A firm must, at all times, have qualifying liquid assets of a value no less than the amount of its e-money outstandings at that time.

For the purpose of ELM 3.3.1 R, a firm's qualifying liquid assets must be valued at the lower of:

1. (1)

   cost;

2. (2)

   the amount that can reasonably be realised in money from that investment (within the time specified in ELM 3.3.11 R (2) or less) by redemption, realisation, sale, exchange or other disposal of that asset.

A qualifying liquid asset is an investment fulfilling all the following criteria:

1. (1)

   it is unsubordinated;

2. (2)

   it ranks at least equally with the unsubordinated, non-preferred and unsecured obligations of the person who owes the obligation under the qualifying liquid asset in question;

3. (3)

   it is:

   1. (a)

      a zero weighted asset; or

   2. (b)

      a deposit that is repayable on demand and is held with a Zone A credit institution; or

   3. (c)

      a qualifying debt security; and

4. (4)

   either:

   1. (a)

      it has a residual maturity of one year or less; or

   2. (b)

      (in the case of an investment on which a floating rate of interest is payable) the interest rate will be redetermined no later than one year from the time in question.

The total amount of investments that fall into (b) or (c) of ELM 3.3.5 R (3) that are included as qualifying liquid assets in the calculation in ELM 3.3.1 R must not exceed an amount equal to 20 times the firm's own funds at the time in question.

A zero weighted asset is any of the following:

1. (1)

   cash;

2. (2)

   a security issued by and representing a claim on (or that is fully, directly and unconditionally guaranteed by):

   1. (a)

      a central government or central bank of a Zone A country; or

   2. (b)

      the European Communities; or

   3. (c)

      the European Central Bank;

   but only if it is sufficiently liquid.

A qualifying debt security means a debenture or government and public security (other than a zero weighted asset) that:

1. (1)

   is sufficiently liquid;

2. (2)

   is not issued by a controller of the firm or by a person in the same group as the firm; and

3. (3)

   satisfies the condition in ELM 3.3.10 R.

The condition referred to in ELM 3.3.9 R is that either:

1. (1)

   the security is issued by and represents a claim on (or it is fully, directly and unconditionally guaranteed by):

   1. (a)

      a multilateral development bank; or

   2. (b)

      the regional or local government of a Zone A country; or

   3. (c)

      a Zone A credit institution, but only if the security does not form part of its regulatory capital resources; or

   4. (d)

      an MiFID investment firm1 or recognised third country investment firm, but only if the shares of that person are listed on a recognised investment exchange or designated investment exchange; or

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2. (2)

   the security:

   1. (a)

      is listed on a recognised investment exchange or designated investment exchange; and

   2. (b)

      is subject to a degree of default risk that, by virtue of the solvency of the issuer or guarantor (as the case may be) is no greater than what would be within the range of what is normal for a security falling into ELM 3.3.10 R (1).

Investments held by a firm are only sufficiently liquid if they satisfy all of the following requirements:

1. (1)

   the firm is without delay able to get quotations for the sale or purchase of the investments complying with the following conditions:

   1. (a)

      the prices are for transactions that would fall into ELM 3.3.11 R (2) and ELM 3.3.11 R (3); and

   2. (b)

      the firm gets the prices from persons who are not associates of the firm, who are independent of the firm and who are willing and able to buy and purchase those investments at the prices they quote;

2. (2)

   it is reasonable to conclude that, except in exceptional circumstances, the firm will be able to find a buyer for the investments and complete the sale, for money, within a time that is within the range of (or that is quicker than) what is normal for a sale falling into (5);

3. (3)

   it is reasonable to conclude that, except in exceptional circumstances, the price that the firm will be able to obtain for the sale of the investments will not be materially affected by either the speed of the sale or the amount of the investments sold;

4. (4)

   they are regularly traded;

5. (5)

   taking into account all other factors such as the volume of trading and the number of persons who frequently trade in them, their liquidity is at least as great as would be within the range of what is normal for government and public securities (being traded on the main market for those government and public securities) of the central government of a Zone A country that are widely and continuously traded in large volumes; and

6. (6)

   the firm can buy or sell the investments in a market in which:

   1. (a)

      there is a timetable for the settlement of sales of those investments; and

   2. (b)

      it is general market practice in that market to follow that timetable;

   so that the settlement timetable for purchases of those investments is generally not a matter for negotiation.

