Related provisions for BIPRU 4.4.70
1 - 20 of 89 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]
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
This table belongs to BIPRU 3.4.8 R.
MEIP |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
0% |
0% |
20% |
50% |
100% |
100% |
100% |
150% |
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]
A firm must treat an exposure to a regional government or local authority of an EEA State other than the United Kingdom as an exposure to the central government in whose jurisdiction that regional government or local authority is established if that regional government or local authority is included on the list of regional governments and local authorities drawn up by the competent authority in that EEA State under a CRD implementation measure with respect to point 9 of Part 1
Exposures to churches or religious communities constituted in the form of a legal person under public law must, in so far as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to regional governments and local authorities, except that BIPRU 3.4.15 R and BIPRU 3.4.17 R do not apply.[Note: BCD Annex VI Part 1 point 10]
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 3.4.28 R to BIPRU 3.4.29 R:(1) a firm must treat exposures to multilateral development banks in the same manner as exposures to institutions in accordance with BIPRU 3.4.34 R to BIPRU 3.4.39 R (Exposures to institutions: credit assessment based method); 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 19]
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 a residual maturity of more than three months 6for 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]
Exposures to an institution with a residual maturity of three months or less 6for 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% |
If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines the application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the short-term assessment and risk weighting specified in BIPRU 3.4.112 R must be used for that specific exposure only. Other short-term exposures must follow the general preferential treatment for
If there is a short-term credit assessment as set out in BIPRU 3.4.112 R and such an assessment determines a less favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in BIPRU 3.4.37 R, then the general preferential treatment for short-term exposures must not be used and all unrated short-term claims must be assigned the same risk weight as that applied by the specific short-term assessment.[Note: BCD Annex VI Part 1
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]
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]
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
The Banking Consolidation Directive permits a competent authority to disapply the condition in BIPRU 3.4.60 R (3), if it has evidence that a well-developed and long-established residential real estate market is present in its territory with loss rates which are sufficiently low to justify such treatment. BIPRU 3.4.61 R implements that option. However, if the evidence changes so that these conditions are no longer satisfied, the FSA may be obliged to revoke BIPRU 3.4.61 R.
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:
The requirements about legal certainty referred to in BIPRU 3.4.60 R (4)(a) are as follows:(1) the mortgage or charge 3must be enforceable in all relevant jurisdictions which are relevant at the time of conclusion of the credit agreement, and the mortgage or charge 3must be properly filed on a timely basis;33(2) the arrangements must reflect a perfected lien (i.e. all legal requirements for establishing the pledge shall have been fulfilled); and(3) the protection agreement and
(1) The requirements about monitoring of property values referred to in BIPRU 3.4.60 R (4)(b) are as follows:(a) the value of the property must be monitored on a frequent basis and at a minimum once every three years for residential real estate;(b) more frequent monitoring must be carried out where the market is subject to significant changes in conditions;(c) statistical methods may be used to monitor the value of the property and to identify property that needs revaluation;(d)
The property must be valued by an independent valuer at or less than the market value. In those EEA States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions the property may instead be valued by an independent valuer at or less than the mortgage lending value.[Note: BCD Annex VIII Part 3 point 62]
Market value means the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value must be documented in a transparent and clear manner.[Note: BCD Annex VIII Part 3 point 63]
Mortgage lending value means the value of the property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements must not be taken into account in the assessment of the mortgage lending value. The mortgage lending value must be documented in a transparent and clear
A firm may only treat an exposure as fully and completely secured by residential property situated in another EEA State for the purposes of BIPRU 3.4.56 R or BIPRU 3.4.58 R if it would be treated as fully and completely secured by the relevant CRD implementation measures in that EEA State implementing points 45 and 47 of Part 1 of Annex VI of the Banking Consolidation Directive.
Exposures or any part of an exposure secured by mortgages on offices or other commercial premises which cannot properly be considered to fall within any other standardised credit risk exposure class or to qualify for a lower risk weight under BIPRU 3 must be assigned a risk weight of 100%.[Note: BCD Annex VI Part 1 point 51]
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]
If a CRD implementation measure in another EEA State implements the discretion in point 51 of Part 1 of Annex VI of the Banking Consolidation Directive, a firm may apply the same treatment as that CRD implementation measure to exposures falling within the scope of that CRD implementation measure which are fully and completely secured by mortgages on offices or other commercial premises situated in that EEA State.[Note: BCD Annex VI Part 1 points 51 and 57]
If a CRD implementation measure in another EEA State implements the discretion in point 53 of Part 1 of Annex VI of the Banking Consolidation Directive, a firm may apply the same treatment as that CRD implementation measure to exposures related to property leasing transactions concerning offices or other commercial premises situated in that EEA State and governed by statutory provisions whereby the lessor retains full ownership of the rented assets until the tenant exercises his
(1) If a CRD implementation measure in another EEA State implements the discretion in point 58 of Part 1 of Annex VI of the Banking Consolidation Directive to dispense with the condition in point 54(b) for exposures fully and completely secured by mortgages on commercial property situated in that EEA State, a firm may apply the same treatment as that CRD implementation measure to exposures fully and completely secured by mortgages on commercial property situated in that EEA State
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]
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)
Exposures to institutions where BIPRU 3.4.34 R to BIPRU 3.4.39 R apply, and exposures to corporates6 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]
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 EU5 law; and5(ii)
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
The exposure value for leases must be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. an option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in BIPRU 5.7.1 R (Eligibility), regarding the eligibility of protection providers as well as the minimum requirements for recognising other types of guarantees
A firm may determine the exposure value for:(1) financial derivative instruments;(2) repurchase transactions;(3) securities or commodities lending or borrowing transactions;(4) margin lending transactions; and(5) long settlement transactionsusing the CCR internal model method.[Note: BCD Annex III Part 2 point 2]
Point 2 of Part 6 of Annex III of the Banking Consolidation Directive provides that a firm using the CCR internal model method may use a type of model other than the type set out in BIPRU 13.6. If the FSA agrees to this the details of the model and the necessary calculations will be set out in the CCR internal model method permission, which will modify BIPRU 13.6 to the extent necessary. The FSA would not expect to agree to such a request unless the firm was able to satisfy the
If permitted by its CCR internal model method permission, and subject to its terms, a firm may carry out the implementation of the CCR internal model method sequentially across different transaction types; and during this period the firm may use the CCR mark to market method or the CCR standardised method.[Note: BCD Annex III Part 6 point 2]
Subject to BIPRU 13.6.10 R to BIPRU 13.6.16 G, a firm that has a CCR internal model method permission must not use the CCR mark to market method or the CCR standardised method for transactions within the scope of the firm'sCCR internal model method permission.[Note: BCD Annex III Part 6 point 4 (part)]
(1) A firm must measure the exposure value at the level of the netting set.(2) The model must specify the forecasting distribution for changes in the market value of the netting set attributable to changes in market variables, such as interest rates, foreign exchange rates.(3) The model must then compute the exposure value for the netting set at each future date given the changes in the market variables.(4) For margined counterparties, the model may also capture future collateral
A firm may include eligible financial collateral as defined in BIPRU 5.4.8 R (Eligible collateral under financial collateral comprehensive method) and BIPRU 14.2.15 R to BIPRU 14.2.17 R in its forecasting distributions for changes in the market value of the netting set, if the quantitative, qualitative and data requirements for the CCR internal model method are met for the collateral.[Note: BCD Annex III Part 6 point 6]
A firm must compute effective EPE by estimating expected exposure (EEt) as the average exposure at future date t, where the average is taken across possible future values of relevant market risk factors. The model estimates EE at a series of future dates t1, t2, t3, etc.[Note: BCD Annex III Part 6 point 7 third part]
For the purposes of 2BIPRU 13.6.25 R2 :2(1) effective EPE is the average effective EE during the first year of future exposure;(2) if all contracts in the netting set mature within less than one year, effective EPE2 is the average of effective EE2 until all contracts in the netting set mature.22[Note: BCD Annex III Part 6 point 9, first part]
A firm must compute effective EPE as a weighted average of effective EE:Effective EPE = (k=1min(1 year;maturity))((Effective EEtk)*(tk))where:the weights ?tk = tk tk-1 allow for the case when future exposure is calculated at dates that are not equally spaced over time.[Note: BCD Annex III Part 6 point 9, second part]
If a firm'sCCR internal model method permission permits it, the firm may use its own estimates of , subject to a floor of 1.2, where must equal the ratio of internal capital from a full simulation of CCRexposure across counterparties (numerator) and internal capital based on EPE (denominator).[Note: BCD Annex III Part 6 point 12 (part)]
For the purposes of BIPRU 13.6.33 R:(1) in the denominator, EPE must be used as if it were a fixed outstanding amount;(2) a firm must be able to demonstrate that its internal estimates of capture in the numerator material sources of stochastic dependency of distribution of market values of transactions or of portfolios of transactions across counterparties;(3) internal estimates of must take account of the granularity of portfolios.[Note: BCD Annex III Part 6 point 12 (part
A firm must ensure that the numerator and denominator of are computed in a consistent fashion with respect to the modelling methodology, parameter specifications and portfolio composition. The approach used must be based on the firm's internal capital approach, be well-documented and be subject to independent validation. In addition, a firm must review their estimates on at least a quarterly basis, and more frequently when the composition of the portfolio varies over time. A
3Where appropriate, volatilities and correlations of market risk factors used in the joint simulation of market risk and credit risk must be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an economic downturn.[Note: BCD Annex III Part 6 point 14]
If the netting set is subject to a margin agreement, a firm must use one of the following EPE measures:(1) effective EPE without taking into account the margin agreement;(2) the margin threshold, if positive, under the margin agreement plus an add-on that reflects the potential increase in exposure over the margin period of risk:(a) the add-on is computed as the expected increase in the netting set'sexposure beginning from a current exposure of zero over the margin period of risk;(b)
(1) The firm must have a control unit that is responsible for the design and implementation of its CCR management system, including the initial and on-going validation of the model.(2) This unit must control input data integrity and produce and analyse reports on the output of the firm's risk measurement model, including an evaluation of the relationship between measures of risk exposure and credit and trading limits.(3) This unit must be:(a) independent from units responsible
(1) A firm's risk management policies must take account of market risk, liquidity risk, and legal and operational risk that can be associated with CCR.(2) The firm must not undertake business with a counterparty without assessing its creditworthiness and must take due account of settlement and pre-settlement credit risk.(3) These risks must be managed as comprehensively as practicable at the counterparty level (aggregating CCRexposures with other credit exposures) and at the firm-wide
A firm'sgoverning body and senior management must be actively involved in the CCR control process and must regard this as an essential aspect of the business to which significant resources need to be devoted. Senior management must be aware of the limitations and assumptions of the model used and the impact these can have on the reliability of the output. Senior management must also consider the uncertainties of the market environment and operational issues and be aware of how
A firm must ensure that the daily reports prepared on its exposures to CCR are reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual credit managers or traders and reductions in the firm's overall CCRexposure.[Note: BCD Annex III Part 6 point 21]
(1) A firm's CCR management system must be used in conjunction with internal credit and trading limits.(2) A firm must ensure that its credit and trading limits are related to its risk measurement model in a manner that is:(a) consistent over time; and(b) well understood by credit managers, traders and senior management.[Note: BCD Annex III Part 6 point 22]
(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:
(1) A firm must have a routine and rigorous program of stress testing in place as a supplement to the CCR analysis based on the day-to-day output of the firm's risk measurement model.(2) The results of this stress testing must be reviewed periodically by senior management and must be reflected in the CCR policies and limits set by management and the governing body.(3) Where stress tests reveal particular vulnerability to a given set of circumstances, prompt steps must be taken
(1) A firm must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the CCR management system.(2) The firm's CCR management system must be well documented and must provide an explanation of the empirical techniques used to measure CCR.[Note: BCD Annex III Part 6 point 25]
A firm must conduct an independent review of the CCR management system regularly through its own internal auditing process. This review must include both the activities of the business units referred to in BIPRU 13.6.41 R and of the independent CCR control unit. A review of the overall CCR management process must take place at regular intervals and must specifically address, at a minimum:(1) the adequacy of the documentation of the CCR management system and process;(2) the organisation
The distribution of exposures1 generated by the model used to calculate effective EPE must be closely integrated into the day-to-day CCR management process of the firm. The model's output must accordingly play an essential role in the credit approval, CCR management, internal capital allocation, and corporate governance of the firm.[Note: BCD Annex III Part 6 point 27]
A firm must have a track record in the use of models that generate a distribution of exposures1 to CCR. Thus, the firm must be able to demonstrate that it has been using a model to calculate the distribution of exposures1 upon which the EPE calculation is based that meets, broadly, the minimum requirements set out in BIPRU 13.6 for at least one year prior to the date of its CCR internal model method permission.[Note: BCD Annex III Part 6 point 28]
(1) A firm must ensure that the model used to generate a distribution of exposures1 to CCR is part of a CCR management framework that includes the identification, measurement, management, approval and internal reporting of CCR. This framework must include the measurement of usage of credit lines (aggregating CCRexposures with other credit exposures) and internal capital allocation.(2) In addition to EPE, a firm must measure and manage current exposures.(3) Where appropriate, the
A firm must have the systems capability to estimate EE daily if necessary, unless it is able to demonstrate to the FSA that its exposures to CCR warrant less frequent calculation. The firm must compute EE along a time profile of forecasting horizons that adequately reflects the time structure of future cash flows and maturity of the contracts and in a manner that is consistent with the materiality and composition of the exposures.[Note: BCD Annex III Part 6 point 30]
(1) Exposure must be measured, monitored and controlled over the life of all contracts in the netting set (not just to the one year horizon).(2) A firm must have procedures in place to identify and control the risks for counterparties where the exposure rises beyond the one-year horizon.(3) A firm must input the forecast increase in exposure into the firm's internal capital model.[Note: BCD Annex III Part 6 point 31]
(1) A firm must have in place sound stress testing processes for use in the assessment of capital adequacy for CCR.(2) These stress measures must be compared with the measure of EPE and considered by the firm as part of the process set out in GENPRU 1.2.42 R.(3) Stress testing must also involve identifying possible events or future changes in economic conditions that could have unfavourable effects on a firm's credit exposures and an assessment of the firm's ability to withstand
