1. (1)

   2This chapter applies to a BIPRU firm unless it is:

   1. (a)

      a BIPRU limited licence firm; or

   2. (b)

      a BIPRU limited activity firm

2. (2)

   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.

[Note: BCD Article 111(1) (part) and CAD Article 28(1)]2

1Unless BIPRU 10.2.2 R applies, an exposure is:

1. (1)

   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;

   [Note: BCD Article 106(1) first paragraph]

2. (2)

   any exposure arising from financial derivative instruments;

   [Note: BCD Article 106(1) second paragraph (part)]

3. (3)

   any exposure to an individual counterparty that arises in the trading book calculated by summing the following items:

   1. (a)

      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, the net position of each of the different CRD financial instruments being calculated in accordance with the relevant method in BIPRU 7;

   2. (b)

      the firm'snet underwriting exposure to that counterparty; and

   3. (c)

      any exposure 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 credit risk charge).

   [Note: CAD Article 29(1) first paragraph]

An exposure does not include:

1. (1)

   an exposure which is entirely deducted from a firm'scapital resources; or1

2. (2)

   in the case of foreign currency transactions, exposures incurred in the ordinary course of settlement during the two business days1 following payment; or

   1
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 business days1 following payment or delivery of the securities, whichever is earlier; or1

   1
4. (4)

   1in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other exposures arising from client activity which do not last longer than the following business day; or

5. (5)

   in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking, intra-day exposures to institutions providing those services.

   [Note: BCD Articles 106(1) third paragraph and 106(2)]

1Subject to BIPRU 10.2.6 R and BIPRU 10.2.7 R, the value of a firm'sexposures, 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 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.

[Note: CAD Article 29(1)(c) (part) and fourth paragraph]

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.

[Note: BCD Article 106(1) second paragraph]

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

Subject to this section, funded credit protection or unfunded credit protection that 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) is permitted to be recognised for the purposes of calculating a firm'sexposure. A firm utilising the methods below must still report to the FSA the gross value of its exposures.

[Note: BCD Articles 111(1) first paragraph (part) and 112(2)]

For the purposes of this section, the use of own estimates for LGDs and conversion factors under the IRB approach for an IRB exposure class is referred to as the full IRB approach.

A firm may only recognise collateral for the purpose of BIPRU 10.2.9R (Recognition of credit risk mitigation) 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 the 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.

[Note: BCD Article 112(2) (part)]

A firm which uses the financial collateral comprehensive method (but not under the full IRB approach (see BIPRU 10.2.10R)) may calculate the value of its exposures to a counterparty or to a group of connected clients as being the fully adjusted value of the exposures to the counterparty or group of connected clients3 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.

[Note: BCD Article 114(1) first paragraph]

For the purposes of BIPRU 10.2.9R (Recognition of credit risk mitigation), a firm may use both the financial collateral comprehensive method and the financial collateral simple method where it is permitted to use both those methods under BIPRU 5.4.16 R.

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

A firm may only recognise collateral for the purpose of BIPRU 10.2.14R (Financial collateral comprehensive method) 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 the full IRB approach (see BIPRU 10.2.10R) may recognise the effects described in (1) in calculating the value of its exposures to a counterparty or to a group of connected clients for the purposes of BIPRU 10.5 (Limits on 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'sIRB permission specifically allows it (also see BIPRU 4.1.23 R (4)).

   [Note: BCD Article 114(2) first and second paragraphs]

If a firm that uses the full IRB approach (see BIPRU 10.2.10R) 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. A firm may only use one of BIPRU 10.2.14R (Financial collateral comprehensive method under standardised approach and IRB approach) and BIPRU 10.2.19R (Own estimates of effects of financial collateral).

[Note: BCD Article 114(2) third and fourth paragraphs]

If a firm relies on BIPRU 10.2.19R (Own estimates of effects of financial collateral) the recognition of credit protection is subject to the relevant requirements of the IRB approach.

