Related provisions for BIPRU 7.6.9

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BIPRU 7.10.18RRP
A firm must use the VaR model approach to calculate the PRR for a position:(1) to the extent that the risks in relation to that position are within the scope of the VaR model permission (see BIPRU 7.10.136R (Link to standard PRR rules: Incorporation of the model output into the capital calculation)); and(2) if the position is of a type that comes within the scope of the VaR model permission.
BIPRU 7.10.46RRP
(1) If a firm'sVaR model covers the calculation of PRR with respect to specific risk the firm must meet the VaR specific risk minimum requirements in addition to the other requirements of BIPRU 7.10.(2) The VaR model must explain the historical price variation in the portfolios concerned.(3) The VaR model must capture concentration in terms of magnitude and changes of composition of the portfolios concerned.(4) The VaR model must be robust to an adverse environment.(5) The VaR
BIPRU 7.10.75RRP
At least once a year, a firm must conduct, as part of its regular internal audit process, a review of its risk management process. This review must include both the activities of the business trading units and of the independent risk control unit, and must be undertaken by suitably qualified staff independent of the areas being reviewed. This review must consider, at a minimum:(1) the adequacy of the documentation of the risk management system and process;(2) the organisation
BIPRU 7.10.135RRP
To the extent that a position does not fall within the scope of a firm'sVaR model permission the firm must calculate the PRR under the standard market risk PRR rules1 or, as applicable, those provisions as modified by the firm'sCAD 1waiver.
BIPRU 7.10.136RRP
(1) This rule applies to a position of a type that comes within the scope of a firm'sVaR model permission.(2) If, where the standard market risk PRR rules apply, a position is subject to a PRR charge and the firm'sVaR model permission says that it covers the risks to which that PRR charge relates, the firm must, for those risks, calculate the PRR for that position under the VaR model approach rather than under the standard market risk PRR rules.(3) If, where the standard market
BIPRU 7.10.142RRP
The standard market risk PRR rules for the option PRR are only disapplied to the extent that the derived positions arising under BIPRU 7.6.13R (Table: Derived positions) come within the scope of the VaR model permission.
BIPRU 7.2.1RRP
(1) A firm must calculate its interest rate PRR under BIPRU 7.2 by:(a) identifying which positions must be included within the interest rate PRR calculation;(b) deriving the net position in each debt security in accordance with BIPRU 7.2.36R-BIPRU 7.2.41R;(c) including these net positions in the interest rate PRR calculation for general market risk and the interest rate PRR calculation for specific risk; and(d) summing all PRRs calculated for general market risk and specific risk.(2)
BIPRU 7.2.3RRP
A firm's interest rate PRR calculation must:(1) include all trading bookpositions in debt securities, preference shares and convertibles, except:(a) positions in convertibles which have been included in the firm'sequity PRR calculation;(b) positions fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude them; or(c) positions hedging an option which is being treated under BIPRU 7.6.26R (Table: Appropriate
BIPRU 7.2.5GRP
BIPRU 7.2.3R(1) includes a trading bookposition in debt security, preference share or convertible that is subsequently repo'd under a repurchase agreement or lent under a stock lending agreement. Clearly, if the security had initially been obtained via a reverse repurchase agreement or stock borrowing agreement, the security would not have been included in the PRR calculation in the first place.
BIPRU 7.2.11RRP
(1) For the purposes of calculating interest rate PRR, unless specified otherwise, a firm must derive the value of notional positions as follows:(a) notional positions in actual debt securities must be valued as the nominal amount underlying the contract at the current market price of the debt security; and(b) positions in zero-specific-risk securities must be valued using one of the two methods in (2).(2) A firm must use one of the following two methods for all positions arising
BIPRU 7.2.12RRP
A firm must use BIPRU 7.2.11R(2)(a) in respect of any positions that it includes in the interest rate duration method.
BIPRU 7.2.32RRP
(1) Where included in the PRR calculation in BIPRU 7.2 (see the table in BIPRU 7.2.4R), options and warrants must be treated in accordance with this rule.(2) An option or warrant on a debt security, a basket of debt securities or a debt security index must be treated as a position in that debt security, basket or index.(3) An option on an interest rate must be treated as a position in a zero coupon zero-specific-risk security with a maturity equal to the sum of the time to expiry
BIPRU 7.2.35RRP

Table: Interest rate risk on other futures, forwards, options and swaps

This table belongs to BIPRU 7.2.34R.