(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
A firm must ensure that:(1) the model reflects transaction terms and specifications in a timely, complete, and conservative fashion;(2) such terms include at least:(a) contract notional amounts;(b) maturity;(c) reference assets;(d) margining arrangements; and(e) netting arrangements;(3) the terms and specifications are maintained in a database that is subject to formal and periodic audit;(4) the process for recognising netting arrangements requires:(a) signoff by legal staff
A firm must ensure that:(1) the model employs current market data to compute current exposures;(2) when using historical data to estimate volatility and correlations, at least three years of historical data are used and updated quarterly or more frequently if market conditions warrant;(3) the data covers a full range of economic conditions, such as a full business cycle;(4) a unit independent from the business unit validates the price supplied by the business unit;(5) the data
A firm must ensure that the model is subject to a validation process which:(1) is clearly articulated in firms' policies and procedures;(2) specifies the kind of testing needed to ensure model integrity(3) identifies conditions under which assumptions are violated and may result in an understatement of EPE; and(4) includes a review of the comprehensiveness of the model.[Note: BCD Annex III Part 6 point 38]
A firm must monitor the appropriate risks and have processes in place to adjust its estimation of EPE when those risks become significant. This includes the following:(1) the firm must identify and manage its exposures to specific wrong-way risk;(2) for exposures with a rising risk profile after one year, the firm must compare on a regular basis the estimate of EPE over one year with EPE over the life of the exposure; and(3) for exposures with a residual maturity below one year,
A firm that makes use of collateral to mitigate its CCR must have internal procedures to verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in BIPRU 5 as modified, where relevant, by BIPRU 4.10.[Note: BCD Annex III Part 6 point 41]
(1) A firm'sCCR internal model method model must meet the validation requirements in (2) to (8).(2) The qualitative validation requirements set out in BIPRU 7.10 must be met.(3) Interest rates, foreign currency rates, equity prices, commodities, and other market risk factors must be forecast over long time horizons for measuring CCRexposure. The performance of the forecasting model for market risk factors must be validated over a long time horizon.(4) The pricing models used to
If backtesting indicates that the CCR internal model method model is not sufficiently accurate, the FSA may revoke a firm'sCCR internal model method permission or take appropriate measures to ensure that the model is improved promptly. Measures taken by the FSA may include the use of its own-initiative power to require the firm to hold more capital resources.[Note: BCD Annex III Part 6 point 42 (part)]
Each exposure must be assigned to one of the following exposure classes:(1) claims or contingent claims on central governments and central banks;(2) claims or contingent claims on institutions;(3) claims or contingent claims on corporates;(4) retail claims or contingent retail claims;(5) equity claims;(6) securitisation positions; and(7) non credit-obligation assets.[Note: BCD Article 86(1)]
The risk weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in (1) to (4) must, unless deducted from capital resources, be calculated in accordance with the following provisions:(1) for exposures in the sovereign, institution and corporate IRB exposure class, BIPRU 4.4.57 R to BIPRU 4.4.60 R, BIPRU 4.4.79 R, BIPRU 4.5.8 R to BIPRU 4.5.10 R (for specialised lending exposures), BIPRU 4.9.3 R and BIPRU 4.8.16 R to BIPRU 4.8.17
The calculation of risk weighted exposure amounts for credit risk and dilution risk must be based on the relevant parameters associated with the exposure in question. These include probability of default (PD), loss given default (LGD), maturity (M) and the exposure value of the exposure. PD and LGD may be considered separately or jointly, in accordance with the provisions relating to PD and LGD in BIPRU 4.4, BIPRU 4.6, BIPRU 4.7 and BIPRU 4.8 at:(1) for exposures in the sovereign,
The expected loss amounts for exposures belonging to one of the IRB exposure classes referred to in (1) to (3) must be calculated in accordance with the methods set out in the following provisions:(1) for exposures in the sovereign, institution and corporate IRB exposure class, BIPRU 4.4.61 R to BIPRU 4.4.62 R and (for specialised lending exposures) BIPRU 4.5.13 R to BIPRU 4.5.15R;(2) for exposures in the retail exposure class, BIPRU 4.6.47 R to BIPRU 4.6.48 R;(3) for exposures
The calculation of expected loss amounts in accordance with BIPRU 4.3.6 R must be based on the same input figures of PD, LGD and the exposure value for each exposure as being used for the calculation of risk weighted exposure amounts in accordance with BIPRU 4. For defaultedexposures,where a firm uses its own estimate of LGDs, EL must be the firm's best estimate of expected loss (ELBE), for the defaultedexposure in accordance with BIPRU 4.3.122 R.[Note:BCD Article 88(2)]
The expected loss amounts calculated in accordance with BIPRU 4.3.6 R (1), BIPRU 4.3.6 R (2) and BIPRU 4.3.6 R (4) must be subtracted from the sum of value adjustments and provisions related to these exposures. Discounts on balance sheet exposures purchased when in default according to BIPRU 4.4.71 R must be treated in the same manner as value adjustments. Expected loss amounts for securitised exposures and value adjustments and provisions related to these exposures must not be
All material aspects of the rating and estimation processes must be approved by the firm'sgoverning body or a designated committee thereof and senior management. These parties must possess a general understanding of the firm'srating systems and detailed comprehension of its associated management reports.[Note: BCD Annex VII Part 4 point 124]
Senior management must have a good understanding of the rating system's designs and operations. Senior management must ensure on an ongoing basis that the rating systems are operating properly. Senior management must be regularly informed by the credit risk control units about the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.[Note:BCD Annex VII Part 4 point 126]
Internal ratings-based analysis of the firm's credit risk profile must be an essential part of the management reporting required under BIPRU 4.3.9 R, BIPRU 4.3.11 R and BIPRU 4.3.13 R. Reporting must include at least risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realised default rates and, to the extent that own estimates are used, of realised LGDs and realised conversion factors against expectations and stress-test
The credit risk control unit must be independent from the personnel and management functions responsible for originating or renewing exposures and report directly to senior management. The unit must be responsible for the design or selection, implementation, oversight and performance of the rating systems. It must regularly produce and analyse reports on the output of the rating systems.[Note:BCD Annex VII Part 4 point 128]
The areas of responsibility for the credit risk control unit(s) must include the following:(1) testing and monitoring grades and pools;(2) production and analysis of summary reports from the firm'srating systems;(3) implementing procedures to verify that grade and pool definitions are consistently applied across departments and geographic areas;(4) reviewing and documenting any changes to the rating process, including the reasons for the changes;(5) reviewing the rating criteria
Notwithstanding BIPRU 4.3.16 R, a firm using pooled data according to BIPRU 4.3.92 R - BIPRU 4.3.94 R (Overall requirements for estimation) may outsource the following tasks:(1) production of information relevant to testing and monitoring grades and pools;(2) production of summary reports from the firm'srating systems;(3) production of information relevant to review of the rating criteria to evaluate if they remain predictive of risk;(4) documentation of changes to the rating
A firm making use of BIPRU 4.3.17 R must ensure that the FSA has access to all relevant information from the third party that is necessary for examining compliance with the minimum IRB standards and the firm'sIRB permission and that the FSA may perform on-site examinations to the same extent as within the firm.[Note:BCD Annex VII Part 4 point 130 (part)]
A firm must document the design and operational details of its rating systems. The documentation must evidence compliance with the minimum IRB standards and the firm'sIRB permission, and address topics including portfolio differentiation, rating criteria, responsibilities of parties that rate obligors and exposures, frequency of assignment reviews, and management oversight of the rating process.[Note:BCD Annex VII Part 4 point 31]
Where a firm employs statistical models in the rating process, the firm must document its methodologies. This material must:(1) provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the assignment of estimates to grades, individual obligors, exposures, or pools, and the data source(s) used to estimate the model;(2) establish a rigorous statistical process (including out-of-time and out-of-sample performance tests) for validating the model;
A rating system comprises all of the methods, processes, controls, data collection and IT systems that support the assessment of credit risk, the assignment of exposures to grades or pools (rating), and the quantification of default and loss estimates for a certain type of exposure.[Note:BCD Annex VII Part 4 point 1]
A firm must have robust systems in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk parameters (PD, LGD, conversion factors and EL). A firm must be able to demonstrate to the FSA that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.[Note:BCD Annex VII Part 4 point 110]
A firm must regularly compare realised default rates with estimated PDs for each grade and where realised default rates are outside the expected range for that grade a firm must specifically analyse the reasons for the deviation. A firm3using its own estimates of LGDs and/or conversion factors must also perform analogous analysis for own estimates of LGDs and conversion factors. Such comparisons must make use of historical data that cover as long a period as possible. A firm must
A firm must also use other appropriate quantitative validation tools and comparisons with relevant external data sources. The analysis must be based on data that is appropriate to the portfolio, is updated regularly, and covers a relevant observation period. A firm's internal assessments of the performance of its rating systems must be based on as long a period as possible.[Note:BCD Annex VII Part 4 point 112]
A firm must have sound internal standards for situations where deviations in realised PDs, LGDs, conversion factors and, where EL is used, total losses, from expectations become significant enough to call the validity of the estimates into question. These standards must take account of business cycles and similar systematic variability in default and loss experience. Where realised values continue to be higher than expected values, a firm must revise estimates upward to reflect
Internal audit or another comparable independent auditing unit must review at least annually the firm'srating systems and its operations, including the operations of the firm and the estimation of PDs, LGDs, ELs and conversion factors. Areas of review must include adherence to all applicable minimum requirements.[Note:BCD Annex VII Part 4 point 131]
A firm must have in place sound stress testing processes for use in the assessment of its capital adequacy. Stress testing must involve identifying possible events or future changes in economic conditions that could have unfavourable effects on the firm's credit exposures and assessment of the firm's ability to withstand such changes.[Note:BCD Annex VII Part 4 point 40]
(1) A firm must regularly perform a credit risk stress test to assess the effect of certain specific conditions on its total capital requirements for credit risk. The test to be employed must be one chosen by the firm. The test to be employed must be meaningful and reasonably conservative. Stressed portfolios must contain the vast majority of a firm's total exposures covered by the IRB approach.(2) The stress test must be designed to assess the firm's ability to meet its capital
The grade or pool definitions and criteria must be sufficiently detailed to allow those charged with assigning ratings consistently to assign obligors or facilities posing similar risk to the same grade or pool. This consistency must exist across lines of business, departments and geographic locations within each rating system.[Note:BCD Annex VII Part 4 point 17 (part)]
A firm must take all relevant information into account in assigning obligors and facilities to grades or pools. Information must be current and must enable the firm to forecast the future performance of the exposure. The less information a firm has, the more conservative must be its assignments of exposures to obligor and facility grades or pools. If a firm uses an external rating as a primary factor determining an internal rating assignment, the firm must ensure that it considers
For grade and pool assignments a firm must document the situations in which human judgement may override the inputs or outputs of the assignment process and the personnel responsible for approving these overrides. A firm must document these overrides and the personnel responsible. A firm must analyse the performance of the exposures whose assignments have been overridden. This analysis must include assessment of the performance of exposures whose rating has been overridden by
(1) This paragraph applies to the use of statistical models and/or other mechanical methods to assign exposures to obligor grades, obligor pools, facility grades or facility pools.(2) A firm must be able to demonstrate to the FSA that the model has good predictive power and that capital requirements are not distorted as a result of its use.(3) The input variables to the model must form a reasonable and effective basis for the resulting predictions. The model must not have material
A default must be considered to have occurred with regard to a particular obligor when either or both of the two following events has taken place:(1) the firm considers that the obligor is unlikely to pay its credit obligations to the firm, the parent undertaking or any of its subsidiary undertakings in full, without recourse by the firm to actions such as realising security (if held); and(2) the obligor is past due more than 90 days on any material credit obligation to the firm,
The following provisions also apply with respect to the definition of default:(1) for overdrafts, days past due commence once an obligor has breached an advised limit, has been advised a limit smaller than current outstandings, or has drawn credit without authorisation and the underlying amount is material;(2) an advised limit means a limit which has been brought to the knowledge of the obligor;(3) days past due for credit cards commence on the minimum payment due date;(4) in
(1) Elements to be taken as indications of unlikeliness to pay must include the items set out in this rule.(2) The firm putting the credit obligation on non-accrued status must be taken as an indication of unlikeliness to pay.(3) The firm making a value adjustment resulting from a significant perceived decline in credit quality subsequent to the firm taking on the exposure must be taken as an indication of unlikeliness to pay.(4) The firm selling the credit obligation at a material
If a firm considers that a previously defaultedexposure is such that no trigger of default continues to apply, the firm must rate the obligor or facility as it would for a non-defaultedexposure. Should the definition of default subsequently be triggered, another default must be deemed to have occurred.[Note:BCD Annex VII Part 4 point 47]
A firm's own estimates of the risk parameters PD, LGD, conversion factor and EL must incorporate all relevant data, information and methods. The estimates must be derived using both historical experience and empirical evidence, and must not be based purely on judgemental considerations. The estimates must be plausible and intuitive and must be based on the material drivers of the respective risk parameters. The less data a firm has, the more conservative it must be in its estimation.[Note:BCD
A firm must be able to provide a breakdown of its loss experience in terms of default frequency, LGD, conversion factor, or loss where EL estimates are used, by the factors it sees as the drivers of the respective risk parameters. A firm must be able to demonstrate to the FSA that its estimates are representative of long-run experience.[Note:BCD Annex VII Part 4 point 50]
Any changes in lending practice or the process for pursuing recoveries over the observation periods referred to in BIPRU 4.4.31 R (Observation period for sovereigns, institutions and corporates for PDs), BIPRU 4.6.28 R (Observation period for retail exposures for PDs), BIPRU 4.4.54 R (Observation period for sovereigns, institutions and corporates for LGDs), BIPRU 4.6.33 R (Observation period for retail exposures for LGDs), BIPRU 4.4.55 R (Observation period for sovereigns, institutions
The population of exposures represented in the data used for estimation, the lending standards used when the data was generated and other relevant characteristics must be comparable with those of a firm'sexposures and standards. A firm must also be able to demonstrate to the FSA that the economic or market conditions that underlie the data are relevant to current and foreseeable conditions. The number of exposures in the sample and the data period used for quantification must
If a firm can demonstrate to the FSA that for data that has been collected prior to 31 December 2006, appropriate adjustments have been made to achieve broad equivalence with the definitions of default or loss, the FSA may in the IRB permission allow the firm some flexibility in the application of the required standards for data.[Note:BCD Annex VII Part 4 point 56]
If a firm uses data that is pooled across institutions it must be able to demonstrate to the FSA that:(1) the rating systems and criteria of other firms in the pool are similar to its own;(2) the pool is representative of the portfolio for which the pooled data is used; and(3) the pooled data is used consistently over time by the firm for its permanent estimates.2[Note:BCD Annex VII Part 4 point 57]