[Note: BCD Article 112(3)]

1. (1)

   A firm which:

   1. (a)

      uses the financial collateral comprehensive method; or

   2. (b)

      calculates the value of its exposures in accordance with BIPRU 10.2.19R (Own estimates of effects of financial collateral);

   must conduct periodic stress tests of its credit risk concentrations including in relation to the realisable value of any collateral taken.

2. (2)

   The stress tests required by this rule must address:

   1. (a)

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

   2. (b)

      risks arising from the realisation of collateral in stressed situations.

3. (3)

   A firm must be able to satisfy the FSA that the stress tests it carries out under this rule are adequate and appropriate for the assessment of such risks.

4. (4)

   In the event that a stress test carried out in accordance with this rule indicates a lower realisable value of collateral taken than would be permitted to be taken into account under BIPRU 10.2.14R (Financial collateral comprehensive method) or BIPRU 10.2.19R (Own estimates of effect of financial collateral) 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) is the lower value.

5. (5)

   A firm to which this rule applies must include in its strategy to address concentration risk:

   1. (a)

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

   2. (b)

      policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account under BIPRU 10.2.14R (Financial collateral comprehensive method) or BIPRU 10.2.19R (Own estimates of effects of financial collateral); and

   3. (c)

      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).

      [Note: BCD Article 114(3)]

Unless, and to the extent, permitted under BIPRU 10.6.3R (11) (Residential mortgages and leasing transactions) or BIPRU 10.6.3R (12) (Commercial mortgages and leasing transactions), a firm must not take into account the following collateral for the purposes of this section:

1. (1)

   amounts receivable linked to a commercial transaction or transactions with an original maturity of less than or equal to one year;

2. (2)

   a physical item of a type other than those types indicated in BIPRU 4.10.6 R to BIPRU 4.10.12 R (Eligibility of real estate collateral); and

3. (3)

   property leased under a leasing transaction.

   [Note: BCD Article 112(4)]

An individual counterparty may be a natural or legal person.

1. (1)

   1Where an exposure to a counterparty is:

   1
   1. (a)

      guaranteed by a third party, a firm may treat the portion of the exposure which is guaranteed as having been incurred to the guarantor rather than to the counterparty, provided that the unsecured exposure to the guarantor would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the counterparty under the standardised approach; or

   2. (b)

      secured by collateral issued by a third party, a firm may treat the portion of the exposure collateralised by the market value of recognised collateral as having been incurred to the third party rather than to the counterparty, provided that the collateralised portion of the exposure would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the counterparty under the standardised approach.

      [Note: BCD Article 117(1)(a) and (b)]

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)

   [deleted]1

   1
4. (4)

   [deleted]1

   1
5. (5)

   [deleted]1

   1
6. (6)

   A guarantee or collateral 1may only be treated in accordance with (1) if the firm complies with the eligibility requirements and other minimum requirements set out in BIPRU 5 (Credit risk mitigation)1 and, if applicable, BIPRU 4.10 (The IRB approach: Credit risk mitigation) 1for 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.

   1[Note: BCD Article 112(1)]

4Control in this context means control as defined in Article 1 of the Seventh Council Directive 83/349/EEC (the Seventh Company Law Directive) or a similar relationship between any person and an undertaking.

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.

1Where under a transaction or scheme (for example, securitisation positions or claims in the form of CIUs) there is an exposure to underlying assets, a firm must assess the exposure to the transaction or scheme, or its underlying exposures, or both, in order to determine the existence of a group of connected clients. For the purpose of this rule, a firm must evaluate the economic substance and the risks inherent in the structure of the transaction.

[Note: BCD Article 106(3)]

A large exposure of a firm means its total exposure to a counterparty 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.

[Note: BCD Article 108]2

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 10.10A.2 R to BIPRU 10.10A.11R (Intra-group exposures: Trading book limits)2, 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).

   [Note: BCD Article 66(3)]2

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

   3

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.

