Related provisions for BIPRU 13.5.23
1 - 20 of 123 items.
PRA Rulebook: Non-Solvency II firms: Insurance Company – Capital Resources 136 provides that a derivative, quasi-derivative or stock lending transaction will only be an admissible asset if it is approved. This section sets out the criteria for determining when a derivative, quasi-derivative or stock lending transaction is approved for this purpose. INSPRU 3.2.5 R to INSPRU 3.2.35 R set out the criteria for derivatives and quasi-derivatives. INSPRU 3.2.36 R to INSPRU 3.2.41 R set
For the purpose of PRA Rulebook: Non-Solvency II firms: Insurance Company – Capital Resources 136 (Admissible assets in insurance), and also in relation to permitted links,1 a derivative or quasi-derivative is approved if:(1) it is held for the purpose of efficient portfolio management (INSPRU 3.2.6 R to INSPRU 3.2.7 R) or reduction of investment risk (INSPRU 3.2.8 R to INSPRU 3.2.13 G);(2) it is covered (INSPRU 3.2.14 R to INSPRU 3.2.33 G); and(3) it is effected or issued:(a)
(1) PRA Rulebook: Non-Solvency II firms: Insurance Company – Capital Resources 13.36 requires firms to consider first whether an asset is a derivative or quasi-derivative transaction notwithstanding that it is also capable of falling within one or more other categories in PRA Rulebook: Non-Solvency II firms: Insurance Company – Capital Resources 13.16. If it is a derivative or quasi-derivative transaction it is only admissible if it satisfies the conditions for it to be approved
A derivative or quasi-derivative is held for the purpose of efficient portfolio management if the firm reasonably believes the derivative or quasi-derivative (either alone or together with any other covered transactions) enables the firm to achieve its investment objectives by one of the following (or, in relation to permitted links, in a manner which includes but is not limited to)1:(1) generating additional capital or income in one of the ways described in INSPRU 3.2.7 R; or(2)
INSPRU 3.2.8 R does not require that a derivative or quasi-derivative has no possible adverse consequences. Often a derivative or quasi-derivative is effected to protect against a severe adverse consequence that only arises in one circumstance. In all other circumstances it may itself lead to adverse consequences, even if only because it expires worthless resulting in the loss of the purchase price. Conversely a derivative or quasi-derivative may reduce risk in a wide range of
In assessing whether investment risk is reduced, the impact of a transaction on both the assets and liabilities should be considered. In particular, where the amount of liabilities depends upon the fluctuations in an index or other factor, investment risk is reduced where assets whose value fluctuates in the same way match those liabilities. In appropriate circumstances this may include:(1) a derivative or quasi-derivative that is linked to the same index as the liabilities from
A firm is required to cover a derivative under INSPRU 3.2.14R whether it satisfies the other conditions for approval under INSPRU 3.2.5R or not. Under INSPRU 3.2.17R a firm may cover an obligation to pay a monetary amount by setting up a provision. If the derivative is not covered at any time by other means then a provision needs to be set up to complete the cover taking into account obligations to pay monetary amounts that would arise if, for example, an obligation to transfer
For the purpose of INSPRU 3.2.5R (3)(b), a derivative or quasi-derivative is on approved terms only if the firm reasonably believes that it could, in all reasonably foreseeable circumstances and under normal market conditions, readily enter into a further transaction with the counterparty or a third party to close out the derivative or quasi-derivative at a price not less than the value attributed to it by the firm, taking into account any valuation adjustments or reserves established
For the purpose of INSPRU 3.2.5R (3)(b), a derivative or quasi-derivative is capable of valuation only if the firm:(1) is able to value it with reasonable accuracy on a reliable basis in compliance with PRA Rulebook: Non-Solvency II firms: Insurance Company – Overall Resources and Valuation, 3.16; and(2) reasonably believes that it will be able to do so throughout the life of the transaction.
(1) When calculating the PRR of the protection seller, unless specified differently by other rules and subject to (2), the notional amount of the credit derivative contract must be used. For the purpose of calculating the specific riskPRR charge, other than for total return swaps, the maturity of the credit derivative contract is applicable instead of the maturity of the obligation.4(2) When calculating the PRR of the protection seller, a firm may choose to replace the notional
A credit default swap does not create a position for general market risk. For the purposes of specific risk, a firm must record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt security, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in zero-specific-risk
A first-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity. If the size of the maximum credit event payment is lower than the PRR requirement under the method in the first sentence of this rule, the maximum payment amount may be taken as the PRR requirement for specific risk.
