IPRU-INV 13.5 FINANCIAL RESOURCES TEST 2 - EXPENDITURE-BASED REQUIREMENT

(a)

Staff bonuses (except to the extent that they are guaranteed);

(b)

employees' and directors' shares in profits (except to the extent that the amount is guaranteed);

(c)

other appropriations of profits;

(d)

shared commissions paid which are directly related to commissions received;

(e)

interest charges in respect of borrowing made to finance the acquisition of its readily realisable investments;

(f)

interest paid to clients on client money;

(g)

interest paid to counterparties;

(h)

fees, brokerage and other charges paid to recognised clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;

(i)

foreign exchange losses;

(j)

a firm must not deduct any exceptional expenditure.

EXEMPT CAD FIRM

ASSETS

CALCULATION

TYPE OF ADJUSTMENT

(1) Land and Buildings

Exclude in full. (A loan secured by a charge on land and buildings may be deducted from liabilities in accordance with item (14) of Part II of this table.

An Illiquid

Adjustment

(2) Investments

Exclude in full the value of shares in connected companies.

Include any net long position in any fixed or current asset investment

(a) valued at its current bid price (or, in the case of a with profits life policy, at its surrender value), and

(b) discounted by the applicable percentage specified in table 13.5.4A.

An Illiquid

Adjustment

A Position Risk

Adjustment

(3) Investments subject to Repurchase, Reverse Repurchase, Stock Borrowing or Stock Lending transactions

Include investments for which the firm has entered as principal into a repurchase, reverse repurchase, stock borrowing or stock lending transaction, after making (I) a deduction in accordance with item (2), and (II) a deduction calculated by

(a) computing the firm's exposure (the difference between the market value of the securities and the loan or collateral (including accrued interest) where that difference is not in the firm's favour, after adjusting for any excess collateral), and

(b) multiplying that exposure by the applicable percentage in table 13.5.4C.

A Position Risk

Adjustment

A Counterparty

Risk Adjustment

(4) Debtors relating to Unsettled Securities Transactions - Cash against Documents

Include debtors where the firm has entered into a transaction in securities or units in collective investment schemes as agent on a cash against documents basis and the transaction remains unsettled, after deducting an amount calculated by

(a) computing the difference between the agreed settlement price for those investments and their current market value where that difference is not in the firm's favour, and

(b) multiplying that difference by the applicable percentage specified in table 13.5.4B.

A Counterparty

Risk Adjustment

(5) Debtors relating to Unsettled Securities Transactions - Free Deliveries

Where the firm has delivered securities or units in collective investment schemes before receiving payment for them, or paid for such investments before receiving certificates of good title for them, and not more than 3 days have passed since delivery, include debtors after deducting an amount calculated by

(a) (i) (where the firm has delivered them) computing the full amount due to a firm under the contract;

(ii) (where the firm has paid for them) computing their current market value; and

(b) multiplying the amount or value at (a) by the applicable percentage specified in table 13.5.4C.

Exclude debtors if more than 3 days have passed since delivery.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(6) Regulated collective investment schemes

Include an amount owing in respect of a transaction in units in a regulated collective investment scheme only

(a) if the amount has been due and unpaid for less than 90 days after the settlement date of the transaction to which it relates, and

(b) after discounting that amount by the applicable percentage specified in table 13.5.4C.

Exclude amounts that have been due and unpaid for more than 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(7) Debts of group or connected companies

Include an amount due from group or connected companies (which does not relate to trade debts)

(a) where the firm has no reason to doubt that it will be repaid in full on demand, and

(b) after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude an amount that the firm has reason to doubt will be repaid in full on demand.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(8) Debtors

Include amounts due from debtors (including group or connected companies) which have been due and unpaid for less than 90 days, after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude amounts that have been due and unpaid for more than 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(9) Prepayments

Include the amount of prepayments which relate to goods or services to be received or performed within 90 days, after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude the amount of prepayments relating to more than 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(10) Accrued income

Include accrued income, including any such income not yet due and receivable in respect of fees earned in the performance of investment management services that is receivable within 90 days, after discounting the amount by the applicable percentage specified in table 13.5.4C.

Exclude accrued income receivable after 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(11) Deposits

Include amounts in respect of

(a) cash and balances on current accounts and on deposit accounts with an approved bank or National Savings Bank which can be withdrawn within 90 days;

(b) money on deposit with a UK local authority which can be withdrawn within 90 days;

(c) money deposited and evidenced by a certificate of tax deposit

Exclude amounts which can only be withdrawn after 90 days.

