1This chapter applies to a BIPRU firm.

A firm must calculate a PRR in respect of:

1. (1)

   all its trading bookpositions;

2. (2)

   all positions falling within BIPRU 7.5.3 R (Scope of the foreign exchange PRR calculation), whether or not in the trading book; and

3. (3)

   all positions in commodities (including physical commodities) whether or not in the trading book;

even if no treatment is provided for that position in the other sections of this chapter.

A firm must calculate a PRR for any position falling into BIPRU 7.1.3 R using:

1. (1)

   the PRR calculations contained in BIPRU 7; or

2. (2)

   another method provided the firm is able to demonstrate that in all circumstances the calculation being employed results in a higher PRR for the position than would be required under (1).

A firm must be able to monitor its total PRR on an intra-day basis, and, before executing any trade, must be able to re-calculate PRR to the level of detail necessary to establish whether or not the firm'scapital resources exceed its capital resources requirement.

Where a firm has a position for which no PRR treatment has been specified, it must calculate the PRR for that position in accordance with BIPRU 7.1.12R-BIPRU 7.1.13R.

If BIPRU 7.1.9 R applies, a firm must document its policies and procedures for calculating the PRR for that position of that type in its trading book policy statement.

A firm may calculate the PRR for a position falling into BIPRU 7.1.9R by applying by analogy the rules relating to the calculation of the interest rate PRR, the equity PRR, the commodity PRR, the foreign currency PRR2, the option PRR or the collective investment undertaking PRR if doing so is appropriate and if the position and PRR item are sufficiently similar to those that are covered by those rules.

Where a firm has a position for which no PRR treatment has been specified and it is not applying BIPRU 7.1.12R, it must calculate a PRR of an appropriate percentage of the current value of the position calculated under GENPRU 1.3 (Valuation).

1. (1)

   If a firm has a position:

   1. (a)

      in a PRR item in non-standard form; or

   2. (b)

      that is part of a non-standard arrangement; or

   3. (c)

      that, taken together with other positions (whether or not they are subject to PRRcharges under BIPRU 7), gives rise to a non-standard market risk;

   the firm must notify the appropriate regulator of that fact and of details about the position, PRR item, arrangements and type of risk concerned.

2. (2)

   Except as (1) provides to the contrary, (1) applies to a position that is subject to a PRR under BIPRU 7.1.3R.

3. (3)

   The question of what is non-standard for the purposes of (1) must be judged by reference to the standards:

   1. (a)

      prevailing at the time the rule is being applied; and

   2. (b)

      of firms generally who carry on business which gives rise to PRRs under BIPRU 7 rather than merely by reference to the firm's own business.

If a firm has a position or combination of positions falling into BIPRU 7.1.14R and the PRR relating to that position or positions materially underestimates the market risk incurred by the firm to which they give rise, the firm must calculate the PRR for that position or positions under BIPRU 7.1.13R.

3A firm must conduct a regular programme of stress testing and scenario analysis of its trading bookpositions, both at the trading desk level and on a firm-wide basis. The results of these tests must be reviewed by senior management and reflected in the policies and limits the firm sets.

3In carrying out the stress tests and scenario analyses required by BIPRU 7.1.17 R, a firm must incorporate and take into account any other relevant stress tests and scenario analyses that it is required to carry out under any other provision of the Handbook, and in particular under BIPRU 7.10.72 R where the firm has a VaR model permission.

1. (1)

   A firm must calculate its interest rate PRR under BIPRU 7.2 by:

   1. (a)

      identifying which positions must be included within the interest rate PRR calculation;

   2. (b)

      deriving the net position in each debt security in accordance with BIPRU 7.2.36R-BIPRU 7.2.41R;

   3. (c)

      including these net positions in the interest rate PRR calculation for general market risk and the interest rate PRR calculation for specific risk; and

   4. (d)

      summing all PRRs calculated for general market risk and specific risk.

2. (2)

   A firm must calculate its interest rate PRR by adding the amount calculated under (1) to the amount calculated under the basic interest rate PRR calculation under BIPRU 7.3.45R.

3. (3)

   All net positions, irrespective of their signs, must be converted on a daily basis into the firm'sbase currency at the prevailing spot exchange rate before their aggregation.

4. (4)

   Net positions must be classified according to the currency in which they are denominated. A firm must calculate the capital requirement for general market risk and specific risk in each individual currency separately.

A firm's interest rate PRR calculation must:

1. (1)

   include all trading bookpositions in debt securities, preference shares and convertibles, except:

   1. (a)

      positions in convertibles which have been included in the firm'sequity PRR calculation;

   2. (b)

      positions fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude them; or

   3. (c)

      positions hedging an option which is being treated under BIPRU 7.6.26R (Table: Appropriate treatment for equities, debt securities or currencies hedging options);

2. (2)

   include notional positions arising from trading bookpositions in the instruments listed in the table in BIPRU 7.2.4R; and

3. (3)

   (if the firm is the transferor of debt securities or guaranteed rights relating to title to debt securities in a repurchase agreement or the lender of debt securities in a debt securities lending agreement) include such debt securities if those debt securities meet the criteria for inclusion in the trading book.