Instrument

Notional positions

foreign currencyforward or future

a long position denominated in the currency purchased

and

a short position denominated in the currency sold

Gold forward or future

a long position if the forward or future involves an actual (or notional) sale of gold

or

a short position if the forward or future involves an actual (or notional) purchase of gold

Equityforward or future, or option (unless the interest rate PRR is calculated under the basic interest rate PRR calculation in BIPRU 7.3)

A long position if the contract involves an actual (or notional) sale of the underlying equity

or

A short position if the contract involves an actual (or notional) purchase of the underlying equity
BIPRU 7.2.43RRP
(1) A firm must calculate the specific risk portion of the interest rate PRR for each debt security by multiplying the market value of the individual net position (ignoring the sign) by the appropriate PRA from the table in BIPRU 7.2.44R or as specified by BIPRU 7.2.45R - BIPRU 7.2.47R.(2) Notional positions in zero-specific-risk securities do not attract specific risk.
BIPRU 7.2.55GRP
The interest rate simplified maturity method weights individual net positions to reflect their price sensitivity to changes in interest rates. The weights are related to the coupon and the residual maturity of the instrument (or the next interest rate re-fix date for floating rate items).
BIPRU 7.2.56RRP
Under the interest rate simplified maturity method, the portion of the interest rate PRR for general market risk equals the sum of each individual net position (long or short) multiplied by the appropriate PRA in the table in BIPRU 7.2.57R. A firm must assign its net positions to the appropriate maturity bands in the table in BIPRU 7.2.57R on the basis of residual maturity in the case of fixed-rate instruments and on the basis of the period until the interest rate is next set
BIPRU 7.2.58GRP
The interest rate maturity method builds on the interest rate simplified maturity method by partially recognising offsetting positions. BIPRU 7.2.61G provides an illustration of the interest rate maturity method.
BIPRU 7.2.59RRP
Under the interest rate maturity method, the portion of the interest rate PRR for general market risk is calculated as follows:(1) Step 1: each net position is allocated to the appropriate maturity band in the table in BIPRU 7.2.57R and multiplied by the corresponding PRA;(2) Step 2: weighted long and short positions are matched within:(a) the same maturity band;(b) the same zone (using unmatched positions from (a)); and(c) different zones (using unmatched positions from (b) and
BIPRU 7.2.61GRP
This paragraph sets out an example of a calculation under the interest rate maturity method. In this example, a firm with a £ sterling base currency is processing its euro denominated positions.
BIPRU 7.2.64RRP
Under the interest rate duration method, the portion of the interest rate PRR for general market risk is calculated as follows:(1) Step 1: allocate each net position to the appropriate duration zone in the table in BIPRU 7.2.65R and multiply it by:(a) its modified duration (using the formula in BIPRU 7.2.63R); and(b) the appropriate assumed interest rate change in the table in BIPRU 7.2.65R;(2) Step 2: match weighted long and short positions:(a) within zones; and(b) across zones
BIPRU 7.3.1RRP
(1) A firm must calculate its equity PRR by:(a) identifying which positions must be included within the PRR calculation (see BIPRU 7.3.2R);(b) deriving the net position in each equity in accordance with BIPRU 7.3.23R;(c) including each of those net positions in either the simplified equity method (see BIPRU 7.3.29R) or, subject to BIPRU 7.3.27R, the standard equity method (see BIPRU 7.3.32R); and(d) summing the PRR on each net position as calculated under the simplified equity
BIPRU 7.3.2RRP
A firm'sequity PRR calculation must:(1) include all trading bookpositions in equities, unless:(a) the position is fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude it; or(b) the position is hedging an option or warrant which is being treated under BIPRU 7.6.26R (Table: Appropriate treatment for equities, debt securities or currencies hedging options);(2) include notional positions arising from trading
BIPRU 7.3.11GRP
(1) An example of BIPRU 7.3.10R is as follows. The current market value of a particular equity is £2.50. If a firm contracts to sell this equity in five year's time for £3 it would treat the notional short equityposition as having a value of £2.50 when calculating the equity PRR.(2) In effect, the forward position has been treated as being equivalent to a spot position for the purposes of calculating equity PRR. To capture the risk that the forward price changes relative to the
BIPRU 7.3.13RRP
Where a convertible is included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R):(1) it must be treated as a position in the equity into which it converts; and(2) the firm'sequity PRR must be adjusted by making:(a) an addition equal to the current value of any loss which the firm would make if it did convert to equity; or(b) a deduction equal to the current value of any profit which the firm would make if it did convert to equity (subject to a maximum deduction equal
BIPRU 7.3.21RRP
If included in BIPRU 7.3's PRR calculation (see the table in BIPRU 7.3.3R), options must be treated as follows:(1) an option on a single equity must be treated as a notional position in that equity;(2) an option on a basket of equities or equity index must be treated as a future on that basket or index; and(3) an option on an equityfuture must be treated as:(a) a long position in that future, for purchased call options and written put options; and(b) a short position in that future,
BIPRU 7.3.29RRP
Under the simplified equity method, the PRR for each equity, equity index, or equity basket equals the market value of the net position (ignoring the sign) multiplied by the appropriate PRA from the table in BIPRU 7.3.30R. The result must be converted into the firm'sbase currency at current spot foreign currency rates.
BIPRU 7.3.30RRP

Table: simplified equity method PRAs

This table belongs to BIPRU 7.3.29R

Instrument

PRA

Single equities

12%

Qualifying equity indices (see BIPRU 7.3.38R)

