Related provisions for BIPRU 7.9.52

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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 7.2.6GRP
BIPRU 7.2.3R(1) includes net underwriting positions or reduced net underwriting position in debt securities.
BIPRU 7.2.10GRP
BIPRU 7.2.11 R - BIPRU 7.2.35R convert the instruments listed in the table in BIPRU 7.2.4R into notional positions in:(1) the underlying debt security, where the instrument depends on the price (or yield) of a specific debt security; or(2) notional debt securities to capture the pure interest rate risk arising from future payments and receipts of cash (including notional payments and receipts) which, because they are designed to represent pure general market risk (and not specific
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 7.2.13RRP
Futures, forwards or synthetic futures on a single debt security must be treated as follows:(1) a purchased future, synthetic future or forward is treated as:(a) a notional long position in the underlying debt security (or the cheapest to deliver (taking into account the conversion factor) where the contract can be satisfied by delivery of one from a range of securities); and(b) a notional short position in a zero coupon zero-specific-risk security with a maturity equal to the
BIPRU 7.2.16RRP
The notional debt securities in BIPRU 7.2.14R are assigned a specific risk PRA and a general market risk PRA equal to the highest that would apply to the debt securities in the basket or index.
BIPRU 7.2.17GRP
The debt security with the highest specific risk PRA within the basket might not be the same as the one with the highest general market risk PRA. BIPRU 7.2.16R requires a firm to select the highest percentages even where they relate to different debt securities in the basket or index, and regardless of the proportion of those debt securities in the basket or index.
BIPRU 7.2.18RRP
Interest rate futures or FRAs must be treated as the two notional positions (one long, one short) shown in the table in BIPRU 7.2.19R.
BIPRU 7.2.20GRP
(1) The following example illustrates BIPRU 7.2.18R and BIPRU 7.2.19R in conjunction with BIPRU 7.2.11R (the last rule determines the value of notional positions). A firm sells £1mn notional of a 3v6 FRA at 6%. This results in:(a) a short position in a zero-specific-risk security with a zero coupon, three month maturity, and a nominal amount of £1million; and(b) a long position in a zero-specific-risk security with a zero coupon, six month maturity, and nominal amount of £1,015,000
BIPRU 7.2.21RRP
Interest rate swaps or foreign currency swaps without deferred starts must be treated as the two notional positions (one long, one short) shown in the table in BIPRU 7.2.22R.
BIPRU 7.2.22RRP

Table: Interest rate and foreign currency swaps

This table belongs to BIPRU 7.2.21R

Paying leg (which must be treated as a short position in a zero-specific-risk security)

Receiving leg (which must be treated as a long position in a zero-specific-risk security)

Receiving fixed and paying floating

Coupon equals the floating rate and maturity equals the reset date

Coupon equals the fixed rate of the swap and maturity equals the maturity of the swap

Paying fixed and receiving floating

Coupon equals the fixed rate of the swap and maturity equals the maturity of the swap

Coupon equals the floating rate and maturity equals the reset date

Paying floating and receiving floating

Coupon equals the floating rate and maturity equals the reset date

Coupon equals the floating rate and maturity equals the reset date
BIPRU 7.2.24RRP
Interest rate swaps or foreign currencyswaps with a deferred start must be treated as the two notional positions (one long, one short) shown in the table in BIPRU 7.2.25R.
BIPRU 7.2.25RRP

Table: Deferred start interest rate and foreign currency swaps

This table belongs to BIPRU 7.2.24R

Paying leg (which must be treated as a short position in a zero-specific-risk security with a coupon equal to the fixed rate of the swap)

Receiving leg (which must be treated as a long position in a zero-specific-risk security with a coupon equal to the fixed rate of the swap)

Receiving fixed and paying floating

maturity equals the start date of the swap

maturity equals the maturity of the swap

Paying fixed and receiving floating

maturity equals the maturity of the swap

maturity equals the start date of the swap
BIPRU 7.2.27RRP
A firm must treat a swap with only one interest rate leg as a notional position in a zero-specific-risk security:(1) with a coupon equal to that on the interest rate leg;(2) with a maturity equal to the date that the interest rate will be reset; and(3) which is a long position if the firm is receiving interest payments and short if making interest payments.
BIPRU 7.2.30RRP
The forward cash leg of a repurchase agreement or reverse repurchase agreement must be treated as a notional position in a zero-specific-risk security which:(1) is a short notional position in the case of a repurchase agreement; and a long notional position in the case of a reverse repurchase agreement;(2) has a value equal to the market value of the cash leg;(3) has a maturity equal to that of the repurchase agreement or reverse repurchase agreement; and(4) has a coupon equal
BIPRU 7.2.31RRP
A cash borrowing or deposit must be treated as a notional position in a zero coupon zero-specific-risk security which:(1) is a short position in the case of a borrowing and a long position in the case of a deposit;(2) has a value equal to the market value of the borrowing or deposit;(3) has a maturity equal to that of the borrowing or deposit, or the next date the interest rate is reset (if earlier); and(4) has a coupon equal to:(a) zero, if the next interest payment date coincides
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 7.2.33RRP
Where a debt security pays coupons in one currency, but will be redeemed in a different currency, it must be treated as:(1) a debt security denominated in the coupon's currency; and(2) a foreign currencyforward to capture the fact that the debt security's principal will be repaid in a different currency from that in which it pays coupons, specifically:(a) a notional forward sale of the coupon currency and purchase of the redemption currency, in the case of a long position in the
BIPRU 7.2.34RRP
Other futures, forwards, options and swaps treated under BIPRU 7.2 must be treated as positions in zero-specific-risk securities, each of which:(1) has a zero coupon;(2) has a maturity equal to that of the relevant contract; and(3) is long or short according to the table in BIPRU 7.2.35R.
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 7.2.36RRP
The net position in a debt security is the difference between the value of the firm's long positions (including notional positions) and the value of its short positions (including notional positions) in the same debt security.
BIPRU 7.2.37RRP
(1) A firm must not net positions (including notional positions) unless those positions are in the same debt security. This rule sets out the circumstances in which debt securities may be treated as the same for these purposes.(2) Subject to (3) long and short positions are in the same debt security, and a debt security is the same as another if and only if:(a) they enjoy the same rights in all respects; and(b) are fungible with each other.(3) Long and short positions in different
BIPRU 7.2.38RRP
A firm may net a short notional position in the cheapest to deliver security arising from a short future or forward (see BIPRU 7.2.13R(2)(a)) under which the seller has a choice of which debt security it may use to settle its obligations against a long position in any deliverable security up to a maximum of 90% of the common nominal amounts. The residual long and short nominal amounts must be treated as separate long and short positions.
BIPRU 7.2.40RRP
A firm may net a notional long position in a zero-specific-risk security against a notional short position in a zero-specific-risk security if:(1) they are denominated in the same currency;(2) their coupons do not differ by more than 15 basis points; and(3) they mature:(a) on the same day, if they have residual maturities of less than one month;(b) within 7 days of each other, if they have residual maturities of between one month and one year; and(c) within 30 days of each other,
BIPRU 7.2.41RRP
A firm must not net a reduced net underwriting position in a debt security with any other debt securityposition.
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 7.2.44RRP

Table: specific risk PRAs

This table belongs to BIPRU 7.2.43R.