1. (1)

   For the purposes of calculating interest rate PRR, unless specified otherwise, a firm must derive the value of notional positions as follows:

   1. (a)

      notional positions in actual debt securities must be valued as the nominal amount underlying the contract at the current market price of the debt security; and

   2. (b)

      positions in zero-specific-risk securities must be valued using one of the two methods in (2).

2. (2)

   A firm must use one of the following two methods for all positions arising under (1)(b) and must use the same method for all positions denominated in the same currency:

   1. (a)

      the present value approach, under which the zero-specific-risk security is assigned a value equal to the present value of all the future cash flows that it represents; or

   2. (b)

      the alternative approach, under which the zero-specific-risk security is assigned a value equal to:

      1. (i)

         the market value of the underlying notional equityposition in the case of an equityderivative;

      2. (ii)

         the notional principal amount in the case of an interest rate or foreign currencyswap; or

      3. (iii)

         the notional amount of the future cash flow that it represents in the case of any other CRD financial instrument.

A firm must use BIPRU 7.2.11R(2)(a) in respect of any positions that it includes in the interest rate duration method.

Futures, forwards or synthetic futures on a single debt security must be treated as follows:

1. (1)

   a purchased future, synthetic future or forward is treated as:

   1. (a)

      a notional long position in the underlying debt security (or the cheapest to deliver (taking into account the conversion factor) where the contract can be satisfied by delivery of one from a range of securities); and

   2. (b)

      a notional short position in a zero coupon zero-specific-risk security with a maturity equal to the expiry date of the future or forward; and

2. (2)

   a sold future, synthetic future or forward is treated as:

   1. (a)

      a notional short position in the underlying security (or the cheapest to deliver (taking into account the conversion factor) where the contract can be satisfied by delivery of one from a range of securities); and

   2. (b)

      a notional long position in a zero coupon zero-specific-risk security with a maturity equal to the expiry date of the future, synthetic future or forward.

Futures, forwards or synthetic futures on a basket or index of debt securities must be converted into forwards on single debt securities as follows (and then the resulting positions must be treated under BIPRU 7.2.13R):

1. (1)

   futures, synthetic futures or forwards on a single currency basket or index of debt securities must be treated as either:

   1. (a)

      a series of forwards, one for each of the constituent debt securities in the basket or index, of an amount which is a proportionate part of the total underlying the contract according to the weighting of the relevant debt security in the basket; or

   2. (b)

      a single forward on a notional debt security; and

2. (2)

   futures, synthetic futures or forwards on multiple currency baskets or indices of debt securities must be treated as either:

   1. (a)

      a series of forwards (using the method described in (1)(a)); or

   2. (b)

      a series of forwards, each one on a notional debt security to represent one of the currencies in the basket or index, of an amount which is a proportionate part of the total underlying the contract according to the weighting of the relevant currency in the basket.

The notional debt securities in BIPRU 7.2.14R are assigned a specific risk position risk adjustment and a general market risk position risk adjustment equal to the highest that would apply to the debt securities in the basket or index.

Interest rate futures or FRAs must be treated as the two notional positions (one long, one short) shown in the table in BIPRU 7.2.19R.

Interest rate swaps or foreign currency swaps without deferred starts must be treated as the two notional positions (one long, one short) shown in the table in BIPRU 7.2.22R.

Interest rate swaps or foreign currencyswaps with a deferred start must be treated as the two notional positions (one long, one short) shown in the table in BIPRU 7.2.25R.

A firm must treat a swap with only one interest rate leg as a notional position in a zero-specific-risk security:

1. (1)

   with a coupon equal to that on the interest rate leg;

2. (2)

   with a maturity equal to the date that the interest rate will be reset; and

3. (3)

   which is a long position if the firm is receiving interest payments and short if making interest payments.

The forward cash leg of a repurchase agreement or reverse repurchase agreement must be treated as a notional position in a zero-specific-risk security which:

1. (1)

   is a short notional position in the case of a repurchase agreement; and a long notional position in the case of a reverse repurchase agreement;

2. (2)

   has a value equal to the market value of the cash leg;

3. (3)

   has a maturity equal to that of the repurchase agreement or reverse repurchase agreement; and

4. (4)

   has a coupon equal to:

   1. (a)

      zero, if the next interest payment date coincides with the maturity date; or

   2. (b)

      the interest rate on the contract, if any interest is due to be paid before the maturity date.

A cash borrowing or deposit must be treated as a notional position in a zero coupon zero-specific-risk security which:

1. (1)

   is a short position in the case of a borrowing and a long position in the case of a deposit;

2. (2)

   has a value equal to the market value of the borrowing or deposit;

3. (3)

   has a maturity equal to that of the borrowing or deposit, or the next date the interest rate is reset (if earlier); and

4. (4)

   has a coupon equal to:

   1. (a)

      zero, if the next interest payment date coincides with the maturity date; or

   2. (b)

      the interest rate on the borrowing or deposit, if any interest is due to be paid before the maturity date.

1. (1)

   Where included in the PRR calculation in BIPRU 7.2 (see the table in BIPRU 7.2.4R), options and warrants must be treated in accordance with this rule.

2. (2)

   An option or warrant on a debt security, a basket of debt securities or a debt security index must be treated as a position in that debt security, basket or index.

3. (3)

   An option on an interest rate must be treated as a position in a zero coupon zero-specific-risk security with a maturity equal to the sum of the time to expiry of the option and the length of the period for which the interest rate is fixed.

