BIPRU 7.8 Securities underwriting

A firm which underwrites or sub-underwrites an issue of securities must, for the purposes of calculating its market risk capital component and its concentration risk capital component:

1. (1)

   identify commitments to underwrite or sub-underwrite which give rise to an underwriting position (see BIPRU 7.8.8R);

2. (2)

   identify the time of initial commitment (see BIPRU 7.8.13R); and

3. (3)

   calculate the net underwriting position (set out in BIPRU 7.8.17R), reduced net underwriting position or the net underwriting exposure.

A firm must include the net underwriting position or reduced net underwriting position in whichever one or more of the following is or are relevant:

1. (1)

   BIPRU 7.2.3R (1) where debt securities are being underwritten;

2. (2)

   BIPRU 7.3.2R (1) where equities are being underwritten;

3. (3)

   BIPRU 7.6.22R where warrants are being underwritten; and

4. (4)

   BIPRU 7.5.3R where the equities, debt securities or warrants being underwritten are denominated in a foreign currency.

A firm must comply with BIPRU 7.8.3R from initial commitment (as determined under BIPRU 7.8.8R) until the end of the fifth business day after working day 0 (as determined under BIPRU 7.8.23R).

1. (1)

   For the purpose of BIPRU 7.8.2R (1), a firm has a commitment to underwrite or sub-underwrite an issue of securities where:

   1. (a)

      it gives a commitment to an issuer of securities to underwrite an issue of securities; or

   2. (b)

      (where BIPRU 7.8.12R (2) applies) it gives a commitment to a seller of securities to underwrite a sale of those securities;

   3. (c)

      it gives a commitment to a person, other than the issuer of securities or, if BIPRU 7.8.12R (2) applies, the seller of the securities, to sub-underwrite an issue of securities; or

   4. (d)

      it is a member of a syndicate or group that gives a commitment of the type described in (1)(a)-(c).

2. (2)

   Unless a rule deals with them separately or the context otherwise requires, a provision of BIPRU 7.8 that deals with underwriting also applies to sub-underwriting.

1. (1)

   A firm that buys and sells securities before issue is dealing in the grey market for the purposes of BIPRU 7.8.

2. (2)

   BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market unless the firm:

   1. (a)

      has an underwriting commitment to the issuer in respect of those securities; or

   2. (b)

      has a sub-underwriting commitment in respect of those securities and is using the grey market solely for the purpose of reducing that sub-underwriting commitment.

3. (3)

   BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market if the transaction is undertaken by the proprietary trading part of the firm or is undertaken for proprietary trading purposes.

4. (4)

   BIPRU 7.8 does not apply to a firm with respect to its dealings in the grey market except as described in BIPRU 7.8.17R.

For the purposes of BIPRU 7.8, a firm must treat securities as being new for the purposes of the definition of underwriting if they are:

1. (1)

   securities that, prior to the allotment following the underwriting, were not in issue; or

2. (2)

   securities that do not fall within (1) but that have not previously been offered for sale or subscription to the public and have not been admitted to trading on a market operated by a recognised investment exchange or an overseas investment exchange.

Subject to BIPRU 7.8.14R, the time of initial commitment is the earlier of:

1. (1)

   (in the case of underwriting) the time the firm agrees with the issuer of securities to underwrite those securities; or

2. (2)

   (in the case of underwriting falling under BIPRU 7.8.12R (2)) the time the firm agrees with the seller of securities to underwrite those securities; or

3. (3)

   (in the case of sub-underwriting) the time the firm agrees with the person referred to BIPRU 7.8.8R (1)(c) to sub-underwrite those securities; or

4. (4)

   (in the case of BIPRU 7.8.8R (1)(d)) the time the group or syndicate in question (or a member of that group or syndicate on behalf of the others) agrees with the issuer or other person to whom the commitment is given as referred to in BIPRU 7.8.8R (1)(d) to underwrite or sub-underwrite the securities in question; or

5. (5)

   (if the firm at that time has a commitment, whether legally or binding or not) the time the price and allocation of the issue or offer are set.

If a firm has an irrevocable and unfettered right to withdraw from an underwriting commitment, exercisable within a certain period, the commitment commences (and thus the time of initial commitment occurs) when that right expires.