If a firm uses data that is pooled across institutions it remains responsible for the integrity of its rating systems. If a firm uses such data it must be able to demonstrate to the FSA that it has sufficient in-house understanding of its rating systems, including effective ability to monitor and audit the rating process.[Note:BCD Annex VII Part 4 point 58]
A firm must use LGD estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver constant realised LGDs by grade or pool over time, a firm must make adjustments to its estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn.[Note:BCD Annex VII Part 4 point 74]
To the extent that LGD estimates take into account the existence of collateral, these estimates must not solely be based on the collateral's estimated market value. LGD estimates must take into account the effect of the potential inability of the firm expeditiously to gain control of its collateral and liquidate it.[Note:BCD Annex VII Part 4 point 77]
To the extent that LGD estimates take into account the existence of collateral, a firm must establish internal requirements for collateral management, legal certainty and risk management that are generally consistent with those set out in BIPRU 5 (Credit risk mitigation) as modified by BIPRU 4.10.[Note:BCD Annex VII Part 4 point 78]
To the extent that a firm recognises collateral for determining the exposure value for counterparty credit risk according to the CCR standardised method or the CCR internal model method, any amount expected to be recovered from the collateral must not be taken into account in the LGD estimates.[Note:BCD Annex VII Part 4 point 79]
For the specific case of exposures already in default, a firm must use the sum of its best estimate of expected loss for each exposure given current economic circumstances and exposure status and the possibility of additional unexpected losses during the recovery period.[Note:BCD Annex VII Part 4 point 80]
A firm must use conversion factor estimates that are appropriate for an economic downturn if those are more conservative than the long-run average. To the extent a rating system is expected to deliver realised conversion factors at a constant level by grade or pool over time, a firm must make adjustments to its estimates of risk parameters by grade or pool to limit the capital impact of an economic downturn.[Note:BCD Annex VII Part 4 point 88]
A firm's estimates of conversion factors must reflect the possibility of additional drawings by the obligor up to and after the time a default event is triggered. The conversion factor estimate must incorporate a larger margin of conservatism where a stronger positive correlation can reasonably be expected between the default frequency and the magnitude of conversion factor.[Note:BCD Annex VII Part 4 point 89]
In arriving at estimates of conversion factors a firm must consider its specific policies and strategies adopted in respect of account monitoring and payment processing. A firm must also consider its ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events.[Note:BCD Annex VII Part 4 point 90]
(1) Where the credit risk mitigation used relies on the right of a firm to liquidate or retain assets, eligibility depends upon whether risk weighted exposure amounts, and, as relevant, expected loss amounts, are calculated under the standardised approach or the IRB approach.(2) Eligibility further depends upon whether the financial collateral simple method is used or the financial collateral comprehensive method.(3) In relation to repurchase transactions and securities or commodities
The following financial items may be recognised as eligible collateral under all approaches and methods:(1) cash on deposit with, or cash assimilated instruments held by, the lending firm;(2) debt securities issued by central governments or central banks which securities have a credit assessment by an eligible ECAI or export credit agency recognised as eligible for the purposes of the standardised approach, which is associated with credit quality step 4 or above under the rules
For the purposes of BIPRU 5.4.2 R (2), ‘debt securities issued by central governments or central banks' include –(1) debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central government in whose jurisdiction they are established under the standardised approach;(2) debt securities issued by public sector entities which are treated as exposures to central governments in accordance with BIPRU 3.4.24 R;(3) debt securities
For the purposes of BIPRU 5.4.2 R (3), ‘debt securities issued by institutions’ include:(1) debt securities issued by regional governments or local authorities other than those exposures to which are treated as exposures to the central government in whose jurisdiction they are established under the standardised approach;(2) debt securities issued by public sector entities, exposures to which are treated as exposures to a credit institution under the standardised approach;(3) debt
Debt securities issued by institutions which securities do not have a credit assessment by an eligible ECAI may be recognised as eligible collateral if they fulfil the following criteria:(1) they are listed on a recognised investment exchange or a designated investment exchange;(2) they qualify as senior debt;(3) all other rated issues by the issuing institution of the same seniority have a credit assessment by an eligible ECAI associated with credit quality step 3 or above under
(1) Units in CIUs may be recognised as eligible collateral if the following conditions are satisfied:(a) they have a daily public price quote;4(b) the CIU is limited to investing in instruments that are eligible for recognition under BIPRU 5.4.2 R to BIPRU 5.4.5 R; and4(c) 4if the CIU is not limited to investing in instruments that are eligible for recognition under BIPRU 5.4.2 R to BIPRU 5.4.5 R, units may be recognised with the value of the eligible assets as collateral under
In relation to BIPRU 5.4.2 R (2) to (5):(1) where a security has two credit assessments by eligible ECAIs, the less favourable assessment must be deemed to apply;(2) in cases where a security has more than two credit assessments by eligible ECAIs:(a) the two most favourable assessments must be deemed to apply; or(b) if the two most favourable credit assessments are different, the less favourable of the two must be deemed to apply.[Note:BCD Annex VIII Part 1 point 10]
(1) In addition to the collateral set out in BIPRU 5.4.2 R to BIPRU 5.4.7 R, where a firm uses the financial collateral comprehensive method, the following financial items may be recognised as eligible collateral:(a) equities or convertible bonds not included in a main index but traded on a recognised investment exchange or a designated investment exchange;(b) units in CIUs if the following conditions are met:(i) they have a daily public price quote; and(ii) the CIU is limited
The low correlation conditions referred to in BIPRU 5.4.9 R (1) are as follows:(1) (a) the credit quality of the obligor and the value of the collateral must not have a material positive correlation; and(b) securities issued by the obligor, or any related group entity are not eligible.(2) notwithstanding (1)(b), the obligor's own issues of covered bonds falling within the terms of BIPRU 3.4.107 R to BIPRU 3.4.109 R may be recognised as collateral for repurchase transactions, provided
The legal certainty conditions referred to in BIPRU 5.4.9 R (2) are as follows:(1) a firm must fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under the law applicable to its interest in the collateral;(2) in accordance with the general principle in BIPRU 5.2.2 R, a firm must have conducted sufficient legal review confirming the enforceability of the collateral arrangements
The operational requirements referred to in BIPRU 5.4.9 R (3) are as follows:(1) the collateral arrangements must be properly documented, with a clear and robust procedure for the timely liquidation of collateral;(2) a firm must employ robust procedures and processes to control risks arising from the use of collateral – including risks of failed or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration risk arising
A firm must not use both the financial collateral simple method and the financial collateral comprehensive method, unless such use is for the purposes of BIPRU 4.2.17 R to BIPRU 4.2.19 R and BIPRU 4.2.26 R, and such use is provided for by the firm'sIRB permission. A firm must demonstrate to the FSA that this exceptional application of both methods is not used selectively with the purpose of achieving reduced minimum capital requirements and does not lead to regulatory arbitrage.4[Note:BCD
The risk weight that would be assigned under the standardised approach to credit risk if the lending firm had a direct exposure to the collateral instrument must be assigned to those portions of exposure values4 collateralised by the market value of recognised collateral. For this purpose, the exposure value of an off-balance sheet item listed in BIPRU 3.7.2 R must be 100% of its value rather than the exposure value indicated in BIPRU 3.2.1 R.4 The risk weight of the collateralised
A risk weight of 0% must, to the extent of the collateralisation, be assigned to the exposure values determined under BIPRU 13 for financial derivative instruments and subject to daily marking-to-market, collateralised by cash or cash assimilated instruments where there is no currency mismatch. A risk weight of 10% must be assigned to the extent of the collateralisation to the exposure values of such transactions collateralised by debt securities issued by central governments
A 0% risk weight may be assigned where the exposure and the collateral are denominated in the same currency, and either:(1) the collateral is cash on deposit or a cash assimilated instrument; or(2) the collateral is in the form of debt securities issued by central governments or central banks eligible for a 0% risk weight under the standardised approach, and its market value has been discounted by 20%.[Note:BCD Annex VIII Part 3 point 29]
For the purposes of BIPRU 5.4.20 R and BIPRU 5.4.21 R ‘debt securities issued by central governments or central banks' must include:(1) debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central government in whose jurisdiction they are established under the standardised approach;(2) debt securities issued by multilateral development banks to which a 0% risk weight is assigned under or by virtue of the standardised
In valuing financial collateral for the purposes of the financial collateral comprehensive method, volatility adjustments must be applied to the market value of collateral, as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R, in order to take account of price volatility.[Note:BCD Annex VIII Part 3 point 30]
Subject to the treatment for currency mismatches in the case of financial derivative instrument set out in BIPRU 5.4.26 R, where collateral is denominated in a currency that differs from that in which the underlying exposure is denominated, an adjustment reflecting currency volatility must be added to the volatility adjustment appropriate to the collateral as set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R.[Note:BCD Annex VIII Part 3 point 31]
In the case of financial derivative instrument covered by netting agreements recognised under BIPRU 13, a volatility adjustment reflecting currency volatility must be applied when there is a mismatch between the collateral currency and the settlement currency. Even in the case where multiple currencies are involved in the transactions covered by the netting agreement, only a single volatility adjustment may be applied.[Note:BCD Annex VIII Part 3 point 32]
In the case of a firm using the financial collateral comprehensive method, where an exposure takes the form of securities or commodities sold, posted or lent under a repurchase transaction or under a securities or commodities lending or borrowing transaction, and margin lending transactions the exposure value must be increased by the volatility adjustment appropriate to such securities or commodities as prescribed in BIPRU 5.4.30 R to BIPRU 5.4.65 R.[Note: BCD Article 78(1), third
(1) The volatility-adjusted value of the collateral to be taken into account is calculated as follows in the case of all transactions except those transactions subject to recognised master netting agreements to which the provisions set out in BIPRU 5.6.5 R to BIPRU 5.6.29 R are to be applied:CVA = C x (1-HC-HFX)(2) The volatility-adjusted value of the exposure to be taken into account is calculated as follows:EVA = E x (1+HE), and in the case of financial derivative instruments
A firm may choose to use the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach independently of the choice it has made between the standardised approach and the IRB approach for the calculation of risk weighted exposure amounts. However, if a firm seeks to use the own estimates of volatility adjustments approach, it must do so for the full range of instrument types, excluding immaterial portfolios where it may use the supervisory
(1) For secured lending transactions the liquidation period is 20 business days.(2) For repurchase transactions (except insofar as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities) and securities lending or borrowing transactions the liquidation period is 5 business days.(3) For other capital market-driven transactions1, the liquidation period is 10 business days.[Note:BCD Annex VIII Part 3 point 37]
In the tables in BIPRU 5.4.35 R – BIPRU 5.4.38 R and in BIPRU 5.4.41 R to BIPRU 5.4.43 R, the credit quality step with which a credit assessment of the debt security is associated is the credit quality step with which the external credit assessment is associated under the standardised approach. For the purposes of this rule, BIPRU 5.4.7 R also applies.[Note:BCD Annex VIII Part 3 point 38]
For non-eligible securities or for commodities lent or sold under repurchase transactions or securities or commodities lending or borrowing transactions, the volatility adjustment is the same as for non-main index equities listed on a recognised investment exchange or a designated investment exchange.[Note:BCD Annex VIII Part 3 point 39]
For eligible units in CIUs the volatility adjustment is the weighted average volatility adjustments that would apply, having regard to the liquidation period of the transaction as specified in BIPRU 5.4.39 R, to the assets in which the fund has invested. If the assets in which the fund has invested are not known to the firm, the volatility adjustment is the highest volatility adjustment that would apply to any of the assets in which the fund has the right to invest.[Note:BCD Annex
For unrated debt securities issued by institutions and satisfying the eligibility criteria in BIPRU 5.4.5 R the volatility adjustments are the same as for securities issued by institutions or corporates with an external credit assessment associated with credit quality steps 2 or 3.[Note:BCD Annex VIII Part 3 point 41]
In determining relevant categories, a firm must take into account the type of issuer of the security the external credit assessment of the securities, their residual maturity, and their modified duration. Volatility estimates must be representative of the securities included in the category by the firm.[Note:BCD Annex VIII Part 3 point 44]
The liquidation period is 20 business days for secured lending transactions; 5 business days for repurchase transactions except insofar as such transactions involve the transfer of commodities or guaranteed rights relating to title to commodities and securities lending or borrowing transactions; and 10 business days for other capital market-driven transactions1.[Note:BCD Annex VIII Part 3 point 48]
A firm may use volatility adjustment numbers calculated according to shorter or longer liquidation periods, scaled up or down to the liquidation period set out in BIPRU 5.4.51 R for the type of transaction in question, using the square root of time formula:(HM = HN )√TM/TN)where:(1) TM is the relevant liquidation period;(2) HM is the volatility adjustment under TM ; and(3) HN is the volatility adjustment based on the liquidation period TN.[Note:BCD Annex VIII Part 3 point 49]
A firm must take into account the illiquidity of lower-quality assets. The liquidation period must be adjusted upwards in cases where there is doubt concerning the liquidity of the collateral. A firm must also identify where historical data may understate potential volatility, e.g. a pegged currency. Such cases must be dealt with by means of stress scenario assessments3.[Note:BCD Annex VIII Part 3 point 50]3
The historical observation period (sample period) for calculating volatility adjustments must be a minimum length of one year. For a firm that uses a weighting scheme or other methods for the historical observation period, the effective observation period must be at least one year (that is, the weighted average time lag of the individual observations must not be less than 6 months).[Note:BCD Annex VIII Part 3 point 51]
If the liquidation period used by a firm in its day-to-day risk management process is longer than that set out in BIPRU 5.4 for the type of transaction in question, the firm's volatility adjustments must be scaled up in accordance with the square root of time formula set out in BIPRU 5.4.52 R.[Note: BCD Annex VIII Part 3 point 54]
A firm must have established procedures for monitoring and ensuring compliance with a documented set of policies and controls for the operation of its system for the estimation of volatility adjustments and for the integration of such estimations into its risk management process.[Note:BCD Annex VIII Part 3 point 55]
An independent review of a firm's system for the estimation of volatility adjustments must be carried out regularly in the firm's own internal auditing process. A review of the overall system for the estimation of volatility adjustments and for integration of those adjustments into the firm's risk management process must take place at least once a year and must specifically address, at a minimum:(1) the integration of estimated volatility adjustments into daily risk management;(2)
The volatility adjustments set out in BIPRU 5.4.34 R to BIPRU 5.4.43 R are the volatility adjustments to be applied where there is daily revaluation. Similarly, where a firm uses its own estimates of the volatility adjustments in accordance with BIPRU 5.4.45 R to BIPRU 5.4.60 R, these must be calculated in the first instance on the basis of daily revaluation. If the frequency of revaluation is less than daily, larger volatility adjustments must be applied. These must be calculated
In relation to repurchase transaction and securities lending or borrowing transactions, where a firm uses the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach and where the conditions set out in (1) – (8) are satisfied, a firm may, instead of applying the volatility adjustments calculated under BIPRU 5.4.30 R to BIPRU 5.4.61 R, apply a 0% volatility adjustment:(1) both the exposure and the collateral are cash or debt securities