An Illiquid

Adjustment

(12) Other amounts due from Government bodies or local authorities

Include other amounts due from UK Government bodies or local authorities if they are agreed and due within 90 days, after discounting the amounts by the applicable percentage specified in table 13.5.4C.

Exclude amounts that are not due to be paid within 90 days.

A Counterparty

Risk Adjustment

An Illiquid

Adjustment

(13) All other assets

Exclude in full.

If not otherwise excluded in full in this table, this category should include any holding in eligible capital instruments of an insurance undertaking, insurance holding company, or reinsurance undertaking that is a subsidiary or participation.

Eligible capital instruments include ordinary share capital,1 preference shares, perpetual securities and long-term subordinated loans, that are eligible for insurance undertakings under GENPRU 2 or, as the case may be, INSPRU 7, or is an item of basic own funds as defined in the PRA Rulebook: Glossary1.

An Illiquid

Adjustment

Where applicable - Large exposures

Deduct an amount calculated in accordance with rule 13.6.2.

A Large exposure Adjustment

EXEMPT CAD FIRM

LIABILITY

CALCULATION

TYPE OF ADJUSTMENT

(14) Secured Liabilities

Include in full, except the amount of the liabilities secured by a charge on land and buildings which may be reduced by the smallest of the following amounts:

An Illiquid Adjustment

(a) the aggregate amount of the firm's secured liabilities which are due more than one year after the balance sheet date;

(b) (if the land and buildings have been valued by an independent professional valuer within the past 18 months) 85% of the amount certified by the valuer as their market value; and

(c) 85% of the net book value of land and buildings.

(15) Subordinated loans

Include in full except any long term or short term subordinated loan in the standard form prescribed by the FCA which may be treated as capital up to the limits specified in SUP 16.

(16) Commission on indemnity terms from the sale of life policies or pension contracts

Include as a liability a provision for repayment, in the event that premiums cease within the indemnity period, which must equal or exceed 2.5% of the commissions the firm has received on indemnity terms during the previous twelve months. This provision must be reasonable having regard to the firm's circumstances and, in particular, its previous lapse ratio.

An Illiquid Adjustment

(17) Investments (Short Positions)

Include a net short position

A Position Risk Adjustment

(a) valued at its offer price, and

(b) increased by the applicable percentage specified in table 13.5.4A.

(18) Deficiency in subsidiary

Include as a liability the amount by which the liabilities of any subsidiary (excluding its capital and reserves) exceed its tangible assets. This requirement applies only to the extent that the firm has not already made such a provision elsewhere in its financial statements.

An Illiquid Adjustment

(19) Liability for tax

Include as a liability a provision for taxation on the whole of the profits of its business up to its balance sheet date.

An Illiquid Adjustment

(20) Creditors relating to Unsettled Securities Transactions Cash against Documents

Include creditors where a firm has entered into a transaction in securities or units in collective investment schemes as agent on a cash against documents basis, and the transaction remains unsettled, after adding an amount calculated by

A Counterparty Risk Adjustment

(a) computing the difference between the agreed settlement price for those investments and their current market value, and

(b) multiplying that exposure by the applicable percentage specified in table 13.5.4B.

(21) Creditors relating to Unsettled Securities Transactions Free D eliveries

Include an amount for creditors where (acting as agent) the firm has delivered certificates of title for securities or units in collective investment schemes before receiving payment for them, or where the firm has bought such investments before receiving certificates of good title for them, after adding an amount calculated by

A Counterparty Risk Adjustment

(a) (i) (where the firm has paid for them but not received certificates of good title for them) computing their current market value;

(ii) (where the firm has delivered the certificates without receiving payment for them) computing the full amount due to a firm under the contract for sale; and

(b) multiplying that exposure by the applicable percentage specified in table 13.5.4C.

(22) Over the counter derivatives

Include as a liability an amount for its positions in such derivatives calculated by

A Counterparty Risk Adjustment

(a) computing the credit equivalent of those positions in accordance with table 13.5.4D, and

(b) increasing that credit equivalent by the applicable percentage specified in table 13.5.4C,

(in addition to making an adjustment in accordance with item (17) of this table and (in respect of bought OTC equity options and covered warrants) in accordance with item (25)).