4. (4)

   An option on a future - where the future is based on an interest rate or debt security - must be treated as:

   1. (a)

      a long position in that future for purchased call options and written put options; and

   2. (b)

      a short position in that future for purchased put options and written call options.

5. (5)

   An option on a swap must be treated as a deferred starting swap.

Where a debt security pays coupons in one currency, but will be redeemed in a different currency, it must be treated as:

1. (1)

   a debt security denominated in the coupon's currency; and

2. (2)

   a foreign currencyforward to capture the fact that the debt security's principal will be repaid in a different currency from that in which it pays coupons, specifically:

   1. (a)

      a notional forward sale of the coupon currency and purchase of the redemption currency, in the case of a long position in the debt security; or

   2. (b)

      a notional forward purchase of the coupon currency and sale of the redemption currency, in the case of a short position in the debt security.

Other futures, forwards, options and swaps treated under BIPRU 7.2 must be treated as positions in zero-specific-risk securities, each of which:

1. (1)

   has a zero coupon;

2. (2)

   has a maturity equal to that of the relevant contract; and

3. (3)

   is long or short according to the table in BIPRU 7.2.35R.

The net position in a debt security is the difference between the value of the firm's long positions (including notional positions) and the value of its short positions (including notional positions) in the same debt security.

1. (1)

   A firm must not net positions (including notional positions) unless those positions are in the same debt security. This rule sets out the circumstances in which debt securities may be treated as the same for these purposes.

2. (2)

   Subject to (3) long and short positions are in the same debt security, and a debt security is the same as another if and only if:

   1. (a)

      they enjoy the same rights in all respects; and

   2. (b)

      are fungible with each other.

3. (3)

   Long and short positions in different tranches of the same debt security may be treated as being in the same debt security for the purpose of (1) where:

   1. (a)

      the tranches enjoy the same rights in all respects; and

   2. (b)

      the tranches become fungible within 180 days and thereafter the debt security of one tranche can be delivered in settlement of the other tranche.

A firm may net a short notional position in the cheapest to deliver security arising from a short future or forward (see BIPRU 7.2.13R(2)(a)) under which the seller has a choice of which debt security it may use to settle its obligations against a long position in any deliverable security up to a maximum of 90% of the common nominal amounts. The residual long and short nominal amounts must be treated as separate long and short positions.

The netting permitted by BIPRU 7.2.38R only relates to where the firm has sold the future or forward. It does not relate to where the firm has bought a future or forward.

A firm may net a notional long position in a zero-specific-risk security against a notional short position in a zero-specific-risk security if:

1. (1)

   they are denominated in the same currency;

2. (2)

   their coupons do not differ by more than 15 basis points; and

3. (3)

   they mature:

   1. (a)

      on the same day, if they have residual maturities of less than one month;

   2. (b)

      within 7 days of each other, if they have residual maturities of between one month and one year; and

   3. (c)

      within 30 days of each other, if they have residual maturities in excess of one year.

A firm must not net a reduced net underwriting position in a debt security with any other debt securityposition.

3A correlation trading portfolio may only consist of securitisation positions and nth-to-default credit derivatives that meet the following criteria:

1. (1)

   the positions are neither resecuritisation positions, nor options on a securitisation position, nor any other derivatives of securitisationexposures that do not provide a pro-rata share in the proceeds of a securitisationtranche;

2. (2)

   all reference instruments are either single-name instruments, including single-name credit derivatives, for which a liquid two-way market exists, or commonly traded indices based on reference entities which meet this criterion;

3. (3)

   the positions do not fall under the exposure classes outlined in BIPRU 3.2.9 R (8) (retail claims or contingent retail claims) and BIPRU 3.2.9 R (9) (claims or contingent claims secured on real estate property); and

4. (4)

   the positions do not reference a claim on a special purpose vehicle.

3 Positions which are not securitisation positions or nth-to-default credit derivatives may be included in the correlation trading portfolio only if they hedge other such positions in this portfolio and a liquid two-way market exists for the relevant position or its reference entities.

3For the purposes of BIPRU 7.2.42A R (2) and BIPRU 7.2.42B R, a two-way market may be deemed to exist only where there are independent, bona fide offers to buy and sell, so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one business day and settled at that price within a relatively short time conforming to trade custom.

3A firm must calculate both the net long and the net short positions in the correlation trading portfolio by applying BIPRU 7.2.36 R and BIPRU 7.2.37 R or, where applicable, BIPRU 7.11.13 R to BIPRU 7.11.17 R.

1. (1)

   A firm must calculate the specific risk portion of the interest rate PRR for each debt security by multiplying the market value of the individual net position (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.2.44R or as specified by BIPRU 7.2.45R - BIPRU 7.2.48L R or by BIPRU 7.11.13 R - BIPRU 7.11.17 R.3

   3
2. (2)

   Notional positions in zero-specific-risk securities do not attract specific risk.

3. (3)

   For the purpose of (1), a firm may cap the product of multiplying the individual net position by the appropriate position risk adjustment at the maximum possible default-risk-related loss. For a short position in a credit derivative, a firm may calculate the maximum possible default-risk-related loss as a change in value due to the underlying names immediately becoming default-risk-free.3

To the extent that a firm applies the IRB approach, to qualify for a credit quality step for the purpose of the table in BIPRU 7.2.44R the obligor of the exposure must have an internal rating with a PD equivalent to or lower than that associated with the appropriate credit quality step under the standardised approach to credit risk.

