(2) In considering whether this requirement is satisfied, the [FSA]must (without prejudice to the generality of regulation 6(1)) take into account all the circumstances, including the [UK RIE's] connection with any person , and any activity carried on by the [UK RIE], whether or not it is an exempt activity.
the operational and other risks to which the UK recognised body is exposed;
if the UK recognised body acts as a central counterparty or otherwise guarantees the performance of transactions in specified investments, the counterparty and market risks to which it is exposed in that capacity;
the amount and composition of the UK recognised body's capital;
the amount and composition of the UK recognised body's liquid financial assets;
the amount and composition of the UK recognised body's other financial resources (such as insurance policies and guarantees, where appropriate);
any person with whom it has a significant contractual relationship.
the amount and liquidity of its financial assets and the likely availability of liquid financial resources to the UK recognised body during periods of major market turbulence or other periods of major stress for the UK financial system;3 and
the nature and scale of the UK recognised body's exposures to counterparty and market risks and, where relevant, the counterparties to which it is exposed.
In assessing whether a UK recognised body has sufficient financial resources in relation to operational and other risks, the FSA may have regard to the extent to which, after allowing for the financial resources necessary to cover counterparty and market risks, the UK recognised body's financial resources are sufficient and sufficiently liquid:
to ensure that it would be able to complete an orderly closure or transfer of its exempt activities without being prevented from doing so by insolvency or lack of available funds.
liquid financial assets amounting to at least six months' operating costs; and
net capital of at least this amount;
will, at that time, have sufficient financial resources to meet the recognition requirement unless there are special circumstances indicating otherwise.
In this standard approach, the FSA assumes liquid financial assets are needed to cover the costs that would be incurred during an orderly run down of the UK recognised body's business as such, while continuing to satisfy all the recognition requirements and complying with any other obligations under the Act (including the obligations to pay periodic fees to the FSA under REC 7).
The calculation of operating costs may exclude non-cash costs (costs that do not involve an outflow of funds) and variable costs of the UK recognised body'sexempt activities that would not be incurred if no exempt activities were performed. Fixed costs should be included in the assessment of operating costs. The FSA would normally expect the capital equal to the amount of liquid financial assets to be in the form of equity.
The FSA recognises that UK recognised bodies may wish to satisfy the recognition requirements in different ways. The FSA does not prescribe any particular approach to calculating financial resources or to assessing their adequacy. It is willing to discuss with each UK recognised body the most appropriate way for it to meet the recognition requirement and each UK recognised body will need to be able to show the FSA that its financial resources are at all times sufficient to meet the recognition requirement.