Core market participant means the following entities:(1) the entities mentioned in BIPRU 5.4.2 R (2)exposures to which are assigned a 0% risk weight under the standardised approach to credit risk;(2) institutions;(3) other financial companies (including insurance companies) exposures which are assigned a 20% risk weight under the standardised approach;(4) regulated CIUs that are subject to capital or leverage requirements;(5) regulated pension funds; and(6) a recognised clearing
If under the CRD implementation measure for a particular EEA State with respect to point 58 of Part 3 of Annex VIII of the Banking Consolidation Directive (Conditions for applying the 0% volatility adjustment) the treatment set out in that point is permitted to be applied in the case of repurchase transactions or securities lending or borrowing transactions in securities issued by the domestic government of that EEA State, then a firm may adopt the same approach to the same transactions.[Note:BCD
Under the standardised approachE* as calculated under BIPRU 5.4.28 R must be taken as the exposure value for the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 R. In the case of off-balance sheet items listed in BIPRU 3.7, E* must be taken as the value to which the percentages indicated in BIPRU 3.2.1 R and BIPRU 3.7.2 R must be applied to arrive at the exposure value.[Note:BCD Annex VIII Part 3 point 60]
The following exposures must be treated as exposures to central governments and central banks:(1) exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments under the standardised approach; and(2) exposures to multilateral development banks and international organisations which attract a risk weight of 0% under the standardised approach.[Note:BCD Article 86(2)]
The following exposures must be treated as exposures to institutions:(1) exposures to regional governments and local authorities which are not treated as exposures to central governments under the standardised approach;(2) exposures to public sector entities which are treated as exposures to institutions under the standardised approach;(3) exposures to multilateral development banks which do not attract a 0% risk weight under the standardised approach; and(4) without prejudice
An obligor grade means for the purpose of BIPRU 4 as it applies to the sovereign, institution and corporate IRB exposure class a risk category within a rating system's obligor rating scale, to which obligors are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. A firm must document both the relationship between obligor grades in terms of the level of default risk each grade implies and the criteria used to distinguish
A firm with portfolios concentrated in a particular market segment and range of default risk must have enough obligor grades within that range to avoid undue concentrations of obligors in a particular grade. Significant concentrations within a single grade must be supported by convincing empirical evidence that the obligor grade covers a reasonably narrow PD band and that the default risk posed by all obligors in the grade falls within that band.[Note:BCD Annex VII Part 4 point
Separate exposures to the same obligor must be assigned to the same obligor grade, irrespective of any differences in the nature of each specific transaction. Exceptions, where separate exposures are allowed to result in multiple grades for the same obligor are:(1) country transfer risk, this being dependent on whether the exposures are denominated in local or foreign currency;(2) where the treatment of associated guarantees to an exposure may be reflected in an adjusted assignment
In addition to complying with the material in BIPRU 4.3.54 R (Data maintenance) a firm must collect and store:(1) complete rating histories on obligors and recognised guarantors;(2) the dates the ratings were assigned;(3) the key data and methodology used to derive the rating;(4) the person responsible for the rating assignment;(5) the identity of obligors and exposures that defaulted;(6) the date and circumstances of such defaults;(7) data on the PDs and realised default rates
(1) This rule, in accordance with BIPRU 4.3.57 R (4) (Definition of default), sets the exact number of days past due that a firm should abide by in the case of exposures to PSEs.(2) For counterparts that are PSEs situated within the United Kingdom the number of days past due is 180.(3) For counterparts that are PSEs situated in another EEA State the number of days past due is the lower of:(a) 180; and(b) the number of days past due fixed under the CRD implementation measure with
To the extent that a firm uses data on internal default experience for the estimation of PDs it must be able to demonstrate in its analysis that the estimates are reflective of underwriting standards and of any differences in the rating system that generated the data and the current rating system. Where underwriting standards or rating systems have changed, a firm must add a greater margin of conservatism in its estimate of PD.[Note:BCD Annex VII Part 4 point 63]
To the extent that a firm associates or maps its internal grades to the scale used by an ECAI or similar organisations and then attributes the default rate observed for the external organisation's grades to the firm's grades, mappings must be based on a comparison of internal rating criteria to the criteria used by the external organisation and on a comparison of the internal and external ratings of any common obligors. Biases or inconsistencies in the mapping approach or underlying
To the extent that a firm uses statistical default prediction models it may estimate PDs as the simple average of default-probability estimates for individual obligors in a given grade. The firm's use of default probability models for this purpose must meet the standards specified in BIPRU 4.3.51 R.[Note:BCD Annex VII Part 4 point 65]
Irrespective of whether a firm is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation period spans a longer period for any source, and this data is relevant, this longer period must be used. A firm not permitted to use own estimates of LGDs or conversion factors may have, when it implements
A firm must use the following LGD values:(1) senior exposures without eligible collateral, 45%;(2) subordinated exposures without eligible collateral, 75%;(3) a firm may recognise funded and unfunded credit protection in the LGD in accordance with BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10;(4) covered bonds may be assigned an LGD value of 11.257%; and7(5) for certain senior corporate exposure purchased receivables, for certain subordinated corporate exposure purchased
(1) The exposure value for the items set out in this rule must be calculated as the committed but undrawn amount multiplied by the applicable conversion factor set out in this rule.(2) For credit lines which are uncommitted, that are unconditionally cancellable at any time by the firm without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's credit worthiness, a conversion factor of 0 % applies. To apply a conversion factor
For all off-balance sheet items other than mentioned in BIPRU 4.4.37 R, BIPRU 4.4.45 R, BIPRU 4.4.71 R - BIPRU 4.4.78 R, BIPRU 4.6.44 R, BIPRU 4.8.28 R and BIPRU 4.8.29 R, the exposure value must be the following percentage of its value:(1) 100% if it is a full risk item;(2) 50% if it is a medium risk item;(3) 20% if it is a medium/low risk item; and(4) 0% if it is a low risk item.For the purposes of this rule the off-balance sheet items must be assigned to risk categories as
1Notwithstanding BIPRU 4.4.34 R and BIPRU 4.8.25 R, if a firm'sIRB permission permits it to use own LGD estimates under the advanced IRB approach for exposures to which BIPRU 4 applies and permits it to use the approach in this rule, unfunded credit protection may be recognised by adjusting PD and/or LGD estimates subject to the minimum IRB standards. A firm must not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of
1If a firm uses its own estimates of conversion factors under the advanced IRB approach it must calculate the exposure value of off-balance sheet exposures calculated with the use of conversion factors by using its own estimates of conversion factors across different product types as mentioned in BIPRU 4.4.37 R and BIPRU 4.4.39 R (2) to BIPRU 4.4.39 R (4).[Note:BCD Annex VII Part 3 point 9 (part)]
1A facility grade means for the purpose of the advanced IRB approach a risk category within a rating system's facility scale to which exposures are assigned on the basis of a specified and distinct set of rating criteria from which own estimates of LGDs are derived. The grade definition must include both a description of how exposures are assigned to the grade and of the criteria used to distinguish the level of risk across grades.[Note:BCD Annex VII Part 4 point 10]
1For a firm permitted to use own estimates of LGDs or conversion factors under the advanced IRB approach, each exposure must be assigned to a facility grade as part of the credit approval process. This is in addition to the requirements in BIPRU 4.4.11 R - BIPRU 4.4.13 R.[Note:BCD Annex VII Part 4 point 20]
1As well as complying with BIPRU 4.3.54 R and BIPRU 4.4.21 R (Data maintenance), a firm using own estimates of LGDs and/or conversion factors under the advanced IRB approach must collect and store:(1) complete histories of data on the facility ratings and LGD and conversion factor estimates associated with each rating scale3;(2) the dates the ratings were assigned and the estimates were done;(3) the key data and methodology used to derive the facility ratings and LGD and conversion
1In addition to the requirements in BIPRU 4.3.74 R - BIPRU 4.3.94 R (General requirements about risk quantification) and BIPRU 4.3.98 R - BIPRU 4.3.123 R (Requirements for risk quantification specific to own-LGD estimates), estimates of LGD must be based on data over a minimum of five years, increasing by one year each year after implementation until a minimum of seven years is reached, for at least one data source. If the available observation period spans a longer period for
1In addition to the requirements in BIPRU 4.3.124 R - BIPRU 4.3.131 R (Requirements specific to own-conversion factor estimates), estimates of conversion factors must be based on data over a minimum of five years, increasing by one year each year after implementation until a minimum of seven years is reached, for at least one data source. If the available observation period spans a longer period for any source, and the data is relevant, this longer period must be used.[Note:BCD
Subject to BIPRU 4.4.59 R to BIPRU 4.4.60 R, BIPRU 4.5.6 R, BIPRU 4.5.8 R - BIPRU 4.5.10 R (Risk weights for specialised lending), BIPRU 4.8.16 R, BIPRU 4.8.17 R (Risk weights for corporate exposure purchased receivables) and BIPRU 4.9.3 R (Securitisation: provision of credit protection), risk weighted exposure amounts must be calculated according to the formulae in the table in BIPRU 4.4.58 R and the adjustment formula in BIPRU 4.4.79 R (Double default).[Note:BCD Annex VII Part
Table: Formulae for the calculation of risk weighted exposure amounts
This table belongs to BIPRU 4.4.57 R
Correlation (R) |
0.12 × (1 - EXP(-50*PD))/(1-EXP(-50)) + 0.24* |
|
[1-(1-EXP(-50*PD))/(1-EXP(-50))] |
||
Maturity factor (b) |
(0.11852-0.05478*1n(PD))2 |
|
(1-1.5*b)-1*(1+(M-2.5)*b)*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 = 0 |
For PD = 0, RW shall be: 0 |
|
PD = 1 |
For PD = 1: |
|
(i) |
for defaultedexposures where a firm applies the LGD values set out in BIPRU 4.4.32R and BIPRU 4.8.25R RW shall be: 0; |
|
(ii) |
for defaultedexposures where a firm uses its own estimates of LGDs, RW shall 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. |
||
[Note:BCD Annex VII Part 1 point 3]
For exposures to companies where the total annual sales for the consolidated group of which the firm is a part is less than EUR 50 million a firm may use the following correlation formula for the calculation of risk weights for corporate exposures. In this formula S is expressed as total annual sales in millions of Euros with EUR 5 million < = S < = EUR 50 million. Reported sales of less than EUR 5 million must be treated as if they were equivalent to EUR 5 million. In accordance
A firm must for the purpose of BIPRU 4.4.59 R substitute total assets of the consolidated group for total annual sales when total annual sales are not a meaningful indicator of firm size and total assets are a more meaningful indicator than total annual sales.[Note:BCD Annex VII Part 1 point 5 (part)]
3Table: Formulae for the calculation of expected loss amounts
This table belongs to BIPRU 4.4.61 R
Expected loss amount |
|
For defaultedexposures (PD = 1) where a firm uses its own estimates of LGDs, EL must be ELBE, the firm's best estimate of expected loss for the defaultedexposure according to BIPRU 4.3.122 R. |
|
For exposures subject to the treatment set out in BIPRU 4.4.79 R (Double default) EL must be 0. |
|
[Note:BCD Annex VII Part 1 point 30 (part)]
Subject to BIPRU 4.4.42 R (Advanced IRB approach: LGDs and PDs) a firm may recognise unfunded credit protection in the PD in accordance with the provisions of BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10. For dilution risk, however, a firm may also recognise unfunded credit protection providers which are specified in its IRB permission in addition to those indicated in the CRM eligibility conditions.[Note:BCD Annex VII Part 2 point 5]
(1) A firm must calculate maturity (M) for each of the exposures referred to in this rule in accordance with this rule and subject to BIPRU 4.4.68 R to BIPRU 4.4.70 R. In all cases, M must be no greater than 5 years.(2) For an instrument subject to a cash flow schedule M must be calculated according to the following formula:where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the obligor in period t.(3) For derivatives subject to a
Notwithstanding BIPRU 4.4.67 R (2) - (4)6 and (8)-(9), M must be at least one-day for:6(1) fully or nearly-fully collateralised financial derivative instruments;(2) fully or nearly-fully collateralised margin lending transactions; and(3) repurchase transactions, securities or commodities lending or borrowing transactions,provided the documentation requires daily remargining and daily revaluation and includes provisions that allow for the prompt liquidation or setoff of collateral
The last paragraph of paragraph 14 of Part 2 of Annex VII of the Banking Consolidation Directive says: "In addition, for other short-term exposures specified by the competent authorities which are not part of the credit institution's ongoing financing of the obligor, M shall be at least one-day. A careful review of the particular circumstances shall be made in each case." BIPRU 4.4.67R (10) is currently the only instance where the FSA has specified any such short-term exposures5.[Note:BCD
Unless provided otherwise in BIPRU 4 the exposure value of on-balance sheet exposures must be measured gross of value adjustments. This also applies to assets purchased at a price different than the amount owed. For purchased assets, the difference between the amount owed and the net value recorded on the balance-sheet of the firm is denoted discount if the amount owed is larger, and premium if it is smaller.[Note:BCD Annex VII Part 3 point 1]
Where a firm uses master netting agreements in relation to repurchase transactions or securities or commodities lending or borrowing transactions the exposure value must be calculated in accordance with BIPRU 5 (Credit risk mitigation), as modified by BIPRU 4.10, and BIPRU 13.8.[Note:BCD Annex VII Part 3 point 2]
The exposure value for leases must be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in BIPRU 5.7.1 R (Eligibility), as modified by BIPRU 4.10.38 R and BIPRU 4.10.39 R (Unfunded credit protection: Eligibility of providers) regarding the eligibility
Where an exposure takes the form of securities or commodities sold, posted or lent under repurchase transactions or securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, the exposure value must be the value of the securities or commodities determined in accordance with GENPRU 1.3 (Valuation). Where the financial collateral comprehensive method is used, the exposure value must be increased by the volatility adjustment
Notwithstanding BIPRU 4.4.76 R, the exposure value of credit risk exposures outstanding, as determined by the firm, with a central counterparty must be determined in accordance with BIPRU 13.3.3 R and BIPRU 13.8.8 R (Exposure to central counterparty), provided that the central counterparty'sCCRexposures with all participants in its arrangements are fully collateralised on a daily basis.[Note:BCD Annex VII Part 3 point 8]
The risk weighted exposure amount for each exposure which meets the requirements set out in BIPRU 5.7.2 R and BIPRU 4.4.83 R (Double default) may be adjusted according to the following formula:(1) Risk weighted exposure amount = RW *exposure value * (0.15 + 160*PDpp)](2) PDpp = PD of the protection provider(3) RW must be calculated using the relevant risk weight formula set out in BIPRU 4.4.57 R for the exposure, the PD of the obligor and the LGD of a comparable direct exposure
Notwithstanding BIPRU 4.4.34 R and BIPRU 4.4.43 R, for the purposes of BIPRU 4.4.79 R, the LGD of a comparable direct exposure to the protection provider shall either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor, depending upon whether in the event both the guarantor and the obligor default during the life of the hedged transaction available evidence and the structure of the guarantee indicate that the amount recovered
An institution, an insurance undertaking (including an insurance undertaking that carries out reinsurance) or an export credit agency which fulfils the following conditions may be recognised as an eligible provider of unfunded credit protection which qualifies for the treatment set out in BIPRU 4.4.79 R:(1) the protection provider has sufficient expertise in providing unfunded credit protection;(2) the protection provider is regulated in a manner equivalent to the rules laid down
To be eligible for the treatment set out in BIPRU 4.4.79 R, credit protection deriving from a guarantee or credit derivative must meet the following conditions:(1) the underlying obligation must be to:(a) a corporate exposure, excluding an exposure to an insurance undertaking (including an insurance undertaking that carries out reinsurance); or(b) an exposure to a regional government, local authority or public sector entity which is not treated as an exposure to a central government
A firm using the IRB approach, but not using its own estimates of LGD and conversion factors, may recognise credit risk mitigation in accordance with BIPRU 5 as modified by BIPRU 4.10 in the calculation of risk weighted exposure amounts for the purposes of the calculation of the credit risk capital component or as relevant expected loss amounts for the purposes of the calculation in GENPRU 2.2.191 R to GENPRU 2.2.193 R or GENPRU 2.2.236 R.[Note: BCD Article 91 (as it applies to