A second-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity less one (that with the lowest specific riskPRR requirement). If the size of the maximum credit event payment is lower than the PRR requirement under the method in the first sentence of this rule, this amount may be taken as the PRR requirement for specific risk.
Ifan nth-to-default4 derivative is externally rated and meets the conditions for a qualifying debt security, then the protection seller need only calculate one specific risk charge reflecting the rating of the derivative. The specific risk charge must be based on the securitisationPRAs in BIPRU 7.2 as applicable.44
For the protection buyer, the positions are determined as the mirror principle 3of the protection seller, with the exception of a credit linked note (which entails no short position in the issuer). If at a given moment there is a call option in combination with a step-up, such moment is treated as the maturity of the protection. In the case of first-to-default credit derivatives and3 nth to default credit derivatives, the treatment in BIPRU 7.11.12AR and BIPRU 7.11.12B R applies
3Where a firm obtains credit protection for a number of reference entities underlying a credit derivative under the terms that the first default among the assets will trigger payment and that this credit event will terminate the contract, the firm may off-set specific risk for the reference entity to which the lowest specific risk percentage charge among the underlying reference entities applies according to the Table in BIPRU 7.2.44R.[Note:CAD Annex I point 8.B]
(1) BIPRU 7.11.14R - BIPRU 7.11.17R relate to specific riskPRR for trading bookpositions hedged by credit derivatives for the purposes of the calculation of the securities PRR.(2) A firm may take an allowance for protection provided by credit derivatives for the purposes in (1) in accordance with the principles set out in the rules referred to in (1).(3) [deleted]44
An 80% offset may be applied when the value of two legs always move in the opposite direction and where there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure. In addition, key features of the credit derivative contract must not cause the price movement of the credit derivative materially to deviate from the price movements of the cash position. To the extent
The specific risk portion of the interest rate PRR for credit derivatives in the trading book4 must be calculated in accordance withBIPRU 7.2.43 R to BIPRU 7.2.46A G (Specific risk calculation), BIPRU 7.2.48A R to BIPRU 7.2.48K R (Specific risk: securitisations and re-securitisations), BIPRU 7.2.48L R (Specific risk: Correlation trading portfolio), BIPRU 7.2.49 R to BIPRU 7.2.51 G (Definition of a qualifying debt security)4 and the other provisions of BIPRU 7.11, as applicabl
If a firm recognises profits on a non-accrual basis it should consider whether the capital requirements for its credit derivatives business adequately cover the risk that any recognised profit may not be achieved due to a credit event occurring. This includes positions for which the firm may have a perfect hedge in place.
A firm must hold capital calculated in accordance with BIPRU 14.2.13 Ragainst the CCR arising from exposures arising in the trading book due to the following:(1) free deliveries (where BIPRU 14.4 requires it to be treated as an exposure);(2) financial derivative instruments and credit derivatives;(3) repurchase agreements, reverse repurchase agreements, securities or commodities lending or borrowing transaction based on securities or commodities included in the trading book;(4)
For the purposes of the calculation of the counterparty risk capital component, a financial derivative instrument means:(1) an item falling within BIPRU 13.3.3 R other than an item to which an exposure value of zero is attributed under BIPRU 13.3.13 R or BIPRU 13.8.8 R (Exposure to a central counterparty); and(2) a credit derivative.[Note: CAD Article 3(1)(h) and Annex II point 7 first sentence]
In the case of total return swap credit derivatives and credit default swap credit derivatives, a firm must obtain a figure for potential future credit exposure by multiplying the nominal amount of the instrument by the following percentages:(1) 5% where the reference obligation is one that if it gave rise to a direct exposure of the firm would be a qualifying debt security for the purposes of BIPRU 7.2;(2) 10 % where the reference obligation is one that if it gave rise to a direct
Where the credit derivative provides protection in relation to 'nth to default' amongst a number of underlying obligations, a firm must apply the percentage figure in BIPRU 14.2.5 R applicable to the obligation with the nth lowest credit quality determined by whether it is one that if incurred by the firm would be a qualifying debt security for the purposes of BIPRU 7.2.