A debt security issued by a non-qualifying issuer must receive a specific risk position risk adjustment of 8% or 12% according to the table in BIPRU 7.2.44R. However a firm must apply a higher specific risk position risk adjustment to such a debt security and/or not recognise offsetting for the purposes of defining the extent of general market risk between such a security and any other debt securities to the extent that doing otherwise would not be a prudent treatment of specific risk or general market risk.

1. (1)

   3Subject to (3), a firm must calculate the specific risk portion of the interest rate PRR for each securitisation and resecuritisationposition by multiplying the market value of the individual net position (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.2.48D R or BIPRU 7.2.48E R, or in accordance with BIPRU 7.2.48F R, as applicable.

2. (2)

   In calculating the specific risk capital charge of an individual net securitisation or resecuritisation position, a firm may cap the product of the weight and the individual net position at the maximum possible default-risk-related loss. For a short position, that limit may be calculated as a change in value due to the underlying names immediately becoming default-risk-free.

3. (3)

   For a transitional period ending on 31 December 2013, where a firm holds securitisation and resecuritisation positions, other than positions included in the correlation trading portfolio, it must calculate:

   1. (a)

      the total specific risk capital charges that would apply just to the net long positions; and

   2. (b)

      the total specific risk capital charges that would apply just to the net short positions.

   The total specific risk capital charge for securitisation and resecuritisation positions will be the higher of (3)(a) and (3)(b).

3The firm must report to the appropriate regulator the total sum of its weighted net long and net short securitisation and resecuritisation positions, broken down by types of underlying assets.

3When calculating the PRR of a protection seller in securitisation and resecuritisation credit derivatives, a firm must apply BIPRU 7.11.3 R.

1. (1)

   3A firm may use the supervisory formula method to calculate the appropriate position risk adjustment for specific risk where:

   1. (a)

      the firm is permitted to apply the supervisory formula method to the same position if it was held in its non-trading book in accordance with BIPRU 9.12; or

   2. (b)

      otherwise, the firm is expressly permitted by its VaR model permission to apply the supervisory formula method to calculate the appropriate position risk adjustment for specific risk.

2. (2)

   The appropriate position risk adjustment under the supervisory formula method must be calculated by multiplying the risk weight calculated according to BIPRU 9.12.21 R by 8%.

3. (3)

   Where relevant, estimates of PDs and LGDs as inputs to the supervisory formula method must be determined in accordance with BIPRU 4.

4. (4)

   Where expressly permitted by its VaR model permission, a firm may use the approach outlined in BIPRU 7.10.55A R to BIPRU 7.10.55S G (Incremental Risk Charge) to determine PDs and LGDs as inputs to the supervisory formula method.

3Where a securitisation position in the trading book is subject to an increased risk weight in accordance with BIPRU 9.15, the appropriate position risk adjustment must be calculated as 8% of the risk weight that would apply to the position in accordance with BIPRU 9.15.

3A securitisation exposure in the trading book that would be subject to deduction in accordance with GENPRU 2.2. (Capital resources) or to a 1250% risk weight in accordance with BIPRU 9 (Securitisation) is subject to a capital charge that is no less than that set out under those provisions, capped at the maximum possible default-risk-related loss. Unrated liquidity facilities are subject to a capital charge that is no less than that set out in BIPRU 9.

1. (1)

   3Where a firm holds a position in the correlation trading portfolio, it must calculate:

   1. (a)

      The total specific risk capital charges that would apply just to the net long positions of the correlation trading portfolio; and

   2. (b)

      The total specific risk capital charges that would apply just to the net short positions of the correlation trading portfolio.

2. (2)

   The higher of (1)(a) and (1)(b) will be the specific risk capital charge for the correlation trading portfolio.

3. (3)

   In calculating the specific risk capital charge of an individual net position in the correlation trading portfolio, a firm may cap the product of multiplying the individual net position by the appropriate position risk adjustment at the maximum possible default-risk-related loss. For a short position, a firm may calculate the maximum possible default-risk-related loss as a change in value due to the underlying names immediately becoming default-risk-free.

A debt security is a qualifying debt security if:

1. (1)

   it qualifies for a credit quality step under the standardised approach to credit risk corresponding at least to investment grade; or

2. (2)

   it has a PD which, because of the solvency of the issuer, is not higher than that of the debt securities referred to under (1) under the IRB approach; or

3. (3)

   it is a debt security for which a credit assessment by a nominated ECAI is unavailable and which meets the following conditions:

   1. (a)

      it is considered by the firm to be sufficiently liquid;

   2. (b)

      it is of investment quality, according to the firm's own discretion, at least equivalent to that of the debt securities referred to under (1); and

   3. (c)

      it is listed on at least one regulated market or designated investment exchange; or

4. (4)

   it is a debt security issued by an institution subject to the capital adequacy requirements set out in the Banking Consolidation Directive that satisfies the following conditions:

   1. (a)

      it is considered by the firm to be sufficiently liquid;

   2. (b)

      its investment quality is, according to the firm's own discretion, at least equivalent to that of the assets referred to under (1) above; or

5. (5)

   it is a debt security issued by an institution that is deemed to be of equivalent or higher credit quality than that associated with credit quality step 2 under the standardised approach to credit risk and that is subject to supervision and regulatory arrangements comparable to those under the Capital Adequacy Directive.