   [Note: BCD Article 112(1)]2

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 following exposures are exempt from the limits described in BIPRU 10.5 (Limits on exposures):2

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,2multilateral development banks or public sector entities2where 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)

   [deleted]2

   2
6. (6)

   [deleted]2

   2
7. (7)

   asset items constituting claims on EEA States' regional governments or 2local authorities which claims would receive a 0% risk weight under the standardised approach;

   2
8. (8)

   other exposures to or guaranteed by EEA States' regional governments or 2local authorities claims on which would receive a 0% risk weight under the standardised approach;

   2
9. (9)

   [deleted]2

   2
10. (10)

    [deleted]2

    2
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 commercial 2property 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;

       2
13. (13)

    [deleted]2

    2
14. (14)

    2asset 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;

15. (15)

    2asset 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

16. (16)

    2exposures arising from undrawn credit facilities that are classified as low risk off-balance sheet items in BIPRU 3.7.2 R and provided that an agreement has been concluded with the counterparty or group of connected clients under which the facility may be drawn only if it has been ascertained that it will not cause the limit in BIPRU 10.5.6 R (Limits on exposures) to be exceeded.

    [Note: BCD Articles 113(3), 115(1) sub-paragraphs (a) and (b) and 115(2) sub-paragraphs (a) and (b)]

2For the purposes of BIPRU 10.6.3R (11) (Loan secured by residential mortgages and leasing transactions):

1. (1)

   the requirements set out in BIPRU 3.4.64 R to BIPRU 3.4.73 R (Requirements for recognition of real estate collateral) apply;2

2. (2)

   the value of the property must be calculated on the basis of prudent valuation standards laid down by law, regulation or administrative provisions;2

3. (3)

   valuation must be carried out at least once every three years;2

4. (4)

   the valuation rules set out in BIPRU 3.4.77 R to BIPRU 3.4.80 R apply; and2

5. (5)

   residential property means a residence to be occupied or let by the borrower.2

   [Note: BCD Article 115(1) second to fourth paragraphs]2

2For the purposes of BIPRU 10.6.3R (12) (Loans secured by commercial mortgages and leasing transactions):

1. (1)

   the value of the property must be calculated on the basis of prudent valuation standards laid down by law, regulation or administrative provisions; and

2. (2)

   the commercial property concerned must be fully constructed, leased and produce appropriate rental income.

   [Note: BCD Article 115(2) second and third paragraphs]

For the purposes of BIPRU 10.6.3R (14) (Cash deposits) and BIPRU 10.6.3R (15) (Certificates of deposit), a firm may only treat the asset items or other exposures as secured 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 calculating a firm'sexposure.

Where a counterparty is an institution or where a group of connected clients includes one or more institutions:

1. (1)

   the total amount of a firm'sexposures to the same counterparty or group of connected clients may exceed 25% of the firm'scapital resources so long as the total amount of such exposures does not exceed €150 million;

2. (2)

   the firm must ensure that the total amount of its exposures, after taking into account the effect of credit risk mitigation, to other persons in that group of connected clients which are not institutions does not exceed 25% of the firm'scapital resources;

3. (3)

   where the amount of €150 million in (1) is higher than an amount equivalent to 25% of the firm'scapital resources, the firm must ensure the following:

   1. (a)

      the total amount of those exposures in (1) in relation to the same counterparty or group of connected clients does not exceed a reasonable limit in terms of the firm'scapital resources; and

   2. (b)

      in any case, the limit in this rule must not exceed 100% of the firm'scapital resources; and

   capital resources are as determined under BIPRU 10.5.2 R, BIPRU 10.5.3 R and BIPRU 10.5.5 R (Stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions)); and

4. (4)

   for the purpose of (3), the firm must determine the limit consistently with the policies and procedures required under BIPRU 10.12.3 R (Concentration risk policies).