(1) Where the requirements of BIPRU 5.2.2 R - BIPRU 5.2.8 R are met the calculation of risk weighted exposure amounts, and, as relevant, expected loss amounts, may be modified in accordance with BIPRU 5 as modified by BIPRU 4.10.(2) No exposure in respect of which credit risk mitigation is obtained must produce a higher risk weighted exposure amount or expected loss amount than an otherwise identical exposure in respect of which there is no credit risk mitigation.(3) Where the
(1) Residential real estate property which is or will be occupied or let by the owner or the beneficial owner in the case of personal investment companies and commercial real estate property, that is offices and other commercial premises, may be recognised as eligible collateral where the conditions set out in the remaining provisions of this paragraph are met.(2) The value of the property must not materially depend upon the credit quality of the obligor. This requirement does
(1) The condition in BIPRU 4.10.6 R (3) does not apply for exposures secured by residential real estate property situated within the territory of another EEA State.(2) However (1) only applies if and to the extent that the CRD implementation measures for that EEA State in relation to the IRB approach implement the option set out in paragraph 16 of Part 1 of Annex VIII of the Banking Consolidation Directive (waiver for residential real estate property) with respect to residential
(1) The condition in BIPRU 4.10.6 R (3) does not apply for commercial real estate property situated within the territory of another EEA State.(2) However (1) only applies if and to the extent that the CRD implementation measures for that EEA State in relation to the IRB approach implement the option set out in paragraph 17 of Part 1 of Annex VIII of the Banking Consolidation Directive (waiver for commercial real estate property) with respect to commercial real estate property
A firm may also recognise as eligible collateral 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 will be occupied or let by the owner, as residential real estate collateral, provided that the conditions in BIPRU 4.10.6 R are met.[Note: BCD Annex VIII Part 1 point 14]
A firm may also recognise as eligible collateral shares in Finnish housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation as commercial real estate collateral, provided that the conditions in BIPRU 4.10.6 R are met.[Note: BCD Annex VIII Part 1 point 15]
For the recognition of real estate collateral: the minimum requirements in BIPRU 3.4.64 R - BIPRU 3.4.73 R must be met with the following adjustments:(1) those provisions apply to all real estate collateral eligible under BIPRU 4.10; and(2) the minimum frequency of valuation as referred to in BIPRU 3.4.66 R is once every year for commercial real estate.[Note: BCD Annex VIII Part 2 point 8 (as it applies to the IRB approach)]
Amounts receivable linked to a commercial transaction or transactions with an original maturity of less than or equal to one year may be recognised as eligible collateral. Eligible receivables do not include those associated with securitisations, sub-participations or credit derivatives or amounts owed by affiliated parties.[Note: BCD Annex VIII Part 1 point 20]
(1) For the recognition of receivables as collateral the requirements in this paragraph must be met.(2) The legal mechanism by which the collateral is provided must be robust and effective and ensure that the lender has clear rights over the proceeds.(3) A firm must take all steps necessary to fulfil local requirements in respect of the enforceability of security interests. There must be a framework which allows the lender to have a first priority claim over the collateral subject
A firm may recognise as eligible collateral a physical item of a type other than those types indicated in BIPRU 4.10.6 R - BIPRU 4.10.12 R (Eligibility of real estate collateral) if its IRB permission provides that the firm may treat collateral of that type as eligible and if the firm is able to demonstrate the following:(1) the existence of liquid markets for disposal of the collateral in an expeditious and economically efficient manner;(2) the existence of well-established,
(1) If a type of other physical collateral referred to in BIPRU 4.10.16 R is potentially eligible under a firm'sIRB permission a firm must only recognise it as eligible if the minimum requirements in (2) to (10) are met.(2) The collateral arrangement must be legally effective and enforceable in all relevant jurisdictions and must enable the firm to realise the value of the property within a reasonable timeframe.(3) With the sole exception of permissible prior claims referred to
(1) Where the requirements set out in this paragraph are met, exposures arising from transactions whereby a firm leases property to a third party must be treated the same as loans collateralised by the type of property leased.(2) For the exposures arising from leasing transactions to be treated as collateralised by the type of property leased, the following conditions must be met:(a) the conditions set out or referred to in BIPRU 4.10.13 R or BIPRU 4.10.18 R as appropriate for
Physical collateral recognised as eligible as described in BIPRU 4.10.16 R must be valued for the purpose of calculating the effect of credit risk mitigation at its market value. Market value is the estimated amount for which the property would exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction.[Note: BCD Annex VIII Part 3 point 67]
Where the ratio of the value of the collateral (C) to the exposure value (E) is below a threshold level of C* (the required minimum collateralisation level for the exposure) as laid down in BIPRU 4.10.28 R, LGD* must be the LGD laid down in the other sections of BIPRU 4 for uncollateralised exposures to the counterparty. For this purpose, the exposure value of items listed in BIPRU 4.4.37 R to BIPRU 4.4.39 R and BIPRU 4.8.29 R must be calculated using a conversion factor or percentage
Where the ratio of the value of the collateral to the exposure value exceeds a second, higher threshold level of C** (i.e. the required level of collateralisation to receive full LGD recognition) as laid down in BIPRU 4.10.28 R, LGD* must be that prescribed in that table.[Note: BCD Annex VIII Part 3 point 70]
Where the required level of collateralisation C** is not achieved in respect of the exposure as a whole, the exposure must be considered to be two exposures - that part in respect of which the required level of collateralisation C** is achieved and the remainder.[Note: BCD Annex VIII Part 3 point 71]
Table: Minimum LGD for secured portion of exposures
This table belongs to BIPRU 4.10.24 R - BIPRU 4.10.27 R
LGD* for senior claims or contingent claims |
LGD* for subordinated claims or contingent claims |
Required minimum collateralisation level of the exposure (C*) |
Required minimum collateralisation level of the exposure (C**) |
|
Receivables |
35% |
65% |
0% |
125% |
Residential real estate/commercial real estate |
35% |
65% |
30% |
140% |
Other collateral |
40% |
70% |
30% |
140% |
[Note: BCD Annex VIII Part 3 point 72 (part)]
(1) A firm may apply the treatment in paragraph 74 of Part 3 of Annex VIII of the Banking Consolidation Directive (50% risk weight for exposures secured by real estate) in respect of exposures collateralised by:(a) residential real estate property; or(b) commercial real estate property;located in the territory of another EEA State.(2) However (1)(a) or (1)(b) only applies if the CRD implementing measures for that EEA State with respect to the IRB approach have implemented the
(1) Where:(a) risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach; and(b) an exposure is collateralised by both financial collateral and other eligible collateral;LGD* to be taken as the LGD for the purposes of the IRB approach must be calculated in accordance with this rule.(2) A firm must subdivide the volatility-adjusted value of the exposure (i.e. the value after the application of the volatility adjustment as set out in BIPRU 5.4.28
(1) This rule sets out how the calculations under BIPRU 5.6.11 R (Using the supervisory volatility adjustments or the own estimates volatility adjustments approaches to master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions) must be modified under the IRB approach.(2) Where risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach,
(1) This rule sets out how the calculations under BIPRU 5.6.24 R (Using the internal models approach to master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions) must be modified under the IRB approach.(2) Where risk weighted exposure amounts and expected loss amounts are calculated under the IRB approach E is the exposure value for each separate exposure under
(1) This rule sets out how the calculations under BIPRU 5.6.29 R (Calculating risk-weighted exposure amounts and expected loss amounts for master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market driven transactions) must be modified under the IRB approach.(2) E* must be taken as the exposure value of the exposure to the counterparty arising from the transactions subject to the master
(1) This rule sets out the calculation of risk weighted exposure amounts2 and expected loss2 amounts under the financial collateral comprehensive method2 for a firm using the IRB approach.222(2) LGD* (the effective loss given default) calculated as set out in this paragraph must be taken as the LGD for the purposes of BIPRU 4.(3) LGD* = LGD x (E*/E) where:(a) LGD is the loss given default that would apply to the exposure under the IRB approach if the exposure was not collateralised;(b)
(1) In the case of a firm using the IRB approach to calculate risk weighted exposure amounts and expected loss amounts, the persons in (2) are added to the list in BIPRU 5.4.64 R (Definition of core market participant).(2) The persons referred to in (1) are other financial companies (including insurance companies) exposures to which do not have a credit assessment by an eligible ECAI and are internally rated as having a probability of default equivalent to that associated with
(1) In the case of a firm using the IRB approach in calculating risk weighted exposure amounts and expected loss amounts, the persons in (2) are added to the list in BIPRU 5.7.1 R (List of eligible providers of unfunded credit protection).(2) The persons referred to in (1) are other corporate entities, including parent undertakings, subsidiary undertakings and affiliate corporate entities of the firm, that do not have a credit assessment by an eligible ECAI and are internally
BIPRU 4.10.41 R to BIPRU 4.10.48 R set out the minimum requirements:(1) assessing the effect of guarantees and credit derivatives for:(a) exposures in the sovereign, institution and corporate IRB exposure class2 where the advanced IRB approach is being used to calculate LGDs; and(b) retail exposures; and(2) additionally, in the case of retail exposure guarantees, to the assignment of exposures to grades or pools, and the estimation of PD.[Note: BCD Annex VII Part 4 point 97]
The requirements in BIPRU 4.10.40 R (2) and BIPRU 4.10.42 R - BIPRU 4.10.48 R do not apply to3 guarantees provided by institutions, central governments, central banks and other corporate entities which meet the requirements in BIPRU 5.7.1 R (7)31 if the firm has received approval under BIPRU 4.2 to apply the standardised approach for exposures to such entities. In this case the requirements of BIPRU 5 (credit risk mitigation) apply.[Note: BCD Annex VII Part 4 point 96]33
For recognised guarantors the same requirements as for obligors as set out in BIPRU 4.3.43 R - BIPRU 4.3.48 R (Assignment to grades and pools), BIPRU 4.4.11 R - BIPRU 4.4.18 R and BIPRU 4.4.51 R (Assignment of exposures and rating systems), BIPRU 4.5.6 R (Assignment of exposures) and BIPRU 4.6.11 R and BIPRU 4.6.14 R (Assignment of exposures and rating systems) apply.[Note: BCD Annex VII Part 4 point 99]
The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the obligation is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. Guarantees prescribing conditions under which the guarantor may not be obliged to perform (conditional guarantees) may be recognised if the IRB permission
A firm must have clearly specified criteria for adjusting grades, pools or LGD estimates, and in the case of retail exposures and eligible purchased receivables, the process of allocating exposures to grades or pools, to reflect the impact of guarantees for the calculation of risk weighted exposure amounts. These criteria must comply with the minimum requirements referred to in BIPRU 4.10.43 R.[Note: BCD Annex VII Part 4 point 101]
The criteria in BIPRU 4.10.45 R must be plausible and intuitive. They must address the guarantor's ability and willingness to perform under the guarantee, the likely timing of any payments from the guarantor, the degree to which the guarantor's ability to perform under the guarantee is correlated with the obligor's ability to repay, and the extent to which residual risk to the obligor remains.[Note: BCD Annex VII Part 4 point 102]
The minimum requirements for guarantees set out in BIPRU 4.10 also apply for single name credit derivatives. In relation to a mismatch between the underlying obligation and the reference obligation of the credit derivative or the obligation used for determining whether a credit event has occurred the requirements set out under BIPRU 5.7.14 R (Mismatches and credit derivatives) apply. For retail exposures and eligible purchased receivables, this paragraph applies to the process
(1) This rule relates to the calculation of risk-weighted exposure amounts and expected loss amounts in the case of unfunded credit protection.(2) BIPRU 5.7.21 R (Tranching) applies for the purpose in (1).(3) The provisions in (4) replace those in BIPRU 5.7.22 R to BIPRU 5.7.25 R (Calculating risk weighted exposure amounts under the standardised approach in the case of unfunded credit protection).(4) For the covered portion of the exposure value E3 (based on the adjusted value
In addition to BIPRU 5.8.2 R, where there is a maturity mismatch the credit protection must not be recognised where the exposure is a short term exposure specified in the firm'sIRB permission as being subject to a one-day floor rather than a one-year floor in respect of the maturity value (M) under BIPRU 4.4.68 R.[Note: BCD Annex VIII Part 4 point 2(b)]
Notwithstanding BIPRU 4.3.5 R (Relevant parameters), the calculation of risk weighted exposure amounts for credit risk for all exposures belonging to the equity exposureIRB exposure class must be calculated in accordance with one of the following ways:(1) the simple risk weight approach (see BIPRU 4.7.8 R;(2) the PD/LGD approach (see BIPRU 4.7.13 R); and(3) the internal models approach (see BIPRU 4.7.23 R);in accordance with BIPRU 4.7 and subject to the firm'sIRB permission.[Note:BCD
A firm may employ different approaches to different portfolios where the firm itself uses different approaches internally. A firm must, if it uses different approaches in accordance with the previous sentence, be able to demonstrate to the FSA that the choice is made consistently and is not determined by regulatory arbitrage considerations.[Note:BCD Annex VII Part 1 point 17]
The exposure value must be the value presented in the financial statements. Admissible equity exposure measures are the following:(1) for investments held at fair value with changes in value flowing directly through income and into capital resources, the exposure value is the fair value presented in the balance sheet;(2) for investments held at fair value with changes in value not flowing through income but into a tax-adjusted separate component of equity, the exposure value is
The risk weighted exposure amounts must be calculated according to the following formula:risk-weighted exposure amounts = RW * exposure value;where:(1) risk weight (RW) = 190% for private equity exposures in sufficiently diversified portfolios;(2) risk weight (RW) = 290% for exchange traded equity exposures; and(3) risk weight (RW) = 370% for all other equity exposures.[Note:BCD Annex VII Part 1 point 19]
Short cash positions and derivative instruments held in the non-trading book are permitted to offset long positions in the same individual stocks provided that these instruments have been explicitly designated as hedges of specific equity exposures and that they provide a hedge for at least another year. Other short positions must be treated as if they are long positions with the relevant risk weight assigned to the absolute value of each position. In the context of maturity mismatched
The expected loss amounts1 for equity exposures must be calculated according to the following formula:(1) expected loss amount = EL × exposure value; and(2) the EL values must be the following:(a) expected loss (EL) = 0.8% for private equity exposures in sufficiently diversified portfolios;(b) expected loss (EL) = 0.8% for exchange traded equity exposures; and(c) expected loss (EL) = 2.4% for all other equity exposures.[Note:BCD Annex VII Part 1 point 32]
The risk weighted exposure amounts must be calculated according to the formulas in BIPRU 4.4.58 R (Risk weighted exposure amounts for sovereigns, institutions and corporates). If a firm does not have sufficient information to use the definition of default a scaling factor of 1.5 must be assigned to the risk weights.[Note:BCD Annex VII Part 1 point 22]
A firm may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out in BIPRU 5 (Credit risk mitigation) as modified by BIPRU 4.10. This must be subject to an LGD of 90% on the exposure to the provider of the hedge. For private equity exposures in sufficiently diversified portfolios an LGD of 65% may be used.[Note:BCD Annex VII Part 1 point 24]
PDs must be determined according to the methods for corporate exposures. The following minimum PDs must be applied:(1) 0.09% for exchange traded equity exposures where the investment is part of a long-term customer relationship;(2) 0.09% for non-exchange traded equity exposures where the returns on the investment are based on regular and periodic cash flows not derived from capital gains;(3) 0.40% for exchange traded equity exposures including other short positions as set out
The risk weighted exposure amount is the potential loss on the firm'sequity exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, multiplied by 12.5. The risk weighted exposure amounts at the equity exposure portfolio2 level must not be less than the total of the sums2 of the minimum risk weighted
(1) A firm must meet the standards set out in (2) to (9) for the purpose of calculating capital requirements.(2) The estimate of potential loss must be robust to adverse market movements relevant to the long-term risk profile of the firm's specific holdings. The data used to represent return distributions must reflect the longest sample period for which data is available and be meaningful in representing the risk profile of the firm's specific equity exposures. The data used must
