Related provisions for SYSC 7.1.1
1 - 20 of 152 items.
Subject to BIPRU 3.4.4 R, exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.3 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 2]
This table belongs to BIPRU 3.4.2 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
0 % |
20 % |
50 % |
100 % |
100 % |
150 % |
When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA assign a risk weight which is lower than that indicated in BIPRU 3.4.1 R to BIPRU 3.4.3 R to exposures to their central government and central bank denominated and funded in the domestic currency, a firm may risk weight such exposures in the same manner.[Note: BCD Annex VI Part 1 point 5]
An export credit agency credit assessment may be recognised by a firm for the purpose of determining the risk weight to be applied to an exposure under the standardised approach if either of the following conditions is met:(1) the credit assessment is a consensus risk score from export credit agencies participating in the OECD "Arrangement on Guidelines for Officially Supported Export Credits"; or(2) the export credit agency publishes its credit assessments, and the export credit
Without prejudice to BIPRU 3.4.15 R to BIPRU 3.4.19 R:(1) a firm must risk weightexposures to regional governments and local authorities in accordance with BIPRU 3.4.11 R to BIPRU 3.4.14 R; and(2) the preferential treatment for short-term exposures specified in BIPRU 3.4.37 R, BIPRU 3.4.39 R and BIPRU 3.4.44 R must not be applied.[Note: BCD Annex VI Part 1 point 8]
(1) Exposures to regional governments and local authorities must be assigned a risk weight according to the credit quality step to which exposures to the central government of the jurisdiction in which the regional government or local authority is established are assigned in accordance with the table in BIPRU 3.4.12 R.(2) Exposures to an unrated regional government or local authority must not be assigned a risk weight lower than that applied to exposures to its central government.[Note:
This table belongs to BIPRU 3.4.11 R.
Credit quality step to which central government is assigned |
1 |
2 |
3 |
4 |
5 |
6 |
20% |
50% |
100% |
100% |
100% |
150% |
The FSA will include a regional government or local authority in the list in BIPRU 3 Annex 2 R where there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the specific revenue-raising powers of the regional government or local authority, and the existence of specific institutional arrangements the effect of which is to reduce the risk of default.[Note: BCD Annex VI Part 1 point 9]
When competent authorities of a third country jurisdiction which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA treat exposures to regional governments and local authorities as exposures to their central government, a firm may risk weightexposures to such regional governments and local authorities in the same manner.[Note: BCD Annex VI Part 1 point 11]
In exceptional circumstances a firm may treat an exposure to a public sector entity established in the United Kingdom as an exposure to the central government of the United Kingdom if there is no difference in risk between exposures to that body and exposures to the central government of the United Kingdom because of the existence of an appropriate guarantee by the central government.[Note: BCD Annex VI Part 1 point 15]
Where a competent authority of another EEA State implements points 14 or 15 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to treat exposures to public sector entities as exposures to institutions or as exposures to the central government of the EEA State concerned, a firm may risk weightexposures to the relevant public sector entities in the same manner.[Note: BCD Annex VI Part 1 point 16]
When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent to those applied in the EEA, treat exposures to public sector entities as exposures to institutions, a firm may risk weightexposures to the relevant public sector entities in the same manner.[Note: BCD Annex VI Part 1 point 17]
Without prejudice to BIPRU 3.4.33 R to BIPRU 3.4.47 R, exposures to financial institutions authorised and supervised by the competent authorities responsible for the authorisation and supervision of credit institutions and subject to prudential requirements equivalent to those applied to credit institutions must be risk weighted as exposures to institutions.[Note: BCD Annex VI Part 1 point 24]
Exposures to institutions with an original effective maturity of more than three months for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.35 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 29]
This table belongs to BIPRU 3.4.34 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
50% |
50% |
100% |
100% |
150% |
Exposures to an institution with an original effective maturity of three months or less for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.38 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 31]
This table belongs to BIPRU 3.4.37 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
20% |
20% |
50% |
50% |
150% |
A firm may assign to an exposure to an institution formed under the law of the United Kingdom of a residual maturity of 3 months or less denominated and funded in pounds sterling a risk weight that is one category less favourable than the preferential risk weight, as described in BIPRU 3.4.5 R (Exposures in the national currency of the borrower), assigned to exposures to the central government of the United Kingdom.[Note: BCD Annex VI Part 1 point 37]
(1) Where a competent authority of another EEA State implements point 37 of Part 1 of Annex VI of the Banking Consolidation Directive by exercising the discretion to allow the treatment in that point, a firm may assign to the relevant national currency exposures the risk weight permitted by that CRD implementation measure.(2) When the competent authority of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the EEA assigns
Where an exposure to an institution is in the form of minimum reserves required by the European Central Bank or by the central bank of an EEA State to be held by the firm, a firm may assign the risk weight that would be assigned to exposures to the central bank of the EEA State in question provided:(1) the reserves are held in accordance with Regulation (EC) No. 1745/2003 of the European Central Bank of 12 September 2003 or a subsequent replacement regulation or in accordance
Exposures for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.51 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 41]
This table belongs to BIPRU 3.4.50 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
50% |
100% |
100% |
150% |
150% |
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure fully and completely secured, to the satisfaction of the firm, by mortgages on residential property which is or shall be occupied or let by the owner or the beneficial owner in the case of personal investment companies must be assigned a risk weight of 35%.[Note: BCD Annex VI Part 1 point 45]
(1) 4This paragraph provides guidance on BIPRU 3.4.56A R.(2) For the purposes of BIPRU 3.4.56A R (2), a firm may use the FTSE UK gilt 10-year yield index which the Council of Mortgage Lenders makes available to its members.(3) If a firm offers a variable interest rate on a lifetime mortgage, it should calculate an average interest rate in a way which is consistent with the calculation of the discount rate.(4) To determine the projected number of years to maturity of the exposure,
Exposures fully and completely secured, to the satisfaction of the firm, by shares in Finnish residential housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of residential property which is or shall be occupied or let by the owner must be assigned a risk weight of 35%.[Note: BCD Annex VI Part 1 point 46]
Without prejudice to BIPRU 3.4.85 R, an exposure or any part of an exposure to a tenant under a property leasing transaction concerning residential property under which the firm is the lessor and the tenant has an option to purchase, must be assigned a risk weight of 35% provided that the firm is satisfied that the exposure of the firm is fully and completely secured by its ownership of the property.[Note: BCD Annex VI Part 1 point 47]
(1) In the exercise of its judgement for the purposes of BIPRU 3.4.56 R to BIPRU 3.4.58 R, a firm may be satisfied only if the conditions in (2) to (6) are met.(2) The value of the property does not materially depend upon the credit quality of the obligor. This requirement does not preclude situations where purely macroeconomic factors affect both the value of the property and the performance of the borrower.(3) The risk of the borrower does not materially depend upon the performance
If a CRD implementation measure of another EEA State exercises the discretion in point 49 of Part 1 of Annex VI of the Banking Consolidation Directive to dispense with the condition corresponding to BIPRU 3.4.60 R (3) (The risk of the borrower should not materially depend upon the performance of the underlying property or project) , a firm may apply a risk weight of 35% to such exposures fully and completely secured by mortgages on residential property situated in that EEA State.[Note:
