Related provisions for BIPRU 7.2.36

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To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004 (From field only).

BIPRU 7.2.1RRP
(1) A firm must calculate its interest rate PRR under BIPRU 7.2 by:(a) identifying which positions must be included within the interest rate PRR calculation;(b) deriving the net position in each debt security in accordance with BIPRU 7.2.36R-BIPRU 7.2.41R;(c) including these net positions in the interest rate PRR calculation for general market risk and the interest rate PRR calculation for specific risk; and(d) summing all PRRs calculated for general market risk and specific risk.(2)
BIPRU 7.2.3RRP
A firm's interest rate PRR calculation must:(1) include all trading bookpositions in debt securities, preference shares and convertibles, except:(a) positions in convertibles which have been included in the firm'sequity PRR calculation;(b) positions fully deducted as a material holding under the calculations under the capital resources table, in which case the firm may exclude them; or(c) positions hedging an option which is being treated under BIPRU 7.6.26R (Table: Appropriate
BIPRU 7.2.5GRP
BIPRU 7.2.3R(1) includes a trading bookposition in debt security, preference share or convertible that is subsequently repo'd under a repurchase agreement or lent under a stock lending agreement. Clearly, if the security had initially been obtained via a reverse repurchase agreement or stock borrowing agreement, the security would not have been included in the PRR calculation in the first place.
BIPRU 7.2.6GRP
BIPRU 7.2.3R(1) includes net underwriting positions or reduced net underwriting position in debt securities.
BIPRU 7.2.10GRP
BIPRU 7.2.11 R - BIPRU 7.2.35R convert the instruments listed in the table in BIPRU 7.2.4R into notional positions in:(1) the underlying debt security, where the instrument depends on the price (or yield) of a specific debt security; or(2) notional debt securities to capture the pure interest rate risk arising from future payments and receipts of cash (including notional payments and receipts) which, because they are designed to represent pure general market risk (and not specific
BIPRU 7.2.11RRP
(1) For the purposes of calculating interest rate PRR, unless specified otherwise, a firm must derive the value of notional positions as follows:(a) notional positions in actual debt securities must be valued as the nominal amount underlying the contract at the current market price of the debt security; and(b) positions in zero-specific-risk securities must be valued using one of the two methods in (2).(2) A firm must use one of the following two methods for all positions arising
BIPRU 7.2.13RRP
Futures, forwards or synthetic futures on a single debt security must be treated as follows:(1) a purchased future, synthetic future or forward is treated as:(a) a notional long position in the underlying debt security (or the cheapest to deliver (taking into account the conversion factor) where the contract can be satisfied by delivery of one from a range of securities); and(b) a notional short position in a zero coupon zero-specific-risk security with a maturity equal to the
BIPRU 7.2.16RRP
The notional debt securities in BIPRU 7.2.14R are assigned a specific risk position risk adjustment and a general market risk position risk adjustment equal to the highest that would apply to the debt securities in the basket or index.
BIPRU 7.2.17GRP
The debt security with the highest specific risk position risk adjustment within the basket might not be the same as the one with the highest general market risk position risk adjustment. BIPRU 7.2.16R requires a firm to select the highest percentages even where they relate to different debt securities in the basket or index, and regardless of the proportion of those debt securities in the basket or index.
BIPRU 7.2.20GRP
(1) The following example illustrates BIPRU 7.2.18R and BIPRU 7.2.19R in conjunction with BIPRU 7.2.11R (the last rule determines the value of notional positions). A firm sells £1mn notional of a 3v6 FRA at 6%. This results in:(a) a short position in a zero-specific-risk security with a zero coupon, three month maturity, and a nominal amount of £1million; and(b) a long position in a zero-specific-risk security with a zero coupon, six month maturity, and nominal amount of £1,015,000
BIPRU 7.2.22RRP