A firm must not treat a debt security as a qualifying debt security if it would be prudent to consider that the debt security concerned is subject to too high a degree of specific risk for it to be treated as a qualifying debt security.

A firm must calculate the general market risk portion of the interest rate PRR for each currency using either:

1. (1)

   the interest rate simplified maturity method;

2. (2)

   the interest rate maturity method; or

3. (3)

   the interest rate duration method.

BIPRU 7.2.52R(3) is subject to BIPRU 7.2.54R.

A firm must not use the interest rate duration method for index-linked securities. Instead, these securities must:

1. (1)

   be attributed a coupon of 3%; and

2. (2)

   be treated separately under either the interest rate simplified maturity method or the interest rate maturity method.

Under the interest rate simplified maturity method, the portion of the interest rate PRR for general market risk equals the sum of each individual net position (long or short) multiplied by the appropriate position risk adjustment in the table in BIPRU 7.2.57R. A firm must assign its net positions to the appropriate maturity bands in the table in BIPRU 7.2.57R on the basis of residual maturity in the case of fixed-rate instruments and on the basis of the period until the interest rate is next set in the case of instruments on which the interest rate is variable before final maturity.

Under the interest rate maturity method, the portion of the interest rate PRR for general market risk is calculated as follows:

1. (1)

   Step 1: each net position is allocated to the appropriate maturity band in the table in BIPRU 7.2.57R and multiplied by the corresponding position risk adjustment;

2. (2)

   Step 2: weighted long and short positions are matched within:

   1. (a)

      the same maturity band;

   2. (b)

      the same zone (using unmatched positions from (a)); and

   3. (c)

      different zones (using unmatched positions from (b) and matching between zones 1 and 2 and 2 and 3 before zone 1 and 3); and

3. (3)

   Step 3: the portion of the interest rate PRR for general market risk is the sum of:

   1. (a)

      10% of the total amount matched within maturity bands;

   2. (b)

      40% of the amount matched within zone 1 under (2)(b);

   3. (c)

      30% of the amount matched within zones 2 & 3 under (2)(b);

   4. (d)

      40% of the amounts matched between zones 1 and 2, and between zones 2 and 3;

   5. (e)

      150% of the amount matched between zones 1 and 3; and

   6. (f)

      100% of the weighted positions remaining unmatched after (2)(c).

1. (1)

   A firm must use the following formula to calculate modified duration for the purpose of the interest rate duration method:

   
2. (2)
   
3. (3)

   For the purpose of the formulae in (1) and (2):

   1. (a)

      C_t=cash payment at time t

   2. (b)

      m=total maturity

   3. (c)

      r=yield to maturity. In the case of a fixed-rate debt security a firm must take the current mark to market of the debt security and thence calculate its yield to maturity, which is the implied discount rate for that instrument. In the case of a floating rate instrument, a firm must take the current mark to market of the debt security and thence calculate its yield on the assumption that the principal is due on the date that the interest rate can next be changed.

   4. (d)

      t=time

Under the interest rate duration method, the portion of the interest rate PRR for general market risk is calculated as follows:

1. (1)

   Step 1: allocate each net position to the appropriate duration zone in the table in BIPRU 7.2.65R and multiply it by:

   1. (a)

      its modified duration (using the formula in BIPRU 7.2.63R); and

   2. (b)

      the appropriate assumed interest rate change in the table in BIPRU 7.2.65R;

2. (2)

   Step 2: match weighted long and short positions:

   1. (a)

      within zones; and

   2. (b)

      across zones (using unmatched positions from (2)(a) and following the process in BIPRU 7.2.59R (2)(c)); and

3. (3)

   Step 3: calculate the portion of the interest rate PRR for general market risk as the sum of:

   1. (a)

      100% of the weighted positions remaining unmatched after (2)(b);

   2. (b)

      2% of the matched weighted position in each zone;

   3. (c)

      40% of the matched weighted position between zones 1 and 2, and between zones 2 and 3; and

   4. (d)

      150% of the matched weighted position between zones 1 and 3.

If a firm uses the interest rate duration method it must do so on a consistent basis.

1. (1)

   A firm must calculate its equity PRR by:

   1. (a)

      identifying which positions must be included within the PRR calculation (see BIPRU 7.3.2R);

   2. (b)

      deriving the net position in each equity in accordance with BIPRU 7.3.23R;

   3. (c)

      including each of those net positions in either the simplified equity method (see BIPRU 7.3.29R) or, subject to BIPRU 7.3.27R, the standard equity method (see BIPRU 7.3.32R); and

   4. (d)

      summing the PRR on each net position as calculated under the simplified equity method and standard equity method.

2. (2)

   All net positions, irrespective of their signs, must be converted on a daily basis into the firm'sbase currency at the prevailing spot exchange rate before their aggregation.