(1) With regard to the development and use of internal models for capital requirement purposes, a firm must establish policies, procedures, and controls to ensure the integrity of the model and modelling process. These policies, procedures, and controls must include the ones set out in the rest of this paragraph.(2) There must be full integration of the internal model into the overall management information systems of the firm and in the management of the non-trading bookequity
A firm must regularly compare actual equity exposure returns (computed using realised and unrealised gains and losses) with modelled estimates. Such comparisons must make use of historical data that cover as long a period as possible. A firm must document the methods and data used in such comparisons. This analysis and documentation must be updated at least annually.[Note:BCD Annex VII Part 4 point 120]
A firm must make use of other quantitative validation tools and comparisons with external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. A firm's internal assessments of the performance of its models must be based on as long a period as possible.[Note:BCD Annex VII Part 4 point 121]
A firm must have sound internal standards for situations where comparison of actual equity exposure returns with the models' estimates calls the validity of the estimates or of the models as such into question. These standards must take account of business cycles and similar systematic variability in equity exposure returns. All adjustments made to internal models in response to model reviews must be documented and consistent with the firm's model review standards.[Note:BCD Annex
To be eligible to be treated as a retail exposure, exposures must meet the following criteria:(1) they must be either to an individual person or persons, or to a small or medium sized entity, provided in the latter case that the total amount owed to the firm and parent undertaking and its subsidiary undertakings, including any past due exposure, by the obligor client or group of connected clients, but excluding claims or contingent claims secured on residential real estate collateral,
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]
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 at least annually update obligor and facility assignments or review the loss characteristics and delinquency status of each identified risk pool whichever is applicable. A firm must also at least annually review in a representative sample the status of individual exposures within each pool as a means of ensuring that exposures continue to be assigned to the correct pool.[Note:BCD Annex VII Part 4 point 29]
In addition to complying with BIPRU 4.3.54 R (Data maintenance) a firm must collect and store:(1) data used in the process of allocating exposures to grades or pools;(2) data on the estimated PDs, LGDs and conversion factors associated with grades or pools of exposures;(3) the identity of obligors and exposures that defaulted;(4) for defaultedexposures, data on the grades or pools to which the exposure was assigned over the year prior to default and the realised outcomes on LGD
(1) This rule, in accordance with BIPRU 4.3.57 R (4) (Definition of default), sets the exact number of days past due that a firm must abide by in the case of retail exposures.(2) For retail exposures to counterparts situated within the United Kingdom the number of days past due is 180 days with the exception of retail SME exposures. For these exposures the number is 90 days.(3) For retail exposures to counterparts situated in another EEA State the number of days past due is the
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]
Irrespective of whether a firm is using external, internal, pooled data sources or a combination of the three, for its estimation of loss characteristics, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation spans a longer period for any source, and these data are relevant, this longer period must be used. However:(1) a firm need not give equal importance to historic data if this is compatible
Estimates of LGD must be based on data over a minimum of five years. Notwithstanding BIPRU 4.3.99 R (Default weighted average):(1) a firm need not give equal importance to historic data if this is permitted by its IRB permission; and(2) (in the case of a firm with an IRB permission that permits this treatment of historic data) the firm must be able to convince the FSA that more recent data is a better predictor of loss rates.[Note:BCD Annex VII Part 4 point 86 (part)]
Estimates of conversion factors must be based on data over a minimum of five years. Notwithstanding BIPRU 4.3.125 R:(1) a firm need not give equal importance to historic data if this is permitted by its IRB permission; and(2) (in the case of a firm with an IRB permission that permits this treatment of historic data) the firm must be able to convince the FSA if asked that more recent data is a better predictor of loss rates.[Note:BCD Annex VII Part 4 point 95 (part)]
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)]
(1) For qualifying revolving retail exposures a correlation (R) of 0.04 must replace the correlation formula in the table in BIPRU 4.6.42 R.(2) Retail exposures qualify as qualifying revolving retail exposures if they meet the following conditions:(a) the IRB permission of the firm in question does not disapply this paragraph;(b) the exposures are to individuals;(c) the exposures are revolving, unsecured, and, to the extent they are not drawn, immediately and unconditionally cancellable
Table: Formulae for the calculation of expected loss amounts
This table belongs to BIPRU 4.6.47 R
Expected loss amount |
|
For defaultedexposures (PD = 1) where a firm uses its own estimates of LGDs, EL must be ELBE, the firm's best estimate of expected loss for the defaultedexposure according to BIPRU 4.3.122 R. For exposures subject to the treatment set out in BIPRU 4.4.79 R (Double default) EL must be 0. |
|
[Note:BCD Annex VII Part 1 point 30 (part)]
Unfunded credit protection may be recognised by adjusting PDs subject to BIPRU 4.6.54 R. For dilution risk, where a firm does not use its own estimates of LGDs, this must be subject to compliance with BIPRU 5 (Credit risk mitigation) modified by BIPRU 4.10 and, for this purpose, a firm may recognise unfunded credit protection providers other than those indicated in the CRM eligibility conditions provided the firm is able to demonstrate that the unfunded protection provider giving
Unfunded credit protection may be recognised as eligible by adjusting PD or LGD estimates subject to the minimum IRB standards as specified in BIPRU 4.10.43 R - BIPRU 4.10.48 R and in accordance with the IRB permission either in support of an individual exposure or a pool of exposures. A firm must not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor.[Note:BCD Annex VII
Notwithstanding BIPRU 4.6.54 R for the purposes of BIPRU 4.4.80 R the LGD of a comparable direct exposure to the protection provider must either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor, depending upon whether in the event both the guarantor and obligor default during the life of the hedged transaction available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial
The following parties may be recognised as eligible providers of unfunded credit protection:(1) central governments and central banks;(2) regional governments or local authorities;(3) multilateral development banks;(4) international organisationsexposures which are assigned a 0% risk weight under the standardised approach;(5) public sector entities, claims on which are treated as claims on institutions or central governments under the standardised approach;(6) institutions;(7)
The following types of credit derivatives, and instruments that may be composed of such credit derivatives or that are economically effectively similar, may be recognised as eligible;(1) credit default swaps;(2) total return swaps; and(3) credit linked notes to the extent of their cash funding.[Note: BCD Annex VIII Part 1 point 30]
Where a firm buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection must not be recognised as eligible.[Note: BCD Annex VIII Part 1 point 31]
When a firm conducts an internal hedge using a credit derivative – i.e. hedges the credit risk of an exposure in the non-trading book with a credit derivative booked in the trading book – in order for the protection to be recognised as eligible for the purposes of BIPRU 4.10 or BIPRU 5 the credit risk transferred to the trading book must be transferred out to a third party or parties. In such circumstances, subject to the compliance of such transfer with the requirements for the
Subject to BIPRU 5.7.9 R, for the credit protection deriving from a guarantee or credit derivative to be recognised the following conditions must be met:(1) the credit protection must be direct;(2) the extent of the credit protection must be clearly defined and incontrovertible;(3) the credit protection contract must not contain any clause, the fulfilment of which is outside the direct control of the lender, that:(a) would allow the protection provider unilaterally to cancel the
A firm must be able to satisfy the FSA that it has systems in place to manage potential concentration of risk arising from the firm's use of guarantees and credit derivatives. The firm must be able to demonstrate how its strategy in respect of its use of credit derivatives and guarantees interacts with its management of its overall risk profile.[Note: BCD Annex VIII Part 2 point 15]
Where an exposure is protected by a guarantee which is counter-guaranteed by a central government or central bank, a regional government or local authority or a public sector entity claims on which are treated as claims on the central government in whose jurisdiction they are established under the standardised approach, a multilateral development bank or an international organisation,1to which a 0% risk weight is assigned under or by virtue of the standardised approach, or a public
The treatment of BIPRU 5.7.9 R applies, also, to an exposure which is not counter-guaranteed by an entity listed in that rule if the exposure's counter-guarantee is in its turn directly guaranteed by one of the listed entities and the conditions listed in BIPRU 5.7.9 R are satisfied.[Note: BCD Annex VIII Part 2 point 17]
For a guarantee to be recognised the following conditions must also be met:(1) on the qualifying default of and/or non-payment by the counterparty, the lending firm must have the right to pursue, in a timely manner, the guarantor for any monies due under the claim in respect of which the protection is provided;(2) payment by the guarantor must not be subject to the lending firm first having to pursue the obligor;(3) in the case of unfunded credit protection covering residential
In the case of guarantees provided in the context of mutual guarantee schemes recognised for these purposes by another EEA competent authority under a CRD implementation measure with respect to point 19 of Part 2 of Annex VIII of the Banking Consolidation Directive or provided by or counter-guaranteed by entities referred to in BIPRU 5.7.9 R, the requirements in BIPRU 5.7.11 R (1) – (3) will be satisfied where either of the following conditions are met:(1) the lending firm has
For a credit derivative to be met the following conditions must also be met.(1) Subject to (2), the credit events specified under the credit derivative must at a minimum include:(a) the failure to pay the amounts due under the terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with or shorter than the grace period in the underlying obligation);(b) the bankruptcy, insolvency or inability of the obligor
A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for the purposes of determining cash settlement value or the deliverable obligation) or between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible only if the following conditions are met:(1) the reference obligation or the obligation used for purposes of determining whether
(1) The value of unfunded credit protection (G) is the amount that the protection provider has undertaken to pay in the event of the default or non-payment of the borrower or on the occurrence of other specified credit events.(2) In the case of credit derivatives which do not include as a credit event restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that result in a credit loss event (e.g. value adjustment, the making
Where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated (a currency mismatch) the value of the credit protection must be reduced by the application of a volatility adjustment HFX as follows:G* = G x (1-HFX)where:(1) G is the nominal amount of the credit protection;(2) G* is G adjusted for any foreign currency risk; and(3) Hfx is the volatility adjustment for any currency mismatch between the credit protection and the
Where a firm transfers a part of the risk of a loan in one or more tranches, BIPRU 9 applies. Materiality thresholds on payments below which no payment shall be made in the event of loss are considered to be equivalent to retained first loss positions and to give rise to a tranched transfer of risk.[Note: BCD Annex VIII Part 3 point 86]
For the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 R, g shall be the risk weight to be assigned to an exposure, the exposure value (E) of1 which is fully protected by unfunded credit protection (GA), where:(1) g is the risk weight of exposures to the protection provider as specified under the standardised approach; 1(2) GA is the value of G* as calculated under BIPRU 5.7.17 R further adjusted for any maturity mismatch as laid down in BIPRU 5.8; and1(3) 1E is the exposure value
Where the protected amount is less than the exposure value and the protected and unprotected portions are of equal seniority – i.e.1 the firm and the protection provider share losses on a pro-rata basis, proportional regulatory capital relief is afforded. For the purposes of BIPRU 3.2.20 R to BIPRU 3.2.26 Rrisk weighted exposure amounts must be calculated in accordance with the following formula:(E-GA) x r + GA x gwhere:1(1) E is the exposure value; according to BIPRU 3.2.1 R
A firm may apply the treatment provided for in BIPRU 3.4.5 R to BIPRU 3.4.7 R to exposures or parts of exposures guaranteed by the central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure is funded in that currency.[Note: BCD Annex VIII Part 3 point 89]
Where a firm obtains credit protection for a number of exposures under terms that the first default among the exposures will trigger payment and that this credit event will terminate the contract, the firm may modify the calculation of the risk weighted exposure amount and, as relevant, the expected loss amount of the exposure which would in the absence of the credit protection produce the lowest risk weighted exposure amount under the standardised approach or the IRB approach
Where the nth default among the exposures triggers payment under the credit protection provided by a credit derivative, a firm purchasing the protection may only recognise the protection for the calculation of risk weighted exposure amounts and, as relevant, expected loss amounts if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such cases the methodology must follow that set out in BIPRU 5.7.27 R for first-to-default derivatives
The estimates for determining the risk parameters PD, LGD, conversion factor and EL must reflect all relevant information available to the purchasing firm regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing firm, or by external sources. The purchasing firm must evaluate any data relied upon which is provided by the seller.[Note: BCD Annex VII Part 4 point 53]
If a firm derives long run average estimates of PDs and LGDs for corporate exposure purchased receivables from an estimate of EL, and an appropriate estimate of PD or LGD, the process for estimating total losses must meet the overall standards for estimation of PD and LGD set out in the minimum IRB standards,2 and the outcome must be consistent with the concept of LGD as set out in BIPRU 4.3.99 R.[Note: BCD Annex VII Part 4 point 61]
The structure of the facility must ensure that under all foreseeable circumstances a firm has effective ownership and control of all cash remittances from the receivables. When the obligor makes payments directly to a seller or servicer a firm must verify regularly that payments are forwarded completely and within the contractually agreed terms. Servicer means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis. A firm
(1) A firm must monitor both the quality of the purchased receivables and the financial condition of the seller and servicer. In particular a firm must comply with the remaining provisions of this rule.(2) A firm must assess the correlation among the quality of the purchased receivables and the financial condition of both the seller and servicer, and have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including
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
A firm must have an effective internal process for assessing compliance with all internal policies and procedures. The process must include regular audits of all critical phases of the firm's receivables purchase programme, verification of the separation of duties between, firstly, the assessment of the seller and servicer and the assessment of the obligor and, secondly, between the assessment of the seller and servicer and the field audit of the seller and servicer and evaluations
For its corporate exposure purchased receivables a firm must comply with the minimum requirements set out in BIPRU 4.8.11 R - BIPRU 4.8.15 R. For corporate exposure purchased receivables that comply in addition with the conditions set out in BIPRU 4.8.18 R, and where it would be unduly burdensome for a firm to use the risk quantification standards for corporate exposures as set out in the minimum IRB standards for these receivables, the risk quantification standards for retail
For corporate exposure purchased receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection for defaultlosses, dilution losses, or both, may be treated as first-loss positions under the provisions in BIPRU 9 (Securitisation) about the IRB approach.[Note: BCD Annex VII Part 1 point 8]
To be eligible for the retail exposure treatment purchased receivables must comply with the minimum requirements set out in BIPRU 4.8.11 R - BIPRU 4.8.15 R and the following conditions:(1) the firm has purchased the receivables from unrelated, third party sellers, and its exposure to the obligor of the receivable does not include any exposures that are directly or indirectly originated by the firm itself;(2) the purchased receivables must be generated on an arm's-length basis