Table: Interest rate and foreign currency swaps

This table belongs to BIPRU 7.2.21R

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

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

Receiving fixed and paying floating

Coupon equals the floating rate and maturity equals the reset date

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

Paying fixed and receiving floating

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

Coupon equals the floating rate and maturity equals the reset date

Paying floating and receiving floating

Coupon equals the floating rate and maturity equals the reset date

Coupon equals the floating rate and maturity equals the reset date
BIPRU 7.2.25RRP

Table: Deferred start interest rate and foreign currency swaps

This table belongs to BIPRU 7.2.24R

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

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

Receiving fixed and paying floating

maturity equals the start date of the swap

maturity equals the maturity of the swap

Paying fixed and receiving floating

maturity equals the maturity of the swap

maturity equals the start date of the swap
BIPRU 7.2.27RRP
A firm must treat a swap with only one interest rate leg as a notional position in a zero-specific-risk security:(1) with a coupon equal to that on the interest rate leg;(2) with a maturity equal to the date that the interest rate will be reset; and(3) which is a long position if the firm is receiving interest payments and short if making interest payments.
BIPRU 7.2.30RRP
The forward cash leg of a repurchase agreement or reverse repurchase agreement must be treated as a notional position in a zero-specific-risk security which:(1) is a short notional position in the case of a repurchase agreement; and a long notional position in the case of a reverse repurchase agreement;(2) has a value equal to the market value of the cash leg;(3) has a maturity equal to that of the repurchase agreement or reverse repurchase agreement; and(4) has a coupon equal
BIPRU 7.2.31RRP
A cash borrowing or deposit must be treated as a notional position in a zero coupon zero-specific-risk security which:(1) is a short position in the case of a borrowing and a long position in the case of a deposit;(2) has a value equal to the market value of the borrowing or deposit;(3) has a maturity equal to that of the borrowing or deposit, or the next date the interest rate is reset (if earlier); and(4) has a coupon equal to:(a) zero, if the next interest payment date coincides
BIPRU 7.2.32RRP
(1) Where included in the PRR calculation in BIPRU 7.2 (see the table in BIPRU 7.2.4R), options and warrants must be treated in accordance with this rule.(2) An option or warrant on a debt security, a basket of debt securities or a debt security index must be treated as a position in that debt security, basket or index.(3) An option on an interest rate must be treated as a position in a zero coupon zero-specific-risk security with a maturity equal to the sum of the time to expiry
BIPRU 7.2.33RRP
Where a debt security pays coupons in one currency, but will be redeemed in a different currency, it must be treated as:(1) a debt security denominated in the coupon's currency; and(2) a foreign currencyforward to capture the fact that the debt security's principal will be repaid in a different currency from that in which it pays coupons, specifically:(a) a notional forward sale of the coupon currency and purchase of the redemption currency, in the case of a long position in the
BIPRU 7.2.34RRP
Other futures, forwards, options and swaps treated under BIPRU 7.2 must be treated as positions in zero-specific-risk securities, each of which:(1) has a zero coupon;(2) has a maturity equal to that of the relevant contract; and(3) is long or short according to the table in BIPRU 7.2.35R.
BIPRU 7.2.37RRP
(1) A firm must not net positions (including notional positions) unless those positions are in the same debt security. This rule sets out the circumstances in which debt securities may be treated as the same for these purposes.(2) Subject to (3) long and short positions are in the same debt security, and a debt security is the same as another if and only if:(a) they enjoy the same rights in all respects; and(b) are fungible with each other.(3) Long and short positions in different
BIPRU 7.2.38RRP
A firm may net a short notional position in the cheapest to deliver security arising from a short future or forward (see BIPRU 7.2.13R(2)(a)) under which the seller has a choice of which debt security it may use to settle its obligations against a long position in any deliverable security up to a maximum of 90% of the common nominal amounts. The residual long and short nominal amounts must be treated as separate long and short positions.
BIPRU 7.2.40RRP
A firm may net a notional long position in a zero-specific-risk security against a notional short position in a zero-specific-risk security if:(1) they are denominated in the same currency;(2) their coupons do not differ by more than 15 basis points; and(3) they mature:(a) on the same day, if they have residual maturities of less than one month;(b) within 7 days of each other, if they have residual maturities of between one month and one year; and(c) within 30 days of each other,
BIPRU 7.2.41RRP
A firm must not net a reduced net underwriting position in a debt security with any other debt securityposition.
BIPRU 7.2.43RRP
(1) A firm must calculate the specific risk portion of the interest rate PRR for each debt security by multiplying the market value of the individual net position (ignoring the sign) by the appropriate 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
BIPRU 7.2.44RRP

Table: specific risk position risk adjustments

This table belongs to BIPRU 7.2.43R.