Issuer

Residual maturity

PRA

Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities which would qualify for credit quality step 1 or which would receive a 0% risk weight under the standardised approach to credit risk.

Any

0%

(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities which would qualify for credit quality step 2 or 3 under the standardised approach to credit risk.

(B) Debt securities issued or guaranteed by institutions which would qualify for credit quality step 1 or 2 under the standardised approach to credit risk.

(C) Debt securities issued or guaranteed by institution which would qualify for credit quality step 3 under BIPRU 3.4.34 R (Exposures to institutions: Credit assessment based method) or which would do so if it had an original effective maturity of three months or less.

(D) Debt securities issued or guaranteed by corporates which would qualify for credit quality step 1 or 2 under the standardised approach to credit risk.

(E) Other qualifying debt securities (see BIPRU 7.2.49R)

Zero to six months

0.25%

over 6 and up to and including 24 months

1%

Over 24 months

1.6%

(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities or institutions which would qualify for credit quality step 4 or 5 under the standardised approach to credit risk.

(B) Debt securities issued or guaranteed by corporates which would qualify for credit quality step 3 or 4 under the standardised approach to credit risk.

(C) Exposures for which a credit assessment by a nominated ECAI is not available.

Any

8%

(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or EEA States' regional governments or local authorities or institution which would qualify for credit quality step 6 under the standardised approach to credit risk.

(B) Debt securities issued or guaranteed by corporate which would qualify for credit quality step 5 or 6 under the standardised approach to credit risk.

(C) An instrument that shows a particular risk because of the insufficient solvency of the issuer of liquidity. This paragraph applies even if the instrument would otherwise qualify for a lower PRA under this table.

Any

12%

Note: The question of what a corporate is and of what category a debt security falls into must be decided under the rules relating to the standardised approach to credit risk.
BIPRU 7.2.46RRP
A debt security issued by a non-qualifying issuer must receive a specific risk PRA of 8% or 12% according to the table in BIPRU 7.2.44R. However a firm must apply a higher specific risk PRA to such a debt security and/or not recognise offsetting for the purposes of defining the extent of general market risk between such a security and any other debt securities to the extent that doing otherwise would not be a prudent treatment of specific risk or general market 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 7.2.57RRP

Table: general market risk PRAs

This table belongs to BIPRU 7.2.56R.

Zone

Maturity band

PRA

Coupon of 3% or more

Coupon of less than 3%

One

0 ≤ 1 month

0 ≤ 1 month

0.00%

> 1 ≤ 3 months

> 1 ≤ 3 months

0.20%

> 3 ≤ 6 months

> 3 ≤ 6 months

0.4%

> 6 ≤ 12 months

> 6 ≤ 12 months

0.7%

Two

> 1 ≤ 2 years

> 1.0 ≤ 1.9 years

1.25%

> 2 ≤ 3 years

> 1.9 ≤ 2.8 years

1.75%

> 3 ≤ 4 years

> 2.8 ≤ 3.6 years

2.25%

Three

> 4 ≤ 5 years

> 3.6 ≤ 4.3 years

2.75%

> 5 ≤ 7 years

> 4.3 ≤ 5.7 years

3.25%

> 7 ≤ 10 years

> 5.7 ≤ 7.3 years

3.75%

> 10 ≤ 15 years

> 7.3 ≤ 9.3 years

4.5%

> 15 ≤ 20 years

> 9.3 ≤ 10.6 years

5.25%

> 20 years

> 10.6 ≤ 12.0 years

6.00%

> 12.0 ≤ 20.0 years

8.00%

> 20 years

12.50%
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 7.3.5GRP
BIPRU 7.3.2R(1) includes net underwriting positions or reduced net underwriting positions in equities. BIPRU 7.3.27R requires a firm to use the simplified equity method in the case of reduced net underwriting positions. In the case of net underwriting positions that have not been reduced according to BIPRU 7.8.27R (Calculating the reduced net underwriting position), there is no such restriction; a firm can choose which of the two equity methods to use.
BIPRU 7.3.9GRP
BIPRU 7.3.10R - BIPRU 7.3.21R convert the instruments listed in the table in BIPRU 7.3.3R into notional positions in individual equities, equity baskets or equity indices.
BIPRU 7.3.10RRP
Unless specified otherwise, the value of each notional equityposition equals the quantity of that equity underlying the instrument multiplied by the current market value of the equity.
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 7.3.12RRP
A depository receipt must be treated as a notional position in the underlying equity.
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 7.3.14RRP
A future (including a synthetic future), forward or CFD on a single equity must be treated as a notional position in that equity.
BIPRU 7.3.15RRP
A future (including a synthetic future), forward or CFD on an equity index or basket must be treated as either:(1) a position in each of the underlying equities; or(2) the positions shown in the table in BIPRU 7.3.16R.
BIPRU 7.3.16RRP

Table: Instruments which result in notional positions

This table belongs to BIPRU 7.3.15R(2)

Under the simplified equity method (BIPRU 7.3.29R)

Under the standard equity method (BIPRU 7.3.32R)

Only one country in the index or basket (see BIPRU 7.3.32R)

