Prudential Regulation Authority Rulebook

Pre CRD capital requirements applying on a solo basis during 2007: Investment management firms

		Application
6.1	R	This section applies to a BIPRU firm that:
		(1)	is an investment management firm; and
		(2)	is applying BIPRU TP 3.4R (Use of IPRU on a solo basis during 2007).
		Purpose of this section
6.2	G	BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) says that during 2007 a firm may apply the credit risk requirements of IPRU instead of the ones in BIPRU. For an investment management firm this involves applying the credit risk requirements in chapter 5 of IPRU(INV). This section explains how this is done. In particular this section explains:
		(1)	which parts of chapter 5 should be treated as credit risk requirements for this purpose;
		(2)	what parts of chapter 5 apply during 2007 and what changes are made to chapter 5 for that purpose; and
		(3)	what changes are made to GENPRU and BIPRU to reflect the fact that chapter 5 applies in place of parts of GENPRU and BIPRU.
		Duration of transitional
6.3	R	This section applies until 1 January 2008.
		Drafting approach in this section
6.4	G	The purpose of BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) is that the basic provisions of BIPRU and GENPRU should be in force from 1 January 2007. However a firm should be able to calculate the capital requirements for credit risk under IPRU and use the large exposures requirements in IPRU. This means that an investment management firm should slot the credit risk requirements of chapter 5 of IPRU(INV) into the general requirements of GENPRU and BIPRU.
6.5	G	The capital calculation for credit risk under BIPRU is made up of three elements, which are set out in GENPRU 2.1.51 R (Calculation of the credit risk capital requirement). These are the credit risk capital component, the counterparty risk capital component and the concentration risk capital component. So the approach in BIPRU TP 6.4G involves finding equivalents for these three elements in chapter 5 where this is possible.
6.6	G	Under GENPRU and BIPRU a firm calculating its capital resources may usually choose between deducting illiquid assets and material holdings. Only if it has a waiver from consolidated supervision need it deduct both. However under chapter 5, both illiquid assets and material holdings in credit and financial institutions are deducted.
6.7	G	The chapter 5 rules can still be made to work if a firm is allowed to choose between deducting illiquid assets and material holdings as any exposure that is not deducted is covered by the chapter 5 other assets requirement.
6.8	G	(1)	To make the GENPRU and BIPRU requirements compatible with chapter 5 for the purpose of BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007), this section takes the approach in this paragraph.
		(2)	The illiquid assets and material holdings provisions of GENPRU 2.2 (Capital resources) apply.
		(3)	The chapter 5 counterparty risk requirement and the other assets requirement are used to calculate the BIPRU credit risk charge for non-trading book items (called the credit risk capital component) and the BIPRU credit risk charge for trading book items (called the counterparty risk capital component).
		(4)	BIPRU 10 (Concentration risk) allows a firm to exceed the large exposure limits in the trading book. A firm that takes up that option is subject to an additional capital requirement, called the concentration risk capital component. Chapter 5 does not give a firm that option. Therefore the concentration risk capital component does not apply to a firm under this section.
		Parts of chapter 5 of IPRU(INV) that apply in 2007
6.9	R	The parts of chapter 5 of IPRU(INV) that do and do not apply during the period that BIPRU TP 3.4R applies are set out in BIPRU TP 6.11R.
6.10	G	The table in BIPRU TP 6.11R assumes that the firm is not applying the IRB approach. BIPRU TP 6.31R to BIPRU TP 6.34R deal with a firm that does apply the IRB approach.

6.11

R

Table: Parts of chapter 5 of IPRU(INV) that apply in 2007 This table belongs to BIPRU TP 6.9R

