BIPRU TP 12 Operational risk transitionals: small trading book

1Application

12.1

R

Subject to BIPRU TP 12.2R, BIPRU TP 12 applies to a BIPRU investment firm that satisfies the following conditions:

(1)

it is a full scope BIPRU investment firm;

(2)

it does not fall within the definition of limited licence firm or limited activity firm in BIPRU 1.1.11 R to BIPRU 1.1.12 R (Definitions of limited licence firm or limited activity firm);

(3)

its total trading book positions never exceed 50 million Euro;

(4)

the average number of its relevant employees during the financial year does not exceed 100; and

(5)

the firm has a waiver that modifies BIPRU 6 (Operational risk) so as to require the firm to calculate its ORCR in accordance with BIPRU TP 12.

12.2

R

BIPRU TP 12.12R to BIPRU TP 12.14G apply to any firm to which BIPRU 8 (Group risk - consolidation) applies.

Purpose

12.3

G

BIPRU TP 12 implements Article 46 of the Capital Adequacy Directive.

Duration of transitional

12.4

R

BIPRU TP 12 applies until 31 December 2011.

Calculation of number of employees

12.5

R

In calculating the average number of its relevant employees a firm must:

(1)

include all its directors, officers having executive responsibilities and senior managers;

(2)

include all staff whose responsibilities include front office responsibilities in relation to activities that give rise to positions in the trading book;

(3)

include all staff whose responsibilities include back office, compliance or risk management responsibilities in relation to activities that give rise to positions in the trading book;

(4)

include contractors of or persons seconded to the firm or carrying out functions for the firm who would be relevant employees if they were employed by the firm; and

(5)

take into account the methodology for calculating an average number of employees referred to in section 382(6) 3of the Companies Act 2006.3

12.6

R

A firm must have a written policy for identifying persons who are relevant employees for the purpose of BIPRU TP 12.5R.

Purpose of BIPRU TP 12.1R(2)

12.7

G

The purpose of BIPRU TP 12.1R(2) is to exclude a firm that falls into the definition of full scope BIPRU investment firm because it has obtained a waiver or has a Part IV permission that enables it to calculate an ORCR instead of the fixed overheads requirement (see BIPRU 6.1.2 G).

Reduction of the ORCR

12.8

R

The ORCR of a firm to which this rule applies is the lower of:

(1)

the ORCR that would have applied but for this rule; and

(2)

12/88 of the higher of the following:

(a)

the sum of credit risk capital requirement and the market risk capital requirement; and

(b)

the fixed overheads requirement, notwithstanding that the fixed overheads requirement does not apply.

12.9

R

The fraction 12/88 in BIPRU TP 12.8R(2) increases in accordance with the table in BIPRU TP 12.10R.

12.10

R

Table: Increase in 12/88 fraction

This table belongs to BIPRU TP 12.9R

1 January 2008

27/88

1 January 2009

42/88

1 January 2010

57/88

1 January 2011

72/88

Minimum capital requirement

12.11

R

(1)

A firm must have capital resources at least equal to the capital resources requirement that applies to it under whichever part of IPRU applies to the firm under BIPRU TP 1.4R.

(2)

A firm must calculate its capital resources for the purposes of this rule in accordance with the same part of IPRU.

(3)

The following provisions of BIPRU TP 2 (Capital floors for a firm using the IRB or AMA approaches) apply for the purposes of this rule:

(a)

BIPRU TP 2.14R to BIPRU TP 2.15G (Adjustments to the calculation of capital resources);

(b)

BIPRU TP 2.18R to BIPRU TP 2.19G (CAD 1 model and VaR model);

(c)

BIPRU TP 2.20R to BIPRU TP 2.21G (Individual capital guidance);

(d)

BIPRU TP 2.22R to BIPRU TP 2.27G (How to apply IPRU for the purposes of the capital floor calculations); and

(e)

BIPRU TP 2.29R (Solo consolidation and the capital floor calculations).

Consolidation

12.12

R

A firm may only calculate the consolidated operational risk requirement with respect to its UK consolidation group or non-EEA sub-group in accordance with BIPRU TP 122 if the group in question satisfies the following conditions:

(1)

there is no credit institution in the group;

(2)

the consolidated capital resources requirement of the group is calculated in accordance with stage 2 in BIPRU 8 Annex 5 R (Consolidation requirements for a group containing a CAD full scope firm);

(3)

the group meets the conditions in BIPRU TP 12.1R(3) and (4) applied on a consolidated basis; and

(4)

the firm has a waiver that modifies BIPRU 8 (Group risk - consolidation) so as to require the firm to calculate its consolidated operational risk requirement in accordance with BIPRU TP 12.

Minimum consolidated capital requirement

12.13

R

If a firm applies BIPRU TP 12.12R to its UK consolidation group or non-EEA sub-group it must apply BIPRU TP 12.11R to that group in accordance with BIPRU TP 2.31R to BIPRU TP 2.33G (Consolidated capital floors for a firm using the IRB approach or AMA (advanced measurement approach)).2

Changes in a firm's business

12.14

G

The Capital Adequacy Directive says that a competent authority may agree to reduce the capital floor implemented by BIPRU TP 12.11R and BIPRU TP 12.13R if such a reduction is prudentially justified by a reduction in the size of the firm's business. Those rules implement that option by requiring a firm to apply the IPRU requirements to its business as it changes over time.