One position in the index or basket

One position in the index or basket

More than one country in the index or basket

One position in the index or basket

Several notional basket positions, one for each country

or

One notional basket position in a separate, notional country
BIPRU 7.3.17GRP
An example of BIPRU 7.3.16R is as follows. A firm decides to treat a FTSE Eurotop 300 future under the standard equity method, and furthermore, chooses to treat it as one notional position. The table in BIPRU 7.3.16R requires that this notional position be treated as if it were from a separate notional country rather than any of the countries to which the underlying equities are from.
BIPRU 7.3.18RRP
The notional positions created under BIPRU 7.3.15R have the following values:(1) where only one notional position is created, it has a value equal to the total market value of the equities underlying the contract; or(2) where more than one notional position is created, each one has a value which reflects the relevant equity's or country's contribution to the total market value of the equities underlying the contract.
BIPRU 7.3.19RRP
The equity leg of an equityswap must be treated as a position in the underlying equity, equity basket or equity index, which is:(1) long, if the firm has contracted to receive any increase and pay any decrease in the value of the underlying equities or equity index; and(2) short, if the firm has contracted to receive any decrease and pay any increase in the value of the underlying equities or equity index.
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 7.3.22RRP
The net position in each equity is the difference between the value of the firm's long positions (including notional positions) and the value of its short positions (including notional positions) in the same equity.
BIPRU 7.3.23RRP
(1) When deriving the net position in each equity, a firm must not net long and short positions except in accordance with this rule.(2) Subject to (3), a firm may net long and short positions in the same equity. Two equities are the same if and only if they:(a) enjoy the same rights in all respects; and(b) are fungible with each other.(3) Long and short positions in different tranches of the same equity may be treated as being in the same equity for the purpose of (1), where:(a)
BIPRU 7.3.24RRP
A firm must not net a reduced net underwriting position with any other equityposition.
BIPRU 7.3.25GRP
BIPRU 7.3.24R only relates to reduced net underwriting position.
BIPRU 7.3.26GRP
BIPRU 7.3.1R (1) requires that the net position in each equity be included in either the simplified equity method or the standard equity method, subject to the restriction in BIPRU 7.3.27R. A firm does not have to use the same method for all equities.
BIPRU 7.3.27RRP
A firm must use the simplified equity method for reduced net underwriting positions.
BIPRU 7.3.28GRP
A firm may use either method for a net underwriting position; BIPRU 7.3.27R only relates to reduced net underwriting positions.
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 7.3.31GRP
The standard equity method divides the risk of loss from a firm'sequitypositions into the risk of loss from a general move in a country's equity market and the risk of loss from an individual equity's price changing relative to that country's equity market. These are called general market risk and specific risk respectively.
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 7.3.34RRP

Table: PRAsfor specific risk under the standard equity method

This table belongs to BIPRU 7.3.33R1

Instrument

PRA

Qualifying equities

2%

Qualifying equity indices (see BIPRU 7.3.38R)

0%

All other equities, equity indices or equities baskets

4%
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 7.10.18RRP
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 7.10.20GRP
A VaR model permission will generally set out the broad classes of position within its scope. It may also specify how individual products within one of those broad classes may be brought into or taken out of the scope of the VaR model permission.
BIPRU 7.10.21GRP
The broad classes of position referred to in BIPRU 7.10.20G are as follows:(1) linear products, which comprise securities with linear pay-offs (e.g. bonds and equities) and derivative products which have linear pay-offs in the underlying risk factor (e.g. interest rate swaps, FRAs, total return swaps);(2) European, American and Bermudan put and call options (including caps, floors and swaptions) and investments with these features (see BIPRU 7.6.18R (Table: Option PRR: methods
BIPRU 7.10.32GRP
A data series is unreliable if it has, for example, missing data points, or data points which contain stale data. Reliable data series may be difficult to obtain for new products (for example an instrument of longer dated tenor that did not previously trade) and for less liquid risk factors or positions. With regard to less liquid risk factors or positions, a firm may use a combination of prudent valuation techniques and alternative VaR estimation techniques to ensure there is
BIPRU 7.10.40RRP
For interest rate risk, a VaR model must incorporate a set of risk factors corresponding to the interest rate curves in each currency in which the firm has interest rate sensitive positions. A firm must ensure that it captures the variations of volatility of rates along the yield curve. In order to achieve this, a firm must divide the yield curves of, at a minimum, the major currencies and markets in which it has material interest rate exposures into a minimum of six maturity
BIPRU 7.10.41RRP
For equity risk, a VaR model must use a separate risk factor at least for each of the equity markets in which the firm has material positions.
BIPRU 7.10.42RRP
For foreign currency risk, a VaR model must incorporate risk factors corresponding to the individual foreign currencies, including gold, in which the firm'spositions are denominated.
BIPRU 7.10.43RRP
For commodity risk, the VaR model must use a separate risk factor at least for each commodity in which the firm has material positions. The VaR model must also capture the risk of less than perfectly correlated movements between similar, but not identical, commodities and the exposure to changes in forward prices arising from maturity mismatches. It must also take account of market characteristics, notably delivery dates and the scope provided to traders to close out position
BIPRU 7.10.44RRP
(1) For CIUs the actual foreign currencypositions of the CIU must be taken into account.(2) A firm may rely on third party reporting of the foreign currencyposition of the CIU, where the correctness of this report is adequately ensured.(3) If a firm is not aware of the foreign currencypositions in a CIU, this position must be carved out and treated in BIPRU 7.5.18R (Derivation of notional positions in CIUs for the foreign currencyPRR).
BIPRU 7.10.45GRP
(1) This paragraph contains guidance on the inclusion of CIUs in a VaR model.(2) The FSA may allow all types of CIU to be included within the scope of a firm'sVaR model permission.(3) BIPRU 7.10 does not distinguish between specific risk and general market risk for positions in CIUs. Therefore even if specific risk is not otherwise included within the scope of a firm'sVaR model permission, a firm should be able to demonstrate that its VaR model captures specific risk.(4) A firm
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 7.10.48RRP
(1) Where a firm is subject to event risk that is not reflected in its VaR measure, because it is beyond the 10-day holding period and 99 percent confidence interval (low probability and high severity events), the firm must ensure that the impact of such events is factored into its internal capital assessment.(2) A firm'sVaR model must conservatively assess the risk arising from less liquid positions and positions with limited price transparency under realistic market scenarios.
BIPRU 7.10.53RRP
A firm'sVaR model must capture accurately all material price risks for positions within the scope of its VaRpermission, including risks relating to options or option-like positions. The firm must ensure that, if its VaR model does not accurately capture any material risk, the firm has capital resources adequate to cover that risk. These capital resources must be additional to those required to meet its capital resources requirement.
BIPRU 7.10.63RRP
A firm'sgoverning body and senior management must be actively involved in the risk control process, and the daily reports produced by the risk control unit must be reviewed by a level of management with sufficient authority to enforce both reductions of positions taken by individual traders as well as in the firm's overall risk exposure.
BIPRU 7.10.72RRP
(1) A firm must frequently conduct a rigorous programme of stress testing. The results of these tests must be reviewed by senior management and reflected in the policies and limits the firm sets.(2) The programme must particularly address:(a) concentration risk;(b) illiquidity of markets in stressed market conditions;(c) one way markets;(d) event and jump to default risks;(e) non linearity of products;(f) deep out of the money positions;(g) positions subject to the gapping of
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 7.10.97GRP
Generally the positions underlying the profit and loss account and VaR measures should not be materially different.
BIPRU 7.10.115RRP
The VaR number for any business day means the VaR measure, in respect of the previous business day's close-of-business positions in products coming within the scope of the VaR model permission, calculated by the VaR model and in accordance with BIPRU 7.10 and any methodology set out in the VaR model permission. The VaR number must not be calculated taking into account matters on the business day for which it is the VaR number.
BIPRU 7.10.116RRP
The incremental default risk charge for any business day means the incremental default risk charge required under the provisions in BIPRU 7.10 about specific risk, in respect of the previous business day's close-of-business positions with respect to which those provisions apply.
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 7.4.1RRP
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 7.4.5GRP
BIPRU 7.4.2R includes a trading bookposition in a commodity that is subsequently repo'd under a repurchase agreement or lent under a stock lending agreement. Clearly, if the commodity had initially been obtained via a reverse repurchase agreement or stock borrowing agreement, the commodity would not have been included in the trading book in the first place.
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 7.4.10RRP
Commitments to buy or sell at the average spot price of the commodity prevailing over some period between trade date and maturity must be treated as a combination of:(1) a position equal to the full amount underlying the contract with a maturity equal to the maturity date of the contract which is:(a) long, where the firm will buy at the average price; or(b) short, where the firm will sell at the average price; and(2) a series of notional positions, one for each of the reference
BIPRU 7.4.11GRP
The following guidance provides an example of BIPRU 7.4.10R. In January, a firm agrees to buy 100 tonnes of copper for the average spot price prevailing during the 20 business days in February, and will settle on 30 June. After entering into this agreement, the firm faces the risk that the average price for February increases relative to that for 30 June. Therefore, as highlighted in the table below:(1) the short positions reflect the fact that this could occur because any one
BIPRU 7.4.12GRP