A firm'sequity PRR calculation must:

1. (1)

   include all trading bookpositions in equities, unless:

   1. (a)

      the position is fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude it; or

   2. (b)

      the position is hedging an option or warrant which is being treated under BIPRU 7.6.26R (Table: Appropriate treatment for equities, debt securities or currencies hedging options);

2. (2)

   include notional positions arising from trading bookpositions in the instruments listed in the table in BIPRU 7.3.3R; and

3. (3)

   (if the firm is the transferor of equities or guaranteed rights relating to title to equities in a repurchase agreement or the lender of equities in an equities lending agreement) include such equities if those equities meet the criteria for inclusion in the trading book.

Unless specified otherwise, the value of each notional equityposition equals the quantity of that equity underlying the instrument multiplied by the current market value of the equity.

A depository receipt must be treated as a notional position in the underlying equity.

Where a convertible is included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R):

1. (1)

   it must be treated as a position in the equity into which it converts; and

2. (2)

   the firm'sequity PRR must be adjusted by making:

   1. (a)

      an addition equal to the current value of any loss which the firm would make if it did convert to equity; or

   2. (b)

      a deduction equal to the current value of any profit which the firm would make if it did convert to equity (subject to a maximum deduction equal to the PRR on the notional position underlying the convertible).

A future (including a synthetic future), forward or CFD on a single equity must be treated as a notional position in that equity.

A future (including a synthetic future), forward or CFD on an equity index or basket must be treated as either:

1. (1)

   a position in each of the underlying equities; or

2. (2)

   the positions shown in the table in BIPRU 7.3.16R.

The notional positions created under BIPRU 7.3.15R have the following values:

1. (1)

   where only one notional position is created, it has a value equal to the total market value of the equities underlying the contract; or

2. (2)

   where more than one notional position is created, each one has a value which reflects the relevant equity's or country's contribution to the total market value of the equities underlying the contract.

The equity leg of an equityswap must be treated as a position in the underlying equity, equity basket or equity index, which is:

1. (1)

   long, if the firm has contracted to receive any increase and pay any decrease in the value of the underlying equities or equity index; and

2. (2)

   short, if the firm has contracted to receive any decrease and pay any increase in the value of the underlying equities or equity index.

If included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R), options must be treated as follows:

1. (1)

   an option on a single equity must be treated as a notional position in that equity;

2. (2)

   an option on a basket of equities or equity index must be treated as a future on that basket or index; and

3. (3)

   an option on an equityfuture must be treated as:

   1. (a)

      a long position in that future, for purchased call options and written put options; and

   2. (b)

      a short position in that future, for purchased put options and written call options.

The net position in each equity is the difference between the value of the firm's long positions (including notional positions) and the value of its short positions (including notional positions) in the same equity.

1. (1)

   When deriving the net position in each equity, a firm must not net long and short positions except in accordance with this rule.

2. (2)

   Subject to (3), a firm may net long and short positions in the same equity. Two equities are the same if and only if they:

   1. (a)

      enjoy the same rights in all respects; and

   2. (b)

      are fungible with each other.

3. (3)

   Long and short positions in different tranches of the same equity may be treated as being in the same equity for the purpose of (1), where:

   1. (a)

      the tranches enjoy the same rights in all respects; and

   2. (b)

      the tranches become fungible with each other within 180 days, and thereafter the equity of one tranche can be delivered in settlement of the other tranche.

A firm must not net a reduced net underwriting position with any other equityposition.

A firm must use the simplified equity method for reduced net underwriting positions.

Under the simplified equity method, the PRR for each equity, equity index, or equity basket equals the market value of the net position (ignoring the sign) multiplied by the appropriate position risk adjustment from the table in BIPRU 7.3.30R. The result must be converted into the firm'sbase currency at current spot foreign currency rates.

Under the standard equity method, a firm must:

1. (1)

   group equitypositions into country portfolios as follows:

   1. (a)

      a position in an individual equity belongs to:

      1. (i)

         the country it is listed in;

      2. (ii)

         any of the countries it is listed in, if more than one; or

      3. (iii)

         the country it was issued from, if unlisted;

   2. (b)

      a position in an equity basket or index that is treated under BIPRU 7.3.15R(2), is allocated to one or more country portfolios based on the countries to which the underlying equities belong to under (a) or a notional country provided for in the table in BIPRU 7.3.16R; and

2. (2)

   sum:

   1. (a)

      the PRRs for specific risk calculated under BIPRU 7.3.33R; and

   2. (b)

      the PRRs for general market risk for each country portfolio as calculated under BIPRU 7.3.41R and BIPRU 7.3.42R.

Under the standard equity method, a firm must calculate a PRR for specific risk based on the net position in each equity, equity index or equity basket by multiplying its market value (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.3.34R.

A qualifying equity index is one which is traded on a recognised investment exchange or a designated investment exchange and:

1. (1)

   is listed in the table in BIPRU 7.3.39R; or

2. (2)

   is not listed in the table in BIPRU 7.3.39R, but is constructed in such a way that:

   1. (a)

      it contains at least 20 equities;

   2. (b)

      no single equity represents more than 20% of the total index; and

   3. (c)

      no five equities combined represent more than 60% of the total index.

Under the standard equity method, a firm must apply approach one, as set out in BIPRU 7.3.41R, to each country portfolio (or part portfolio) unless the conditions in BIPRU 7.3.42R(3) are met, in which case the firm may instead apply approach two, as set out in BIPRU 7.3.42R, to the relevant country portfolios (or part portfolios).