(1) The application of BIPRU 3.4.81 R may be illustrated by an example. If a firm has a mortgage exposure of £100,000 secured on residential property in the United Kingdom that satisfies the criteria listed in BIPRU 3.4.56 R to BIPRU 3.4.80 R and the value of that property is £100,000, then £80,000 of that exposure may be treated as fully and completely secured and risk weighted at 35%. The remaining £20,000 may be risk weighted at 75% provided the exposure meets the criteria
For the purposes of BIPRU 3.4.56 R or BIPRU 3.4.58 R, where the residential property in question is situated in the territory of a third-country competent authority that is not listed as equivalent for credit risk in BIPRU 8 Annex 3 R:(1) a firm must not treat an exposure as fully and completely secured by the residential property in question unless the value of the property exceeds the exposures by a substantial margin, which must be at least 20%;(2) the firm must apply a risk
Exposures fully and completely secured by shares in Finnish housing companies, operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in respect of offices or other commercial premises may be assigned a risk weight of 50%.[Note: BCD Annex VI Part 1 point 52]
Without prejudice to the provisions contained in BIPRU 3.4.97 R to BIPRU 3.4.101 R, the unsecured part of any item that is past due for more than 90 days (irrespective of the amount of that item or of the unsecured portion of that item) must be assigned a risk weight of:(1) 150% if value adjustments are less than 20% of the unsecured part of the exposure gross of value adjustments; and(2) 100% if value adjustments are no less than 20% of the unsecured part of the exposure gross
Exposures indicated in BIPRU 3.4.56 R to BIPRU 3.4.63 R (Exposures secured by mortgages on residential property) must be assigned a risk weight of 100% net of value adjustments if they are past due for more than 90 days. If value adjustments are no less than 20% of the exposure gross of value adjustments, the risk weight to be assigned to the remainder of the exposure is 50%.[Note: BCD Annex VI Part 1 point 64]
The application of BIPRU 3.4.96 R and BIPRU 3.4.99 R may be illustrated on the basis of a £110,000 loan on a property valued at £100,000, where £80,000 of the loan is secured and £30,000 of the exposure is unsecured and provisions of £20,000 are taken:(1) Option 1 (application of BIPRU 3.4.96 R):(a) provision of £20,000 taken on £80,000 secured exposure;(b) provision exceeds 20%, so the firm should risk weight the remaining £60,000 secured exposure at 50%;(c) the risk weight to
Non past due items to be assigned a 150% risk weight under BIPRU 3.4 and for which value adjustments have been established may be assigned a risk weight of:(1) 100% if value adjustments are no less than 20% of the exposure value gross of value adjustments; and(2) 50%, if value adjustments are no less than 50% of the exposure value gross of value adjustments.[Note: BCD Annex VI Part 1 point 67]
(1) Covered bonds means covered bonds as defined in paragraph (1) of the definition in the glossary (Definition based on Article 22(4) of the UCITS Directive) and collateralised by any of the following eligible assets:(a) exposures to or guaranteed by central governments, central bank, public sector entities, regional governments and local authorities in the EEA;(b) (i) exposures to or guaranteed by non-EEA central governments, non-EEAcentral banks, multilateral development banks,
Covered bonds must be assigned a risk weight on the basis of the risk weight assigned to senior unsecured exposures to the credit institution which issues them. The following correspondence between risk weights applies:(1) if the exposures to the institution are assigned a risk weight of 20%, the covered bond must be assigned a risk weight of 10%;(2) if the exposures to the institution are assigned a risk weight of 50%, the covered bond must be assigned a risk weight of 20%;(3)
Short-term exposures to an institution or corporate for which a short-term credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.113 R in accordance with the mapping by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 73]
Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available must be assigned a risk weight according to the table in BIPRU 3.4.117 R in accordance with the assignment by the FSA in accordance with the Capital Requirements Regulations 2006 of the credit assessments of eligible ECAIs to six steps in a credit quality assessment scale.[Note: BCD Annex VI Part 1 point 75]
Table: Exposures in the form of CIUs for which a credit assessment by a nominated ECAI is available
This table belongs to BIPRU 3.4.116 R.
1 |
2 |
3 |
4 |
5 |
6 |
|
20% |
50% |
100% |
100% |
150% |
150% |
Where BIPRU 3.4.116 R does not apply, a firm may determine the risk weight for a CIU as set out in BIPRU 3.4.123 R to BIPRU 3.4.125 R, if the following eligibility criteria are met:(1) one of the following conditions is satisfied:(a) the CIU is managed by a company which is subject to supervision in an EEA State; or(b) the following conditions are satisfied:(i) the CIU is managed by a company which is subject to supervision that is equivalent to that laid down in Community law;
Where a firm is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for the CIU in accordance with the standardised approach subject to the following rules: it will be assumed that the CIU first invests, to the maximum extent allowed under its mandate, in the standardised credit risk exposure classes attracting the highest capital requirement, and then continues making investments in descending order until the maximum total investment limit
Where a firm provides credit protection for a number of exposures under terms that the nth default among the exposures triggers payment and that this credit event terminates the contract, and where the product has an external credit assessment from an eligible ECAI the risk weights prescribed in BIPRU 9 must be assigned. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket must be aggregated, excluding n-1 exposures, up to a
A common platform firm must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.[Note: article 7(1)(a) of the MiFID implementing Directive, article 13(5) second paragraph of MiFID]
The senior personnel of a common platform firm must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.[Note: annex V paragraph 2 of the Banking Consolidation Directive]
A common platform firm must monitor the following:(1) the adequacy and effectiveness of the firm's risk management policies and procedures;(2) the level of compliance by the firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with SYSC 7.1.3 R;(3) the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant
A common platform firm must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of the investment services and activities undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:(1) implementation of the policies and procedures referred to in SYSC 7.1.2 R to SYSC 7.1.5 R; and(2) provision of reports and advice
Where a common platform firm is not required under SYSC 7.1.6 R to maintain a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and are consistently effective.[Note: article 7(2) second paragraph of the MiFID implementing Directive]
2(1) SYSC 4.1.3 R requires a BIPRU firm to ensure that its internal control mechanisms and administrative and accounting procedures permit the verification of its compliance with rules adopted in accordance with the Capital Adequacy Directive at all times. In complying with this obligation, a BIPRU firm should document the organisation and responsibilities of its risk management function and it should document its risk management framework setting out how the risks in the business
(1) When a financial derivative instrument transaction with a linear risk profile stipulates the exchange of a financial instrument for a payment, the payment Part is referred to as the payment leg.(2) Transactions that stipulate the exchange of payment against payment consist of two payment legs.(3) The payment legs consist of the contractually agreed gross payments, including the notional amount of the transaction.(4) A firm may disregard the interest rate risk from payment
(1) Transactions with a linear risk profile with equities (including equity indices), gold, other precious metals or other commodities as the underlying financial instruments must be mapped to a risk position in the respective equity (or equity index) or commodity (including gold and other precious metals) and an interest rate risk position for the payment leg.(2) If the payment leg is denominated in a foreign currency, it must be additionally mapped to a risk position in the
(1) Transactions with a linear risk profile with a debt instrument as the underlying instrument must be mapped to an interest rate risk position for the debt instrument and another interest rate risk position for the payment leg.(2) Transactions with a linear risk profile that stipulate the exchange of payment against payment, including foreign exchange forwards, must be mapped to an interest rate risk position for each of the payment legs.(3) If the underlying debt instrument
This table belongs to BIPRU 13.5.5 R.