Table: Example of buying at the average spot price prevailing in the future

This table belongs to BIPRU 7.4.11G

Application of BIPRU 7.4.10R(1)

Application of BIPRU 7.4.10R(2)

From trade date to start of averaging period

Long position in 100 tonnes of copper with a maturity of 30 June.

A series of 20 notional short positions each equal to 5 tonnes of copper. Each position is allocated a maturity equal to one of the business days in February (one for each day).

During averaging period

Long position in 100 tonnes of copper with a maturity of 30 June.

As each business day goes by in February the price for 5 tonnes of copper is fixed and so there will be one less notional short position.

After averaging period

Long position in 100 tonnes of copper with a maturity of 30 June.

No short positions.
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 7.4.14RRP

Table: Treatment of commodity index futures and commodity index options

This table belongs to BIPRU 7.4.13R(2)(b)

Construction of index

Notional position (or positions) and maturity

Spot level of index is based on the spot price of each constituent commodity

Each quantity determined in Step 1 as referred to in BIPRU 7.4.13R is assigned a maturity equal to the expiry date of the contract.

Spot level of index is based on an average of the forward prices of each constituent commodity

Each quantity determined in Step 1 as referred to in BIPRU 7.4.13R is divided (on a pro-rata basis) into a series of forward positions to reflect the impact of each forward price on the level of the index. The maturity of each forward position equals the maturity of the relevant forward price determining the level of the index when the contract expires.
BIPRU 7.4.16RRP
A firm must treat a commodityswap as a series of notional positions, one position for each payment under the swap, each of which:(1) equals the total quantity underlying the contract;(2) has a maturity corresponding to the payment date; and(3) is long or short according to BIPRU 7.4.17R.
BIPRU 7.4.17RRP

Table: Treatment of commodity swaps

This table belongs to BIPRU 7.4.16R

Receiving amounts which are unrelated to any commodity's price

Receiving the price of commodity 'b'

Paying amounts which are unrelated to any commodity's price

N/A

Long positions in commodity 'b'

Paying the price of commodity 'a'

Short positions in commodity 'a'

Short positions in commodity 'a' and long positions in commodity 'b'
BIPRU 7.4.18GRP
The table in BIPRU 7.4.17R shows that where the legs of the swap are in different commodities, a series of forward positions are created for each commodity (that is, a series of short positions in commodity 'a' and a series of long positions in commodity 'b').
BIPRU 7.4.22RRP
(1) A firm must treat positions in different grades or brands of the same commodity-class as different commodities unless they:(a) can be delivered against each other; or(b) are close substitutes and have price movements which have exhibited a stable correlation coefficient of at least 0.9 over the last 12 months.(2) If a firm relies on (1)(b) it must then monitor compliance with the conditions in that paragraph on a continuing basis.
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 7.4.26RRP
(1) A firm must calculate the charges referred to in BIPRU 7.4.25R as follows.(2) Step 1: offset long and short positions maturing:(a) on the same day; or(b) (in the case of positions arising under contracts traded in markets with daily delivery dates) within 10 business days of each other.(3) Step 2: allocate the positions remaining after step 1 to the appropriate maturity band in the table in BIPRU 7.4.28R (physical commoditypositions are allocated to band 1).(4) Step 3: match
BIPRU 7.4.27GRP
The matched amount in BIPRU 7.4.26R is the lesser (ignoring the sign) of either the total long position or the total short position. For example, a band with 1000 long and 700 short results in a matched amount of 700. The unmatched amount would be 300.
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 7.4.34GRP
For the purposes of BIPRU 7.4.31R(1) a firm has a diversified commodity portfolio where it holds positions in more than one commodity in each of the categories set out in the table in BIPRU 7.4.33R and holds positions across different maturities in those individual commodities. A firm would not have a diversified commodity portfolio if it held positions in only one commodity in each of the categories set out in the table in BIPRU 7.4.33R. This is because the rates in the table
BIPRU 7.4.35GRP
What constitutes significant business in BIPRU 7.4.31R(2) will vary from firm to firm. The more regularly the firm undertakes trades in commodities and the more consistently it has positions in the relevant commodity, the more likely it is to be undertaking significant business for the purposes of BIPRU 7.4.31R(2).
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 7.4.37GRP
Where an index is only based on precious metals, BIPRU 7.4.13R and BIPRU 7.4.36R allow the firm to treat the single notional position as precious metal for the purposes of BIPRU 7.4.32R. However, if the index contained a mix of precious metals and base metals the firm would have to treat the notional position under BIPRU 7.4.36R as a base metal because base metals attract a higher rate than precious metals in the table in BIPRU 7.4.33R.
BIPRU 7.4.38RRP
If a short position to which BIPRU 7.4 applies falls due before a long position to which BIPRU 7.4 applies, a firm must also guard against the risk of a shortage of liquidity which may exist in some markets.
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 7.6.8RRP

Table: Appropriate PRA

This table belongs to BIPRU 7.6.7R

Underlying position

Appropriate PRA

Equity

The PRA applicable to the underlying equity or equity index in the table in BIPRU 7.3.30R (Simplified equity method)

