BIPRU 6.2 Operational risk: Methodologies and systems
The definition of ORCR
The operational risk capital requirement (ORCR) for a firm is an amount calculated in accordance with:
- (1)
the basic indicator approach (see BIPRU 6.3); or
- (2)
the standardised approach (see BIPRU 6.4).
[Note: BCD Article 102(1)]
The simplest method of calculating the ORCR is the basic indicator approach and a firm should use this approach if it does not, or is not permitted to, use another approach.
A firm does not need a waiver to use the standardised approach. However there are eligibility conditions that a firm should satisfy if it is to use this approach. If it does not satisfy them, it should not use this approach.
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.1 R in order to use its own advanced measurement approach for the calculation of its ORCR (see BIPRU 6.5). If the waiver is granted, the ORCR will be an amount determined in accordance with such waiver.
[Note: BCD Article 105(1)]
Restrictions on changing the approach used for calculating ORCR
A firm that calculates its ORCR using the standardised approach must not change to calculating its ORCR using the basic indicator approach.
[Note: BCD Article 102(2) (part)]
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.5 R where it can demonstrate good cause for changing to the basic indicator approach.
[Note: BCD Article 102(2) (part)]
A firm that calculates its ORCR using an advanced measurement approach must not change to calculating its ORCR using the standardised approach or the basic indicator approach.
[Note: BCD Article 102(3) (part)]
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.7 R where it can demonstrate good cause for changing to the 1standardised approach or the basic indicator approach as the case may be.
[Note: BCD Article 102(3) (part)]
Combination of different methodologies
Without prejudice to any other conditions that may be imposed by a firm's AMA permission, where a firm's AMA permission allows it to use an advanced measurement approach in combination with either the basic indicator approach or the standardised approach, the firm must comply with the following conditions:
- (1)
all operational risks of the firm are captured;
- (2)
the firm must be able to satisfy the appropriate regulator with respect to the methodology used to cover different activities, geographical locations or other relevant divisions determined on an internal basis; and
- (3)
BIPRU 6.4.1 R and BIPRU 6.5.6 R must be complied with for the part of activities covered by the standardised approach and advanced measurement approaches respectively.
[Note: BCD Article 102(4) and Annex X, Part 4 point 1]
Where a firm's AMA permission allows it to use an advanced measurement approach in combination with either the basic indicator approach or the standardised approach, the appropriate regulator may impose additional conditions on a case by case basis as follows:
- (1)
on the date of implementation of an advanced measurement approach, a significant part of the firm's operational risks are captured by the advanced measurement approach; and
- (2)
the firm is obliged to roll out the advanced measurement approach to a material part of its operations within a time schedule set out in its AMA permission.
[Note: BCD Annex X, Part 4 point 2]
A firm applying for an AMA permission to use a combination of different approaches must be able to show that:
- (1)
at the date of implementation of the advanced measurement approach, approximately 50% (or more) of the firm's operational risk is captured under the AMA; and
- (2)
the firm has committed to roll out the advanced measurement approach for around 85% (or more) of its operational risk, subject to the remaining percentage not being concentrated in a single operation, within a timescale set out in the AMA permission.
For the determination of its ORCR, a firm must not use any of the following combinations of methodologies:
- (1)
the basic indicator approach with the standardised approach;
- (2)
the basic indicator approach with the alternative standardised approach; or
- (3)
the standardised approach with the alternative standardised approach for the same business line.
A firm may apply to the appropriate regulator for a waiver from BIPRU 6.2.12 R (1) and BIPRU 6.2.12 R (2) in exceptional circumstances, such as the recent acquisition of new business, which require a transition period for the roll out of the standardised approach (or the alternative standardised approach). In this event, a firm will need to make a commitment to roll out the standardised approach (or the alternative standardised approach) within a time schedule agreed with the appropriate regulator.
[Note: BCD Annex X, Part 4 points 3 and 4]