Transaction or instrument |
Calculation of size of risk position |
Transaction with linear risk profile except for debt instruments. |
The effective notional value (market price multiplied by quantity) of the underlying financial instruments (including commodities) converted to the firm's domestic currency. |
Debt instruments and payment legs. |
The effective notional value of the outstanding gross payments (including the notional amount) converted to the firm'sbase currency, multiplied by the modified duration of the debt instrument, or payment leg, respectively. |
Credit default swap |
The notional value of the reference debt instrument multiplied by the remaining maturity of the credit default swap. |
Subject to BIPRU 13.5.9 R to BIPRU 13.5.10 R, financial derivative instrument with a non-linear risk profile, including options and swaptions except in the case of an underlying debt instrument. |
Equal to the delta equivalent effective notional value of the financial instrument that underlies the transaction. |
Subject to BIPRU 13.5.9 R to BIPRU 13.5.10 R, financial derivative instrument with a non-linear risk profile, including options and swaptions, of which the underlying is a debt instrument or a payment leg. |
Equal to the delta equivalent effective notional value of the financial instrument or payment leg multiplied by the modified duration of the debt instrument, or payment leg, respectively. |
[Note: BCD Annex III Part 5 points 5 to 9]
A firm may use the following formulae to determine the size and sign of a risk position:(1) for all instruments other than debt instruments:effective notional value, or delta equivalentnotional value = pref((V)/(p))where:(a) Pref = price of the underlying instrument, expressed in the reference currency;(b) V = value of the financial instrument (in the case of an option this is the option price; in the case of a transaction with a linear risk profile this is the value of the underlying
For the determination of risk positions, a firm must treat collateral received from a counterparty like a claim on the counterparty under a derivative contract (long position) that is due today, while collateral posted must be treated as an obligation to the counterparty (short position) that is due today.[Note: BCD Annex III Part 5 point 10]
A firm must apply the CCR mark to market method to transactions with a non-linear risk profile or for payment legs and transactions with debt instruments as underlying if:(1) the firm does not have a CAD 1 model permission or a VaR model permission; or(2) where the firm does have a CAD 1 model permission or a VaR model permission but cannot determine the delta or the modified duration, respectively, with its CAD 1 model permission or VaR model permission.[Note: BCD Annex III Part
A firm must group the risk positions into hedging sets and, for each hedging set, compute the absolute value amount of the sum of the resulting risk positions. This sum is termed the net risk position and is represented by:((i)(RPTij) - (l)(RPClj))in the formulae set out in BIPRU 13.5.24 R.[Note: BCD Annex III Part 5 point 12]
For interest rate risk positions from money deposits received from the counterparty as collateral, from payment leg and from underlying debt instruments, to which according to the table in BIPRU 7.2.44R1 a capital charge of 1.60% or less applies, there are six hedging sets for each currency, as set out in the table in BIPRU 13.5.13 R. Hedging sets are defined by a combination of the criteria maturity and referenced interest rates.[Note: BCD Annex III Part 5 point 13]
This table belongs to BIPRU 13.5.12 R:
Government referenced interest rates |
Non-government referenced interest rates |
|
Maturity |
<= 1 year |
<= 1 year |
Maturity |
>1 <= 5 years |
>1 <= 5 years |
Maturity |
> 5 years |
> 5 years |
[Note: BCD Annex III Part 5 Table 4]
For interest rate risk positions from underlying debt instruments or payment legs for which the interest rate is linked to a reference interest rate that represents a general market interest level, the remaining maturity is the length of the time interval up to the next re-adjustment of the interest rate. In all other cases, it is the remaining life of the underlying debt instrument, or in the case of a payment leg the remaining life of the transaction.[Note: BCD Annex III Part
(1) For interest rate risk positions from money deposits that are posted with a counterparty as collateral when that counterparty does not have debt obligations of low specific risk outstanding and from underlying debt instruments, to which according to the table in BIPRU 7.2.44 R1 a capital charge of more than 1.60% applies, there is one hedging set for each issuer.(2) When a payment leg emulates such a debt instrument, there is also one hedging set for each issuer of the reference
This table belongs to BIPRU 13.5.21 R.
Hedging set categories |
||
(1) |
Interest Rates |
0.2% |
(2) |
Interest Rates for risk positions from a reference debt instrument that underlies a credit default swap and to which a capital charge of 1.60%, or less, applies under BIPRU 7.2.44 R1. |
0.3% |
(3) |
Interest Rates for risk positions from a debt instrument or reference debt instrument to which a capital charge of more than 1.60% applies under BIPRU 7.2.44 R. |
0.6% |
(4) |
Exchange Rates |
2.5% |
(5) |
Electric power |
4.0% |
(6) |
Gold |
5.0% |
(7) |
Equity |
7.0% |
(8) |
Precious Metals (except gold) |
8.5% |
(9) |
Other commodities (excluding precious metals and electricity power) |
10.0% |
(10) |
Underlying instruments of financial derivative instruments that are not in any of the above categories. |
10.0% |
[Note: BCD Annex III Part 5 Table 5]
A firm must determine the exposure value net of collateral, as follows:exposure value = *max(CMV-CMC;(j)((i)(RPTij)-(l)(RPClj))*CCRMj)where:CMV = current market value of the portfolio of transactions within the netting set with a counterparty gross of collateral.That is, where:CMV = (i)(CMVi)where:CMVi = the current market value of transaction i;CMC = the current market value of the collateral assigned to the netting set.That is, where:CMC = (l)(CMCl)whereCMCl = the current market
The purpose of BIPRU 7.9 is to provide guidance on the FSA's policy for granting CAD 1 model waivers under section 148 of the Act (Modification or waiver of rules). The policy recognises that CAD 1 models may vary across firms but, as a minimum, the FSA will need to be satisfied:(1) about the quality of the internal controls and risk management relating to the model (see BIPRU 7.9.19G - BIPRU 7.9.23G for further details);(2) about the quality of the model standards; and(3) that
As part of the model review process, the following may be reviewed: organisational structure and personnel; details of the firm's market position in the relevant products; profit and risk information; valuation and reserving policies; operational controls; IT systems; model release and control procedures; risk management and control framework; risk appetite and limit structure and future developments relevant to model recognition.