Interest rate

The sum of the specific risk PRA (see BIPRU 7.2.43R to BIPRU 7.2.51G (Specific risk calculation)) and the general market risk PRA (as set out in BIPRU 7.2.57R (General market risk PRAs)) applicable to the underlying position

Debt securities

The sum of the specific risk PRA (see BIPRU 7.2.43R to BIPRU 7.2.51G (Specific risk calculation)) and the general market risk PRA (as set out in the table in BIPRU 7.2.57R (General market risk PRAs)) applicable to the underlying position

Commodity

18% (unless BIPRU 7.6.7R requires otherwise)

Currency

8%

Gold

8%

CIU

32% (subject to BIPRU 7.6.6R and BIPRU 7.6.7R)
BIPRU 7.6.9RRP
A firm must calculate the derived position specified in the table in BIPRU 7.6.13R for each position included in its option PRR calculation.
BIPRU 7.6.10RRP
A firm may calculate a derived position for its net position in an option or a warrant, if the relevant options or warrants are identical or may be treated as identical under BIPRU 7.6.11R or BIPRU 7.6.12R.
BIPRU 7.6.13RRP

Table: Derived positions

This table belongs to BIPRU 7.6.9R

Underlying

Option (or warrant)

Derived position

Equity

Option (warrant) on a single equity or option on a future/forward on a single equity

A notional position in the actual equity underlying the contract valued at the current market price of the equity.

Option (warrant) on a basket of equities or option on a future/forward on a basket of equities

A notional position in the actual equities underlying the contract valued at the current market price of the equities.

Option (warrant) on an equity index or option on a future/forward on an equity index

A notional position in the index underlying the contract valued at the current market price of the index.

Interest rate

Option on an interest rate or an interest rate future/FRA

A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the sum of the time to expiry of the contract and the length of the period on which the settlement amount of the contract is calculated valued at the notional amount of the contract.

Option on an interest rate swap

A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the length of the swap valued at the notional principal amount.

Interest rate cap or floor

A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the remaining period of the cap or floor valued at the notional amount of the contract.

Debt securities

Option (warrant) on a debt security or option on a future/forward on a debt security

The underlying debt security with a maturity equal to the time to expiry of the option valued as the nominal amount underlying the contract at the current market price of the debt security.

Option (warrant) on a basket of debt securities or option on a future/forward on a basket of debt securities

A notional position in the actual debt securities underlying the contract valued at the current market price of the debt securities.

Option (warrant) on an index of debt securities or option on a future/forward on an index of debt securities

A notional position in the index underlying the contract valued at the current market price of the index.

Commodity

Option on a commodity or option on a future/forward on a commodity

An amount equal to the tonnage, barrels or kilos underlying the option with (in the case of a future/forward on a commodity) a maturity equal to the expiry date of the forward or Futures contract underlying the option. In the case of an option on a commodity the maturity of the position falls into Band 1 in the table in BIPRU 7.4.28R (Table: Maturity bands for the maturity ladder approach).

Option on a commodityswap

An amount equal to the tonnage, barrels or kilos underlying the option with a maturity equal to the length of the swap valued at the notional principal amount.

CIU

(These provisions about CIUs are subject to BIPRU 7.6.35R)

Option (warrant) on a single CIU or option on a future/forward on a single CIU

A notional position in the actual CIU underlying the contract valued at the current market price of the CIU.

Option (warrant) on a basket of CIUs or option on a future/forward on a basket of CIUs

A notional position in the actual CIUs underlying the contract valued at the current market price of the CIUs.

Gold

Option on gold or option on a future/forward on gold

An amount equal to the troy ounces underlying the option with (in the case of a future/forward on gold) a maturity equal to the expiry date of the forward or futures contract underlying the option.

Currency

Currency option

The amount of the underlying currency that the firm will receive if the option is exercised converted at the spot rate into the currency that the firm will sell if the option is exercised.
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 7.6.15RRP

Table: Option strategies

This table belongs to BIPRU 7.6.14R

Option strategy (and an example)

Notional option (and rule it must be treated under)

Bull Spread

(e.g. buy 100 call and sell 101 call)

One purchased option

(treat under BIPRU 7.6.20R)

Bear Spread

(e.g. sell 100 put and buy 101 put)

One written option

(treat under BIPRU 7.6.21R)

Synthetic Long Call

(e.g. long underlying and buy 100 put)

One purchased option

(treat under BIPRU 7.6.20R or BIPRU 7.6.24R)

Synthetic Short Call

(e.g. short underlying and sell 100 put)

One written option

(treat under BIPRU 7.6.21R or BIPRU 7.6.24R)

Synthetic Long Put

(e.g. short underlying and buy 100 call)

One purchased option

(treat under BIPRU 7.6.20R or BIPRU 7.6.24R)

Synthetic Short Put

(e.g. buy underlying and sell 100 call)

One written option

(treat under BIPRU 7.6.21R or BIPRU 7.6.24R)

Long Straddle

(e.g. buy 100 call and buy 100 put)

One purchased option

(treat under BIPRU 7.6.20R)

Short Straddle

(e.g. sell 100 call and sell 100 put)

One written option

(treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money)

Long Strangle

(e.g. buy 101 call and buy 99 put)

One purchased option

(treat under BIPRU 7.6.20R)

Short Strangle

(e.g. sell 99 call and sell 101 put)

One written option

(treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money)

Long Butterfly

(e.g. buy one 100 call, sell two 101 calls, and buy one 102 call)

One purchased option

(treat under BIPRU 7.6.20R)

Short Butterfly

(e.g. sell one 100 put, buy two 101 puts, and sell one 102 put)