Under approach one as referred to in BIPRU 7.3.40R, the PRR for general market risk equals the net value (ignoring the sign) of the country portfolio multiplied by 8%.

1. (1)

   Under approach two as referred to in BIPRU 7.3.40R, the PRR for general market risk is calculated using the following formula:


2. (2)

   In the formula in (1) CP_i denotes the net value of _ith country portfolio (converted to the firm'sbase currency using current spot foreign currency rates).

3. (3)

   The conditions referred to in BIPRU 7.3.40R that must be met for a firm to be able to use approach two as referred to in BIPRU 7.3.40R are as follows:

   1. (a)

      at least four country portfolios are included (that is: n 4);

   2. (b)

      only country portfolios for countries which are full members of the OECD, Hong Kong or Singapore are included;

   3. (c)

      no individual country portfolio comprises more than 30% of the total gross value of country portfolios included; and

   4. (d)

      the total net value of country portfolios included equals zero, that is:

   

This rule applies to a firm that does not include a forward, future, option or swap on an equity, basket of equities or equity index in the calculation of its interest rate PRR calculation under BIPRU 7.2 (Interest rate PRR). However it does not apply to cliquet as defined in BIPRU 7.6.18R (Table: Option PRR: methods for different types of option). A firm must calculate the interest rate PRR for a position being treated under this rule as follows:

1. (1)

   multiply the market value of the notional equityposition underlying the instrument by the appropriate percentage from the table in BIPRU 7.3.47R; and

2. (2)

   sum the results from (1), ignoring the sign.

If a firm nets off positions in one or more of the equities constituting an equity index future, forward or CFD against one or more positions in the equity index future, forward or CFD itself, the firm must apply an additional equity PRR to the netted position to cover the risk of loss caused by the value of the future, forward or CFD not moving fully in line with that of its constituent equities. The same applies if a firm holds opposite positions in a future, forward or CFD on an equity index that are not identical in respect of either their maturity or their composition or both.

A firm must calculate its commodity PRR by:

1. (1)

   identifying which commodityposition must be included within the scope of the PRR calculation (see BIPRU 7.4.2R);

2. (2)

   expressing each such position in terms of the standard unit of measurement of the commodity concerned;

3. (3)

   expressing the spot price in each commodity in the firm'sbase currency at current spot foreign exchange rates;

4. (4)

   calculating an individual PRR for each commodity (see BIPRU 7.4.20R); and

5. (5)

   summing the resulting individual PRRs.

A firm'scommodity PRR calculation must, regardless of whether the positions concerned are trading book or non-trading bookpositions:

1. (1)

   include physical commoditypositions;

2. (2)

   (if the firm is the transferor of commodities or guaranteed rights relating to title to commodities in a repurchase agreement or the lender of commodities in a commodities lending agreement) include such commodities;

3. (3)

   include notional positions arising from positions in the instruments listed in the table in BIPRU 7.4.4R; and

4. (4)

   exclude positions constituting a stock financing transaction.

Gold positions are excluded from the scope of the commodity PRR. Instead, they are included within the scope of the foreign exchange PRR (BIPRU 7.5).

Where a forward, future, CFD, synthetic future or option (unless already included in the firm'soption PRR calculation) settles according to:

1. (1)

   the difference between the price set on trade date and that prevailing at contract expiry, the notional position:

   1. (a)

      equals the total quantity underlying the contract; and

   2. (b)

      has a maturity equal to the expiry date of the contract; and

2. (2)

   the difference between the price set on trade date and the average of prices prevailing over a certain period up to contract expiry, there is a notional position for each of the reference dates used in the averaging period to calculate the average price, which:

   1. (a)

      equals a fractional share of the total quantity underlying the contract; and

   2. (b)

      has a maturity equal to the relevant reference date.

Commitments to buy or sell at the average spot price of the commodity prevailing over some period between trade date and maturity must be treated as a combination of:

1. (1)

   a position equal to the full amount underlying the contract with a maturity equal to the maturity date of the contract which is:

   1. (a)

      long, where the firm will buy at the average price; or

   2. (b)

      short, where the firm will sell at the average price; and

2. (2)

   a series of notional positions, one for each of the reference dates where the contract price remains unfixed, each of which:

   1. (a)

      is long if the position under (1) is short, or short if the position under (1) is long;

   2. (b)

      equals a fractional share of the total quantity underlying the contract; and

   3. (c)

      has a maturity date of the relevant reference date.

Commodity index futures and commodity index options (unless the option is included in the firm'soption PRR calculation), must be treated as follows:

1. (1)

   Step 1: the total quantity underlying the contract must be either:

   1. (a)

      treated as a single notional commodityposition (separate from all other commodities); or

   2. (b)

      divided into notional positions, one for each of the constituent commodities in the index, of an amount which is a proportionate part of the total underlying the contract according to the weighting of the relevant commodity in the index;

2. (2)

   Step 2: each notional position determined in Step 1 must then be included:

   1. (a)

      when using the commodity simplified approach (BIPRU 7.4.24R), without adjustment; or

   2. (b)

      when using the commodity maturity ladder approach (BIPRU 7.4.25R) or the commodity extended maturity ladder approach (BIPRU 7.4.32R), with the adjustments in BIPRU 7.4.14R.