A firm should be able to demonstrate that the risk management standards set out in BIPRU 7.9 are satisfied by each legal entity with respect to which the CAD 1 model approach is being used (even though they are expressed to refer only to a firm). This is particularly important for subsidiary undertakings in groups subject to matrix management where the business lines cut across legal entity boundaries.
(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
In assessing whether the risk management and control framework is implemented with integrity, the FSA will consider the IT systems used to run the CAD 1 model and associated calculations. The assessment will include, where appropriate:(1) feeder systems; risk aggregation systems; the integrity of the data (i.e. whether it is complete, coherent and correct); reconciliations and checks on completeness of capture; and(2) system development, change control and documentation; security
A firm may offset gamma and vega exposures arising from the products listed in BIPRU 7.9.37G (5) where it can demonstrate that it trades different types of interest rate-related options as a portfolio and takes steps to control the basis risk between different types of implied volatility. To the extent that this is the case an individual matrix is not required for each of the products listed in BIPRU 7.9.37G (5) and a combined scenario matrix may be used.
Once the effect of delta has been removed from the matrix, the values left in the matrix relate to gamma and vega risk. A firm'sPRR in relation to gamma and vega risk on the individual option is the absolute of the most negative cell in the scenario matrix produced. Where all cells are positive the PRR is zero. The total PRR for the gamma and vega risk on the portfolio of options is a simple sum of the individual requirements. This amount should then be fed into a firm'sPRR c
In using the scenario matrix approach, none of the steps followed will take specific account of a firm's exposure to rho risk. Where a firm can demonstrate that for interest rate-related options the rho sensitivity is effectively included in the delta sensitivities produced, there is no separate capital requirement relating to rho. For all other options except commodity options, a firm should calculate a rho sensitivity ladder by currency using its CAD 1 model and either feed
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
When calculating the PRR of the protection seller, unless specified differently by other rules, the notional amount of the credit derivative contract must be used. For the purpose of calculating the specific riskPRR charge, other than for total return swaps, the maturity of the credit derivative contract is applicable instead of the maturity of the obligation.
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
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
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
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.
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.
(1) BIPRU 7.11.14R - BIPRU 7.11.17R relate to specific riskPRR for trading bookpositions hedged by credit derivatives for the purposes of the calculation of the securities PRR.(2) A firm may take an allowance for protection provided by credit derivatives for the purposes in (1) in accordance with the principles set out in the rules referred to in (1).(3) BIPRU 7.11.13 R - BIPRU 7.11.17 R are subject to the requirements of the credit default swap PRR methods.
(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
An 80% offset may be applied when the value of two legs always move in the opposite direction and where there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure. In addition, key features of the credit derivative contract must not cause the price movement of the credit derivative materially to deviate from the price movements of the cash position. To the extent
The specific risk portion of the interest rate PRR for positions falling into BIPRU 7.11.19 R (1) and BIPRU 7.11.19 R (2) must be calculated in accordance with the credit default swap PRR methods rather than in accordance with BIPRU 7.2 (Interest rate PRR) and the other provisions of BIPRU 7.11. However a firm may apply BIPRU 7.11.13 R- BIPRU 7.11.17 R before applying the credit default swap PRR methods. If it does so the firm must apply the credit default swap PRR methods to
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.
If more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest risk weights must be referred to. If the two lowest risk weights are different, the higher risk weight must be assigned. If the two lowest risk weights are the same, that risk weight must be assigned.[Note: BCD Annex VI Part 3 point 7]
(1) If a firm has decided to make use of the credit assessments of export credit agencies, when risk weightingexposures to central governments or central banks, if two or more credit assessments are available to a firm from export credit agencies or if credit assessments are available to a firm from both nominated ECAIs and export credit agencies, the firm must adopt the approach in this rule.(2) If two credit assessments are available and correspond to different risk weights
Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment must be used if it produces a higher risk weight than would otherwise be the case or if it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects
Notwithstanding BIPRU 3.6.20 R, when an exposure arises through a firm's participation in a loan that has been extended by a multilateral development bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency item may be used for risk weighting purposes.[Note: BCD Annex VI Part 3 point 17]
A firm is expected ultimately to move towards full revaluation of option positions. For portfolios containing path dependent options, an instantaneous price shock applied to a static portfolio will be acceptable provided that the risks not captured by such an approach are not material. Where a risk is immaterial and does not justify further capital resources, that immaterial risk should still be documented.
A firm should be able to demonstrate that it meets the risk management standards set out in the VaR model permission on a legal entity basis. This is particularly important for a subsidiary undertaking in a group subject to matrix management where the business lines cut across legal entity boundaries.
A firm must have a risk control unit which is independent from business trading units and which reports directly to senior management. It:(1) must be responsible for designing and implementing the firm's risk management system;(2) must produce and analyse daily reports on the output of the VaR model and on the appropriate measures to be taken in terms of the trading limits; and(3) conduct the initial and on-going validation of the VaR model.
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.
(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
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
Stress testing is a way of identifying the risk to a firm posed by a breakdown of model assumptions or by low-probability events. Where stress tests reveal unacceptable vulnerability to a given set of circumstances, a firm should take prompt steps to manage those risks appropriately, for example by hedging against the outcome or reducing the size of the firm'sexposure.
A firm must have procedures to assess and respond to the results produced from stress testing. In particular, stress testing results must be:(1) used to evaluate its capacity to absorb such losses or identify steps to be taken to reduce risk; and(2) communicated routinely to senior management and periodically to the governing body.
This section also has rules requiring a firm to identify and assess risks to its being able to meet its liabilities as they fall due, how it intends to deal with those risks, and the amount and nature of financial resources that the firm considers necessary. GENPRU 1.2.60 R provides that a firm should document that assessment. The FSA will review that assessment as part of its own assessment of the adequacy of a firm's capital under its supervisory review and evaluation process
A firm must have in place sound, effective and complete processes, strategies and systems:(1) to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover:(a) the nature and level of the risks to which it is or might be exposed;(b) the risk in the overall financial adequacy rule; and(c) the risk that the firm might not be able to meet its CRR in the future; and(2)
(1) This rule defines some of the terms used in the overall Pillar 2 rule.(2) Residual risk means the risk that credit risk mitigation techniques used by the firm prove less effective than expected.(3) Securitisation risk includes the risk that the capital resources held by a firm in respect of assets which it has securitised are inadequate having regard to the economic substance of the transaction, including the degree of risk transfer achieved.(4) Business risk means any risk
(1) This paragraph gives guidance on some of the terms used in the overall Pillar 2 rule.(2) Insurance risk refers to the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.(3) Interest rate risk in the non-trading book is explained in BIPRU 2.3 (Interest rate risk in the non-trading book).(4) In a narrow sense, business risk is the risk to a firm that it suffers losses because its income falls or is volatile relative to its fixed cost base.
In the overall Pillar 2 rule , internal capital refers to the financial resources of a firm which it treats as being held against the risks listed in the overall Pillar 2 rule. The obligation in that rule to assess the distribution of such capital refers, in relation to a firm making an assessment on a solo basis, for example, to the need to take account of circumstances where part of a firm's financial resources are held by a branch of that firm which are subject to restrictions
The processes and systems required by the overall Pillar 2 rule must:(1) include an assessment of how itintends to deal with each of the major sources of risk identified in accordance with GENPRU 1.2.30R (2); and(2) take into account the impact of diversification effects and how such effects are factored into the firm's systems for measuring risks.