8%

All other equity indices or baskets

12%

If it is necessary to distinguish between the specific risk PRA and the general market risk PRA, the specific risk PRA for the first and third rows is 4% and that for the second row is 0%. The rest of the PRA in the second column is the general market risk PRA.
BIPRU 7.3.32RRP
Under the standard equity method, a firm must:(1) group equitypositions into country portfolios as follows:(a) a position in an individual equity belongs to:(i) the country it is listed in;(ii) any of the countries it is listed in, if more than one; or(iii) the country it was issued from, if unlisted;(b) a position in an equity basket or index that is treated under BIPRU 7.3.15R(2), is allocated to one or more country portfolios based on the countries to which the underlying equities
BIPRU 7.3.33RRP
Under the standard equity method, a firm must calculate a PRR for specific risk based on the net position in each equity, equity index or equity basket by multiplying its market value (ignoring the sign) by the appropriate PRA from the table in BIPRU 7.3.34R.
BIPRU 7.3.44GRP
A basic interest rate PRR calculation is included in BIPRU 7.3 for a firm that does not wish to use the calculation in BIPRU 7.2 (Interest rate PRR). However, it tends to result in higher charges than the methods in BIPRU 7.2, largely because the interest rate PRR is calculated on each notional equityposition separately and then summed without offsetting long and short positions.
BIPRU 7.3.45RRP
This rule applies to a firm that does not include a forward, future, option or swap on an equity, basket of equities or equity index in the calculation of its interest rate PRR calculation under BIPRU 7.2 (Interest rate PRR). However it does not apply to cliquet as defined in BIPRU 7.6.18R (Table: Option PRR: methods for different types of option). A firm must calculate the interest rate PRR for a position being treated under this rule as follows:(1) multiply the market value
BIPRU 7.3.48RRP
If a firm nets off positions in one or more of the equities constituting an equity index future, forward or CFD against one or more positions in the equity index future, forward or CFD itself, the firm must apply an additional equity PRR to the netted position to cover the risk of loss caused by the value of the future, forward or CFD not moving fully in line with that of its constituent equities. The same applies if a firm holds opposite positions in a future, forward or CFD
BIPRU 7.4.1RRP
A firm must calculate its commodity PRR by:(1) identifying which commodityposition must be included within the scope of the PRR calculation (see BIPRU 7.4.2R);(2) expressing each such position in terms of the standard unit of measurement of the commodity concerned;(3) expressing the spot price in each commodity in the firm'sbase currency at current spot foreign exchange rates;(4) calculating an individual PRR for each commodity (see BIPRU 7.4.20R); and(5) summing the resulting
BIPRU 7.4.2RRP
A firm'scommodity PRR calculation must, regardless of whether the positions concerned are trading book or non-trading bookpositions:(1) include physical commoditypositions;(2) (if the firm is the transferor of commodities or guaranteed rights relating to title to commodities in a repurchase agreement or the lender of commodities in a commodities lending agreement) include such commodities;(3) include notional positions arising from positions in the instruments listed in the table
BIPRU 7.4.3RRP
Gold positions are excluded from the scope of the commodity PRR. Instead, they are included within the scope of the foreign exchange PRR (BIPRU 7.5).
BIPRU 7.4.4RRP

Table: Instruments which result in notional positions

This table belongs to BIPRU 7.4.2R(3)

Instrument

See

Forwards, futures, CFDs, synthetic futures and options on a single commodity (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR))

BIPRU 7.4.8R

A commitment to buy or sell a single commodity at an average of spot prices prevailing over some future period

BIPRU 7.4.10R

Forwards, futures, CFDs, synthetic futures and options on a commodity index (unless the firm calculates an PRR on the option under BIPRU 7.6)

BIPRU 7.4.13R - BIPRU 7.4.14R

Commodityswaps

BIPRU 7.4.16R - BIPRU 7.4.17R

A warrant relating to a commodity must be treated as an option on a commodity.

BIPRU 7.4.7GRP
BIPRU 7.4.8R - BIPRU 7.4.19G convert the instruments listed in the table in BIPRU 7.4.4R into notional positions in the relevant commodities. These notional positions are expressed in terms of quantity (tonnes, barrels, etc), not value. The maturity of the position is only relevant where the firm is using the commodity maturity ladder approach or the commodity extended maturity ladder approach.
BIPRU 7.4.8RRP
Where a forward, future, CFD, synthetic future or option (unless already included in the firm'soption PRR calculation) settles according to:(1) the difference between the price set on trade date and that prevailing at contract expiry, the notional position:(a) equals the total quantity underlying the contract; and(b) has a maturity equal to the expiry date of the contract; and(2) the difference between the price set on trade date and the average of prices prevailing over a certain
BIPRU 7.4.13RRP
Commodity index futures and commodity index options (unless the option is included in the firm'soption PRR calculation), must be treated as follows:(1) Step 1: the total quantity underlying the contract must be either:(a) treated as a single notional commodityposition (separate from all other commodities); or(b) divided into notional positions, one for each of the constituent commodities in the index, of an amount which is a proportionate part of the total underlying the contract
BIPRU 7.4.24RRP
A firm which calculates a commodity PRR using the commodity simplified approach must do so by summing:(1) 15% of the net position multiplied by the spot price for the commodity; and(2) 3% of the gross position (long plus short, ignoring the sign) multiplied by the spot price for the commodity;(and for these purposes the excess of a firm's long (short) positions over its short (long) positions in the same commodity (including notional positions under BIPRU 7.4.4R) is its net position
BIPRU 7.4.28RRP

