1This chapter applies to:

1. (1)

   a MIFIDPRU investment firm; and

2. (2)

   a UK parent entity that is required by MIFIDPRU 2.5.7R to comply with MIFIDPRU 5 on the basis of its consolidated situation.

1Where this chapter applies on the basis of the consolidated situation of the UK parent entity, any reference to a “firm” or “MIFIDPRU investment firm” in this chapter is a reference to the hypothetical single MIFIDPRU investment firm created under the consolidated situation.

1 MIFIDPRU 5.2 applies to all of a firm’s activities that may give rise to concentration risk.

1 MIFIDPRU 5.3 to 5.10 apply to a firm when dealing on own account in relation to transactions that are recorded in the trading book.

1Subject to MIFIDPRU 5.1.13R to MIFIDPRU 5.1.16R, a group of connected clients means:

1. (1)

   two or more persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others; or

2. (2)

   two or more persons between whom there is no relationship of control as described in (1) but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, in particular funding or repayment difficulties, the other or all of the others would also be likely to encounter funding or repayment difficulties.

1Where a central government has direct control over, or is directly interconnected with, more than one person, they do not all have to be treated as a single group of connected clients. Instead, the existence of a group of connected clients may be assessed separately at the level of each person directly controlled by or directly interconnected with the central government, which must include all of the natural and legal persons which are controlled by or interconnected with that person, including the central government.

1Regional governments and local authorities, whether in the United Kingdom or a third country, may be treated in the same way as central governments under MIFIDPRU 5.1.13R if there is no difference in the risk they pose compared to central governments.

1Two or more persons do not constitute a single group of connected clients solely because of their direct exposure to the same central counterparty for clearing purposes.

1For the purposes of this chapter, if a firm has an exposure to a person (‘A’) when A is acting on its own behalf, and also an exposure to A when A acts in the capacity of trustee, custodian or general partner of an investment trust, unit trust, venture capital or other investment fund, pension fund or a similar fund (a “fund”), the firm may treat the latter exposure as if it was to the fund as a separate client, unless such treatment would be misleading.

1A firm must monitor and control its concentration risk using sound administrative and accounting procedures and robust internal control mechanisms.

1For the purposes of MIFIDPRU 5.5 to MIFIDPRU 5.10, a firm must calculate an exposure value (EV) for each client or group of connected clients by adding together the following items:

1. (1)

   the positive excess of the firm’s long positions over its short positions in all the trading bookfinancial instruments issued by the client in question, using the approach specified for K-NPR in MIFIDPRU 4.12.2R to calculate the net position for each instrument; and

2. (2)

   the exposure value of contracts and transactions referred to in MIFIDPRU 4.14.3R with the client in question, calculated using the approach specified for K-TCD in MIFIDPRU 4.14.8R.

1For the purposes of MIFIDPRU 5.4.1R(1), where a firm calculates a K-CMG requirement in relation to a portfolio, it must calculate its net position for the exposures in that portfolio using the approach specified for K-NPR in MIFIDPRU 4.12.2R.

1The EV with regard to a group of connected clients must be calculated by adding together the exposures to the individual clients within the group, which must be treated as a single exposure.

1When calculating EVs, a firm must take all reasonable steps to identify underlying assets in relevant transactions and the counterparty of the underlying exposures.

1. (1)

   1The concentration risk soft limit for EVs to an individual client or group of connected clients is 25% of a firm’sown funds, subject to (2) and (3).

2. (2)

   1Where an individual client is a MIFIDPRU-eligible institution, the concentration risk soft limit for that client is the higher of:

   1. (a)

      25% of the firm’sown funds; or

   2. (b)

      £150 million or 100% of the firm’sown funds, whichever is the lower.

3. (3)

   1Where a group of connected clients includes one or more MIFIDPRU-eligible institutions, the concentration risk soft limit for the group is the higher of:

   1. (a)

      (a) 25% of the firm’sown funds; or

   2. (b)

      £150 million or 100% of the firm’sown funds, whichever is the lower, provided that for the sum of exposure values with regard to all connected clients that are not MIFIDPRU-eligible institutions, the concentration risk soft limit remains at 25% of the firm’sown funds.

1. (1)

   1A firm that exceeds the concentration risk soft limit for a client or group of connected clients must calculate the exposure value excess (EVE).

2. (2)

   A firm must calculate the EVE for an individual client or group of connected clients using the following formula:

   1. EVE = EV – L

   where:

   L = the concentration risk soft limit specified in MIFIDPRU 5.5.1R.

1For as long as a firm exceeds the concentration risk soft limit for one or more clients or groups of connected clients, it must calculate the K-CON requirement.

1When a firm exceeds the concentration risk soft limit for a client or group of connected clients, it must notify the FCA without delay of the amount of the EVE, and the name of the individual client or group of connected clients.

1A firm must make the notification referred to in MIFIDPRU 5.6.2R by completing Part A of the form in MIFIDPRU 5 Annex 1R and submitting it using the online notification and application system.

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. (1)

   determining the own funds requirement for the excess (OFRE) in accordance with MIFIDPRU 5.7.3R; and

2. (2)

   applying the relevant multiplication factor or factors in accordance with MIFIDPRU 5.7.4R.