Certain risks such as systems and controls weaknesses may not be adequately addressed by, for example, holding additional capital and a more appropriate response would be to rectify the weakness. In such circumstances, the amount of financial resources required to address these risks might be zero. However, a firm should consider whether holding additional capital might be an appropriate response until the identified weaknesses are rectified. A firm, should, in accordance with
A firm should carry out assessments of the sort described in the overall Pillar 2 rule and GENPRU 1.2.39 R at least annually, or more frequently if changes in the business, strategy, nature or scale of its activities or operational environment suggest that the current level of financial resources is no longer adequate. The appropriateness of the internal process, and the degree of involvement of senior management in the process, will be taken into account by the FSA when reviewing
(1) A firm should assess the nature and severity of the economic recession or business cycle changes which are relevant to it given the nature and scale of its business. When projecting its capital resources and CRR a firm should consider a range of stresses and scenarios both in nature and severity.(2) Stress and scenario analyses should, in the first instance, be aligned with the risk appetite of the firm and the calibration of such stress and scenario analyses should be reconciled
A firm should use the results of its stress testing and scenario analysis not only to assess capital needs, but also to decide if measures should be put in place to minimise the adverse effect on the firm if the risk covered by the stress or scenario test actually materialises. Such measures might be a contingency plan or might be more concrete risk mitigation steps.
(1) Where significant credit risk associated with securitised exposures has been transferred from the originator in accordance with the terms of BIPRU 9.4 or BIPRU 9.5, that originator may:(a) in the case of a traditional securitisation, exclude from its calculation of risk weighted exposure amounts and, as relevant, expected loss amounts, the exposures which it has securitised; and(b) in the case of a synthetic securitisation, calculate risk weighted exposure amounts and, as
Each of the capital charges in BIPRU 8.7.1 G, as applied on a consolidated basis, is called a consolidated requirement component. The name of each consolidated requirement component reflects the solo capital charge on which it is based. Solo capital charges are called risk capital requirements. Thus for example the consolidated requirement component for market risk is called the consolidated market risk requirement. The calculation of the consolidated market risk requirement is
A firm has a choice about how it should apply a risk capital requirement to the group. It may do this by treating the whole of the group as a single entity and applying the risk capital requirement to the group (a line by line approach), calculating a separate risk capital requirement for each group member (an aggregation approach) or a mixture of the two.
A firm must calculate a consolidated requirement component by applying the risk capital requirement applicable to that consolidated requirement component to the UK consolidation group or non-EEA sub-group in accordance with BIPRU 8.7.13 R. Except where BIPRU 8.7.34 R to BIPRU 8.7.38 R allow the requirements of another regulator to be used, the risk capital requirement must be calculated in accordance with the FSA'srules. The risk capital requirement applicable to a consolidated
Table: Capital charges relating to consolidated requirement components
This table belongs to BIPRU 8.7.11 R
Rules on which the consolidated requirement component are based (the applicable risk capital requirement) |
|
(1) A firm must calculate a consolidated requirement component by using one of the methods in this rule.(2) Under the first method a firm must:(a) apply the risk capital requirement set out in BIPRU 8.7.12 R to each undertaking in the UK consolidation group or non-EEA sub-group; and(b) add the risk capital requirements together.(3) Under the second method a firm must:(a) treat the whole UK consolidation group or non-EEA sub-group as a single undertaking; and(b) apply the risk
In accordance with BIPRU 8.2.1 R and BIPRU 8.3.1 R (The basic consolidation rules for a UK consolidation group or non-EEA sub-group), a firm may exclude that part of the risk capital requirement that arises as a result of:(1) (in respect of the consolidated credit risk requirement) intra-group balances; or(2) (in respect of the consolidated operational risk requirement and consolidated fixed overheads requirement) intra-group transactions;with other undertakings in the UK consolidation
A firm may calculate the risk capital requirement for an institution in the firm'sUK consolidation group or non-EEA sub-group that is an EEA firm in accordance with the CRD implementation measures in the EEA firm'sEEA State that correspond to the FSA'srules that would otherwise apply under this section if the institution is subject to those CRD implementation measures.
(1) This rule applies if:(a) a firm is applying an accounting consolidation approach to part of its UK consolidation group or non-EEA sub-group under method three as described in BIPRU 8.7.13R (4)(a); and(b) the part of the group in (a) constitutes the whole of a group subject to the consolidated capital requirements of a competent authority under the CRD implementation measures relating to consolidation under the Banking Consolidation Directive or the Capital Adequacy Directive.(2)
A firm must disclose its risk management objectives and policies for each separate category of risk, including the risks referred to under BIPRU 11.5.1 R to BIPRU 11.5.17 R. These disclosures must include:(1) the strategies and processes to manage those risks;(2) the structure and organisation of the relevant risk management function or other appropriate arrangements;(3) the scope and nature of risk reporting and measurement systems; and(4) the policies for hedging and mitigating
A firm must disclose the following information regarding compliance with BIPRU 3, BIPRU 4, BIPRU 6, BIPRU 7, BIPRU 10 and the overall Pillar 2 rule:(1) a summary of the firm's approach to assessing the adequacy of its internal capital to support current and future activities;(2) for a firm calculating risk weighted exposure amounts in accordance with the standardised approach to credit risk, 8% of the risk weighted exposure amounts for each of the standardised credit risk exposure
For equity exposures, the requirement under BIPRU 11.5.4 R (3) applies to:(1) each of the approaches ( the simple risk weight approach, the PD/LGD approach and the internal models approach) provided for in BIPRU 4.7.5 R to BIPRU 4.7.6 R, BIPRU 4.7.9 R to BIPRU 4.7.11 R, BIPRU 4.7.14 R to BIPRU 4.7.16 R, BIPRU 4.7.24 R to BIPRU 4.7.25 R;(2) exchange traded exposures, private equity exposures in sufficiently diversified portfolios, and other exposures;(3) exposures subject to supervisory
A firm must disclose the following information regarding its exposure to credit risk and dilution risk:(1) the definitions for accounting purposes of past due and impaired;(2) a description of the approaches and methods adopted for determining value adjustments and provisions;(3) the total amount of exposures after accounting offsets and without taking into account the effects of credit risk mitigation, and the average amount of the exposures over the period broken down by different
A firm calculating risk weighted exposure amounts for specialised lending exposures in accordance with BIPRU 4.5.8 R to BIPRU 4.5.10 R or equity exposures in accordance with BIPRU 4.7.9 R to BIPRU 4.7.10 R (the simple risk weight approach) must disclose the exposures assigned:(1) to each category of the table in BIPRU 4.5.9 R; or(2) to each risk weight mentioned in BIPRU 4.7.9 R to BIPRU 4.7.10 R.[Note: BCD Annex XII Part 2 point 8]
A firm must disclose its capital resources requirements separately for each risk referred to in (1) and (2).(1) in respect of its trading-book business, its:(a) interest rate PRR;(b) equity PRR;1(c) option PRR;(d) collective investment schemesPRR;(e) counterparty risk capital component; and(f) concentration risk capital component; and(2) in respect of all of its business activities, its:(a) commodity PRR; and(b) foreign currency PRR1[Note: BCD Annex XII Part 2 point 9]