The operation of BIPRU 14.2.8 R can be illustrated by an example as follows: where the credit derivative is a first to default transaction, the appropriate percentage for the potential future credit exposure will be determined by the lowest credit quality of the underlying obligations in the basket. If there are non-qualifying items in the basket, the percentage applicable to the non-qualifying reference obligation should be used. For second and subsequent to default transactions,
Where a credit derivative included in the trading book forms part of an internal hedge and the credit protection is recognised under the BCD3, there is deemed to be no counterparty risk arising from the position in the credit derivative. Alternatively, a firm may consistently include for the purposes of calculating capital requirements for counterparty credit risk all credit derivatives included in the trading book forming part of internal hedges or purchased as protection against
For the purposes of BIPRU 14.2.11 R:(1) in the case of repurchase transactions and securities or commodities lending or borrowing transactions booked in the trading book, all CRD financial instruments and commodities that are eligible to be included in the trading book may be recognised as eligible collateral;(2) for exposures due to financial derivative instruments and long settlement transactions booked in the trading book, commodities that are eligible to be included in the
(1) An issuer'slistedsecuritised derivatives must be admitted to trading on a RIE's market for listed securities at all times.(2) An issuer must inform the FCA in writing as soon as possible if it has:(a) requested a RIE to admit or re-admit any of its listedsecuritised derivatives to trading; or(b) requested a RIE to cancel or suspend trading of any of its listedsecuritised derivatives; or(c) been informed by a RIE that the trading of any of its listedsecuritised derivatives
(1) An issuer must ensure that appropriate settlement arrangements for its listedsecuritised derivatives are in place.(2) Listedsecuritised derivatives must be eligible for electronic settlement, which includes settlement by a relevant system, as that term is defined in the Uncertificated Securities Regulations 1995 (SI 1995/3272).
(1) A scheme may invest in derivatives and forward transactions as long as the exposure to which the scheme is committed by that transaction itself is suitably covered from within its scheme property. Exposure will include any initial outlay in respect of that transaction.(2) Cover ensures that a scheme is not exposed to the risk of loss of property, including money, to an extent greater than the net value of the scheme property. Therefore, a scheme is required to hold scheme
(1) Cash obtained from borrowing, and borrowing which the authorised fund manager reasonably regards an eligible institution or an approved bank to be committed to provide, is not available for cover under COLL 5.3.3A R (Cover for investment in derivatives and forward transactions),3 except if (2) applies.3(2) Where, for the purposes of this section, the ICVC or the depositary4 for the account of the AUT or ACS4 on the instructions of the authorised fund manager4:44(a) borrows
2An authorised fund manager must calculate the global exposure of any UCITS scheme it manages either as:(1) the incremental exposure and leverage generated through the use of derivatives and forward transactions (including embedded derivatives as referred to in COLL 5.2.19R (3A) (Derivatives: general)), which may not exceed 100% of the net value of the scheme property; or(2) the market risk of the scheme property.[Note: article 41(1) of the UCITS implementing Directive]
(1) 2An authorised fund manager must calculate the global exposure of a UCITS scheme by using:(a) the commitment approach; or(b) the value at risk approach.(2) An authorised fund manager must ensure that the method selected in (1) is appropriate, taking into account:(a) the investment strategy pursued by the UCITS scheme;(b) the types and complexities of the derivatives and forward transactions used; and(c) the proportion of the scheme property comprising derivatives and forward
2Where an authorised fund manager of a UCITS scheme uses the commitment approach for the calculation of global exposure, it must:(1) ensure that it applies this approach to all derivative and forward transactions (including embedded derivatives as referred to in COLL 5.2.19R (3A) (Derivatives: general)), whether used as part of the scheme's general investment policy, for the purposes of risk reduction or for the purposes of efficient portfolio management in accordance with the
(1) 2An authorised fund manager of a UCITS scheme may apply other calculation methods which are equivalent to the standard commitment approach.(2) An authorised fund manager may take account of netting and hedging arrangements when calculating global exposure of a UCITS scheme, where those arrangements do not disregard obvious and material risks and result in a clear reduction in risk exposure.(3) Where the use of derivatives or forward transactions does not generate incremental
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]
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 appropriate regulator 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]
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 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
An applicant for the admission of securitised derivatives must either:(1) have permission under the Act to carry on its activities relating to securitised derivatives and be either a bank or a securities and futures firm;(2) if the applicant is an overseas company:(a) be regulated by an overseas regulator responsible for the regulation of banks, securities firms or futures firms and which has a lead regulation agreement for financial supervision with the FCA; and(b) be carrying
To be listed, if a retail securitised derivative gives its holder a right of exercise, its terms and conditions must provide that:(1) for cash settled securitised derivatives that are in the money at the exercise time on the expiration date, the exercise of the securitised derivative is automatic; or(2) for physically settled securitised derivatives that are in the money at the exercise time on the expiration date, if the holder fails to deliver an exercise notice by the time
