ELM 3.5 Large exposure risk

A firm must not at any time have any large e-money float exposure that exceeds 25% of its own funds.

The total of a firm's large e-money float exposures must not at any time exceed 800% of its own funds.

1. (1)

   A firm has an e-money float exposure to a person if the firm is exposed to the risk of incurring losses:

   1. (a)

      in connection with an item that forms part of the firm's e-money float and that involves an obligation of that person; or

   2. (b)

      if the firm realises an asset or off-balance sheet position that relates to an investment forming part of the firm's e-money float issued by that person or that otherwise involves an obligation of that person; or

   3. (c)

      if the risk:

      1. (i)

         relates to an investment forming part of the firm's e-money float; and

      2. (ii)

         is wholly or mainly attributable to the risk that the person fails to meet or cannot meet an obligation or to the condition or prospects of that person (including its financial soundness).

2. (2)

   The amount of a firm's e-money float exposure in (1) is the maximum loss that the firm might suffer.

3. (3)

   An individual item gives rise to an individual e-money float exposure.

4. (4)

   The total e-money float exposure to a person is the sum of all such individual e-money float exposures.

When calculating the amount of an e-money float exposure for the purpose of ELM, a firm must include accrued interest and dividends due.

A firm must not take account of the following e-money float exposures for the purposes of the definition of large e-money float exposure:

1. (1)

   a claim or other asset required to be deducted at stages C or F set out in ELM 2.4.2 R;

2. (2)

   a bill endorsement on a bill already endorsed by another firm;

3. (3)

   an e-money float exposure under a zero weighted asset;

4. (4)

   an e-money float exposure that is secured by collateral held by the firm in the form of:

   1. (a)

      zero weighted assets; or

   2. (b)

      a deposit of money with or certificates of deposit issued by the firm;

   (but see ELM 3.5.16 R);

5. (5)

   an e-money float exposure with a residual maturity of one year or less to a full credit institution (including a deposit that is a qualifying liquid asset under ELM 3.3.5 R (3)(b)), but only if that e-money float exposure does not form part of that credit institution's regulatory capital resources.

Each of the following is a large e-money float exposure of a firm:

1. (1)

   (if the total of the firm's e-money float exposures to a person equals or exceeds 10% of the firm's own funds) all the firm's e-money float exposures to that person; and

2. (2)

   (if the total of the firm's e-money float exposures to each member of a group of closely related counterparties equals or exceeds 10% of the firm'sown funds) all the firm's e-money float exposures to each member of that group of closely related counterparties.

A person, together with each person who is closely related to that person, is a group of closely related counterparties.

In ELM 3.5.8 R, persons are closely related if:

1. (1)

   the financial soundness of one of them is, or is likely to be, significantly affected by the financial soundness of the others; or

2. (2)

   it would be prudent to regard them as representing the same risk, because the same factors are likely to affect the financial soundness of them all or for some other reason.

In ELM 3.5.8 R, persons are also closely related if there are close links between them within the meaning of paragraph (2) of the definition of that term.

1. (1)

   ELM 3.5.10 R does not apply with respect to particular e-money float exposures if the firm:

   1. (a)

      has taken all steps that are reasonably required to prove that the persons in question are not closely related as defined in ELM 3.5.9 R; and

   2. (b)

      makes and retains a record of the steps taken under (1)(a).

2. (2)

   A firm must retain the record in (1) for the period of three years after the firm ceases to take advantage of the disapplication of ELM 3.5.10 R by (1) (including where the firm ceases to have that e-money float exposure).

The persons who are closely related to each other under ELM 3.5.9 R and each person who is linked with any of them under ELM 3.5.10 R are all closely related to each other for the purposes of ELM 3.5.8 R.

To the extent that an e-money float exposure is directly and unconditionally guaranteed by a third party, a firm may, for the purposes of the rules in this section, treat that part of the e-money float exposure as having been incurred to the guarantor.

If an e-money float exposure is secured by collateral in the form of securities issued by a third party, a firm may, for the purposes of the rules in ELM 3.5, treat that e-money float exposure as having been incurred to that third party, as long as ELM 3.5.15 R, ELM 3.5.16 Rand ELM 3.5.17 R allow this.

A firm may not recognise the benefits of collateral or a guarantee for the purpose of ELM 3.5.6 R unless ELM 3.5.6 R specifically permits this.

A firm may not recognise the benefits of collateral for the purpose of this section, unless:

1. (1)

   the firm has an unconditional right to apply the collateral to discharge (or to use the proceeds of realising the collateral to discharge) the liability forming the e-money float exposure;

2. (2)

   the collateral arrangements are:

   1. (a)

      legally well-founded in all relevant jurisdictions; and

   2. (b)

      enforceable in the default, liquidation, bankruptcy or other similar circumstance of the person who provides the collateral, the person to whom the firm has the e-money float exposure and the firm; and

3. (3)

   the firm has obtained legal opinions from suitably experienced external lawyers confirming that the requirements of (1) and (2) are satisfied and has taken such other steps as are reasonable to confirm that they are satisfied.

A firm may not recognise the benefits of collateral under ELM 3.5.14 R unless:

1. (1)

   the securities referred to in ELM 3.5.14 R are not issued by:

   1. (a)

      the firm;

   2. (b)

      another member of its group;

   3. (c)

      the person to whom the firm has the e-money float exposure in question; or

   4. (d)

      (in a case in which the question is whether the firm has a large e-money float exposure under ELM 3.5.7 R (2)) any member of that group of closely related counterparties;

2. (2)

   the securities are listed on a recognised investment exchange or designated investment exchange;

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3. (3)

   the mark to market value of the securities is at least 200% of the amount of the e-money float exposure concerned, except that:

   1. (a)

      the percentage figure is 250% rather 200% in the case of shares;

   2. (b)

      the percentage figure is 150% rather than 200% in the case of debentures issued by a full credit institution if those debentures do not form part of its regulatory capital resources; and

   3. (c)

      the percentage figure is 150% rather than 200% in the case of debentures or government and public securities issued by regional or local authorities of an EEA State or by a multilateral development bank; and1

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4. (4)

   the securities issued by any credit institution do not form part of its regulatory capital resources.1

A firm must make the choices set out in this section on a consistent basis. In particular, the firm must not:

1. (1)

   treat a guaranteed e-money float exposure as being one to the guarantor for the purposes of some of the rules in ELM and as being to the principal debtor for others; or

2. (2)

   treat a secured e-money float exposure as being one to the person who is the debtor under the security that is held as collateral for the purposes of some of the rules in ELM and as being to the debtor under the secured obligation for others.

A firm must notify the FSA if:

1. (1)

   it proposes to enter into a transaction or transactions that would result in it having a reportable large exposure; or

2. (2)

   it has a reportable large exposure not already notified under (1).