The following information must be disclosed by a firm which calculates its market risk capital requirement using a VaR model:(1) for each sub-portfolio covered:(a) the characteristics of the models used;(b) a description of stress testing applied to the sub-portfolio;(c) a description of the approaches used for backtesting and validating the accuracy and consistency of the internal models and modelling processes;(2) the scope of the firm'sVaR model permission; and(3) a description
A firm must disclose the following information on its exposure to interest rate risk on positions not included in the trading book:(1) the nature of the interest rate risk and the key assumptions (including assumptions regarding loan prepayments and behaviour of non-maturity deposits), and frequency of measurement of the interest rate risk; and(2) the variation in earnings, economic value or other relevant measure used by the management for upward and downward rate shocks according
A firm calculating risk weighted exposure amounts in accordance with BIPRU 9 must disclose the following information:(1) a description of the firm's objectives in relation to securitisation activity;(2) the roles played by the firm in the securitisation process;(3) an indication of the extent of the firm's involvement in each of them;(4) the approaches to calculating risk weighted exposure amounts that the firm follows for its securitisation activities;(5) a summary of the firm's
(1) This paragraph sets out guidance on BIPRU 4.6.2 R so far as it relates to the boundary between retail exposures and corporate exposures.(2) In deciding what steps are reasonable for the purposes of BIPRU 4.6.2 R (1), a firm may take into account complexity and cost, as well as the materiality of the impact upon its capital calculation. A firm should be able to demonstrate to the FSA that it has complied with the obligation to take reasonable steps under BIPRU 4.6.2 R (1) in
The level of risk differentiation must ensure that the number of exposures in a given grade or pool is sufficient to allow for meaningful quantification and validation of the loss characteristics at the grade or pool level. The distribution of exposures and obligors across grades or pools must be such as to avoid excessive concentrations.[Note:BCD Annex VII Part 4 point 14]
(1) This paragraph contains guidance on the level of differentiation referred to in BIPRU 4.6.7 R.(2) It is important that a firm achieves adequate segmentation to deliver robust estimates of LGD and conversion factors, as well as PD. Whether the focus should be more on exposure size or collateral type is a question of fact for the particular circumstances in which the assignment of exposures to grades or pools occurs. Typically the FSA would expect both to be important.(3) A
A firm must be able to demonstrate to the FSA that the process of assigning exposures to grades or pools provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at grade or pool level.[Note:BCD Annex VII Part 4 point 15 (part)]
(1) A firm must consider the following risk drivers when assigning exposures to grades or pools:(a) obligor risk characteristics;(b) transaction risk characteristics, including product or collateral types or both; and(c) delinquency.(2) In the case of (1)(b) a firm must explicitly address cases where several exposures benefit from the same collateral.(3) However:(a) a firm need not consider delinquency if this is compatible with its IRB permission; and(b) (in the case of a firm
A firm must regard internal data for assigning exposures to grades or pools as the primary source of information for estimating loss characteristics. A firm may use external data (including pooled data) or statistical models for quantification provided a strong link can be demonstrated between:(1) the firm's process of assigning exposures to grades or pools and the process used by the external data source; and(2) the firm's internal risk profile and the composition of the external
If a firm derives long run average estimates of PD and LGD for retail exposures from an estimate of total losses, and an appropriate estimate of PD or LGD, the process for estimating total losses must meet the minimum IRB standards1 for estimation of PD and LGD, and the outcome must be consistent with the concept of LGD as set out in BIPRU 4.3.99 R (Default weighted average).[Note:BCD Annex VII Part 4 point 70]
Table: Risk weighted exposure amounts for retail exposures
This table belongs to BIPRU 4.6.41 R
Correlation (R) |
0.03 × (1 - EXP(-35*PD))/(1-EXP(-35)) + 0.16* |
[1-(1-EXP(-35*PD))/(1-EXP(-35))] |
|
Risk weight (RW) |
(LGD*N[(1-R)-0.5*G(PD)+(R/(1-R))0.5 *G(0.999)]-PD*LGD)* 12.5*1.06 |
N(x) |
denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). |
G(z) |
denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that N(x) = z). |
PD = 1 |
For PD = 1 (defaultedexposure), RW must be: Max {0, 12.5 *(LGD- ELBE)} where ELBEmust be the firm's best estimate of expected loss for the defaultedexposure according to BIPRU 4.3.122 R. |
equals RW*exposure value |
[Note:BCD Annex VII Part 1 point 10 (part)]
The obligation to conduct an ICAAP, includes requirements on a firm to:(1) carry out regularly assessments of the amounts, types and distribution of financial resources, capital resources and internal capital that it considers adequate to cover the nature and level of the risks to which it is or might be exposed (GENPRU 1.2.30 R to GENPRU 1.2.41 G (the overall Pillar 2 rule and related rules);(2) identify the major sources of risk to its ability to meet its liabilities as they
The SREP is a process under which the FSA:(1) reviews the arrangements, strategies, processes and mechanisms implemented by a firm to comply with GENPRU, BIPRU and SYSC and with requirements imposed by or under the regulatory system and evaluates the risks to which the firm is or might be exposed;(2) determines whether the arrangements, strategies, processes and mechanisms implemented by the firm and the capital held by the firm ensures a sound management and coverage of the risks
If the FSA gives individual capital guidance to a firm, the FSA will state what amount and quality of capital the FSA considers the firm needs to hold in order to comply with the overall financial adequacy rule. It will generally do so by saying that the firm should hold capital resources of an amount at least equal to a specified percentage of that firm'scapital resources requirement
In the circumstance set out in BIPRU 2.2.20 G, the FSA may ask a firm for alternative or more detailed proposals and plans or further assessments and analyses of capital adequacy and risks faced by the firm. The FSA will seek to agree with the firm appropriate timescales and scope for any such additional work, in light of the circumstances which have arisen.
(1) This paragraph applies to a firm whose activities are simple.(2) In carrying out its ICAAP it could:(a) identify and consider that firm's largest losses over the last 3 to 5 years and whether those losses are likely to recur;(b) prepare a short list of the most significant risks to which that firm is exposed;(c) consider how that firm would act, and the amount of capital that would be absorbed, in the event that each of the risks identified were to materialise;(d) consider
In relation to a firm whose activities are moderately complex, in carrying out its ICAAP, BIPRU 2.2.25 G (3) to (4) apply. In addition, it could:(1) having consulted the management in each major business line, prepare a comprehensive list of the major risks to which the business is exposed;(2) estimate, with the aid of historical data, where available, the range and distribution of possible losses which might arise from each of those risks and consider using shock stress tests
(1) A firm may take into account factors other than those identified in the overall Pillar 2 rule when it assesses the level of capital it wishes to hold. These factors might include external rating goals, market reputation and its strategic goals. However, a firm should be able to distinguish, for the purpose of its dialogue with the FSA, between capital it holds in order to comply with the overall financial adequacy rule and to meet the risks set out in the overall Pillar 2
A firm should assess its exposure to risks transferred through the securitisation of assets should those transfers fail for whatever reason. A firm should consider the effect on its financial position of a securitisation arrangement failing to operate as anticipated or of the values and risks transferred not emerging as expected.