(1) In this chapter, the value of the scheme property of a UCITS schememeans the net value determined in accordance with COLL 6.3 (Valuation and pricing), after deducting any outstanding borrowings, whether immediately due to be repaid or not.(2) When valuing the scheme property for the purposes of this chapter:(a) the time as at which the valuation is being carried out ("the relevant time") is treated as if it were a valuation point, but the valuation and the relevant time do
7The scheme property of a UCITS scheme must, except where otherwise provided in the rules in this chapter, consist solely of any or all of:(1) transferable securities;(2) approved money-market instruments;(3) units in collective investment schemes;(4) derivatives and forward transactions; (5) deposits; and (6) (for an ICVC) movable and immovable property that is essential13 for the direct pursuit of the ICVC's business;13in accordance with the rules in this section.[Note: articles
(1) 7A UCITS scheme may invest in any other investment which shall be taken to be a transferable security for the purposes of investment by a UCITS scheme provided the investment:(a) fulfils the criteria for transferable securities set out in COLL 5.2.7A R; and(b) is backed by or linked to the performance of other assets, which may differ from those in which a UCITS scheme can invest.(2) Where an investment in (1) contains an embedded derivative component (see COLL 5.2.19R (3A)),
(1) A transaction in derivatives or a forward transaction must not be effected for a UCITS scheme unless:(a) the transaction is of a kind specified in COLL 5.2.20 R (Permitted transactions (derivatives and forwards)); and(b) the transaction is covered, as required by COLL 5.3.3A R (Cover for investment in derivatives and forward transactions).1313(2) Where a UCITS scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in COLL 5.2.11 R (Spread:
(1) 7Collateralised debt obligations (CDOs) or asset-backed securities using derivatives, with or without an active management, will generally not be considered as embedding a derivative except if:(a) they are leveraged, i.e. the CDOs or asset-backed securities are not limited recourse vehicles and the investors' loss can be higher than their initial investment; or(b) they are not sufficiently diversified.(2) Where a transferable security or approved money-market instrument embedding
(1) A transaction in a derivative must:(a) be in an approved derivative; or(b) be one which complies with COLL 5.2.23 R (OTC transactions in derivatives).(2) The underlying of a transaction in a derivative must consist of any one or more of the following to which the scheme is dedicated:(a) transferable securities permitted under COLL 5.2.8 R (3)(a) to (c) and COLL 5.2.8 R (3)(e)7;(b) approved money-market instruments7 permitted underCOLL 5.2.8 R (3)(a) to COLL 5.2.8 R (3)(d)7;77(c)
(1) 7An index based on derivatives on commodities or an index on property may be regarded as a financial index of the type referred to in COLL 5.2.20R (2)(f) provided it satisfies the criteria for financial indices set out in COLL 5.2.20A R.(2) If the composition of an index is not sufficiently diversified in order to avoid undue concentration, its underlying assets should be combined with the other assets of the UCITS scheme when assessing compliance with the requirements on
A derivative or forward transaction which will or could lead to the delivery of property for the account of the UCITS scheme may be entered into only if:(1) that property can be held for the account of the UCITS scheme; and(2) the authorised fund manager having taken reasonable care determines that delivery of the property under the transaction will not occur or will not lead to a breach of the rules in this sourcebook.
[deleted]131(1) In the FCA's view the requirement in COLL 5.2.22R (1)(a) can be met where:(a) the risks of the underlying financial instrument of a derivative can be appropriately represented by another financial instrument and the underlying financial instrument is highly liquid; or(b) the authorised fund manager or the depositary has the right to settle the derivative in cash, and cover exists within the scheme property which falls within one of the following asset classes:(i)
(1) 21Authorised fund managers of UCITS schemes or EEA UCITS schemes should bear in mind that where a UCITS scheme, or an EEA UCITS scheme that is a recognised scheme under section 264 of the Act, employs particular investment strategies such as those in (2)21, COBS 4.13.2R (Marketing communications relating to UCITS schemes or EEA UCITS schemes) and COBS 4.13.3R (Marketing communications relating to a feeder UCITS) contain additional disclosure requirements in relation to marketing
(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
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. |
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]
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]
(1) 1This rule applies to a UK firm operating a multilateral trading facility or an OTF and a UK branch of a third country investment firm operating a multilateral trading facility or an OTF.(2)
A firm must make public and provide to the FCA and ESMA a weekly report with the aggregate positions held by the different categories of persons for the different commodity derivatives or emission allowances traded on the trading venue, where those instruments meet the criteria of article
1A firm must classify persons holding positions in commodity derivatives or emission allowances according to the nature of their main business, taking account of any applicable authorisation or registration, as:(1)
investment firms or credit institutions; or(2)
investment funds, either as a UCITS, or an AIF or an AIFM; or(3)
other financial institutions, including:(a) insurance undertakings and reinsurance undertakings as defined in the Solvency II Directive; and
(b) institutions
(1) 1This direction applies to:(a)
a UK MiFID investment firm; and
(b) a UK branch of a third country investment firm.