   [Note: BCD Article 111(1) second to fourth paragraphs]

BIPRU 10.6.35R to BIPRU 10.6.37G apply to a BIPRUfirm if it has a sovereign large exposure waiver.

A firm that has a sovereign large exposure waiver must exempt from the limits described in BIPRU 10.5 (Limits on exposures) the exposures as specified in the sovereign large exposure waiver. It must do so to the extent specified in that waiver.

For the purpose of the sovereign large exposure waiver, and in relation to a firm, the exposures referred to in BIPRU 10.6.35R are limited to the following:

1. (1)

   asset items constituting claims on central banks not within BIPRU 10.6.3R (1), which are in the form of required minimum reserves held at those central banks which are denominated and funded in their national currencies; and

2. (2)

   asset items constituting claims on central governments not within BIPRU 10.6.3R (1), which are in the form of statutory liquidity requirements held in government securities denominated and funded in their national currencies.

   [Note: BCD Article 113(4)(g) and (h)]

1This section applies to a firm if:

1. (1)

   it is a member of a core UK group (under BIPRU 3.2.25 R and this section); and

2. (2)

   it has a core UK group waiver.

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

1. (1)

   it is a core concentration risk group counterparty;

2. (2)

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

3. (3)

   (in relation to a subsidiary undertaking) 100% of the voting rights attaching to the shares in its capital is held by the firm or a financial holding company (or a subsidiary undertaking of the financial holding company), whether individually or jointly, and that firm or financial holding company (or its subsidiary undertaking) must have the right to appoint or remove a majority of the members of the board of directors, committee of management or other governing body of the undertaking;

4. (4)

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

5. (5)

   it is incorporated in the United Kingdom; and

6. (6)

   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.

1. (1)

   For the purpose of BIPRU 10.8A.2R (6), a firm must be able to demonstrate fully to the FSA the circumstances and arrangements, including legal arrangements, by virtue of which there are no material practical or legal impediments, and none are foreseen, to the prompt transfer of capital resources or repayment of liabilities from the counterparty to the firm.

2. (2)

   In relation to a counterparty that is not a firm, the arrangements referred to in (1) must include a legally binding agreement with each firm that is a member of the core UK group that it will promptly on demand by the firm increase that firm'scapital resources by an amount required to ensure that the firm complies with GENPRU 2.1 (Calculation of capital resources requirements), BIPRU 10 (Large exposures requirements) and any other requirements relating to capital resources or concentration risk imposed on a firm by or under the regulatory system.

If this section applies, exposures between members of the core UK group are exempt from the limits described in BIPRU 10.5 (Limits on exposures).

For the purposes of this section, a firm must calculate the capital resources of the core UK group in accordance with GENPRU 3 Annex 1 R Part 2 (Method 2 of Annex 1 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 core UK 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).

A firm must immediately notify the FSA in writing it if becomes aware that any exposure that it has treated as exempt under this section or any counterparty that it has been treating as a member of its core UK group has ceased to meet the conditions for application of the treatment in this section.

1This section applies to a firm if it has:

1. (1)

   a non-core large exposures group; and

2. (2)

   a non-core large exposures group waiver.

The non-core large exposures group of a firm consists of each non-core concentration risk group counterparty of the firm that is not a member of its core UK group but satisfies all other conditions for membership of the firm'score UK group except for the following:

1. (1)

   BIPRU 10.8A.2R (1) (Core concentration risk group counterparty);

2. (2)

   BIPRU 10.8A.2R (5) (Establishment in the United Kingdom); and

3. (3)

   BIPRU 10.8A.5R (2) (Capital maintenance arrangements).

