BIPRU 5.5 Other funded credit risk mitigation

Cash on deposit with, or cash assimilated instruments held by, a third party institution in a non-custodial arrangement and pledged to a lending firm may be recognised as eligible credit protection.

[Note: BCD Annex VIII Part 1 point 23]

To be eligible for the treatment set out at BIPRU 5.5.3 R, the protection referred to in BIPRU 5.5.1 R must satisfy the following conditions:

1. (1)

   the borrower's claim against the third party institution is openly pledged or assigned to the lending firm and such pledge or assignment is legally effective and enforceable in all relevant jurisdictions;

2. (2)

   the third party institution is notified of the pledge or assignment;

3. (3)

   as a result of the notification, the third party institution is able to make payments solely to the lending firm or to other parties with the lending firm's consent; and

4. (4)

   the pledge or assignment is unconditional and irrevocable.

   [Note: BCD Annex VIII Part 2 point 12]

Where the conditions set out in BIPRU 5.5.2 R are satisfied, credit protection falling within the terms of BIPRU 5.5.1 R may be treated as a guarantee by the third party institution.

[Note: BCD Annex VIII Part 3 point 79]

Life insurance policies pledged to a lending firm may be recognised as eligible credit protection.

[Note: BCD Annex VIII Part 1 point 24]

For life insurance policies pledged to a lending firm to be recognised the following conditions must be met:

1. (1)

   the party providing the life insurance may be recognised as an eligible unfunded credit protection provider under BIPRU 5.7.1 R;

2. (2)

   the life insurance policy is openly pledged or assigned to the lending firm;

3. (3)

   the party providing the life insurance is notified of the pledge or assignment and as a result may not pay amounts payable under the contract without the consent of the lending firm;

4. (4)

   the declared surrender value of the policy is non-reducible;

5. (5)

   the lending firm must have the right to cancel the policy and receive the surrender value in a timely way in the event of the default of the borrower;

6. (6)

   the lending firm is informed of any non-payments under the policy by the policyholder;

7. (7)

   the credit protection must be provided for the maturity of the loan; and

8. (8)

   the pledge or assignment must be legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement.

   [Note: BCD Annex VIII Part 2 point 13 (part)]

Where it is not possible for a firm to meet the condition set out in BIPRU 5.5.5 R (7), because the insurance relationship ends before the loan relationship expires, the firm must ensure that the amount deriving from the insurance contract serves the firm as security until the end of the duration of the credit agreement.

[Note: BCD Annex VIII Part 2 point 13 (part)]

Where the conditions set out in BIPRU 5.5.5 R are satisfied, credit protection falling within the terms of BIPRU 5.5.4 R may be treated as a guarantee by the party providing the life insurance. The value of the credit protection recognised must be the surrender value of the life insurance policy.

[Note: BCD Annex VIII Part 3 point 80]

Instruments issued by third party institutions which will be repurchased by that institution on request may be recognised as eligible credit protection.

[Note: BCD Annex VIII Part 1 point 25]

Instruments eligible under BIPRU 5.5.8 R may be treated as a guarantee by the issuing institution.

[Note: BCD Annex VIII Part 3 point 81]

For the purposes of BIPRU 5.5.9 R, the value of the credit protection recognised is the following:

1. (1)

   where the instrument will be repurchased at its face value, the value of the protection is that amount; or

2. (2)

   where the instrument will be repurchased at market price, the value of the protection is the value of the instrument valued in the same way as the debt securities specified in BIPRU 5.4.5 R.

   [Note: BCD Annex VIII Part 3 point 82]

Investments in credit linked notes issued by a lending firm may be treated as cash collateral.

[Note: BCD Annex VIII Part 3 point 3]