(2) An investment firm in (1) trading in a commodity derivative or emission allowance outside a trading venue must, where the FCA is the competent authority of the trading venue where that commodity derivative or emission allowance is traded, provide the FCA with a report containing a complete breakdown of:(a)
their positions taken in those commodity derivatives
(1) 1This direction applies to:
(a) a UK MiFID investment firm; and
(b) a UK branch of a third country investment firm.
(2) An investment firm in (1) trading in a commodity derivative or emission allowance outside a trading venue must, where an EEA competent authority other than the FCA is the competent authority of the trading venue where that commodity derivative or emission allowance is traded, or the central competent authority for the purposes of that commodity derivative,
(1) 1This direction applies to an EEA MiFID investment firm which is a member, participant or a client of a UK trading venue.
(2) MAR 10.4.7D applies to an EEA MiFID investment firm under (1), as if it were a UK MiFID investment firm.(3) MAR 10.4.8D applies to an EEA MiFID investment firm under (1), as if it were a UK MiFID investment firm, where the EEA MiFID investment firm trades in a commodity derivative or emission allowance outside a trading venue, and the FCA is the competent
(1) 2This guidance applies to persons subject to MAR 10.4.8D(2) or MAR 10.4.10D(3).(2) A firm subject to MAR 10.4.8D(2) or MAR 10.4.10D(3) may use a third party technology provider to submit to the FCA the report referred to in MAR 10.4.8 D(2) provided that it does so in a manner consistent with MiFID. It will retain responsibility for the completeness, accuracy and timely submission of the report and should populate field 5 of MiFID ITS 4 Annex II with its own reporting entity
Table: Instruments which result in notional positions
This table belongs to BIPRU 7.2.3R(2)
Instrument |
See |
Futures, forwards or synthetic futures on debt securities |
|
Futures, forwards or synthetic futures on debt indices or baskets |
|
Interest rate futures or forward rate agreements (FRAs) |
|
Interest rate swaps or foreign currencyswaps |
|
Deferred start interest rate swaps or foreign currencyswaps |
|
The interest rate leg of an equityswap (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives)) |
|
The cash leg of a repurchase agreement or a reverse repurchase agreement |
|
Cash borrowings or deposits |
|
Options on a debt security, a basket of debt securities, a debt security index, an interest rate or an interest rate future or swap (including an option on a future on a debt security) (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR)) |
|
Dual currency bonds |
|
Forwards, futures or options (except cliquets) on an equity, basket of equities or equity index (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3) |
|
Credit derivatives |
|
Cliquets on equities, baskets of equities or equity indices do not attract an interest rate PRR. The table in BIPRU 7.2.4R excludes them from the scope of the interest rate PRR calculation in BIPRU 7.2 and BIPRU 7.3.45R excludes them from the basic interest rate PRR calculation in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives).
(1) For the purposes of calculating interest rate PRR, unless specified otherwise, a firm must derive the value of notional positions as follows:(a) notional positions in actual debt securities must be valued as the nominal amount underlying the contract at the current market price of the debt security; and(b) positions in zero-specific-risk securities must be valued using one of the two methods in (2).(2) A firm must use one of the following two methods for all positions arising
3A correlation trading portfolio may only consist of securitisation positions and nth-to-default credit derivatives that meet the following criteria:(1) the positions are neither resecuritisation positions, nor options on a securitisation position, nor any other derivatives of securitisationexposures that do not provide a pro-rata share in the proceeds of a securitisationtranche;(2) all reference instruments are either single-name instruments, including single-name credit derivatives,
(1) A firm must calculate the specific risk portion of the interest rate PRR for each debt security by multiplying the market value of the individual net position (ignoring the sign) by the appropriate position risk adjustment from the table in BIPRU 7.2.44R or as specified by BIPRU 7.2.45R - BIPRU 7.2.48L R or by BIPRU 7.11.13 R - BIPRU 7.11.17 R.33(2) Notional positions in zero-specific-risk securities do not attract specific risk.(3) For the purpose of (1), a firm may cap the
(1) An authorised fund manager must take reasonable care to determine the following when entering into any transaction in derivatives or any commodity contract which may result in any asset becoming part of the scheme property:(a) if it is an asset in which the scheme property could be invested, that the transaction:(i) can be readily closed out; or(ii) would at the expected time of delivery relate to an asset which could be included in the scheme property under the rules in this
(1) A transaction in derivatives or a forward transaction may be entered into only if the maximum exposure, in terms of the principal or notional principal created by the transaction to which the scheme is or may be committed by another person, is covered globally under (2).(2) Exposure is globally covered if adequate cover from within the scheme property is available to meet the scheme's total exposure taking into account any reasonably foreseeable market movement.(3) The total
A transaction in an OTC derivative must be capable of valuation which it will only be if the authorised fund manager having taken reasonable care determines that, throughout the life of the derivative (if the transaction is entered into), it will be able to value the investment concerned with reasonable accuracy: (1) on the basis of the pricing model; or(2) on some other reliable basis reflecting an up-to-date market value;which has been agreed between the authorised fund manager