A firm should assess its exposure to residual risks that may result from the partial performance or failure of credit risk mitigation techniques for reasons that are unconnected with their intrinsic value. This could result from, for instance, ineffective documentation, a delay in payment or the inability to realise payment from a guarantor in a timely manner. Given that residual risks can always be present, a firm should assess the appropriateness of its CRR against its assumptions
The countervailing factors and off-setting actions that a firm may rely on as referred to in BIPRU 2.2.44 G include, but are not limited to, projected balance sheet shrinkage, growth in capital resources resulting from retained profits between the date of the stress test and the projected start of the economic downturn, the possibility of raising new capital in a downturn, the ability to reduce dividend payments or other distributions, and the ability to allocate capital from
(1) BIPRU 2.2.49 G to BIPRU 2.2.70 G set out guidance for:(a) a bank or building society;(b) an asset management firm; and(c) a securities firm;whose activities are either simple or moderately complex.(2) BIPRU 2.2.49 G to BIPRU 2.2.70 G provide examples of the sorts of risks which such a firm might typically face and of stress tests or scenario analyses which it might carry out as part of its ICAAP.(3) The material on securities firms is also relevant to a commoditiesfirm.
(1) A securities firm may consider the impact of the situations listed in (a) to (c) on its capital levels when assessing its exposure to concentration risk:(a) the potential loss that could arise from large exposures to a single counterparty;(b) the potential loss that could arise from exposures to large transactions or to a product type; and(c) the potential loss resulting from a combination of events such as a sudden increase in volatility leaving a hitherto fully-margined
For a firm to discharge its financial obligations to policyholders, it will incur certain expenses, including payments to the firm's own staff, contributions to any pension scheme and fees to outsourcing suppliers or service companies. All of these expenses, and risks associated with these payments, should be considered when carrying out the ICA. When considering the appropriate level of expenses in a projection, the firm should consider the acceptability of the service provided
Firms should also consider whether their systems and controls provide sufficient information to permit senior management to identify the crystallisation of risks in a timely manner so as to provide them with the opportunity to respond and allow the firm to obtain the full value of the modelled management action. Firms should also analyse the wider implications of the management actions, particularly where they represent significant divergence from the business plan and use this
Firms should not ignore risks simply because they relate to events that occur with an expected likelihood beyond the confidence level. However, the capital required in the face of these tail events may be reduced for the purpose of carrying out the ICA. For example, while an A-rated bond may be assumed not to default within the required confidence level, allowance should be made for the devaluation of that bond through a more likely downgrade or change in credit spreads or other
The assets that a firm holds will include assets to back both the liabilities and any capital requirement. These assets carry risk, both in their own right and to the extent that they do not match the liabilities that they are backing. The risk associated with these assets should be considered over the full term for which the firm expects to carry the liabilities.
The methods and assumptions used in valuing the liabilities should contain no explicit margins for risk, nor should the approach be optimistic. The valuation of liabilities should be consistent with the valuation of assets. To the extent the market price includes an implicit allowance for risk, this should be included within the valuation.
In determining the strength of the ICA, a firm should consider all risks in aggregate making appropriate allowance for diversification such that the assessment meets the required confidence level overall. The firm should be able to describe and explain each of the main diversification benefits allowed for.
For risks that can be observed to crystallise over a short period of the order of a year, the confidence level may be measured with reference to the probability distribution for the impact of the risks over one year. For example, catastrophic events such as hurricanes can be measured in this way by estimating the ultimate capital cost.
(1) A firm may not use a credit assessment of an eligible ECAI to determine the risk weight of a securitisation position in accordance with BIPRU 9.9 unless it complies with the principles of credibility and transparency as elaborated in (2) to (4).(2) There must be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which the firm is entitled under the contract giving rise to the securitisation position in question.(3) The
The guidance in BIPRU 3.3 (Recognition of ratings agencies) applies for the purposes of BIPRU 9 as it does to exposurerisk weighting in BIPRU 3, save that the reference in BIPRU 3.3 to the regulation 221 of the Capital Requirements Regulations 20061 should be read as a reference to regulation 231 of the Capital Requirements Regulations 20061 for the purposes of BIPRU 9.
A firm using the methods set out in BIPRU 4.5.8 R (Slotting) for assigning risk weights for specialised lending exposures is exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor default for these exposures. Notwithstanding BIPRU 4.4.7 R (Seven grades for exposures to sovereigns, institutions and corporates), a firm must have for these exposures four grades for non-defaulted obligors and one grade for defaulted
(1) A firm using the methods set out in BIPRU 4.5.8 R (Slotting) for assigning risk weights for specialised lending exposures must assign each of these exposures to a grade in accordance with BIPRU 4 Annex 1 R, taking into account the following factors:(a) financial strength;(b) political and legal environment;(c) transaction and/or asset characteristics;(d) strength of the sponsor and developer including any public private partnership income stream; and(e) security package.(2)
A firm may generally assign preferential risk weights of 50% to exposures in category 1, and a 70% risk weight to exposures in category 2 if:(1) its IRB permission allows this; and(2) the firm's underwriting characteristics and other risk characteristics are substantially strong for the relevant category.[Note:BCD Annex VII Part 1 point 6 (part)]
Table: Expected loss values for specialised lending
This table belongs to BIPRU 4.5.12 R
Remaining maturity |
Category 1 (Strong) |
Category 2 (Good) |
Category 3 (Satisfactory) |
Category 4 (Weak) |
Category 5 |
Less than 2.5 years |
0% |
0.4% |
2.8% |
8% |
50% |
Equal or more than 2.5 years |
0.4% |
0.8% |
2.8% |
8% |
50% |
The coverage of each of the categories is set out in BIPRU 4.5.6 R |
|||||
[Note:BCD Annex VII Part 1 point 31 (part)]
Where a firm'sIRB permission authorises it generally to assign preferential risk weights as outlined in BIPRU 4.5.10 R of 50% to exposures in category 1, and 70% to exposures in category 2, the EL value for exposures in category 1 must be 0%, and for exposures in category 2 must be 0.4%.[Note:BCD Annex VII Part 1 point 31 (part)]
A firm must have systems and procedures for detecting deteriorations in the seller's financial condition and purchased receivables quality at an early stage, and for addressing emerging problems proactively. In particular a firm must have clear and effective policies, procedures, and information systems to monitor covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem purchased receivables.[Note: BCD Annex VII
A firm must have clear and effective policies and procedures governing the control of purchased receivables, credit, and cash. In particular, written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and the way cash receipts are to be handled. These elements must take appropriate account of all relevant and material factors, including the
The risk weights for dilution risk for purchased receivables (both corporate exposures and retail exposures) must be calculated according to this rule. The risk weights must be calculated according to the formula in BIPRU 4.4.58 R. However, for the purposes of that formula, the total annual sales referred to in BIPRU 4.4.59 R are the weighted average by individual exposures of the pool. The input parameters PD and LGD and the exposure value must be determined under the applicable
In the case of retail exposures, for dilution risk of purchased receivables PD must be set equal to EL estimates for dilution risk. If a firm can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a reliable manner, the PD estimate may be used.[Note: BCD Annex VII Part 2 point 19]
The following LGD values apply for purchased corporate exposure receivables:(1) for senior purchased corporate exposure receivables exposures where a firm cannot demonstrate that its PD estimates meet the minimum IRB standards, the value is 45%;(2) for subordinated purchased corporate exposure receivables exposures where a firm cannot demonstrate that its PD estimates meet the minimum IRB standards, the value is 100%; and(3) for dilution risk of purchased corporate exposure receivables,
Notwithstanding BIPRU 4.4.34 R and BIPRU 4.8.25 R, for dilution risk and default risk if a firm is under its IRB permission using the advanced IRB approach for LGD estimates for corporate exposures and it can decompose its EL estimates for purchased corporate exposure receivables into PDs and LGDs in a reliable manner, the LGD estimate for purchased corporate exposure receivables may be used.[Note: BCD Annex VII Part 2 point 9]
A firm must:(1) have adequate, sound and appropriate risk management processes and internal control mechanisms for the purpose of assessing and managing its own exposure to group risk, including sound administrative and accounting procedures; and(2) ensure that its group has adequate, sound and appropriate risk management processes and internal control mechanisms at the level of the group, including sound administrative and accounting procedures.