A firm must calculate a net underwriting position by adjusting the gross amount it has committed to underwrite for:

1. (1)

   any sales or sub-underwriting commitments received that have been confirmed in writing at the time of initial commitment (but excluding any sales in the grey market as defined in BIPRU 7.8.10R (1));

2. (2)

   any underwriting or sub-underwriting commitments obtained from others since the time of initial commitment;

3. (3)

   any purchases or sales of the securities since the time of initial commitment (other than purchases or sales in the grey market as defined in BIPRU 7.8.10R (1));

4. (4)

   (in the case of sales in the grey market as defined in BIPRU 7.8.10R (1)) any sales of the securities as at the time of initial commitment or since the time of initial commitment subject, in both cases, to the following conditions:

   1. (a)

      any sales of the securities as at the time of initial commitment must be confirmed in writing at the time of initial commitment; and

   2. (b)

      sales must be net of any purchases in the grey market as defined in BIPRU 7.8.10R (1); and

5. (5)

   any allocation of securities granted or received, arising from the commitment to underwrite the securities, since the time of initial commitment.

If the allocation of securities has not been fixed a firm must calculate the gross amount of its commitment, for the purposes of BIPRU 7.8.17R, by reference to the maximum amount it has committed to underwrite until the time the allocation is set.

An underwriting commitment may only be reduced under BIPRU 7.8.17R on the basis of a formal agreement.

1. (1)

   This rule deals with the treatment of short positions that arise when a firm commits to distribute securities that it is underwriting in an amount that exceeds the allocation to the firm made by the issuer of the securities being underwritten.

2. (2)

   When calculating its net underwriting position, a firm may use an over-allotment option granted to it by the issuer of the securities being underwritten to reduce the short positions in (1).

3. (3)

   A firm may also use an over-allotment option granted to another member of the underwriting syndicate for the purpose in (2).

4. (4)

   (2) and (3) only apply from working day 0.

5. (5)

   (2) and (3) only apply to the extent that the treatment is consistent with the terms of the over-allotment option.

Except as provided in BIPRU 7.8.21R, a firm must not take into account an over-allotment option granted to it or another member of the underwriting syndicate in calculating its net underwriting position.

For the purposes of BIPRU 7.8 working day 0 is the business day on which a firm that is underwriting or sub-underwriting becomes unconditionally committed to accepting a known quantity of securities at a specified price.

To calculate the reduced net underwriting position a firm must apply the reduction factors in the table in BIPRU 7.8.28R to the net underwriting position (calculated under BIPRU 7.8.17R) as follows:

1. (1)

   in respect of debt securities, a firm must calculate two reduced net underwriting positions; one for inclusion in the firm's interest rate PRR specific risk calculation (BIPRU 7.2.43R), the other for inclusion in its interest rate PRR general market risk calculation (BIPRU 7.2.52R); and

2. (2)

   in respect of equities, a firm must calculate only one reduced net underwriting position, and then include it in the simplified equity method (see BIPRU 7.3.29R).

For the purposes of calculating the total amount of its trading book exposures to a person for concentration risk purposes, a firm must include net underwriting exposure to that person.

A firm must include any other exposures arising out of underwriting (including any counterparty exposures to any sub-underwriters) for the purposes of calculating the total amount of its trading book exposures to a person for concentration risk purposes.

A firm, before entering into a new underwriting commitment, must be able to recalculate the concentration risk capital component to the level of detail necessary to ensure that the firm's capital resources requirement does not exceed the firm's capital resources.

Except where otherwise specified by a requirement on its Part IV permission, a firm must calculate the net underwriting exposure to an issuer by applying the relevant reduction factors in the table in BIPRU 7.8.35R to its net underwriting position calculated under BIPRU 7.8.17R.

For the purposes of concentration risk monitoring only, a firm must report its net underwriting exposure both before and after the application of the reduction factors in the table in BIPRU 7.8.35R.

A firm must take reasonable steps to establish and maintain such systems and controls to monitor and manage its underwriting and sub-underwriting business as are appropriate to the nature, scale and complexity of its underwriting and sub-underwriting business. In particular, a firm must have systems to monitor and control its underwriting exposures between the time of the initial commitment and working day one in the light of the nature of the risks incurred in the markets in question.