(1) An authorised fund manager must, as frequently as necessary to ensure compliance with COLL 8.4.7 R (2) and COLL 8.4.7 R (4), re-calculate the amount of cover required in respect of derivatives and forwards positions in existence under this chapter.(2) Derivatives and forwards positions may be retained in the scheme property only so long as they remain covered globally under COLL 8.4.7 R.(3) An authorised fund manager must use a risk management process enabling it to monitor
(1) The ICVC or depositary of an AUT or ACS9 (on the instructions of the authorised fund manager)9 may borrow money for the use of the authorised fund on terms that the borrowing is to be repayable out of the scheme property.99(2) The authorised fund manager must ensure that the authorised fund's borrowing does not, on any day, exceed 100 % of the net value of the scheme property and must take reasonable care to ensure that arrangements are in place that will enable borrowings
(1) The authorised fund manager must ensure that the authorised fund's borrowing does not, on any day, exceed 10% of the value of the scheme property.(2) This rule does not apply to "back to back" borrowing under COLL 5.3.5 R (2)(Borrowing).(3) In this rule, borrowing includes, as well as borrowing in a conventional manner, any other arrangement (including a combination of derivatives) designed to achieve a temporary injection of money into the scheme property in the expectation
(1) The scheme property of an authorised fund other than money must not be lent by way of deposit or otherwise.(2) Transactions permitted by COLL 5.4 (Stock lending) are not to be regarded as lending for the purposes of (1).(3) The scheme property must not be mortgaged.(4) Where transactions in derivatives or forward transactions are used for the account of the authorised fund in accordance with any of the rules in this chapter, nothing in this rule prevents the ICVC or the depositary
(1) Any power in this chapter to invest in transferable securities may be used for the purpose of entering into transactions to which this rule applies, subject to compliance with any restriction in the instrument constituting the fund.55(2) This rule applies to any agreement or understanding which:(a) is an underwriting or sub-underwriting agreement; or(b) contemplates that securities will or may be issued or subscribed for or acquired for the account of the authorised fund.(3)
(1) An ICVC or a depositary for the account of an authorised fund must not provide any guarantee or indemnity in respect of the obligation of any person.(2) None of the scheme property of an authorised fund may be used to discharge any obligation arising under a guarantee or indemnity with respect to the obligation of any person.(3) Paragraphs (1) and (2) do not apply to:(a) any indemnity or guarantee given for margin requirements where the derivatives or forward transactions
The following descriptions are intended to assist in understanding certain behaviours which may constitute insider dealing under the Market Abuse Regulation and5 concern the definition of inside information relating to financial instruments other than
commodityderivatives or emissions allowances or auctioned products based thereon:5(1) X, a director at B PLC has lunch with a friend, Y. X tells Y that his company has received a takeover offer that is at a premium
The following description is intended to assist in understanding certain behaviours which may constitute insider dealing under the Market Abuse Regulation and5 concerns the definition of inside information relating to commodity derivatives.Before the official publication of LME stock levels, a metals trader learns (from an insider) that there has been a significant decrease in the level of LME aluminium stocks. This information is reasonably expected to be disclosed in accordance
The following description is intended to assist in understanding certain behaviours which may constitute insider dealing under the Market Abuse Regulation and5concerns the definition of inside information relating to pending client orders.A dealer on the trading desk of a firm dealing in oil derivatives accepts a very large order from a client to acquire a long position in oil futures deliverable in a particular month. Before executing the order, the dealer trades for the firm
The following connected descriptions are intended to assist in understanding certain behaviours which may constitute insider dealing under the Market Abuse Regulation and concern5 the differences in the definition of inside information for commodity derivatives and for other financial instruments.(1) A person deals, on a
trading venue5
, in the equities of XYZ plc, a commodity producer, based on inside information concerning that company. (2) A person
(1) 3(a) An authorised fund manager of a UCITS scheme or a UK UCITS management company of an EEA UCITS scheme must use a risk management process enabling it to monitor and measure at any time the risk of the scheme's positions and their contribution to the overall risk profile of the scheme.3(b) In particular, an authorised fund manager of a UCITS scheme or a UK UCITS management company of an EEA UCITS scheme must not solely or mechanistically rely on credit ratings issued by
(1) 5In addition, an authorised fund manager or a UK UCITS management company of an EEA UCITS scheme subject to COLL 6.12.3R(2) should submit a notification to the FCA if there has been a significant change to the fund’s risk profile since its last report, by sending the form in COLL 6 Annex 2R, completed as applicable, to fundsupervision@fca.org.uk.(2) A significant change to the fund’s risk profile could include, but is not limited to:(a) the first use of derivatives for investment
(1) The risk management process in COLL 6.12.3 R should take account of the investment objectives and policy of the scheme as stated in the most recent prospectus.(2) The depositary of a UCITS scheme should take reasonable care to review the appropriateness of the risk management process in line with its duties under COLL 6.6.4 R (General duties of the depositary) and COLL 6.6.14 R (Duties of the depositary and authorised fund manager: investment and borrowing powers), as appropriate.