ELM 3.3.11 R (1) does not apply to a security listed on a recognised investment exchange or designated investment exchange.

A firm must choose which particular qualifying liquid assets to treat as the e-money float for the purposes of ELM. The firm must do so on a consistent basis. In particular, the firm must not treat a particular investment as part of its e-money float for the purposes of some of the rules in ELM and not for others.

A firm must, at all times, have sufficient own funds to ensure that its FX exposure does not exceed its absolute FX exposure limit.

A firm must, at all times, have sufficient own funds to ensure that its FX exposure does not exceed its FX exposure limit on more than:

1. (1)

   one day in any one week period; or

2. (2)

   two days in any one month period; or

3. (3)

   five days in any one year period;

ending on the day in question.

A firm'sFX exposure is its net FX open position multiplied by 8%.

A firm's net FX open position is calculated as follows:

1. (1)

   only take into account an asset, liability or other position that:

   1. (a)

      is denominated in, or gives rise to a position in, a foreign currency; and

   2. (b)

      forms part of its e-money outstandings or e-money float;

2. (2)

   items forming part of its e-money float must be valued in accordance with ELM 3.3.2 R;

3. (3)

   for each foreign currency:

   1. (a)

      sum the long and short positions;

   2. (b)

      calculate the net long or short position for that currency;

4. (4)

   convert each net position, long and short, into the firm's base currency at prevailing spot rates;

5. (5)

   sum all short positions and sum all long positions;

6. (6)

   the largest figure from (5) is the firm's net FX open position.

For the purposes of determining the currency in which a position is denominated, a firm must apply the following principles:

1. (1)

   where the price of an investment is quoted in only one currency, a position in that investment must be treated as denominated in that currency;

2. (2)

   where the price of an investment is quoted in more than one currency, a position in that investment must be treated as denominated in the currency in which the firm accounts for the investment.

A firm's absolute FX exposure limit is, at any time, the amount by which, at that time, the firm's own funds exceed 2.5% of its e-money outstandings. If there is no such excess, the firm's absolute FX exposure limit is zero.

A firm's FX exposure limit is, at any time, the amount by which, at that time, the firm's own funds exceed 3% of its e-money outstandings. If there is no such excess, the firm's FX exposure limit is zero.

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).

A firm must maintain adequate liquidity, taking into account the nature and scale of its business, so that it is able to meet its obligations as they fall due.

A firm must not be a party to or have a position in a derivative or quasi derivative contract unless ELM 3.7.2 R allows this.

A firm may be a party to a derivative or quasi derivative contract if:

1. (1)

   the sole purpose (ignoring any other purposes which together are insignificant) of becoming a party to it is hedging market risks arising from:

   1. (a)

      issuing e-money; or

   2. (b)

      the e-money float;

2. (2)

   so far as reasonably possible, being a party to that derivative or quasi derivative contract achieves the permitted purpose described in ELM 3.7.2 R (1);

3. (3)

   the derivative or quasi derivative contract is sufficiently liquid; and

4. (4)

   either:

   1. (a)

      the derivative or quasi derivative contract is an exchange rate contract relating to a foreign currency with an original maturity of 14 days or less; or

   2. (b)

      the derivative or quasi derivative contract:

      1. (i)

         is an interest rate or foreign exchange related contract;

      2. (ii)

         is regularly traded on a recognised investment exchange or designated investment exchange; and

      3. (iii)

         is subject to daily margin requirements under the rules of that exchange.