Table: Maturity bands for the maturity ladder approach

This table belongs to BIPRU 7.4.26R

Band

Maturity of position

Band 1

0 ≤ 1 month

Band 2

> 1 month ≤ 3 months

Band 3

> 3 months ≤ 6 months

Band 4

> 6 months ≤ 1 year

Band 5

> 1 year ≤ 2 years

Band 6

> 2 years ≤ 3 years

Band 7

> 3 years
BIPRU 7.4.36RRP
Where a firm is:(1) treating a commodity index derivative as if it was based on a single separate commodity (see BIPRU 7.4.13R(1)(a)); and(2) using the commodity extended maturity ladder approach to calculate the commodity PRR for that commodity;it must determine which index constituent incurs the highest rate in the table in BIPRU 7.4.33R and apply that rate to the notional position for the purposes of BIPRU 7.4.32R.
BIPRU 7.4.39GRP
In particular, where BIPRU 7.4.38R applies and the short position constitutes a material position compared to a firm's total commoditypositions, it should consider a further commodity PRR charge in respect of that position depending on the likelihood of a shortage of liquidity in that market.
BIPRU 7.6.1RRP
A firm must calculate its optionPRR by:(1) identifying which optionpositions must be included within the scope of the optionPRR calculation under BIPRU 7.6.3R - BIPRU 7.6.5R;(2) calculating the derived position in each option in accordance with BIPRU 7.6.9R - BIPRU 7.6.15R;(3) calculating the PRR for each derived position in accordance with BIPRU 7.6.16R - BIPRU 7.6.31R;(4) summing all of the PRRs calculated in accordance with (3).
BIPRU 7.6.2GRP
Firms are reminded that the table in BIPRU 7.2.4R (Instruments which result in notional positions for the purposes of the interest rate PRR) and the table in BIPRU 7.3.3R (Instruments which result in notional positions for the purposes of the equity PRR) also require an interest rate PRR to be calculated for options on equities, baskets of equities or equities indices. The interaction between BIPRU 7.6 and the rest of Chapter 7 is illustrated in BIPRU 7.6.33G.
BIPRU 7.6.7RRP
(1) The appropriate PRA for a position is that listed in the table in BIPRU 7.6.8R against the relevant underlying position.(2) If the firm uses the commodity extended maturity ladder approach or the commodity maturity ladder approach for a particular commodity under BIPRU 7.4 (Commodity PRR) the appropriate PRA for an option on that commodity is the outright rate applicable to the underlying position (see BIPRU 7.4.26R (Calculating the PRR for each commodity: Maturity ladder
BIPRU 7.6.14RRP
A firm may treat (for the purpose of calculating an option PRR under BIPRU 7.6) an option strategy listed in the table in BIPRU 7.6.15R as the single position in a notional option specified against that strategy in the table in BIPRU 7.6.15R, if:(1) each element of the strategy is transacted with the same counterparty;(2) the strategy is documented as a single structure;(3) the underlying for each part of the composite position (including any actual holding of the underlying)
BIPRU 7.6.16RRP
A firm must calculate the option PRR for each individual derived optionposition using the method specified in the table in BIPRU 7.6.18R, or, if more than one method is permitted, using one of those methods.
BIPRU 7.6.17RRP
A firm must convert its positions into its base currency in accordance with the procedures that apply for whichever of the other PRR charges is appropriate (see BIPRU 7.2.1R(3), BIPRU 7.3.1R(2), BIPRU 7.4.1R(3), BIPRU 7.5.19R(2), BIPRU 7.5.20R(3) and BIPRU 7.7.1R(3)).
BIPRU 7.6.18RRP

Table: Option PRR: methods for different types of option

This table belongs to BIPRU 7.6.16R

Option

Description

Method

American option

An option that may be exercised at any time over an extended period up to its expiry date.

Option standard method or option hedging method if appropriate

European option

An option that can only be exercised at expiry.

Bermudan option

A cross between an American option and European option. The Bermudan option can only be exercised at specific dates during its life.

Asian option

The buyer has the right to exercise at the average rate or price of the underlying over the period (or part of the period) of the option. One variant is where the payout is based on the average of the underlying against a fixed strike price; another variant is where the payout gives at expiry the price of the underlying against the average price over the option period.

Option standard method or option hedging method if appropriate

Barrier option

An option which is either cancelled or activated if the price of the underlying reaches a pre-set level regardless of the price at which the underlying may be trading at the expiry of the option. The knock-out type is cancelled if the underlying price or rate trades through the trigger; while the knock-in becomes activated if the price moves through the trigger.