(1) An authorised fund manager of a UCITS scheme or a UK UCITS management company of an EEA UCITS scheme must establish, implement and maintain an adequate and documented risk management policy for identifying the risks to which that scheme is or might be exposed.(2) The risk management policy must comprise such procedures as are necessary to enable the authorised fund manager or UK UCITS management company to assess the exposure of each UCITS it manages to market risk, liquidity
(1) An authorised fund manager of a UCITS scheme or a UK UCITS management company of an EEA UCITS scheme must adopt adequate and effective arrangements, processes and techniques in order to:(a) measure and manage at any time the risks to which that UCITS is or might be exposed; and(b) ensure compliance with limits concerning global exposure and counterparty risk, in accordance with COLL 5.2.11B R (Counterparty risk and issuer concentration) and COLL 5.3 (Derivative exposure).(2)
(1)7 |
The rules of the [UK RIE] must provide that the [UK RIE] must not exercise its power to suspend or remove from trading on a trading venue operated by it any financial instrument which no longer complies with its rules, where such step would be likely to cause significant damage to the interests of investors or the orderly functioning of the financial markets. |
7(2) |
Where the [UK RIE] suspends or removes any financial instrument from trading on a trading venue it operates it must also suspend or remove from trading on that venue any derivative that relates to or is referenced to that financial instrument where that is required to support the objectives of the suspension or removal of trading of that financial instrument. |
7(3) |
Where the [UK RIE] suspends or removes any financial instrument from trading on a trading venue it operates, including any derivative in accordance with sub-paragraph (2), it must make that decision public and notify the FCA. |
7(4) |
Where following a decision made under sub-paragraph (2) the [UK RIE] lifts a suspension or re-admits any financial instrument to trading on a trading venue it operates, including any derivative suspended or removed from trading in accordance with that sub-paragraph , it must make that decision public and notify the FCA. |
[Note: MiFID RTS 18 contains requirements on the suspension and removal of financial instruments from trading]7 |
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[Note: article 3 of MiFIR covers pre-trade transparency requirements for trading venues in respect of shares, depositary receipts8, ETFs, certificates and other similar financial instruments, and article 8 of MiFIR imposes similar requirements in respect of bonds, structured finance products, emission allowances and derivatives]7
2Pre-trade transparency obligations |
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(1) |
A ... market operator operating an MTF or a regulated market shall, in respect of each share admitted to trading on a regulated market that is traded within a system operated by it and specified in Table 1 of Annex II [(see REC 2.6.8 EU)], make public the information set out in paragraphs 2 to 6. |
(2) |
Where one of the entities referred to in paragraph 1 operates a continuous auction order book trading system, it shall, for each share as specified in paragraph 1, make public continuously throughout its normal trading hours the aggregate number of orders and of the shares those orders represent at each price level, for the five best bid and offer price levels. |
(3) |
Where one of the entities referred to in paragraph 1 operates a quote-driven trading system, it shall, for each share as specified in paragraph 1, make public continuously throughout its normal trading hours the best bid and offer by price of each market maker in that share, together with the volumes attaching to those prices. |
The quotes made public shall be those that represent binding commitments to buy and sell the shares and which indicate the price and volume of shares in which the registered market makers are prepared to buy or sell. |
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In exceptional market conditions, however, indicative or one-way prices may be allowed for a limited time. |
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(4) |
Where one of the entities referred to in paragraph 1 operates a periodic auction trading system, it shall, for each share specified in paragraph 1, make public continuously throughout its normal trading hours the price that would best satisfy the system's trading algorithm and the volume that would potentially be executable at that price by participants in that system. |
(5) |
Where one of the entities referred to in paragraph 1 operates a trading system which is not wholly covered by paragraphs 2 or 3 or 4, either because it is a hybrid system falling under more than one of those paragraphs or because the price determination process is of a different nature, it shall maintain a standard of pre-trade transparency that ensures that adequate information is made public as to the price level of orders or quotes for each share specified in paragraph 1, as well as the level of trading interest in that share. |