Issuer

Residual maturity

Position risk adjustment

Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or United Kingdom5 regional governments or local authorities which would qualify for credit quality step 1 or which would receive a 0% risk weight under the standardised approach to credit risk.

Any

0%

(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or United Kingdom5 regional governments or local authorities which would qualify for credit quality step 2 or 3 under the standardised approach to credit risk.

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

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

(D) Debt securities issued or guaranteed by corporates which would qualify for credit quality step 1, 2 or 32 under the standardised approach to credit risk.

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

2

Zero to six months

0.25%

over 6 and up to and including 24 months

1%

Over 24 months

1.6%

(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or United Kingdom5 regional governments or local authorities or institutions which would qualify for credit quality step 4 or 5 under the standardised approach to credit risk.

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

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

2

Any

8%

(A) Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or United Kingdom5 regional governments or local authorities or institution which would qualify for credit quality step 6 under the standardised approach to credit risk.

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

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

Any

12%

Note: The question of what a corporate is and of what category a debt security falls into must be decided under the rules relating to the standardised approach to credit risk.

[Note:CAD Annex I point 14 Table 1]2

BIPRU 7.2.46RRP
A debt security issued by a non-qualifying issuer must receive a specific risk position risk adjustment of 8% or 12% according to the table in BIPRU 7.2.44R. However a firm must apply a higher specific risk position risk adjustment to such a debt security and/or not recognise offsetting for the purposes of defining the extent of general market risk between such a security and any other debt securities to the extent that doing otherwise would not be a prudent treatment of specific
BIPRU 7.2.46AGRP
3BIPRU 7.2.43 R includes both actual and notional positions. However, notional positions in a zero-specific-risk security do not attract specific risk. For example:(1) interest-rate swaps, foreign-currency swaps, FRAs, interest-rate futures, foreign-currencyforwards, foreign-currencyfutures, and the cash leg of repurchase agreements and reverse repurchase agreements create notional positions which will not attract specific risk; while(2) futures, forwards and swaps which are based
BIPRU 7.6.8RRP

Table: Appropriate position risk adjustment

This table belongs to BIPRU 7.6.7R

Underlying position

Appropriate position risk adjustment

Equity

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

Interest rate

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

Debt securities

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

Commodity

18% (unless BIPRU 7.6.7R requires otherwise)

Currency

8%

Gold

8%

CIU

32% (subject to BIPRU 7.6.6R and BIPRU 7.6.7R)
BIPRU 7.6.13RRP

Table: Derived positions

This table belongs to BIPRU 7.6.9R

Underlying

Option (or warrant)

Derived position

Equity

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

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

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

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

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

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

Interest rate

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

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

Option on an interest rate swap

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

Interest rate cap or floor

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

Debt securities

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

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

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

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

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

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

Commodity

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

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

Option on a commodityswap

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

CIU

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

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

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

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

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

Gold

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

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

Currency

Currency option

The amount of the underlying currency that the firm will receive if the option is exercised converted at the spot rate into the currency that the firm will sell if the option is exercised.
BIPRU 7.6.24RRP
Under the option hedging method a firm must calculate the option PRR for individual positions as follows:(1) for an option or warrant on an equity, basket of equities or equity index and its equity hedge(s), the firm must, to the extent specified or permitted in the table in BIPRU 7.6.26R, use the calculation in the table in BIPRU 7.6.27R;(2) for an option or warrant on a debt security, basket of debt securities or debt security index and its debt security hedge(s), the firm must,
BIPRU 7.6.26RRP