Corridor option

Provides the holder with a pay-out for each day that the underlying stays within a defined range chosen by the investor.

Ladder option

Provides the holder with guaranteed pay-outs if the underlying trades through a pre-agreed price(s) or rate(s) at a certain point(s) in time, regardless of future performance.

Lock-in option

An option where the pay-out to the holder is locked in at the maximum (or minimum) value of the underlying that occurred during the life of the option.

Look-back option

A European style option where the strike price is fixed in retrospect, that is at the most favourable price (i.e. the lowest (highest) price of the underlying in the case of a call (put)) during the life of the option.

Forward starting option

An option that starts at a future date.

Compound option

An option where the underlying is itself an option (i.e. an option on an option).

Option standard method or option hedging method if appropriate

Interest rate cap

An interest rate option or series of options under which a counterparty contracts to pay any interest costs arising as a result of an increase in rates above an agreed rate: the effect being to provide protection to the holder against a rise above that agreed interest rate.

Option standard method, but no reduction for the amount the option is out of the money is permitted

Interest rate floor

An interest rate option or series of options under which a counterparty contracts to pay any lost income arising as a result of a fall in rates below an agreed rate: the effect being to provide protection to the holder against a fall below that agreed interest rate.

Performance option

An option based on a reference basket comprising any number of assets, where the pay-out to the holder could be one of the following: the maximum of the worst performing asset, or 0; the maximum of the best performing asset, or 0; the maximum of the spreads between several pairs of the assets, or 0.

Option standard method or option hedging method - using the highest PRA of the individual assets in the basket

Quanto

Quanto stands for "Quantity Adjusted Option". A quanto is an instrument where two currencies are involved. The payoff is dependent on a variable that is measured in one of the currencies and the payoff is made in the other currency.

Subject to BIPRU 7.6.31R, the option standard method

Cliquet option

A cliquet option consists of a series of forward starting options where the strike price for the next exercise date is set equal to a positive constant times the underlying price as of the previous exercise date. It initially acts like a vanilla option with a fixed price but as time moves on, the strike is reset and the intrinsic value automatically locked in at pre-set dates. If the underlying price is below the previous level at the reset date no intrinsic value is locked in but the strike price will be reset to the current price attained by the underlying. If the underlying price exceeds the current level at the next reset the intrinsic value will again be locked in.

Option standard method for a purchased cliquet, or the method specified in BIPRU 7.6.30R for a written cliquet

Digital option

A type of option where the pay-out to the holder is fixed. The most common types are all-or-nothing and one-touch options. All-or-nothing will pay out the fixed amount if the underlying is above (call) or below (put) a set value at expiry. The one-touch will pay the fixed amount if the underlying reaches a fixed point any time before expiry.

The method specified in BIPRU 7.6.29 R

Any other option or warrant

The method specified for the type of instrument whose description it most closely resembles.
BIPRU 7.6.20RRP
Under the option standard method, the PRR for a purchased option or warrant is the lesser of:(1) the market value of the derived position (see BIPRU 7.6.9R) multiplied by the appropriate PRA (see BIPRU 7.6.8R); and(2) the market value of the option or warrant.
BIPRU 7.6.22RRP
Under the option standard method, the PRR for underwriting or sub-underwriting an issue of warrants is the net underwriting position (or reduced net underwriting position) multiplied by the current market price of the underlying securities multiplied by the appropriate PRA, but the result can be limited to the value of the net underwriting position (or reduced net underwriting position) calculated using the issue price of the warrant.
BIPRU 7.6.24RRP
Under the option hedging method a firm must calculate the option PRR for individual positions as follows:(1) for an option or warrant on an equity, basket of equities or equity index and its equity hedge(s), the firm must, to the extent specified or permitted in the table in BIPRU 7.6.26R, use the calculation in the table in BIPRU 7.6.27R;(2) for an option or warrant on a debt security, basket of debt securities or debt security index and its debt security hedge(s), the firm must,
BIPRU 7.6.26RRP

Table: Appropriate treatment for equities, debt securities or currencies hedging options

This table belongs to BIPRU 7.6.24R

Hedge

PRR calculation for the hedge

Limits (if hedging method is used)

Naked position

An equity (hedging an option or warrant)

The equity must be treated in either BIPRU 7.3 (equity PRR) or the option hedging method (see the table in BIPRU 7.6.27R)

The option hedging method must only be used up to the amount of the hedge that matches the notional amount underlying the option or warrant

To the extent that the amount of the hedge (or option or warrant) exceeds the notional amount underlying the option or warrant (or hedge), a firm must apply an equity PRR, interest rate PRR or foreign currencyPRR (or the option standard method)

A debt security (hedging an option or warrant)

The debt security must be treated in BIPRU 7.2 (interest rate PRR) or the option hedging method (see the table in BIPRU 7.6.27R)

As for the first row

As for the first row

Gold (hedging a gold option)

The gold must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.27R)