Chapter 5 rule	A Y denotes that the provision does apply An N denotes that it does not apply		Remarks
5.1.1(1)(a) and (b) (Application)	N		BIPRU TP 6.1R applies instead
Table 5.1.1(1)(a) (What parts of chapter 5 apply to what firm)	N		BIPRU TP 6.1R applies instead
5.1.1(1)(c) (Interpretation)	Y		See BIPRU TP 6.26R to BIPRU TP 6.28G
5.2.1 (General requirement)	N
5.2.2 (Financial resources)	N		GENPRU 2.2 (Capital resources) applies instead
5.2.3(1) (Determination of requirement)	N
5.2.3(2) (Exceptions from the liquid capital requirement)	N
5.2.3(3) (Own funds requirement)	N
5.2.3(4) (Liquid capital requirement)	N
5.2.3(5) (Total capital requirement)	Expenditure based requirement	N
	Position risk requirement	N
	Counterparty risk requirement	Y
	Foreign exchange requirement	N
	Other assets requirement	Y
5.2.4 (Annual audited expenditure)	N
5.2.5 (Qualifying subordinated loans)	N
5.2.6 (Qualifying property and qualifying undertakings)	N
5.2.7 (Large exposures)	Y		See BIPRU TP 6.21R to BIPRU TP 6.22R
Table 5.2.2(1) (Calculation of own funds and liquid capital)	N
Table 5.2.3(3)(b) (Own funds requirement)	N
Table 5.2.3(5)(a) (Expenditure based requirement)	N
Table 5.2.3(5)(b) (Position risk requirement)	N		See BIPRU TP 6.254
Table 5.2.3(5)(c) (Counterparty risk requirement)	Y		See BIPRU TP 6.13R to BIPRU TP 6.19G
Table 5.2.3(5)(c)(i) (Counterparty risk factor -cash settlements)	Y
Table 5.2.3(5)(c)(ii) (Counterparty risk requirement)	Y
Table 5.2.3(5)(c)(iii) (OTC derivatives calculation of credit equivalent amount)	Y		See BIPRU TP 6.15G and BIPRU TP 6.18R to BIPRU TP 6.19G
Table 5.2.3(5)(d) (Foreign exchange requirement)	N
Table 5.2.3(5)(e) (Other assets requirement)	Y		See BIPRU TP 6.20R
5.3.1 (Records)	N		Applied in part under BIPRU TP 23 (Record keeping transitionals)
5.5.1 (Financial notification)	N
5.7 (Consolidated supervision)	N
Glossary	Y		See BIPRU TP 6.26R to BIPRU TP 6.28G

		Categorisation
6.12	R	Each firm is an ISD firm for the purposes of chapter 5 of IPRU(INV) as applied by BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) and this section.
		How to use the chapter 5 Counterparty Risk Requirement and the Other Assets Requirement
6.13	R	A firm must calculate the sum of the credit risk capital component and the counterparty risk capital component as being equal to the sum of the counterparty risk requirement under chapter 5 of IPRU(INV) and of the other assets requirement under chapter 5 of IPRU(INV).
6.14	R	If it is necessary to distinguish between the credit risk capital component and the counterparty risk capital component a firm must allocate:
		(1)	any amount calculated for an exposure in the non-trading book to the credit risk capital component; and
		(2)	any amount calculated for an exposure in the trading book to the counterparty risk capital component;
6.15	G	A firm may still apply the netting provisions for OTC derivatives in chapter 5 even though the OTC derivative calculation is split between the credit risk capital component and the counterparty risk capital component under BIPRU TP 6.14R. The net amount should be allocated to the credit risk capital component if the gross value of the non-trading book derivatives is bigger and to the counterparty risk capital component if the gross value of the trading book derivatives is bigger.
		Adjustments to the Counterparty Risk Requirement calculations: General
6.16	G	Broadly speaking the Directive transitional provisions that allow pre-2007 credit risk rules to be used in 2007 cover all credit risk rules. However the transitional provisions for trading book credit risk (Annex II of the Capital Adequacy Directive, which is implemented in BIPRU 14 (Capital requirements for settlement and counterparty risk)) is not quite as straightforward as that. In some cases pre-2007 requirements can be used. In others they cannot. The purpose of BIPRU TP 6.17R to BIPRU TP 6.19G is to reflect those cases in which the Directive requires the new requirements to apply from 1 January 2007.
		Adjustments to the Counterparty Risk Requirement calculations: Free deliveries
6.17	R	(1)	The calculation of the part of the counterparty risk requirement set out in section 3 of Table 5.2.3(5)(c) of chapter 5 of IPRU(INV) (Free deliveries) is amended in accordance with this rule for the purposes of trading book calculations.
		(2)	A firm must include foreign currency and commodity transactions.
		(3)	The capital treatment in the table in BIPRU 14.4.3 R (Capital treatment for free deliveries) applies. But when the capital treatment in that table is that the firm must treat the transaction as an exposure, the firm must apply the treatment in chapter 5 of IPRU(INV) rather than BIPRU 14 (Capital requirements for settlement and counterparty risk).
		Adjustments to the Counterparty Risk Adjustments calculations: Credit derivative transactions
6.18	R	A firm must treat a credit derivative in the trading book as a derivative to which section 6 of Table 5.2.3(5)(c) of chapter 5 of IPRU(INV) (OTC derivatives) and table 5.2.3(5)(c)(iii) (OTC derivatives calculation of credit equivalent amount) apply.
6.19	G	The capital treatment for credit derivatives set out in BIPRU 14.2.5 R - BIPRU 14.2.8 R (Capital treatment for credit derivatives) does not apply.
		Adjustments to the Other Assets Requirement calculations
6.20	R	A firm must include the items listed in section 4 of Chapter BC of IPRU(BANK) that are in the firm's non-trading book as off-balance sheet items in table 5.2.3(5)(e) (Other assets requirement) whether they are on or off balance sheet. A firm must include a credit derivative as a full risk item.
		How to use the chapter 5 large exposure rules
6.21	R	Section 5.2.7 of chapter 5 of IPRU(INV) (Large exposures) applies in place of BIPRU 10 (Concentration risk).
6.22	R	BIPRU 10.5.2 R to BIPRU 10.5.5 R (Capital resources for concentration risk purposes) apply in place of the definition of own funds that applies under section 5.2.7 of chapter 5 of IPRU(INV).
		Specific risk calculations
6.23	R	A firm must calculate the specific risk portion of the interest rate PRR in accordance with BIPRU TP 8.28R (Pre CRD interest rate PRR for securities and futures firms).
6.24	R	Any reference to a qualifying debt security in a part of BIPRU that applies during 2007 must be interpreted in accordance with the meaning it has when used in section A of Table 5.2.3(5)(b) of chapter 5 of IPRU(INV) (Position risk requirement for qualifying debt securities). However BIPRU 7.2.50 R (Must not apply qualifying debt security treatment to risky assets) also applies. Any reference to a qualifying equity in a part of BIPRU that applies during 2007 must be interpreted in accordance with the definition in the Glossary to chapter 10 of IPRU(INV).
6.25	G	The reason for BIPRU TP 6.23R and BIPRU TP 6.24R is that the calculation of the specific risk portion of the interest rate PRR under BIPRU 7 (Market risk) involves the use of the standardised approach to credit risk. The specific risk rules therefore need to be adjusted for a firm that is not using the standardised approach to credit risk in 2007 so as to apply the pre-2007 method of calculating specific risk. However chapter 5 does not use the concept of specific risk. The nearest equivalent is in chapter 10 of IPRU(INV) (Securities and futures firms). The definition of qualifying equity also depends in part on the standardised approach to credit risk.
		Definitions
6.26	R	The definition of trading book is replaced with the definition in the Glossary.
6.27	R	A firm may treat a reference in the Glossary to Chapter 5 of IPRU(INV) to a financial supervision regime at least equivalent to the Second Consolidated Supervision Directive and the Capital Adequacy Directive (No. 93/6/EEC) as including one to a regime equivalent to the Banking Consolidation Directive and Directive 2006/49 (the new version of the Capital Adequacy Directive).
6.28	G	GENPRU 1.3 (Valuation) applies. The definition of exposure in the Glossary to chapter 5 should be read accordingly.
		Mapping GENPRU and BIPRU concepts onto IPRU
6.29	G	Some of the parts of chapter 5 of IPRU(INV) that apply in 2007 refer to parts of chapter 5 that do not apply. BIPRU TP 3.10R explains that where this happens a firm should interpret that cross-reference in accordance with the provision in BIPRU or GENPRU that corresponds to the chapter 5 provision that does not apply in 2007. A firm should refer to IPRU in the case of cross-references in GENPRU and BIPRU to provisions in GENPRU and BIPRU that do not apply in 2007. BIPRU TP 6.30G sets out how certain concepts in chapter 5 of IPRU(INV) correspond to ones in GENPRU and BIPRU. The purpose of the table is to help firms to interpret such cross-references.