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

This table belongs to BIPRU 7.6.24R

Hedge

PRR calculation for the hedge

Limits (if hedging method is used)

Naked position

An equity (hedging an option or warrant)

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

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

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

A debt security (hedging an option or warrant)

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

As for the first row

As for the first row

Gold (hedging a gold option)

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

As for the first row

As for the first row

A currency or currencies (hedging a currency option)

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

As for the first row

As for the first row
BIPRU 7.6.27RRP

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

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

PRR

Option or warrantposition

In the money by more than the position risk adjustment

In the money by less than the position risk adjustment

Out of the money or at the money

Long in security or gold

Long put

Zero

Wp

X

Short call

Y

Y

Z

Short in security or gold

Long call

Zero

Wc

X

Short put

Y

Y

Z

Where:

Wp means

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

+

The market value of the underlying position

Wc means

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

-

The market value of the underlying position

X means

The market value of the underlying position multiplied by the appropriate position risk adjustment

Y means

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

Z means

The option hedging method is not permitted; the option standard method must be used.
BIPRU 7.3.14RRP
A future (including a synthetic future), forward or CFD on a single equity must be treated as a notional position in that equity.
BIPRU 7.3.17GRP
An example of BIPRU 7.3.16R is as follows. A firm decides to treat a FTSE Eurotop 300 future under the standard equity method, and furthermore, chooses to treat it as one notional position. The table in BIPRU 7.3.16R requires that this notional position be treated as if it were from a separate notional country rather than any of the countries to which the underlying equities are from.
BIPRU 7.8.27RRP
To calculate the reduced net underwriting position a firm must apply the reduction factors in the table in BIPRU 7.8.28R to the net underwriting position (calculated under BIPRU 7.8.17R) as follows:(1) in respect of debt securities, a firm must calculate two reduced net underwriting positions; one for inclusion in the firm'sinterest rate PRRspecific risk calculation (BIPRU 7.2.43R), the other for inclusion in its interest rate PRRgeneral market risk calculation (BIPRU 7.2.52R);
BIPRU 7.8.28RRP

Table: Net underwriting position reduction factors

This table belongs to BIPRU 7.8.27R

Underwriting timeline

Debt

Equity

General market risk

Specific risk

Time of initial commitment until working day 0

0%

100%

90%

Working day 1

0%

90%

90%

Working day 2

0%

75%

75%

Working day 3

0%

75%

75%

Working day 4

0%

50%

50%

Working day 5

0%

25%

25%

Working day 6 and onwards

0%

0%

0%
BIPRU 7.11.5RRP
A credit default swap does not create a position for general market risk. For the purposes of specific risk, a firm must record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets the conditions for a qualifying debt security, in which case a long position in the derivative is recorded. If premium or interest payments are due under the product, these cash flows must be represented as notional positions in zero-specific-risk
BIPRU 7.11.6RRP
A single name credit linked note creates a long position in the general market risk of the note itself, as an interest rate product. For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need
BIPRU 7.11.8RRP
Where a multiple name credit linked note has an external rating and meets the conditions for a qualifying debt security, a single long position with the specific risk of the note need only be recorded.
BIPRU 7.11.62GRP
BIPRU 7.11.5 R requires a firm to recognise any premiums payable or receivable under the contract as notional zero-specific-risk securities. These positions are then entered into the general market risk framework. As premium payments paid under such contracts are contingent on no credit event occurring, a credit event could significantly change the general market risk capital requirement. A firm should consider, under the overall Pillar 2 rule, whether this risk means that the
BIPRU 1.2.18RRP
In order to calculate the proportion that trading book business bears to total business for the purpose of BIPRU 1.2.17 R (1)(a) to BIPRU 1.2.17R (1)(c) the firm must refer to the size of the combined on- and off-balance-sheet business. For this purpose, debt instruments must be valued at their market prices or their principal values, equities at their market prices and derivatives according to the nominal or market values of the instruments underlying them. Long positions and