As for the first row

As for the first row

A currency or currencies (hedging a currency option)

The currency must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.28R)

As for the first row

As for the first row
BIPRU 7.6.27RRP

Table: The hedging method of calculating the PRR (equities, debt securities and gold)

This table belongs to BIPRU 7.6.24R(1) - (3)

PRR

Option or warrantposition

In the money by more than the PRA

In the money by less than the PRA

Out of the money or at the money

Long in security or gold

Long put

Zero

Wp

X

Short call

Y

Y

Z

Short in security or gold

Long call

Zero

Wc

X

Short put

Y

Y

Z

Where:

Wp means

{(PRA-100%) x The underlying position valued at strike price}

+

The market value of the underlying position

Wc means

{(100% +PRA x The underlying position valued at strike price}

-

The market value of the underlying position

X means

The market value of the underlying position multiplied by the appropriate PRA

Y means

The market value of the underlying position multiplied by the appropriate PRA. This result may be reduced by the market value of the option or warrant, subject to a maximum reduction to zero.

Z means

The option hedging method is not permitted; the option standard method must be used.
BIPRU 7.6.28RRP

Table: The hedging method of calculating the PRR (currencies)

This table belongs to BIPRU 7.6.24R(4)

PRR

Optionposition

In the money by more than 8%

In the money by less than 8%

Out of the money or at the money

Long calls & long puts

Zero

WL

X

Short calls & short puts

Zero

Y

X

Where:

WL means

(1.08% x U)

-

The market value of the underlying position

U means

The amount of the underlying currency that the firm will receive if the option is exercised, converted at the strike price into the currency that the firm will sell if the option is exercised

X means

The market value of the underlying position multiplied by 8%.

Y means

The market value of the underlying position multiplied by 8%. This result may be reduced by the market value of the option, subject to a maximum reduction to zero.
BIPRU 7.6.36GRP
(1) This paragraph gives an example of how the appropriate PRA should be calculated for the purpose of deciding whether or not an option on a CIU is sufficiently in the money for the firm to have a choice whether or not to apply an option PRR. This example assumes that there is no leveraging (see BIPRU 7.7.11R (CIU modified look through method)).(2) Say that the CIU contains underlying equityposition and the firm is using one of the CIU look through methods. The appropriate PRA
BIPRU 7.1.3RRP
A firm must calculate a PRR in respect of:(1) all its trading bookpositions;(2) all positions falling within BIPRU 7.5.3 R (Scope of the foreign exchange PRR calculation), whether or not in the trading book; and(3) all positions in commodities (including physical commodities) whether or not in the trading book;even if no treatment is provided for that position in the other sections of this chapter.
BIPRU 7.1.4RRP
A firm must calculate a PRR for any position falling into BIPRU 7.1.3 R using:(1) the PRR calculations contained in BIPRU 7; or(2) another method provided the firm is able to demonstrate that in all circumstances the calculation being employed results in a higher PRR for the position than would be required under (1).
BIPRU 7.1.5GRP
Positions in instruments which are non-trading book items should be treated under BIPRU 3 (Standardised credit risk), (The IRB approach) or BIPRU 13 (Financial derivatives, SFTs and long settlement transactions) unless deducted as an illiquid asset. If they fall into BIPRU 7.1.3R(2) or (3) they also give rise to a PRR charge.
BIPRU 7.1.9RRP
Where a firm has a position for which no PRR treatment has been specified, it must calculate the PRR for that position in accordance with BIPRU 7.1.12R-BIPRU 7.1.13R.
BIPRU 7.1.10RRP
If BIPRU 7.1.9 R applies, a firm must document its policies and procedures for calculating the PRR for that position of that type in its trading book policy statement.
BIPRU 7.1.12RRP
A firm may calculate the PRR for a position falling into BIPRU 7.1.9R by applying by analogy the rules relating to the calculation of the interest rate PRR, the equity PRR, the commodity PRR, the foreign currency PRR2, the option PRR or the collective investment undertaking PRR if doing so is appropriate and if the position and PRR item are sufficiently similar to those that are covered by those rules.
BIPRU 7.1.13RRP