A non-core concentration risk group counterparty (in relation to a firm) is a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking, provided that (in each case) both the counterparty and the firm satisfy one of the following conditions:

1. (1)

   they are included within the scope of consolidation on a full basis with respect to the same UK consolidation group and BIPRU 8.3.1 R applies to the firm with respect to that UK consolidation group; or

2. (2)

   they are included within the scope of consolidation on a full basis with respect to the same group by a competent authority of an EEA State other than the United Kingdom under the CRD implementation measures about consolidated supervision for that EEA State; or

3. (3)

   they are included within the scope of consolidation on a full basis with respect to the same group by a third country competent authority under prudential rules for the banking sector or investment services sector of or administered by that third country competent authority and the firm or another EEA firm in that group has been notified in writing by the FSA or a competent authority of another EEA State pursuant to Article 143 of the Banking Consolidation Directive that that group is subject to equivalent supervision.

A firm to which this section applies must ensure that the rules listed in BIPRU 10.9A.6R are complied with on a consolidated basis subject to the following modifications:

1. (1)

   (if the firm is not a member of a core UK group) the rules apply in relation to exposures of the firm to its non-core large exposures group as if it is a single undertaking;

2. (2)

   if the firm is a member of a core UK group:

   1. (a)

      the rules apply in relation to its core UK group rather than in relation to the firm; and

   2. (b)

      the core UK group and the non-core large exposures group must each be treated as a single undertaking.

The rules referred to in BIPRU 10.9A.5R are:

1. (1)

   BIPRU 10.5.6 R (25% large exposures limit);

2. (2)

   BIPRU 10.10A.2 R (Trading book limits) other than BIPRU 10.10A.2R (2) (CNCOM); and

3. (3)

   BIPRU 10.10A.3 R (500% limit for trading book excess exposures).

A firm must ensure that the total amount of non-trading bookexposures between:

1. (1)

   itself and members of its non-core large exposures group does not exceed 100% of the firm'scapital resources; or

2. (2)

   if it is a member of a core UK group, the members of its core UK group and members of its non-core large exposures group does not exceed 100% of the capital resources of the firm'score UK group.

1. (1)

   Subject to the limit in BIPRU 10.9A.7R (Back-stop large exposures limit), a firm may concentrate its intra-group exposure to a particular member of its non-core large exposures group in excess of 25% of the capital resources of the firm'score UK group.

2. (2)

   A firm may not apply (1) unless it has given prior written notice to the FSA that it intends to do so.

3. (3)

   The written notice referred to in (2) must contain the following:

   1. (a)

      an explanation on how the firm will ensure that it will still meet the requirement in BIPRU 10.9A.7R (Backstop large exposures limit) on a continuing basis when applying (1);

   2. (b)

      details of the counterparty, the size of the exposure and the expected duration of the exposure; and

   3. (c)

      an explanation of the reason for the exposure.

4. (4)

   If a firm stops applying (1) it may start to apply it again if it notifies the FSA under (2) that it intends to do so.

BIPRU 10.8A.10R (Calculation of capital resources for a core UK group) applies for the purposes of this section in the same way that it applies for the purposes of BIPRU 10.8A (Intra-group exposures: core UK group).

If this section applies to a firm, then subject to BIPRU 10.10A.12 (Core UK group and non-core large exposures group: treatment of the trading book concentration risk excess), it may, on a solo basis, treat an exposure to a member of its non-core large exposures group as exempt from the limits in BIPRU 10.5 (Limits on exposures).

A firm must immediately notify the FSA in writing it if becomes aware that any exposure that it has treated as exempt under this section or any counterparty that it has been treating as a member of its non-core large exposures group has ceased to meet the conditions for application of the treatment in this section.

1This section only applies to exposures in a firm'strading book to counterparties which fulfil the following conditions:3

1. (1)

   3subject to (2), and in relation to a firm, a counterparty ('P') to whom the firm has an exposure and who fulfils at least one of the following conditions:

   1. (a)

      P is closely related to the firm; or

   2. (b)

      P is an associate of the firm; or

   3. (c)

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

   4. (d)

      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;

2. (2)

   where P is Business Growth Fund plc or another financial institution which makes venture capital investments and the firm is entitled to ignore that financial institution in accordance with GENPRU 2.2.209 R (2) for the purposes of determining whether there is a material holding, (1) applies with the following modifications to the definition of associate:

   1. (a)

      paragraph (3)(c) (community of interest) of that definition does not apply; and

   2. (b)

      in applying paragraph (3)(a) (affiliated company) of that definition, paragraph (1)(e) (participating interests) of the definition of group does not apply.

