MIFIDPRU 5.7 Calculating K-CON
1The K-CON requirement of a MIFIDPRU investment firm is equal to the sum of the CON own funds requirement for each client or group of connected clients for which the EV exceeds the concentration risk soft limit.
1The CON own funds requirement for each client or group of connected clients in MIFIDPRU 5.7.1R must be calculated by:
- (1)
determining the own funds requirement for the excess (OFRE) in accordance with MIFIDPRU 5.7.3R; and
- (2)
applying the relevant multiplication factor or factors in accordance with MIFIDPRU 5.7.4R.
- (1)
1The OFRE must be calculated using the following formula:
- (2)
- (a)
The OFR for an individual client is the sum of:
- (i)
the TCD own funds requirement for exposures to that client; and
- (ii)
the K-NPR requirement for the exposures to that client, subject to (b).
- (i)
- (a)
- (b)
Where exposures arise from the positive excess of a firm’s long positions over its short positions in all the trading book financial instruments issued by the client in question, the net position of each instrument calculated using the approach specified for K-NPR in MIFIDPRU 4.12.2R shall only include specific-risk requirements.
- (c)
A firm that calculates a K-CMG requirement for a portfolio must calculate the OFR using the approach specified for K-NPR in MIFIDPRU 4.12.2R, subject to (b).
- (d)
The OFR for a group of connected clients must be calculated by adding together the exposures to individual clients within the group, and then determining a single own funds requirement for exposures to the group as if the group were a single undertaking.
- (1)
1Where the excess has persisted for 10 business days or less, the CON own funds requirement is the OFRE multiplied by 200%.
- (2)
Where the excess has persisted for more than 10 business days:
- (a)
the EVE must be apportioned according to the tranches in each row of Column 1 of Table 1;
- (b)
the proportion of the EVE in each tranche must be calculated as a percentage of the overall EVE;
- (c)
the OFRE must be pro-rated according to the proportion of EVE falling within each tranche;
- (d)
each portion of the OFRE must be multiplied by the relevant Factor in Column 2 of Table 1; and
- (e)
the CON own funds requirement is the sum of the amounts calculated in accordance with (d).
- (a)
- (3)
Table 1
Column 1:
EVE as a percentage of own funds
Column 2: Factors
For the amount up to and including 40%
200%
For the amount over 40% up to and including 60%
300%
For the amount over 60% up to and including 80%
400%
For the amount over 80% up to and including 100%
500%
For the amount over 100% up to and including 250%
600%
For the amount over 250%
900%
- (1)
1K-CON is an additional K-factor own funds requirement for concentration risk in the trading book.
- (2)
A firm must calculate a CON own funds requirement for each client or group of connected clients for which the exposure value exceeds the concentration risk soft limit. The CON own funds requirement for each client or group of connected clients is then added together determine the K-CON requirement.
- (3)
Determining the CON own funds requirement for each client or group of connected clients involves a two-step calculation:
- (a)
The first step involves an exposure-based calculation, known as the OFRE (the own funds requirement for the excess).
- (b)
The second step involves applying a multiplying factor to the OFRE (or applying different multiplying factors to tranches of the OFRE) based on the length of time for which the excess has persisted and by how much (as a percentage of own funds) the exposure value exceeds the concentration risk soft limit.
- (a)
- (4)
The reference to how long an excess has persisted relates to how long a firm has had an exposure to a client or group of connected clients that exceeds the concentration risk soft limit, irrespective of whether the constituent parts that make up that total exposure change over the duration of that total exposure.
- (5)
The 10-business day period referred to in MIFIDPRU 5.7.4R runs from the start of the business day on which the excess occurred.
1The following example shows how to calculate the CON own funds requirement for an excess to a client that has persisted for 10 business days or less:
- (1)
A firm has:
- (a)
own funds of 1000;
- (b)
a concentration risk soft limit of 250 (25% of 1000);
- (c)
an EV of 262; and
- (d)
an EVE of 12 (262 - 250 = 12).
- (a)
- (2)
The exposure is all due to debt securities that have a specific risk own funds requirement of 8% (according to Table 1 in article 336 of UK CRR) for the purposes of K-NPR. There is zero K-TCD to this client.
In this example, the OFR = 262 × 8% = 20.96
- (3)
To calculate the OFRE:
- (4)
As the excess has persisted for 10 business days or less:
CON own funds requirement = 0.96 × 200% = 1.92
1The following example shows how to calculate the CON own funds requirement for an excess that has persisted for more than 10 business days:
- (1)
A firm has:
- (a)
own funds of 1000;
- (b)
a concentration risk soft limit of 250 (25% of 1000);
- (c)
an EV of 780; and
- (d)
an EVE of 530 (780 - 250 = 530).
- (a)
- (2)
The exposure is all due to debt securities that have a specific risk own funds requirement of 8% (according to Table 1 in article 336 of UK CRR) for the purposes of K-NPR. There is zero K-TCD to this client.
In this example, the OFR = 780 × 8% = 62.4
- (3)
To calculate the OFRE:
- (4)
As the excess has persisted for more than 10 business days, the CON own funds requirement is calculated by apportioning the OFRE in accordance with the relevant EVE tranche in Table 2, multiplying each part of the OFRE by the applicable factor, and then adding the resulting amounts together:
Application of Table 2
K-CON factor tranche as per Table 1
EVE split by tranche
CON own funds requirement (OFRE × factor in Table 1)
Up to 40%
400
400/530 × 42.4 = 32
32 × 200% = 64
40%-60%
130
130/530 × 42.4 = 10.4
10.4 × 300% = 31.2
Total:
530
42.4
95.2
- (5)
The CON own funds requirement is the total amount in the last column, 95.2.