Where a firm has a position for which no PRR treatment has been specified and it is not applying BIPRU 7.1.12R, it must calculate a PRR of an appropriate percentage of the current value of the position calculated under GENPRU 1.3 (Valuation).
BIPRU 7.1.14RRP
(1) If a firm has a position:(a) in a PRR item in non-standard form; or(b) that is part of a non-standard arrangement; or(c) that, taken together with other positions (whether or not they are subject to PRRcharges under BIPRU 7), gives rise to a non-standard market risk;the firm must notify the FSA of that fact and of details about the position, PRR item, arrangements and type of risk concerned.(2) Except as (1) provides to the contrary, (1) applies to a position that is subject
BIPRU 7.1.15RRP
If a firm has a position or combination of positions falling into BIPRU 7.1.14R and the PRR relating to that position or positions materially underestimates the market risk incurred by the firm to which they give rise, the firm must calculate the PRR for that position or positions under BIPRU 7.1.13R.
BIPRU 7.11.2RRP
BIPRU 7.11.3R - BIPRU 7.11.11R relate to the treatment of the protection seller for the purpose of calculating the securities PRR. Positions are determined in accordance with BIPRU 7.11.4R - BIPRU 7.11.11R.
BIPRU 7.11.9RRP
A first-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity. If the size of the maximum credit event payment is lower than the PRR requirement under the method in the first sentence of this rule, the maximum payment amount may be taken as the PRR requirement for specific risk.
BIPRU 7.11.10RRP
A second-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity less one (that with the lowest specific riskPRR requirement). If the size of the maximum credit event payment is lower than the PRR requirement under the method in the first sentence of this rule, this amount may be taken as the PRR requirement for specific risk.
BIPRU 7.11.14RRP
(1) A firm may take full allowance when the value of two legs always move in the opposite direction and broadly to the same extent.(2) This will be the case in the following situations:(a) the two legs consist of completely identical instruments; or(b) a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (i.e., the cash position).(3) The maturity of the swap itself
BIPRU 7.11.16RRP
(1) A firm may take partial allowance when the value of two legs usually move in the opposite direction. This would be the case in the situations set out in (2) - (4).(2) The first situation referred to in (1) is that the position falls under BIPRU 7.11.16 R (2)(b) but there is an asset mismatch between the reference obligation and the underlying exposure. However, the positions meet the following requirements:(a) the reference obligation ranks pari passu with or is junior to
BIPRU 7.11.17RRP
In all situations not falling under BIPRU 7.11.14 R - BIPRU 7.11.16 R, a firm must assess a specific riskPRR charge against both sides of the positions.
BIPRU 7.5.1RRP
A firm must calculate its foreign currencyPRR by:(1) identifying which foreign currency and gold positions to include in the PRR calculation;(2) calculating the net open position in each currency in accordance with this section (including where necessary the base currency calculated in the same way as it is for foreign currencies) and in gold;(3) calculating the open currency position for foreign currencies as calculated under BIPRU 7.5.19R and the net gold position (see BIPRU
BIPRU 7.5.3RRP
A firm'sforeign currency PRR calculation must include the following items regardless of whether they are trading book or non-trading bookpositions:(1) all gold positions;(2) all spot positions in foreign currency (that is, all asset items less all liability items, including accrued interest, in the foreign currency in question);(3) all forward positions in foreign currency;(4) all CRD financial instruments and other items which are denominated in a foreign currency;(5) irrevocable
BIPRU 7.5.4RRP
(1) The following are excluded from a firm'sforeign currency PRR calculation:(a) foreign currency assets which have been deducted in full from the firm'scapital resources under the calculations under the capital resources table;(b) positions hedging (a);(c) positions that a firm has deliberately taken in order to hedge against the adverse effect of the exchange rate on the ratio of its capital resources to its capital resources requirement; and(d) transactions to the extent that
BIPRU 7.5.5RRP