Exposures in a firm'strading book to counterparties falling within BIPRU 10.10A.1 R3 are exempt from the 25% limit in BIPRU 10.5.6 R (large exposures limit) if:

1. (1)

   the total amount of the exposures on the firm'snon-trading book to counterparties falling within BIPRU 10.10A.1 R3 does not exceed the limit laid down in that rule, calculated with reference to the definition of capital resources calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) as 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

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2. (2)

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

A firm must ensure that the total amount of its trading bookexposures to its counterparties falling within BIPRU 10.10A.1 R3 does not exceed 500% of the firm'scapital resources calculated at stage (T) of the capital resources table (Total capital after deductions).

A firm'sCNCOM is the sum of its individual counterparty CNCOMS.

An individual counterparty CNCOM is the amount a firm must calculate in accordance with BIPRU 10.10A.8R with respect to its exposures to its counterparties falling within BIPRU 10.10A.1 R3.

A firm must calculate its individual counterparty CNCOM for its exposures to itscounterparties falling within BIPRU 10.10A.1 R3 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 calculated at stage (N) of the calculation in the capital resources table (Total tier one capital plus tier two capital after deductions) to determine the total amount of the exposures in the firm'snon-trading book does not exceed this limit in accordance with BIPRU 10.10A.2R (1);

3. (3)

   calculate 25% of the firm'scapital resources calculated at stage (T) of the capital resources table (Total capital after deductions) and deduct those parts of the total exposure which are in the non-trading book falling within the limit in (2);

4. (4)

   a firm must allocate (in the order set out in (6)) trading bookexposures to its counterparties falling within BIPRU 10.10A.1 R3 to the unutilised portion of the 25% limit of the firm'scapital resources calculated at stage (T) of the capital resources table (Total capital after deductions) remaining after deducting the non-trading bookexposures in accordance with (3);

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5. (5)

   no further trading bookexposures can be allocated once the 25% limit in (4) has been reached; the remaining trading bookexposures constitute the trading book concentration risk excess with respect to its counterparties falling within BIPRU 10.10A.1 R3;

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6. (6)

   for the purposes of (4), a firm must allocate the trading bookexposures in the order of the level of capital requirements, starting 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 moving towards 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) 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) appropriate percentage in BIPRU 10.10A.9R.

The appropriate percentage referred to in BIPRU 10.10A.8R (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 10.10A.10R;

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 10.10A.8R (6); and

5. (5)

   for the purposes of (4), those exposures with the lowest capital requirements (as referred to in BIPRU 10.10A.8R (6)) must be assigned first and those with the highest last.

A firm that has a non-core large exposures group waiver must meet the CNCOM in relation to exposures to members of its non-core large exposures group in accordance with this section, subject to the following:

1. (1)

   in BIPRU 10.10A.8 R, 25% is substituted with 100%; and

2. (2)

   the excess exposures for the purpose of BIPRU 10.10A.8R (9) must be assigned to the bands in the first column of the table in BIPRU 10.10A.10 R beginning with the portion from 100% - 250%.

1. (1)

   This rule applies to a firm that has a core UK group waiver or a non-core large exposures group waiver.

2. (2)

   A firm must calculate the CNCOM in relation to the core UK group in question in accordance with BIPRU 10.10A.2 R (Trading book limits).

3. (3)

   A firm must then calculate the percentage of the amount calculated under (2) which is attributable to exposures of the firm.

4. (4)

   A firm must add the result of the calculation in (3) to the CNCOM applied to the firm on a solo basis in accordance with BIPRU 10.10A.5R to BIPRU 10.10A.11R (How to calculate the concentration risk capital component).

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.