With respect to retail exposures, for purchased receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection for defaultlosses, dilution losses, or both, may be treated as first-loss positions under the provisions in BIPRU 9 (Securitisation) about the IRB approach.[Note: BCD Annex VII Part 1 point 15]
For hybrid pools of purchased retail exposure receivables where the purchasing firm cannot separate exposures secured by real estate collateral and qualifying revolving retail exposures from other retail exposures, the retail risk weight2 function producing the highest capital requirements for those exposures must apply.[Note: BCD Annex VII Part 1 point 16]
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
For purchased corporate exposure receivables in respect of which a firm cannot demonstrate that its PD estimates meet the minimum IRB standards, the PDs for these exposures must be determined according to the following methods:(1) for senior claims on purchased corporate exposure receivables PD must be the firm's estimate of EL divided by LGD for these receivables;(2) for subordinated claims on purchased corporate exposure receivables PD must be the firm's estimate of EL; and1(3)
In the case of corporate exposures, for dilution risk of purchased receivables PD must be set equal to EL estimate for dilution 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 dilution risk of purchased corporate exposure receivables into PDs and LGDs in a reliable manner, the PD estimate may be used. A firm may recognise unfunded credit protection in the PD in accordance
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]
(1) The exposure value for the items in (2) must be calculated as the committed but undrawn amount multiplied by a conversion factor.(2) For undrawn purchase commitments for revolving purchased receivables that are unconditionally cancellable or that effectively provide for automatic cancellation at any time by the firm without prior notice, a conversion factor of 0% applies. To apply a conversion factor of 0%, a firm must actively monitor the financial condition of the obligor,
Where there is a securitisation of revolving exposures subject to an early amortisation provision, the originator must calculate an additional risk weighted exposure amount in accordance with this section in respect of the risk that the levels of credit risk to which it is exposed may increase following the operation of the early amortisation provision. Accordingly this section sets out how an originator must calculate a risk weighted exposure amount when it sells revolving exposures
For the purposes of this section, subject to BIPRU 9.13.6 R:(1) originators interest means the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure determines the proportion of the cash-flows generated by principal and interest collections and other associated amounts which are not available to make payments to those having securitisation positions
Subject to BIPRU 9.13.7 R, the exposure of the originator associated with its rights in respect of the originators interest must not be treated as a securitisation position but as a pro rata exposure to the securitised exposures as if they had not been securitised.[Note:BCD Annex IX Part 4 point 20]
(1) For firms using the IRB approach set out in BIPRU 4, this paragraph applies in place of BIPRU 9.13.4 R.(2) For the purposes of this section, originators interest means the sum of:(a) the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure determines the proportion of the cash-flows generated by principal and interest collections and other associated
For firms using the IRB approach set out in BIPRU 4, this paragraph applies in place of BIPRU 9.13.5 R. The exposure of the originator associated with its rights in respect of that part of the originators interest described in BIPRU 9.13.6 R (2)(a) must not be treated as a securitisation position but as a pro rata exposure to the securitised drawn amounts as if they had not been securitised in an amount equal to that described in BIPRU 9.13.6 R (2)(a). The originator must also
Originators of the following types of securitisation are exempt from the capital requirement in BIPRU 9.13.1 R:(1) securitisations of revolving exposures whereby investors remain fully exposed to all future draws by borrowers so that the risk on the underlying facilities does not return to the originator even after an early amortisation event has occurred; and(2) securitisations where any early amortisation provision is solely triggered by events not related to the performance
For an originator subject to the capital requirement in BIPRU 9.13.1 R the total of the risk weighted exposure amounts in respect of its positions in the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) and the risk weighted exposure amounts calculated under BIPRU 9.13.1 R must be no greater than the greater of:(1) the risk weighted exposure amounts calculated in respect of its positions in the investors interest (as so defined); and(2) the risk weighted exposure
Deduction of net gains, if any, arising from the capitalisation of future income required under GENPRU 2.2.90 R (Core tier one capital: profit and loss account and other reserves: Securitisation) must be treated outside the maximum amount indicated in BIPRU 9.13.9 R.[Note:BCD Annex IX Part 4 point 23]
The risk weighted exposure amount to be calculated in accordance with BIPRU 9.13.1 R must be determined by multiplying the amount of the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) by the product of:(1) the appropriate conversion figure as indicated in BIPRU 9.13.16 R, BIPRU 9.13.19 R or BIPRU 9.13.20 R; and(2) the weighted average risk weight that would apply to the securitised exposures if the exposures had not been securitised.[Note:BCD Annex IX Part
An early amortisation provision must be treated as controlled for the purposes of this section where the following conditions are met:(1) the originator has an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortisation;(2) throughout the duration of the transaction there is a pro rata sharing between the originators interest and the investors interest (as defined in BIPRU 9.13.4 R or BIPRU
In the case of a securitisation meeting the following conditions:(1) it is subject to an early amortisation provision;(2) the securitisation is of retail exposures which are uncommitted and unconditionally cancellable without prior notice; and(3) the early amortisation is triggered by the excess spread level falling to a specified levela firm must, to calculate the appropriate conversion figure referred to in BIPRU 9.13.11 R, compare the three-month average excess spread level
In BIPRU 9.13.16 R:(1) Level A means levels of excess spread less than 133.33% of the trapping level of excess spread but not less than 100% of that trapping level;(2) Level B means levels of excess spread less than 100% of the trapping level of excess spread but not less than 75% of that trapping level;(3) Level C means levels of excess spread less than 75% of the trapping level of excess spread but not less than 50% of that trapping level;(4) Level D means levels of excess spread
In the case of a securitisation meeting the conditions in this paragraph, a firm may apply to the FSA for a waiver that would allow a treatment which approximates closely to that prescribed in BIPRU 9.13.13 R to BIPRU 9.13.17 R for determining the conversion figure indicated. If a firm wants such a waiver, it should satisfy the FSA that:(1) the securitisation is subject to an early amortisation provision of retail exposures;(2) those retail exposures are uncommitted and unconditionally
(1) For a firm adopting the financial collateral comprehensive method, the effects of bilateral netting contracts covering repurchase transactions, securities or commodities lending or borrowing transactions, and/or other capital market-driven transactions with a counterparty may be recognised.(2) Without prejudice to BIPRU 14 to be recognised the collateral taken and securities or commodities borrowed within such agreements must comply with the eligibility requirements for collateral
For master netting agreements covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions1 to be recognised for the purposes of BIPRU 5, they must:(1) be legally effective and enforceable in all relevant jurisdictions, including in the event of the bankruptcy or insolvency of the counterparty;(2) give the non-defaulting party the right to terminate and close-out in a timely manner all transactions
In calculating the ‘fully adjusted exposure value’ (E*) for the exposures subject to an eligible master netting agreement covering repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions, a firm must calculate the volatility adjustments to be applied in the manner set out in BIPRU 5.6.6 R to BIPRU 5.6.11 R either using the supervisory volatility adjustments approach or the own estimates of volatility
A firm must calculate the net position in each type of security or commodity by subtracting from the total value of the securities or commodities of that type lent, sold or provided under the master netting agreement, the total value of securities or commodities of that type borrowed, purchased or received under the agreement.[Note:BCD Annex VIII Part 3 point 6]
For the purposes of BIPRU 5.6.6 R, type of security means securities which are issued by the same entity, have the same issue date, the same maturity and are subject to the same terms and conditions and are subject to the same liquidation periods as indicated in BIPRU 5.4.30 R to BIPRU 5.4.65 R.[Note: BCD Annex VIII Part 3 point 7]
A firm must calculate the net position in each currency other than the settlement currency of the master netting agreement by subtracting from the total value of securities denominated in that currency lent, sold or provided under the master netting agreement added to the amount of cash in that currency lent or transferred under the agreement, the total value of securities denominated in that currency borrowed, purchased or received under the agreement added to the amount of cash
E* must be calculated according to the following formula:E* = max {0, [(∑(E) -∑ (C)) + ∑ (|net position in each security| x Hsec) + (∑|Efx| x Hfx)]}where:(1) (where risk weighted exposure amounts are calculated under the standardised approach) E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection;(2) C is the value of the securities or commodities borrowed, purchased or received or the cash borrowed or received
A firm which has been granted a VaR modelwaiver will still need to make an application to the FSA for a master netting agreement internal models approach permission. However, the application should generally be straightforward as a firm which is able to satisfy the requirements for a VaR modelwaiver should usually also be able to satisfy the requirements for a master netting agreement internal models approach permission.[Note: BCD Annex VIII Part 3 point 14]
The master netting agreement internal models approach1 is an alternative to using the supervisory volatility adjustments approach or the own estimates of volatility adjustments approach in calculating volatility adjustments for the purpose of calculating the ‘fully adjusted exposure value’ (E*) resulting from the application of an eligible master netting agreement covering repurchase transactions, securities or commodities lending or borrowing transactions and/or other capital
A firm may also use the internal model used for the master netting agreement internal models approach1 for margin lending transactions if the transactions are covered under the firm'smaster netting agreement internal models approach permission and the transactions are covered by a bilateral master netting agreement that meets the requirements set out in BIPRU 13.7.[Note: BCD Annex VIII Part 3 point 12 (part)]
A firm may use the master netting agreement internal models approach independently of the choice it has made between the standardised approach and the IRB approach for the calculation of risk weighted exposure amounts. However, if a firm uses the master netting agreement internal models approach, it must do so for all counterparties and securities, excluding immaterial portfolios where it may use the supervisory volatility adjustments approach or the own estimates of volatility
(1) A firm must be able to satisfy the FSA that the firm's risk management system for managing the risks arising on the transactions covered by the master netting agreement is conceptually sound and implemented with integrity and that, in particular, the minimum qualitative standards in (2) – (11) are met.(2) The internal risk-measurement model used for calculation of potential price volatility for the transactions is closely integrated into the daily risk-management process of
The calculation of the potential change in value must be subject to the following minimum standards:(1) at least daily calculation of the potential change in value;(2) a 99th percentile, one-tailed confidence interval;(3) a 5-day equivalent liquidation period, except in the case of transactions other than securities repurchase transaction or securities lending or borrowing transactions where a 10-day equivalent liquidation period should be used;(4) an effective historical observation
The fully adjusted exposure value (E*) for a firm using the master netting agreement internal models approach must be calculated according to the following formula:E* = max {0, [(∑E -∑C) + (VaR output of the internal models)]}where(1) (where risk weighted exposure amounts are calculated under the standardised approach) E is the exposure value for each separate exposure under the agreement that would apply in the absence of the credit protection;(2) C is the value of the securities
(1) A firm must under the standardised approach calculate risk weighted exposure amounts for repurchase transactions and/or securities or commodities lending or borrowing transactions and/or other capital market-driven transactions covered by master netting agreements under this rule.(2) E* as calculated under BIPRU 5.6.5 R to BIPRU 5.6.25 R must be taken as the exposure value of the exposure to the counterparty arising from the transactions subject to the master netting agreement
(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. |
2Nth to default credit default swap |
The effective notional value of the reference debt instrument, multiplied by the modified duration of the nth to default derivative with respect to a change in the credit spread of the reference debt instrument. |
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. |
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 not recognise netting for the purpose of applying the CCR mark to market method to an exposure treated under BIPRU 13.5.9 R (that is, the exposure value must be determined as if there were a netting set that comprises just the individual transaction).[Note: BCD Annex III Part 5 point 19 (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
There is one hedging set for each issuer of a reference debt instrument that underlies a credit default swap.Nth to default basket credit default swaps must be treated as follows:2(1) 2the size of a risk position in a reference debt instrument in a basket underlying an nth to default credit default swap is the effective notional value of the reference debt instrument, multiplied by the modified duration of the nth to default derivative, with respect to a change in the credit spread
(1) The similarity of instruments for the purposes of BIPRU 13.5.16 R is established in accordance with (2) to (5).(2) For equities, similar instruments are those of the same issuer. An equity index is treated as a separate issuer.(3) For precious metals, similar instruments are those of the same metal. A precious metal index is treated as a separate precious metal.(4) For electric power, similar instruments are those delivery rights and obligations that refer to the same peak
(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
A firm that makes use of collateral to mitigate its CCR must have internal procedures to verify that, prior to recognising the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in BIPRU 5 modified, where relevant, by BIPRU 4.10.[Note: BCD Annex III Part 5 point 21]
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) |
Reference debt instruments of an nth to default derivative that have a credit assessment from a recognised ECAI equivalent to credit quality step 1 to 32 2 |
0.3%2 |
2(11) |
Reference debt instruments of an nth to default derivative that do not have a credit assessment from a recognised ECAI equivalent to credit quality step 1 to 3 |
0.6% |
2(12) |
Underlying instruments of financial derivative instrument that are not in any of the above categories. |
10.0% |
[Note: BCD Annex III Part 5 Table 5 and Part 5 point 15 (c)2]
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
Subject to BIPRU 13:(1) the exposure value of an asset item must be its balance-sheet value, subject to any value adjustments required by GENPRU 1.3; and(2) the exposure value of an off-balance sheet item listed in the table in BIPRU 3.7.2 R must be the percentage of its value set out in that table.[Note: BCD Article 78(1) part]
BIPRU 13 sets out the method for determination of the exposure value of a financial derivative instrument, with the effects of contracts of novation and other netting agreements taken into account for the purposes of that method in accordance with BIPRU 13.7.[Note: reference to BCD Article 78(2) first sentence. Implementation in BIPRU 13]
BIPRU 13.8 provides that, in the case of a firm using the financial collateral comprehensive method under BIPRU 5, where an exposure takes the form of an SFT, the exposure value should be increased by the volatility adjustment appropriate to such securities or commodities set out in BIPRU 5.4.30 R to BIPRU 5.4.65 R (Supervisory volatility adjustments approach and the own estimates of volatility adjustments approach).[Note: reference to BCD Article 78(1), part. Implementation in
A firm must assign each exposure to one of the following exposure classes:(1) claims or contingent claims on central governments or central banks;(2) claims or contingent claims on regional governments or local authorities;(3) claims or contingent claims on administrative bodies and non-commercial undertakings;(4) claims or contingent claims on multilateral development banks;(5) claims or contingent claims on international organisation;(6) claims or contingent claims on institutions;(7)
To be eligible for the retail exposure class, an exposure must meet the following conditions:(1) the exposure must be either to an individual person or persons, or to a small or medium sized entity;(2) the exposure must be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced; and(3) the total amount owed to the firm, its parent undertakings and its subsidiary undertakings, including any