Table: instruments which result in notional foreign currency positions

This table belongs to BIPRU 7.5.3R(6).

Instruments

See

Foreign currencyfutures, forwards, synthetic futures and CFDs

BIPRU 7.5.11R

Foreign currencyswaps

BIPRU 7.5.13R

Foreign currency options or warrants (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6 (Option PRR)).

BIPRU 7.5.15R

Gold futures, forwards, synthetic futures and CFDs

BIPRU 7.5.16R

Gold options (unless the firm calculates a PRR on the option under BIPRU 7.6).

BIPRU 7.5.17R

Positions in CIUs

BIPRU 7.5.18R
BIPRU 7.5.18RRP
(1) This rule deals with positions in CIUs.(2) The actual foreign currencypositions of a CIU must be included in a firm'sforeign currency PRR calculation under BIPRU 7.5.1 R1.(3) A firm may rely on third party reporting of the foreign currencypositions in the CIU, where the correctness of this report is adequately ensured.(4) If a firm is not aware of the foreign currencypositions in a CIU, the firm must assume that the CIU is invested up to the maximum extent allowed under the
BIPRU 7.7.1RRP
A firm must calculate its CIU PRR by:(1) identifying which CIUpositions must be included within the scope of the PRR calculation (see BIPRU 7.7.2R);(2) identifying which CIUpositions are to be subject to the CIU PRR and which positions are to be subject to one of the other PRR charges;(3) converting on a daily basis net positions into the firm'sbase currency at the prevailing spot exchange rate before their aggregation;(4) calculating an individual PRR for each position in a CIU
BIPRU 7.7.2RRP
(1) A firm'sPRR calculation must include all trading bookpositions in CIUs.(2) A firm'sCIU PRR calculation must include all trading bookpositions in CIUs unless they are treated under one of the CIU look through methods and included in the PRR calculations for the relevant underlying investments or subject to an option PRR.(3) A firm'sPRR calculation for CIUs must include notional positions arising from trading bookpositions in options or warrants on collective investmentunde
BIPRU 7.7.3RRP
Unless noted otherwise, no netting is permitted between the underlying investments of a CIU and other positions held by a firm for the purposes of calculating the PRR charge for a position in a CIU.
BIPRU 7.7.4RRP
A firm may rely on a third party to calculate and report PRR capital requirements for position risk (general market risk and specific risk) for positions in CIUs falling within BIPRU 7.7.9R and BIPRU 7.7.11R, in accordance with the methods set out in BIPRU 7.7, provided that the correctness of the calculation and the report is adequately ensured.
BIPRU 7.7.5RRP
Without prejudice to other provisions in BIPRU 7.7, a position in a CIU is subject to a collective investment undertaking PRR (general market risk and specific risk) of 32%. Without prejudice to provisions in BIPRU 7.5.18R (Foreign currency PRR for CIUs) or, if the firm has a VaR model permission, BIPRU 7.10.44R (Commodity risks and VaR models) taken together with BIPRU 7.5.18R, where the modified gold treatment set out in those rules is used, a position in a CIU is subject to
BIPRU 7.7.6RRP
A firm may determine the securities PRR requirement for positions in CIUs which meet the criteria set out in BIPRU 7.7.7R, by one of the following methods:(1) the standard CIU look through method (BIPRU 7.7.4R and BIPRU 7.7.7R - BIPRU 7.7.10R); or(2) the modified CIU look through method (BIPRU 7.7.4R, BIPRU 7.7.7R - BIPRU 7.7.8R and BIPRU 7.7.11R - BIPRU 7.7.12R).
BIPRU 7.7.9RRP
(1) Where a firm is aware of the underlying investments of the CIU on a daily basis the firm may look through to those underlying investments in order to calculate the securities PRR for position risk (general market risk and specific risk) for those positions in accordance with the methods set out in the securities PRR requirements or, if the firm has a VaR model permission, in accordance with the methods set out in BIPRU 7.10 (Use of a Value at Risk Model).(2) Under this approach,
BIPRU 7.7.11RRP
Where a firm is not aware of the underlying investments of the CIU on a daily basis, the firm may calculate the securities PRR for position risk (general market risk and specific risk) in accordance with the methods set out in the securities PRR requirements, subject to the following conditions:(1) it must be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting the highest securities PRR for position risk (general market
BIPRU 7.7.13GRP
Where BIPRU 7.7 permits a firm to calculate the PRR charge for a position in a CIU using the rules in BIPRU 7 relating to the underlying investment, a firm that has:(1) a CAD 1 model waiver that covers positions in CIUs may use the rules as modified by that waiver; and(2) a VaR model permission that covers positions in CIUs may use its VaR model.
BIPRU 7.9.1GRP
A firm is required under GENPRU 2.1.52 R (Calculation of the market risk capital requirement) to calculate its market risk capital requirement using the rules in BIPRU 7. However, the FSA may at the firm's request modify GENPRU 2.1.52 R to allow the firm to calculate all or part of the PRR for the positions covered by that model by using a CAD 1 model (for options risk aggregation and/or interest rate pre-processing) or a VaR model (value at risk model) instead. BIPRU 7.10 (Use
BIPRU 7.9.42GRP
The values that have been obtained for the delta-equivalent positions of instruments included in the scenario matrix should then be treated in the same way as positions in the underlying. Where the delta obtained relates to interest rate position risk, the delta equivalent positions may be fed into the firm's interest rate pre-processing model to the extent that the positions fall within the scope of interest rate pre-processing models as set out in BIPRU 7.9.7G and provided that
BIPRU 7.8.1GRP
BIPRU 7.8 sets out the method for calculating a net underwriting position or reduced net underwriting position, which is then included in the PRR calculation in other parts of BIPRU 7. It also deals with concentration risk. BIPRU 7.8 only relates to new securities, which is defined in BIPRU 7.8.12R.
BIPRU 7.8.7GRP
The net underwriting position or reduced net underwriting position arising from underwriting or sub-underwriting a rights or warrants issue should be calculated using the current market price of the underlying security for the purposes of the equity PRR or option PRR. However, the PRR will be limited to the value of the net underwriting position calculated using the initial issue price of the rights or warrants. Where there is no market price because the rights or warrants are
BIPRU 7.8.27RRP
To calculate the reduced net underwriting position a firm must apply the reduction factors in the table in BIPRU 7.8.28R to the net underwriting position (calculated under BIPRU 7.8.17R) as follows:(1) in respect of debt securities, a firm must calculate two reduced net underwriting positions; one for inclusion in the firm'sinterest rate PRRspecific risk calculation (BIPRU 7.2.43R), the other for inclusion in its interest rate PRRgeneral market risk calculation (BIPRU 7.2.52R);
GENPRU 1.2.70GRP
The time horizon over which stress tests and scenario analysisshould be carried out shoulddepend on the maturity and liquidity of the positions stressed. For example, for the market risk arising from the holding of investments, this shoulddepend upon:(1) the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily and quickly identified; and(2) the extent to which the market