions for application of the relevant treatment.

A firm must have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying and recording all large exposures and subsequent changes to them, and for that of monitoring those large exposures in the light of the firm's own exposure policies.

A firm must take reasonable care to establish and maintain adequate systems and controls to identify, monitor, and control exposures to a parent undertaking of the firm, a subsidiary undertaking of the firm, or a subsidiary undertaking of the firm's parent undertaking.

A firm must be able to demonstrate to the FSA that:

1. (1)

   it has written policies and procedures to address and control the concentration risk arising from:

   1. (a)

      exposures to counterparties and groups of connected clients;

   2. (b)

      counterparties in the same economic sector or geographic region;

   3. (c)

      the same activity or commodity; and

   4. (d)

      the application of credit risk mitigation techniques, including in particular risks associated with large indirect credit exposures (for example to a single collateral issuer); and

2. (2)

   those policies and procedures are implemented.

Other than in relation to repurchase transactions or securities or commodities lending or borrowing transactions, exposures must be reported on a gross basis, not including the recognition of credit risk mitigation.

In line with the general principle in GENPRU 2.2.1 R (Purposive interpretation) a firm must not, with a view to avoiding the additional capital requirements that it would otherwise incur on exposures exceeding the limits laid down in BIPRU 10.5 (Limits on exposures and large exposures) once those exposures have been maintained for more than ten business days:

1. (1)

   temporarily transfer the exposures in question to another person (whether in the same group or not); or

2. (2)

   undertake artificial transactions to close out the exposure during the ten business day period and create a new exposure.

A firm must notify the FSA if it enters into a transfer, transaction or arrangement of the type mentioned in BIPRU 10.12.5 R.