1. (1)

   1The OFRE must be calculated using the following formula:

   
2. (2)
   1. (a)

      The OFR for an individual client is the sum of:

      1. (i)

         the TCD own funds requirement for exposures to that client; and

      2. (ii)

         the K-NPR requirement for the exposures to that client, subject to (b).

3. (b)

   Where exposures arise from the positive excess of a firm’s long positions over its short positions in all the trading bookfinancial 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.

4. (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).

5. (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.

1A firm must not deliberately avoid the K-CON requirement by:

1. (1)

   undertaking artificial transactions to close out an exposure and create a new exposure; or

2. (2)

   temporarily transferring an exposure to another undertaking, whether within the same group or not.

1A firm must maintain systems which ensure that any closing out or transfer that is prohibited by MIFIDPRU 5.8.1R is immediately reported to the FCA in accordance with MIFIDPRU 1.1.10R2.

1. (1)

   1Whilst an exposure exceeding the concentration risk soft limit has persisted for 10 business days or less, a firm’sEV for the individual client or group of connected clients must not exceed 500% of the firm’sown funds.

2. (2)

   Whilst a firm has one or more exposures exceeding the concentration risk soft limit that have persisted for more than 10 business days, the aggregate EVEs for all such exposures must not exceed 600% of the firm’sown funds.

1If a firm breaches the requirement in MIFIDPRU 5.9.1R, it must notify the FCA without delay of:

1. (1)

   the amounts of the exposure or exposures which give rise to the breach;

2. (2)

   the name or names of the clients concerned; and

3. (3)

   any steps which the firm or any other person has taken or intends to take to rectify the breach and prevent any future potential occurrence.

1A firm must make the notification referred to in MIFIDPRU 5.9.3R using Part B of the form in MIFIDPRU 5 Annex 1R, and must submit it using the online notification and application system.

1The requirements in MIFIDPRU 5.4 to 5.9 do not apply to the following exposures:

1. (1)

   exposures which are entirely deducted from a MIFIDPRU investment firm’s own funds;

2. (2)

   exposures incurred in the ordinary course of the settlement of payment services, foreign currency transactions, securities transactions and the provision of money transmission;

3. (3)

   exposures constituting claims against:

   1. (a)

      central governments, central banks, public sector entities, international organisations or multilateral development banks and exposures guaranteed by or attributable to such persons, where those exposures would receive a 0% risk weight under articles 114 to 118 of the UK CRR;

   2. (b)

      regional governments and local authorities of the UK or a third country which pose no difference in risk compared to a central government covered by (a); and

   3. (c)

      central counterparties and default fund contributions to central counterparties;

4. (4)

   exposures incurred by a firm to its parent undertaking, to other subsidiaries or connected undertakings of that parent undertaking or to its own subsidiaries or connected undertakings, insofar as those undertakings are supervised on a consolidated basis in accordance with MIFIDPRU 2.5 or with UK CRR, are supervised for compliance with the group capital test in accordance with MIFIDPRU 2.6, or are supervised in accordance with comparable standards in force in a third country, and provided that the following conditions are met:

   1. (a)

      there is no current or foreseen material practical or legal impediment to the prompt transfer of capital or repayment of liabilities; and

   2. (b)

      the risk evaluation, measurement and control procedures of the parent undertaking include the firm and any relevant subsidiary or connected undertaking.

1A commodity and emission allowance dealer is not required to comply with MIFIDPRU 5.2 to 5.10 where all of the following conditions are met:

1. (1)

   the other counterparty is a non-financial counterparty;

2. (2)

   both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures;

3. (3)

   the transaction can be assessed as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group; and

4. (4)

   the firm complies with MIFIDPRU 5.11.2R.

1. (1)

   1Before relying on the exemption in MIFIDPRU 5.11.1R, a firm must notify the FCA.

2. (2)

   A firm must notify the FCA annually thereafter in order to continue to rely on the exemption in MIFIDPRU 5.11.1R.

3. (3)

   The notification must explain how the firm expects to meet or continue to meet the conditions in MIFIDPRU 5.11.1R.

4. (4)

   If there is a material change to the information provided in (1) or (2), a firm must notify the FCA without delay.

5. (5)

   The notifications in (1), (2) and (4) must be made using the form in MIFIDPRU 5 Annex 2R, and must be submitted using the online notification and application system.

1[Editor’s note: The forms can be found at this address: https://www.handbook.fca.org.uk/form/MIFIDPRU 5 Annex 1R(A) Notification under MIFIDPRU 5.6.3R that the concentration risk soft limit has been exceeded.pdf]

https://www.handbook.fca.org.uk/form/MIFIDPRU 5 Annex 1R(B) Notification under MIFIDPRU 5.9.3R of the concentration risk hard limit breach.pdf

1[Editor’s note: The forms can be found at this address: https://www.handbook.fca.org.uk/form/MIFIDPRU 5 Annex 2R Notifications under MIFIDPRU 5.11.2R in respect of the exemption from K-CON requirement.pdf]