One written option

(treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money)
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 7.6.31RRP
If the pay-out to the holder of a quanto option is fixed at the inception of the transaction a firm must add 8% to the PRA when applying the option standard method.
BIPRU 7.6.35RRP
For the purpose of identifying the appropriate treatment for the purpose of BIPRU 7.6.5R, the underlying position for the purpose of BIPRU 7.6.8R and the derived position under BIPRU 7.6.13R a firm may choose between treating an option on a CIU as being:(1) a position in the CIU itself; or(2) (if the conditions in BIPRU 7.7 (Position risk requirements for collective investment undertakings) for the use of the method in question are satisfied) positions in the underlying investments
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 7.11.2RRP
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 7.11.4RRP
A total return swap creates a long position in the general market risk of the reference obligation and a short position in the general market risk of a zero-specific-risk security with a maturity equivalent to the period until the next interest fixing and which is assigned a 0% risk weight under the standardised approach to credit risk. It also creates a long position in the specific risk of the reference obligation.
BIPRU 7.11.5RRP
A credit default swap does not create a position for general market risk. For the purposes of specific risk, a firm must record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt security, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in zero-specific-risk
BIPRU 7.11.6RRP
A single name credit linked note creates a long position in the general market risk of the note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need
BIPRU 7.11.7RRP
In addition to a long position in the specific risk of the issuer of the note, a multiple name credit linked note providing proportional protection creates a position in each reference entity, with the total notional amount of the contract assigned across the positions according to the proportion of the total notional amount that each exposure to a reference entity represents. Where more than one obligation of a reference entity can be selected, the obligation with the highest
BIPRU 7.11.8RRP
Where a multiple name credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need only be recorded.
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 7.11.12RRP
For the protection buyer, the positions are determined as the mirror imageof the protection seller, with the exception of a credit linked note (which entails no short position in the issuer). If at a given moment there is a call option in combination with a step-up, such moment is treated as the maturity of the protection. In the case of nth to default credit derivatives, a firm that is a protection buyer may off-set specific risk for n-1 of the underlyings (i.e., the n-1 assets
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 7.11.62GRP
BIPRU 7.11.5 R requires a firm to recognise any premiums payable or receivable under the contract as notional zero-specific-risk securities. These positions are then entered into the general market risk framework. As premium payments paid under such contracts are contingent on no credit event occurring, a credit event could significantly change the general market risk capital requirement. A firm should consider, under the overall Pillar 2 rule, whether this risk means that the
BIPRU 7.11.63GRP
If a firm recognises profits on a non-accrual basis it should consider whether the capital requirements for its credit derivatives business adequately cover the risk that any recognised profit may not be achieved due to a credit event occurring. This includes positions for which the firm may have a perfect hedge in place.
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 7.8.2RRP
A firm which underwrites or sub-underwrites an issue of securities must, for the purposes of calculating its market risk capital component and its concentration risk capital component:(1) identify commitments to underwrite or sub-underwrite which give rise to an underwritingposition (see BIPRU 7.8.8R);(2) identify the time of initial commitment (see BIPRU 7.8.13R); and(3) calculate the net underwriting position (set out in BIPRU 7.8.17R), reduced net underwriting position or the
BIPRU 7.8.6GRP
The net underwriting position calculated in BIPRU 7.8.17R will also be used in calculating the net underwriting exposure under BIPRU 7.8.34R.
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 7.8.17RRP
A firm must calculate a net underwriting position by adjusting the gross amount it has committed to underwrite for:(1) any sales or sub-underwriting commitments received that have been confirmed in writing at the time of initial commitment (but excluding any sales in the grey market as defined in BIPRU 7.8.10R (1));(2) any underwriting or sub-underwriting commitments obtained from others since the time of initial commitment;(3) any purchases or sales of the securities since the
BIPRU 7.8.21RRP
(1) This rule deals with the treatment of short positions that arise when a firm commits to distribute securities that it is underwriting in an amount that exceeds the allocation to the firm made by the issuer of the securities being underwritten.(2) When calculating its net underwriting position, a firm may use an over-allotment option granted to it by the issuer of the securities being underwritten to reduce the short positions in (1).(3) A firm may also use an over-allotment
BIPRU 7.8.22RRP
Except as provided in BIPRU 7.8.21R, a firm must not take into account an over-allotment option granted to it or another member of the underwriting syndicate in calculating its net underwriting position.
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);
BIPRU 7.8.28RRP

Table: Net underwriting position reduction factors

This table belongs to BIPRU 7.8.27R

Underwriting timeline

Debt

Equity

General market risk

Specific risk

Time of initial commitment until working day 0

0%

100%

90%

Working day 1

0%

90%

90%

Working day 2

0%

75%

75%

Working day 3

0%

75%

75%

Working day 4

0%

50%

50%

Working day 5

0%

25%

25%

Working day 6 and onwards

0%

0%

0%
BIPRU 7.8.30GRP

Table: Example of the reduced net underwriting position calculation

This table belongs to BIPRU 7.8.29G

Time

Net underwriting position (see BIPRU 7.8.17R)

Percentage reduction (see BIPRU 7.8.28R)

Reduced net underwriting position

At initial commitment 9.00am Monday

£100m gross amount is reduced by £20m due to sales/sub-underwriting commitments confirmed in writing at the time of initial commitment (see BIPRU 7.8.17R (1)) and (4)).

=

£80m

90%

£8m

Post initial commitment 9.02am Monday

Remaining £80m is reduced by £40m due to further sales, sub-underwriting commitments obtained and allocations granted (see BIPRU 7.8.17R (2) - (5)).

=

£40m

90%

£4m

At the end of working day 1

Remaining £40m is reduced to £20m due to further sales.

=

£20m

90%

£2m

End of working day 3

Remaining £20m is reduced to £5m due to further sales.

=

£5m

75%

£1.25 m

End of working day 4

Remaining £5m is reduced to £2m due to further sales.

=

£2m

50%

£1m

End of working day 5

Remaining £2m is reduced to £1m due to further sales.

=

£1m

25%

£0.75 m

Start of working day 6

£1m remaining

=

£1m

0%

£1m
BIPRU 7.8.34RRP
Except where otherwise specified by a requirement on its Part IV permission, a firm must calculate the net underwriting exposure to an issuer by applying the relevant reduction factors in the table in BIPRU 7.8.35R to its net underwriting position calculated under BIPRU 7.8.17R.
BIPRU 7.8.35RRP