Where this section applies with respect to a financial conglomerate, the risk management processes referred to in SYSC 12.1.8R (2) must include:(1) sound governance and management processes, which must include the approval and periodic review by the appropriate managing bodies within the financial conglomerate of the strategies and policies of the financial conglomerate in respect of all the risks assumed by the financial conglomerate, such review and approval being carried out
Where this section applies with respect to a financial conglomerate, the internal control mechanisms referred to in SYSC 12.1.8R (2) must include:(1) mechanisms that are adequate to identify and measure all material risks incurred by members of the financial conglomerate and appropriately relate capital in the financial conglomerate to risks; and(2) sound reporting and accounting procedures for the purpose of identifying, measuring, monitoring and controlling intra-group transactions
In the case of a firm that:(1) is an ELMI or aBIPRU firm; and(2) has a mixed-activity holding company as a parent undertaking;the risk management processes and internal control mechanisms referred to in SYSC 12.1.8 R must include sound reporting and accounting procedures and other mechanisms that are adequate to identify, measure, monitor and control transactions between the firm'sparent undertakingmixed-activity holding company and any of the mixed-activity holding company'ssubsidiary
In some cases the management of the systems and controls used to address the risks described in SYSC 12.1.8R (1) may be organised on a group-wide basis. If the firm is not carrying out those functions itself, it should delegate them to the group members that are carrying them out. However, this does not relieve the firm of responsibility for complying with its obligations under SYSC 12.1.8R (1). A firm cannot absolve itself of such a responsibility by claiming that any breach
For the purpose of GENPRU 2 Annex 7 (Admissible assets in insurance), and also in relation to permitted links,1 a derivative or quasi-derivative is approved if:(1) it is held for the purpose of efficient portfolio management (INSPRU 3.2.6 R to INSPRU 3.2.7 R) or reduction of investment risk (INSPRU 3.2.8 R to INSPRU 3.2.13 G);(2) it is covered (INSPRU 3.2.14 R to INSPRU 3.2.33 G); and(3) it is effected or issued:(a) on or under the rules of a regulated market; or(b) off-market
INSPRU 3.2.8 R does not require that a derivative or quasi-derivative has no possible adverse consequences. Often a derivative or quasi-derivative is effected to protect against a severe adverse consequence that only arises in one circumstance. In all other circumstances it may itself lead to adverse consequences, even if only because it expires worthless resulting in the loss of the purchase price. Conversely a derivative or quasi-derivative may reduce risk in a wide range of
For the purposes of INSPRU 3.2.8 R, investment risk is the risk that the assets held by a firm:(1) (where they are admissible assets held by the firm to cover its technical provisions) might not be:(a) of a value at least equal to the amount of those technical provisions as required by INSPRU 1.1.20 R; or(b) of appropriate safety, yield and marketability as required by INSPRU 1.1.34R (1)(a); or(c) of an appropriate currency match as required by INSPRU 3.1.53 R;(2) (where they
In assessing whether investment risk is reduced, the impact of a transaction on both the assets and liabilities should be considered. In particular, where the amount of liabilities depends upon the fluctuations in an index or other factor, investment risk is reduced where assets whose value fluctuates in the same way match those liabilities. In appropriate circumstances this may include:(1) a derivative or quasi-derivative that is linked to the same index as the liabilities from
The third purpose of cover is that it protects against the risk that the firm may not be able to deliver assets (including money in any currency) of the right type when the obligation falls due under the transaction. An obligation to deliver assets is covered only if the firm holds those assets or has entered into an offsetting transaction that would deliver those assets when needed. An obligation to pay money is offset only if the firm holds cash in the right currency, its equivalent
(1) 1For the purposes of the rules on permitted links, a stock lending transaction (including a repo transaction) is approved if:(a) the assets lent are permitted links;(b) the counterparty is an authorised person, an approved counterparty, a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America or a bank, or a branch of a bank, supervised, and authorised to deal in investments as principal, with respect to OTC derivatives
5In identifying its money laundering risk and in establishing the nature of these systems and controls, a firm should consider a range of factors, including:(1) its customer, product and activity profiles;(2) its distribution channels;(3) the complexity and volume of its transactions;(4) its processes and systems; and(5) its operating environment.
5A firm should ensure that the systems and controls include:(1) appropriate training for its employees in relation to money laundering;(2) appropriate provision of information to its governing body and senior management, including a report at least annually by that firm'smoney laundering reporting officer (MLRO) on the operation and effectiveness of those systems and controls;(3) appropriate documentation of its risk management policies and risk profile in relation to money laundering,
(1) Depending on the nature, scale and complexity of its business, it may be appropriate for a firm to have a separate risk assessment function responsible for assessing the risks that the firm faces and advising the governing body and senior managers on them.(2) The organisation and responsibilities of a risk assessment function should be documented. The function should be adequately resourced and staffed by an appropriate number of competent staff who are sufficiently independent
A firm should plan its business appropriately so that it is able to identify, measure, manage and control risks of regulatory concern (see SYSC 3.2.11 G (2)). In some firms, depending on the nature, scale and complexity of their business, it may be appropriate to have business plans or strategy plans documented and updated on a regular basis to take account of changes in the business environment.