(23) Contingent Liabilities

A firm must include a provision for any contingent liabilities which exist at its balance sheet date that must be made.

An Illiquid Adjustment

(24) Preference Shares

Include as a liability any amounts in excess of the amounts which may be treated as financial resources specified in table 13.3.2(2) and SUP 16.

(25) Net open foreign currency position

Include as a liability an amount in respect of its foreign exchange risk calculated in accordance with table 13.5.4E.

A Foreign Exchange Risk Adjustment

(26) All other liabilities

Include in full.

POSITION RISK

The percentages in the table are applied to the market value (unless otherwise stated) of gross positions, i.e. both longs and shorts in each category; netting and offsetting are prohibited. The long or short position in a particular investment is the net of any long or short positions held in that same investment.

INVESTMENT

DISCOUNT

A. Debt

Maturity

Central Government

0-2 years

2-5 years

>5 years

2%

5%

13%

Qualifying debt security:

- fixed rate

8%

8%

15%

- floating rate

10%

10%

15%

Non-qualifying debt security:

- fixed rate

10%

20%

30%

- floating rate

30%

30%

30%

B. Equities

- exchange traded

25%

- other

100%

C. Derivatives

- exchange traded futures

4 x initial margin requirement

- OTC futures

Apply the appropriate percentage shown in A and B to the market value of the underlying position

- Purchased options

Apply the appropriate percentage shown in A and B to the market value of the underlying position but the result may be limited to the market value of the option

- Contracts for differences

20% of the market value of the contract

D. Other Investments

- Units in regulated collective investment schemes

25%

- units in higher volatility funds or property funds

50%

- with profit life policies

20% of surrender value

- other

100%

UNSETTLED SECURITIES TRANSACTIONS

Number of business days after due settlement date

Percentage

0 - 4

0

5 - 15

8

16 - 30

50

31 - 45

75

46 or more

100

COUNTERPARTY RISK

Type of Counterparty

Deduction

A counterparty which is, or the contract of which is, explicitly guaranteed by:

NIL

- the government or central bank of the United Kingdom or another Zone A country; or

- the European Economic Area; or

- any other government or central bank, provided the exposure is denominated in that country's national currency.

A counterparty which is, or the contract of which is, explicitly guaranteed by:

1.6%

- a local authority or regional government in the United Kingdom or another Zone A country; or

- a credit institution authorised in the United Kingdom or another Zone A country; or

- a recognised clearing house or recognised investment exchange; or

- an investment firm or a comparable undertaking regulated by a recognised third country.

Any other counterparty

8%

OVER THE COUNTER DERIVATIVES

a . By attaching current market values to contracts (marking to market), obtain the current replacement cost of all contracts with positive values.

b. To obtain a figure for potential future credit exposure (except in the case of single currency "floating/floating interest rate swaps" in which only the current replacement costs will be calculated), multiply the notional principal amounts or values underlying the firm's aggregate positions by the following percentages:

Residual Maturity

Interest Rate Contracts

Foreign Exchange Contracts

One year or less

Nil

1%

More than 1 year

More than 1 year

5%

c. The credit equivalent is the sum of current replacement cost and potential future credit exposure.

FOREIGN EXCHANGE RISK

(a) A firm must deduct a foreign exchange risk requirement for all the following items which are denominated in a foreign currency:

(i) all assets and liabilities, including accrued interest, denominated in the currency (all investments at market or realisable value);

(ii) any currency future, at the nominal value of the contract;

(iii) any forward contract for the purchase or sale of the currency, at the contract value, including any future exchange of principal associated with currency swaps;

(iv) any foreign currency options at the net delta (or delta-based) equivalent of the total book of such options;

(v) any non-currency option, at market value;

(vi) any irrevocable guarantee;

(vii) any other off-balance sheet commitment to purchase or sell an asset denominated in that currency.

(b) The requirement must be calculated as follows:

(i) using the spot rate, convert the net long position and net short position in each foreign currency into the currency in which its annual financial statements are reported;

(ii) total the net open long positions and the net open short positions;

(iii) the higher of (i) and (ii) above is the firm's net open foreign currency position;

(iv) multiply the firm's net open foreign currency position by 10%.

(c) A firm may not include any future income or expense not yet accrued but fully hedged (subject to deduction of an appropriate risk requirement).