Table: Calculation of net underwriting exposure

This table belongs to BIPRU 7.8.34R

Time

Reduction factor to be applied to net underwriting position

Initial commitment to working day 0

100%

Working day 0

100%

Working day 1

90%

Working day 2

75%

Working day 3

75%

Working day 4

50%

Working day 5

25%

Working day 6 onwards

0%
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), BIPRU 4 (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 7.1.16ERP
(1) In BIPRU 7.1.13R and, to the extent that that rule applies BIPRU 7.1.13R, BIPRU 7.1.15R, an "appropriate percentage" is:(a) 100%; or(b) a percentage which takes account of the characteristics of the position concerned and of discussions with the FSA or a predecessor regulator under the Banking Act 1987 or the Financial Services Act 1986.(2) Compliance with (1) may be relied on as tending to establish compliance with BIPRU 7.1.13R or, insofar as it incorporates the requirements
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 7.5.7RRP
When determining the currency of denomination firms must:(1) use the currency in which the firm accounts for the instrument where an instrument is quoted in more than one currency; and(2) treat depository receipts as positions in the underlying security.
BIPRU 7.5.8GRP
Instruments denominated in a foreign currency include, amongst other things, assets and liabilities (including accrued interest); non-foreign currencyderivative; net underwriting positions; reduced net underwriting positions; and irrevocable guarantees (or similar instruments) that are certain to be called.
BIPRU 7.5.9RRP
Where a contract is based on a basket of currencies, the firm can choose either to derive notional positions in each of the constituent currencies or treat it as a single notional position in a separate notional currency.
BIPRU 7.5.11RRP
(1) A firm must treat a foreign currencyforward, future, synthetic future or CFD as two notional currency positions as follows:(a) a long notional position in the currency which the firm has contracted to buy; and(b) a short notional position in the currency which the firm has contracted to sell.(2) In (1) the notional positions have a value equal to either:(a) the contracted amount of each currency to be exchanged in the case of a forward, future, synthetic future or CFD held
BIPRU 7.5.13RRP
(1) A firm must treat a foreign currencyswap as:(a) a long notional position in the currency in which the firm has contracted to receive interest and principal; and(b) a short notional position in the currency in which the firm has contracted to pay interest and principal.(2) In (1) the notional positions have a value equal to either:(a) the nominal amount of each currency underlying the swap if it is held in the non-trading book; or(b) the present value amount of all cash flows
BIPRU 7.5.16RRP
A forward, future, synthetic future or CFD on gold must be treated as a notional position in gold with a value equal to the amount of gold underlying multiplied by the current spot price for gold.
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 7.5.19RRP
A firm must calculate its open currency position by:(1) calculating the net position in each foreign currency;(2) converting each such net position into its base currency equivalent at current spot rates;(3) summing all short net positions and summing all long net positions calculated under (1) and (2); and(4) selecting the larger sum (ignoring the sign) from (3).
BIPRU 7.5.20RRP
A firm must calculate its net gold position by:(1) valuing all gold positions using the prevailing spot price for gold (regardless of the maturity of the positions);(2) offsetting long and short positions; and(3) converting the resulting net position into the base currency equivalent using the current spot foreign currency rate.
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 7.7.12RRP
For the purpose of BIPRU 7.7.11R (1) the position in the CIU must be treated as a direct holding in the assumed position.
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 1.2.3RRP
The trading book of a firm consists of all position in CRD financial instrument and commodities held either with trading intent or in order to hedge other elements of the trading book and which are either free of any restrictive covenants on their tradability or able to be hedged.[Note: CAD Article 11(1)]
BIPRU 1.2.4RRP
The term position includes proprietary positions and positions arising from client servicing and market making.[Note: CAD Article 11(2) second sentence]
BIPRU 1.2.10RRP
Positions held with trading intent for the purpose of the definition of the trading book are those held intentionally for short-term resale and/or with the intention of benefiting from actual or expected short-term price differences between buying and selling prices, or from other price or interest rate variations.[Note: CAD Article 11(2) first sentence]
BIPRU 1.2.11RRP
Trading intent must be evidenced on the basis of the strategies, policies and procedures set up by the firm to manage the position or portfolio in accordance with BIPRU 1.2.12 R.[Note: CAD 11(3)]
BIPRU 1.2.12RRP
Positions/portfolios held with trading intent must comply with the following requirements:(1) there must be a clearly documented trading strategy for the position/instrument or portfolios, approved by senior management, which must include the expected holding horizon;(2) there must be clearly defined policies and procedures to monitor the position against the firm's trading strategy including the monitoring of turnover and stale position in the firm'strading book; and(3) there
BIPRU 1.2.14RRP
(1) An internal hedge is a position that materially or completely offsets the component risk element of a non-trading bookposition or a set of position. Positions arising from internal hedges are eligible for trading book capital treatment, provided that they are held with trading intent and that the general criteria on trading intent and prudent valuation specified in BIPRU 1.2.12 R and the trading book systems and controls rules. In particular:(a) internal hedges must not be
BIPRU 1.2.18RRP
In order to calculate the proportion that trading book business bears to total business for the purpose of BIPRU 1.2.17 R (1)(a) to BIPRU 1.2.17R (1)(c) the firm must refer to the size of the combined on- and off-balance-sheet business. For this purpose, debt instruments must be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and
BIPRU 1.2.26RRP
A firm must have clearly defined policies and procedures for determining which positions to include in the trading book for the purposes of calculating its capital requirements, consistent with the criteria set out in BIPRU 1.2.3 R to BIPRU 1.2.4 R, BIPRU 1.2.10 R to BIPRU 1.2.11 R, BIPRU 1.1.13 R and BIPRU 1.2.22 R and taking into account the firm's risk management capabilities and practices. Compliance with these policies and procedures must be fully documented and subject to
BIPRU 1.2.27RRP
A firm must have clearly defined policies and procedures for overall management of the trading book. At a minimum these policies and procedures must address:(1) the activities the firm considers to be trading and as constituting part of the trading book for capital requirement purposes;(2) the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;(3) for positions that are marked-to-model, the extent to which the firm can:(a)
BIPRU 1.2.35GRP
All positions that are in a firm'strading book require capital to cover position risk and may require capital to cover counterparty credit risk and to cover large exposures. Counterparty credit risk in the trading book is dealt with by BIPRU 14 and capital for large exposures is covered by BIPRU 10.
BIPRU 1.2.36GRP
All positions that are not in a firm'strading book are included in its non-trading book and subject capital requirements for the non-trading book unless they are deducted from capital resources under GENPRU 2.2 (Capital resources).
BIPRU 9.4.1RRP
The originator of a traditional securitisation may exclude securitisedexposures1 from the calculation of risk weighted exposure amounts and expected loss amounts if significant credit risk associated with the securitised exposures has been transferred to third parties and the transfer complies with the conditions in BIPRU 9.4.2 RBIPRU 9.4.10 R.[Note:BCD Annex IX Part 2 point 1 (part)]
BIPRU 9.4.8RRP
Where there is a clean-up call option, the following conditions must be satisfied:(1) the clean-up call option is exercisable at the discretion of the originator;(2) the clean-up call option may only be exercised when 10% or less of the original value of the exposuressecuritised remains unamortised; and(3) the clean-up call option is not structured to avoid allocating losses to credit enhancement positions or other positions held by investors and is not otherwise structured to
BIPRU 9.4.9RRP