A firm must treat a commodityswap as a series of notional positions, one position for each payment under the swap, each of which:

1. (1)

   equals the total quantity underlying the contract;

2. (2)

   has a maturity corresponding to the payment date; and

3. (3)

   is long or short according to BIPRU 7.4.17R.

A firm must calculate a commodity PRR for each commodity separately using either the commodity simplified approach (BIPRU 7.4.24R), the commodity maturity ladder approach (BIPRU 7.4.25R) or the commodity extended maturity ladder approach (BIPRU 7.4.32R).

A firm must use the same approach for a particular commodity but need not use the same approach for all commodities.

1. (1)

   A firm must treat positions in different grades or brands of the same commodity-class as different commodities unless they:

   1. (a)

      can be delivered against each other; or

   2. (b)

      are close substitutes and have price movements which have exhibited a stable correlation coefficient of at least 0.9 over the last 12 months.

2. (2)

   If a firm relies on (1)(b) it must then monitor compliance with the conditions in that paragraph on a continuing basis.

If a firm intends to rely on the approach in BIPRU 7.4.22R(1)(b):

1. (1)

   it must notify the appropriate regulator in writing at least 20 business days prior to the date the firm starts relying on it; and

2. (2)

   the firm must, as part of the notification under (1), provide to the appropriate regulator the analysis of price movements on which it relies.

A firm which calculates a commodity PRR using the commodity simplified approach must do so by summing:

1. (1)

   15% of the net position multiplied by the spot price for the commodity; and

2. (2)

   3% of the gross position (long plus short, ignoring the sign) multiplied by the spot price for the commodity;

(and for these purposes the excess of a firm's long (short) positions over its short (long) positions in the same commodity (including notional positions under BIPRU 7.4.4R) is its net position in each commodity).

A firm using the commodity maturity ladder approach must calculate the commodity PRR following the steps in BIPRU 7.4.26R and then sum all spread charges, carry charges and outright charges that result. A firm must use a separate maturity ladder for each commodity.

1. (1)

   A firm must calculate the charges referred to in BIPRU 7.4.25R as follows.

2. (2)

   Step 1: offset long and short positions maturing:

   1. (a)

      on the same day; or

   2. (b)

      (in the case of positions arising under contracts traded in markets with daily delivery dates) within 10 business days of each other.

3. (3)

   Step 2: allocate the positions remaining after step 1 to the appropriate maturity band in the table in BIPRU 7.4.28R (physical commoditypositions are allocated to band 1).

4. (4)

   Step 3: match long and short positions within each band. In each instance, calculate a spread charge equal to the matched amount multiplied first by the spot price for the commodity and then by the spread rate of 3%.

5. (5)

   Step 4: carry unmatched positions remaining after step 3 to another band where they can be matched, then match them. Do this until all matching possibilities are exhausted. In each instance, calculate:

   1. (a)

      a carry charge equal to the carried position multiplied by the spot price for the commodity, the carry rate of 0.6% and the number of bands by which the position is carried; and

   2. (b)

      a spread charge equal to the matched amount multiplied by the spot price for the commodity and the spread rate of 3%.

6. (6)

   Step 5: calculate the outright charge on the remaining positions (which will either be all long positions or all short positions). The outright charge equals the remaining position (ignoring the sign) multiplied by the spot price for the commodity and the outright rate of 15%.

A firm may use the commodity extended maturity ladder approach to calculate the commodity PRR for a particular commodity provided the firm:

1. (1)

   has a diversified commodities portfolio;

2. (2)

   undertakes significant commodities business;

3. (3)

   is not yet in a position to use the VaR model approach to calculate commodity PRR; and

4. (4)

   at least twenty business days before the date the firm uses that approach notifies the appropriate regulator in writing of:

   1. (a)

      its intention to use the commodity extended maturity ladder approach;1 and

   2. (b)

      the facts and matters relied on to demonstrate that the firm meets the criteria in (1) - (3).

A firm using the commodity extended maturity ladder approach must calculate its commodity PRR by:

1. (1)

   following the same steps as in BIPRU 7.4.26R but using the rates from the table in BIPRU 7.4.33R rather than those in BIPRU 7.4.26R; and

2. (2)

   summing all spread charges, carry charges and outright charge that result.

Where a firm is:

1. (1)

   treating a commodity index derivative as if it was based on a single separate commodity (see BIPRU 7.4.13R(1)(a)); and

2. (2)

   using the commodity extended maturity ladder approach to calculate the commodity PRR for that commodity;

it must determine which index constituent incurs the highest rate in the table in BIPRU 7.4.33R and apply that rate to the notional position for the purposes of BIPRU 7.4.32R.

If a short position to which BIPRU 7.4 applies falls due before a long position to which BIPRU 7.4 applies, a firm must also guard against the risk of a shortage of liquidity which may exist in some markets.

A firm must safeguard against other risks, apart from the delta risk, associated with commodity options.

The interest-rate and foreign-exchange risks not covered by other provisions of BIPRU 7.4 or by the provisions of BIPRU 7.2 (Interest rate PRR) or BIPRU 7.5 (Foreign currency PRR) must be included in the calculation of general market risk for traded debt securities and in the calculation of foreign currency PRR.