(1) To calculate risk weighted exposure amounts, risk weights must be applied to all exposures, unless deducted from capital resources, in accordance with the provisions of BIPRU 3.4.(2) The application of risk weights must be based on the standardised credit risk exposure class to which the exposure is assigned and, to the extent specified in BIPRU 3.4, its credit quality.(3) Credit quality may be determined by reference to:(a) the credit assessments of eligible ECAIs in accordance
(1) Subject to BIPRU 3.2.35 R, and with the exception of exposures giving rise to liabilities in the form of the items referred to in BIPRU 3.2.26 R, a firm is not required to comply with BIPRU 3.2.20 R (Calculation of risk weighted exposures amounts under the standardised approach) in the case of the exposures of the firm to a counterparty which is its parent undertaking, its subsidiary undertaking or a subsidiary undertaking of its parent undertaking provided that the following
A firm must not apply the treatment in BIPRU 3.2.25 R to exposures giving rise to liabilities in the form of any of the following items:(1) in the case of a BIPRU firm, any tier one capital or tier two capital; and(2) in the case of any other undertaking, any item that would be tier one capital or tier two capital if the undertaking were a BIPRU firm.[Note: BCD Article 80(7), part]
This table belongs to BIPRU 13.4.5 R
Residual maturity |
Interest-rate contracts |
Contracts concerning foreign currency rates and gold |
Contracts concerning equities |
Contracts concerning precious metals except gold |
Contracts concerning commodities other than precious metals |
One year or less |
0% |
1% |
6% |
7% |
10% |
Over one year, not exceeding five years |
0,5% |
5% |
8% |
7% |
12% |
Over five years |
1.5% |
7.5% |
10% |
8% |
15% |
[Note: BCD Annex III Part 3, Table 1]
For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, a firm must treat the residual maturity as equal to the time until the next reset date.[Note: BCD Annex III Part 3, Table 1 footnote 27 (part)]
This table belongs to BIPRU 13.4.10 R
Residual maturity |
Precious metals (except gold) |
Base metals |
Agricultural products (softs) |
Other, including energy products |
One year or less |
2% |
2,5% |
3% |
4% |
Over one year, not exceeding five years |
5% |
4% |
5% |
6% |
Over five years |
7.5% |
8% |
9% |
10% |
[Note: BCD Annex III Part 3, Table 2]
A firm must ensure that the notional amount to be taken into account is an appropriate yardstick for the risk inherent in the contract. Where, for instance, the contract provides for a multiplication of cash flows, a firm must adjust the notional amount in order to take into account the effects of the multiplication on the risk structure of that contract.[Note: BCD Annex III Part 2 point 8]
The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be weighted. For the purposes of the CCR mark to market method, a firm may obtain:(1) in BIPRU 13.4.2 R, the current replacement cost; and(2) in BIPRU 13.4.3 R, the notional principal amounts or underlying values;by taking account of the contract for novation.[Note: BCD Annex III Part 7 point c(i)]
In application of the CCR mark to market method:(1) in BIPRU 13.4.2 R a firm may obtain the current replacement cost for the contracts included in a netting agreement by taking account of the actual hypothetical net replacement cost which results from the agreement; in the case where netting leads to a net obligation for the firm calculating the net replacement cost, the current replacement cost is calculated as "0"; and(2) in BIPRU 13.4.3 R a firm may reduce the figure for potential
For the calculation of the potential future credit exposure according to the formula in BIPRU 13.4.17 R perfectly matching contracts included in the netting agreement may be taken into account as a single contract with a notional principal equivalent to the net receipts.[Note: BCD Annex III Part 7 point c(ii) (part)]
For the purposes of BIPRU 13.4.18 R a perfectly matching contract is a forward foreign currency contract or similar contract in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully or partly in the same currency.[Note: BCD Annex III Part 7 point c(ii) (part)]
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 the scope of application of the requirements of the Banking Consolidation Directive:(1) the name of the firm which is the subject of the disclosures;(2) an outline of the differences in the basis of consolidation for accounting and prudential purposes, with a brief description of the entities that are:(a) fully consolidated;(b) proportionally consolidated;(c) deducted from capital resources;(d) neither consolidated nor deducted;(3)
A firm must disclose the following information regarding its capital resources:(1) summary information on the terms and conditions of the main features of all capital resources items and components thereof, including:2(a) 2hybrid capital;(b) 2capital instruments which provide an incentive for the firm to redeem them; and(c) 2capital instruments which the firm treats as tier one capital under GENPRU TP8A;(2) tier one capital resources, with separate disclosure of:22(a) 2all positive
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 retail exposures, the requirement under BIPRU 11.5.4 R (3) applies to each of the following categories:(1) exposures to retail SMEs;(2) retail exposures secured by real estate collateral;(3) qualifying revolving retail exposures; and(4) other retail exposures.[Note: BCD Annex XII Part 2 point 4(part)]
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 counterparty credit risk:(1) a discussion of the methodology used to assign internal capital and credit limits for counterparty credit exposures;(2) a discussion of policies for securing collateral and establishing credit reserves;(3) a discussion of policies with respect to wrong-way riskexposures;(4) a discussion of the impact of the amount of collateral the firm would have to provide given a downgrade
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
The information to be disclosed under BIPRU 11.5.8 R (9) must comprise:(1) a description of the type of value adjustments and provisions;(2) the opening balances;(3) the amounts taken against the provisions during the period;(4) the amounts set aside or reversed for estimated probable losses on exposures during the period, any other adjustments including those determined by exchange rate differences, business combinations, acquisitions and disposals of subsidiary undertakings,
For a firm calculating risk weighted exposure amounts in accordance with the standardised approach to credit risk, the following information must be disclosed for each of the standardised credit risk exposure classes;(1) the names of the nominated ECAIs and export credit agencies and the reasons for any changes;(2) the standardised credit risk exposure classes for which each ECAI or export credit agency is used;(3) a description of the process used to transfer the issuer and issue
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 back-testing 2and validating the accuracy and consistency of the internal models and modelling processes;(d) 2the highest, the lowest and the mean of the daily value-at-risk
A firm must disclose the following information regarding the exposures in equities not included in the trading book:(1) the differentiation between exposures based on their objectives, including for capital gains relationship and strategic reasons, and an overview of the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation and any significant changes in these practices;(2) the balance sheet value, the fair value and,
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
3A firm must disclose the following information, including regular, at least annual, updates, regarding its remuneration policy and practices for those categories of staff whose professional activities have a material impact on its risk profile:(1) information concerning the decision-making process used for determining the remuneration policy, including if applicable, information about the composition and the mandate of a remuneration committee, the external consultant whose services
3The FSA would normally consider the requirements to publish disclosures in accordance with BIPRU 11.3.8 R and 11.3.9 R in respect of BIPRU 11.5 as a whole to meet the requirement in paragraph 15 of Annex XII to the Banking Consolidation Directive to publish "regular, at least annual, updates" (as implemented in BIPRU 11.5.18 R).
(1) 3A firm that is significant in terms of its size, internal organisation and the nature, scope and the complexity of its activities must also disclose the quantitative information referred to in BIPRU 11.5.18 R at the level of senior personnel.(2) Firms must comply with the requirements set out in BIPRU 11.5.18 R in a manner that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities and without prejudice to the UK or other
Subject to any IRB permission of the type described in BIPRU 9.12.28 G, in the case of an originator or sponsor unable to calculate KIRB and which has not obtained approval to use the ABCP internal assessment approach, and in the case of other firms where they have not obtained approval to use the supervisory formula method or, for positions in ABCP programmes, the ABCP internal assessment approach, a risk weight of 1250% must be assigned to securitisation positions which are
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
For an originator, a sponsor, or for other firms which can calculate KIRB, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to that which would produce an amount in respect of its credit risk capital requirement equal to the sum of 8% of the risk weighted exposure amount which would be produced if the securitised assets had not been securitised and were on the balance sheet of the firm plus the expected loss amounts of
Under the ratings based method, the risk weighted exposure amount of aratedsecuritisation position must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment is associated as prescribed in BIPRU 9.12.11 R and BIPRU 9.12.12 R multiplied by 1.06.[Note:BCD Annex IX Part 4 point 46]
Table: Positions other than ones with short-term credit assessments
This table belongs to BIPRU 9.12.10 R
Credit Quality Step (CQS) |
Risk weight |
||
A |
B |
C |
|
CQS 1 |
7% |
12% |
20% |
CQS 2 |
8% |
15% |
25% |
CQS 3 |
10% |
18% |
35% |
CQS 4 |
12% |
20% |
|
CQS 5 |
20% |
35% |
|
CQS 6 |
35% |
50% |
|
CQS 7 |
60% |
75% |
|
CQS 8 |
100% |
||
CQS 9 |
250% |
||
CQS 10 |
425% |
||
CQS 11 |
650% |
||
Below CQS 11 |
1250% |
||
[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, referto: www.fsa.gov.uk/pubs/international/ecais_securitisation.pdf ]
The risk weights in column C of each table in BIPRU 9.12.11 R and BIPRU 9.12.12 R must be applied where the position is in a securitisation where the effective number of exposuressecuritised is less than six. In calculating the effective number of exposuressecuritised multiple exposures to one obligor must be treated as one exposure. The effective number of exposures is calculated as:N = (((i)(EADi))2)/((i)(EADi2))where EADi represents the sum of the exposure values of all exposures
(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
(1) Subject to any permission of the type described in BIPRU 9.12.28 G, the risk weight to be applied to the exposure amount must be:12.5 (S[L+T] - S[L]) / T(2) The remaining provisions of this paragraph define the terms used in the formulae in (1) and (3).(3) 2(4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) In these expressions, Beta [x; a, b]refers to the cumulative beta distribution with parameters a and b evaluated at x.(16) T (the thickness of the tranche in which the
(1) Under the supervisory formula method, if the exposure value of the largest securitisedexposure, C1, is no more than 3% of the sum of the exposure values of the securitisedexposures, then for the purposes of the supervisory formula method the firm may set LGD equal 50% and N equal to either:(a) ;or(b) N=1/ C1.(2) Cm is the ratio of the sum of the exposure values of the largest 'm' exposures to the sum of the exposure values of the exposuressecuritised. The level of m may be
(1) When it is not practical for the firm to calculate the risk weighted exposure amounts for the securitised exposures as if they had not been securitised and the position does not qualify for the ABCP internal assessment approach, a firm may apply to the FSA for a variation of its IRB permission under which, on an exceptional basis, it may temporarily apply the method in (2) for the calculation of risk weighted exposure amounts for an unratedsecuritisation position in the form
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]
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]
Each of the following is a financial derivative instrument:(1) an interest-rate contract, being:(a) a single-currency interest rate swap;(b) a basis-swap;(c) a forward rate agreement;(d) an interest-rate future;(e) a purchased interest-rate option; and(f) other contracts of similar nature.(2) a foreign currency contract or contract concerning gold, being:(a) a cross-currency interest-rate swap;(b) a forward foreign currency contract;(c) a currency future;(d) a currency option
Long settlement transaction means a transaction where a counterparty undertakes to deliver a security, a commodity, or a foreign currency amount against cash, other financial instruments, or commodities, or vice versa, at a settlement or delivery date that is contractually specified as more than the lower of the market standard for this particular transaction and five business days after the date on which the firm enters into the transaction.[Note: BCD Annex III Part 1 point
A firm must calculate the exposure value of a long settlement transaction in accordance with either:(1) BIPRU 13; or(2) the master netting agreement internal models approach, if it has a master netting agreement internal models approachwaiver which permits it to apply that approach.[Note: BCD Article 78(2) second sentence, in respect of long settlement transaction]
A firm may determine exposures arising from long settlement transactions using any of the CCR mark to market method, the CCR standardised method and the CCR internal model method, regardless of the methods chosen for treating financial derivatives instruments and repurchase transactions, securities or commodities lending or borrowing transactions, and margin lending transactions. In calculating capital requirements for long settlement transactions, a firm that uses the IRB approach
Under the CCR mark to market method, the CCR standardised method and the CCR internal model method, a firm must determine the exposure value for a given counterparty as equal to the sum of the exposure values calculated for each netting set with that counterparty.[Note: BCD Annex III Part 2 point 5]
The combined use of the CCR mark to market method, the CCR standardised method and the CCR internal model method is not permitted. The combined use of the CCR mark to market method and the CCR standardised method is permitted where one of the methods is used for the cases set out in BIPRU 13.5.9 R to BIPRU 13.5.10 R.[Note: BCD Annex III Part 2 point 1(part)]
Notwithstanding BIPRU 13.3.1 R and BIPRU 13.3.5 R, a firm may determine the exposure value of a credit risk exposure outstanding with a central counterparty in accordance with BIPRU 13.3.13 R, provided that the central counterparty'scounterparty credit riskexposure with all participants in its arrangements are fully collateralised on a daily basis.[Note: BCD Article 78(4) in respect of financial derivatives and long settlement transactions]
A firm may attribute an exposure value of zero for CCR to derivative contracts and long settlement transactions, or to other exposures arising in respect of those contracts or transactions (but excluding an exposure arising from collateral held to mitigate losses in the event of the default of other participants in the central counterparty's arrangements) where they are outstanding with a central counterparty and have not been rejected by the central counterparty.[Note: BCD Annex
When a firm purchases credit derivative protection against a non-trading book ,exposure or against a CCRexposure, it must compute its capital requirement for the hedged asset in accordance with:(1) BIPRU 5.7.16 R to BIPRU 5.7.25 R and BIPRU 4.10.49 R (4) to (6) (Unfunded credit protection: Valuation and calculation of risk-weighted exposure amounts and expected loss amounts); or1(2) 1where a firm calculates risk weighted exposure amounts in accordance with the IRB approach:1(a)
(1) 1In the cases in BIPRU 13.3.14R, and where the option in the second sentence of BIPRU 14.2.10 R is not applied, the exposure value for CCR for these creditderivatives is set to zero.(2) 1However, a firm may choose consistently to include for the purposes of calculating capital requirements for counterparty credit risk all credit derivatives not included in the trading book and purchased as protection against a non-trading exposure or against a CCRexposure where the credit
Eligible funded protection is limited to that which is eligible for the calculation of risk weighted exposure amounts under the standardised approach as laid down under BIPRU 5 and recognition is subject to compliance with the relevant minimum requirements as laid down under BIPRU 5.[Note:BCD Annex IX Part 4 point 60]
Eligible unfunded credit protection and unfunded protection providers are limited to those which are eligible under BIPRU 5 (Credit risk mitigation) and BIPRU 4.10 (Credit risk mitigation under the IRB approach) and recognition is subject to compliance with the relevant minimum requirements laid down under those provisions.[Note:BCD Annex IX Part 4 point 61]
Where risk weighted exposure amounts are calculated using the ratings based method, the exposure value and/or the risk weighted exposure amount for a securitisation position in respect of which credit protection has been obtained may be modified in accordance with the provisions of BIPRU 5 (Credit risk mitigation) as they apply for the calculation of risk weighted exposure amounts under the standardised approach set out in BIPRU 3.[Note:BCD Annex IX Part 4 point 62]
In the case of funded credit protection, the risk weighted exposure amount of the securitisation position must be calculated by multiplying the funded protection-adjusted exposure amount of the position (E*, as calculated under BIPRU 5.4.28 R (3), taking the amount of the securitisation position to be E) by the effective risk weight.[Note:BCD Annex IX Part 4 point 64]
In the case of unfunded credit protection, the risk weighted exposure amount of the securitisation position must be calculated by multiplying GA (the amount of the protection adjusted for any currency mismatch and maturity mismatch in accordance BIPRU 5.7.23 R (2)) by the risk weight of the protection provider; and adding this to the amount arrived at by multiplying the amount of the securitisation position minus GA by the effective risk weight.[Note:BCD Annex IX Part 4 point
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