In particular, the five best bid and offer price levels and/or two-way quotes of each market maker in that share shall be made public, if the characteristics of the price discovery mechanism permit it. |
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(6) |
A summary of the information to be made public in accordance with paragraphs 2 to 5 is specified in Table 1 of Annex II. [(see REC 2.6.8 EU)] |
[Note: article 6 of MiFIR now covers post-trade transparency requirements for trading venues in respect of shares, depositary receipts8, ETFs, certificates and other similar financial instruments and article 10 of MiFIR imposes similar requirements in respect of bonds, structured finance products, emission allowances and derivatives]7
Article 27(1) of the MiFID Regulation
2Post-trade transparency obligation |
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1. |
... regulated markets, and ... market operators operating an MTF shall, with regard to transactions in respect of shares admitted to trading on regulated markets concluded ... within their systems, make public the following details: |
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(a) |
the details specified in points 2, 3, 6, 16, 17, 18 and 21 of Table 1 of Annex I [(see REC 2.6.16 EU)] |
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(b) |
an indication that the exchange of shares is determined by factors other than the current market valuation of the share, where applicable [(see REC 2.6.17 EU)]; |
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(c) |
an indication that the trade was a negotiated trade, where applicable; |
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(d) |
any amendments to previously disclosed information, where applicable. |
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Those details shall be made public either by reference to each transaction or in a form aggregating the volume and price of all transactions in the same share taking place at the same price at the same time. |
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2In determining whether a UK RIE is ensuring that business conducted by means of its facilities is conducted in an orderly manner (and so as to afford proper protection to investors), the FCA5 may have regard to whether the UK RIE's arrangements and practices: 5(1) enable members and clients for whom they act to obtain the best price available at the time for their size and type of trade;(2) demonstrate that the UK RIE is able to satisfy:7(a) either or both of the following:7(i)
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
(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
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
(1) The scheme property of a non-UCITS retail scheme may, subject to the rules in this section, comprise any assets or investments to which it is dedicated.(2) For an ICVC, the scheme property may also include movable or immovable property that is necessary for the direct pursuit of the ICVC's business of investing in those assets or investments.(3) The scheme property must be invested only in accordance with the relevant provisions in this section that are applicable to that
(1) This rule does not apply in respect of a transferable security or an approved money-market instrument to which COLL 5.6.8R (Spread: government and public securities) applies21. (2) Not more than 20% in value of the scheme property is to consist of deposits with a single body.(3) Not more than 10% in value of the scheme property is to consist of transferable securities or money-market instruments issued by any single body subject to COLL 5.6.23 R (Schemes replicating an index).(3A)
(1) 2COLL 5.6.7 R (7) to (10) replicate the provisions of Article 5 of the Commission Recommendation 2004/383/EC of 27 April 2004 on the use of financial derivative instruments for undertakings for collective investment in transferable securities, so as to enable non-UCITS retail schemes to benefit from the same flexibility.11(2) The attention of authorised fund managers is specifically drawn to condition (d) in COLL 5.6.7 R (8) under which the collateral has to be legally enforceable
(1) A transaction in derivatives or a forward transaction must not be effected for a non-UCITS retail scheme unless the transaction is:(a) of a kind specified in COLL 5.6.13 R2 (Permitted transactions (derivatives and forwards)); and2(b) covered, as required by COLL 5.3.3A R (Cover for investment in derivatives and forward transactions).1414(2) Where a scheme invests in derivatives, the exposure to the underlying assets must not exceed the limits in COLL 5.6.7 R (Spread: general)
(1) A transaction in a derivative must be within COLL 5.2.20 R (1) (Permitted transactions (derivatives and forwards)) and:(a) the underlying must be within COLL 5.6.4 R (5) (Investment powers: general) or COLL 5.2.20R (2)(f) to (i)2; and2(b) the exposure to the underlying must not exceed the limits in COLL 5.6.7 R (Spread: general),9COLL 5.6.8 R (Spread: government and public securities) and COLL 5.6.5 R (2).99(2) A transaction in an approved derivative must be effected on or