The securitisation documentation must not contain clauses that:(1) other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator including but not limited to altering the underlying credit exposures or increasing the yield payable to investors in response to a deterioration in the credit quality of the securitised exposures; or(2) increase the yield payable to holders of positions in the securitisation in response
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 7.9.21GRP
(1) A firm should have a conceptually sound risk management system which is implemented with integrity and should meet the minimum standards set out in this paragraph.(2) A firm should have a risk control unit that is independent of business trading units and reports directly to senior management. The unit should be responsible for designing and implementing the firm's risk management system. It should produce and analyse daily reports on the risks run by the business and on the
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 7.9.44GRP
To the extent that a firm'sCAD 1 model waiver is for the use of an interest rate pre-processing model the firm should use it for the pre-processing of the instruments set out in BIPRU 7.9.7G, from which the residual positions are fed into the interest rate maturity method or interest rate duration method calculation.
BIPRU 7.9.45GRP
There are a number of different methods of constructing pre-processing models but all should comply with BIPRU 7.9.45G - BIPRU 7.9.53G. All pre-processing models should generate positions that have the same sensitivity to defined interest rate changes as the underlying cash flows.
BIPRU 7.9.50GRP
Sensitivity figures calculated by a firm using an interest rate pre-processing model are usually produced in the format of a net sensitivity by maturity bucket or by discrete gridpoint. These maturity buckets or gridpoints should then be allocated to the 15 bands set out in BIPRU 7.9.49G. The number of maturity buckets or gridpoints used to represent a yield curve can be referred to as granularity. The granularity should always be adequate to capture the material curve risk in
BIPRU 9.8.4RRP
Subject to BIPRU 9.8.5 R and BIPRU 9.8.6 R, a firm must not use an ECAI's credit assessments for its positions in some tranches and another ECAI's credit assessments for its positions in other tranches within the same structure that may or may not be rated by the first ECAI.[Note:BCD Annex IX Part 3 point 4]
BIPRU 9.8.5RRP
Where a position has two credit assessments by nominated ECAIs, the firm must use the less favourable credit assessment.[Note:BCD Annex IX Part 3 point 5]
BIPRU 9.8.6RRP
Where a position has more than two credit assessments by nominated ECAIs, the two most favourable credit assessments must be used. If the two most favourable assessments are different, the least favourable of the two must be used.[Note:BCD Annex IX Part 3 point 6]
BIPRU 9.9.3RRP
(1) Where there is an exposure to different tranches in a securitisation, the exposure to each tranche must be considered a separate securitisation position.(2) The providers of credit protection to securitisation positions must be treated as holding positions in the securitisation.(3) securitisation positions include exposures to a securitisation arising from interest rate or currency derivative contracts.[Note:BCD Article 96(2)]
BIPRU 9.9.4RRP
Subject to BIPRU 9.9.5 R,(1) where a firm calculates risk weighted exposure amounts under the standardised approach to securitisations outlined in BIPRU 9.11, the exposure value of an on-balance sheet securitisation position must be its balance sheet value;(2) where a firm calculates risk weighted exposure amounts under the IRB approach to securitisations outlined in BIPRU 9.12, the exposure value of an on-balance sheet securitisation position must be measured gross of value adjustments;(3)
BIPRU 9.9.6RRP
Where a securitisation position is subject to funded credit protection, the exposure value of that position may be modified in accordance with and subject to the requirements of BIPRU 5 (Credit risk mitigation) as further specified in BIPRU 9.11.13 R and BIPRU 9.14.[Note:BCD Annex IX Part 4 point 4]
BIPRU 9.9.8RRP
(1) Where a firm has two or more overlapping positions in a securitisation the firm must, to the extent that the positions overlap, include in its calculation of risk weighted exposure amounts only the position, or portion of a position, producing the higher risk weighted exposure amounts.(2) For the purposes of (1), overlapping means that the positions, wholly or partially, represent an exposure to the same risk such that to the extent of the overlap there is a single exposure.[Note:BCD
BIPRU 9.12.2RRP
For a rated position or a position in respect of which an inferred rating may be used, the ratings based method must be used to calculate the risk weighted exposure amount.[Note:BCD Annex IX Part 4 point 38]
BIPRU 9.12.3RRP
For an unrated position the supervisory formula method must be used except where a firm uses the ABCP internal assessment approach.[Note:BCD Annex IX Part 4 point 39]
BIPRU 9.12.7RRP
When the following minimum operational requirements are satisfied a firm must attribute to an unrated position an inferred credit assessment equivalent to the credit assessment of those rated positions (the reference positions) which are the most senior positions which are in all respects subordinate to the unratedsecuritisation position in question:(1) the reference positions must be subordinate in all respects to the unratedsecuritisation position;(2) the maturity of the reference
BIPRU 9.12.20RRP
(1) If:(a) a firm'sIRB permission allows it to use this treatment; and(b) the conditions in (2)(16) are satisfied,a firm may attribute to an unrated position in an asset backed commercial paper programme a derived rating as laid down in (3).(2) Positions in the commercial paper issued from the programme must be rated positions.(3) Under the ABCP internal assessment approach, the unrated position must be assigned by the firm to one of the rating grades described in (5). The position
BIPRU 9.14.8RRP
A firm must determine the effective risk weight of the position. It must do this by dividing the risk weighted exposure amount of the position by the exposure value of the position and multiplying the result by 100.[Note:BCD Annex IX Part 4 point 63 (part)]
BIPRU 9.14.13RRP
In other cases the firm must treat the securitisation position as two or more positions with the uncovered portion being the position with the lower credit quality. For the purposes of calculating the risk weighted exposure amount for this position, the provisions in BIPRU 9.12.22 R to BIPRU 9.12.24 G apply subject to the modifications that T is adjusted to e* in the case of funded credit protection; and to T-g in the case of unfunded credit protection, where e* denotes the ratio
BIPRU 13.6.47RRP
(1) A firm's measurement of CCR must include measuring daily and intra-day usage of credit lines.(2) The firm must measure current exposure gross and net of collateral.(3) At portfolio and counterparty level, the firm must calculate and monitor peak exposure or potential future exposure (PFE) at the confidence interval chosen by the firm.(4) The firm must take account of large or concentrated positions, including by groups of related counterparties, by industry, by market, etc.[Note:
BIPRU 13.6.57RRP
(1) A firm must stress test its CCRexposures, including jointly stressing market risk and credit risk factors.(2) In its stress tests of CCR, a firm must consider concentration risk (to a single counterparty or groups of counterparties), correlation risk across market risk and credit risk, and the risk that liquidating the counterparty's positions could move the market.(3) In its stress tests a firm must also consider the impact on its own positions of such market moves and integrate
GENPRU 1.2.33RRP
(1) This rule amplifies some of the obligations in the overall Pillar 2 rule.(2) In the case of a BIPRU firm the processes, strategies and systems relating to concentration risk must include those necessary to ensure compliance with BIPRU 10 (Concentration risk requirements).(3) As part of its obligations in respect of market risk, a BIPRU firm must consider whether the value adjustments and provisions taken for positions and portfolios in the trading book enable the firm to sell
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
COBS 16.2.3AGRP
1In determining what is essential information, a firm should consider including:(1) for transactions in a derivative:(a) the maturity, delivery or expiry date of the derivative;(b) in the case of an option, a reference to the last exercise date, whether it can be exercised before maturity and the strike price;(c) if the transaction closes out an open futures position, all essential details required in respect of each contract comprised in the open position and each contract by