6.30

G

Table: Mapping GENPRU and BIPRU concepts onto ones in chapter 5 of IPRU(INV) This table belongs to BIPRU TP 6.29G

GENPRU and BIPRU	Chapter 5 of IPRU(INV)
Illiquid asset	Illiquid asset
Material holding	Material holdings in credit and financial institutions (item 8 in Table 5.2.2(1) (Calculation of own funds and liquid capital))
Unsettled transaction under BIPRU 14.3	Delivery of cash against documents and settlements outstanding for 30 days or more (part of counterparty risk requirement)
Free deliveries under BIPRU 14.4	Free deliveries (part of counterparty risk requirement)
See BIPRU TP 6.8G	Counterparty risk requirement
See BIPRU TP 6.8G	Other assets requirement
Market risk capital requirement	The position risk requirement and the foreign exchange requirement
Trading book concentration risk excess	This concept does not apply in Chapter 5
Risk weight	Risk weights in Table 5.2.3(5)(c)(ii) (Counterparty risk requirement). In general where Table 5.2.3(5)(e) (Other assets requirement) applies a risk factor of 8% that is equivalent to applying a risk weight of 100%. Applying the 1.6% adjustment under that table is equivalent to applying a 20% risk weight under BIPRU together with the standard 8% BIPRU credit risk charge. The "NIL" adjustment under that table is equivalent to applying a 0% risk weight.

Firms using the IRB approach during 2007: General Firms using the IRB approach during 2007: General6.31R BIPRU TP 6.31R to BIPRU TP 6.34R only apply to a firm that is applying the IRB approach under BIPRU TP 3 (Pre CRD capital requirements applying on a solo basis during 2007) as well as using IPRU.6.32GThe effect of BIPRU TP 3.17G (Pre CRD capital requirements applying on a solo basis during 2007 for firms also using the IRB approach) is that the counterparty risk requirement and the other assets requirement do not apply to an exposure to which the firm applies the IRB approach. The IRB approach requirements in BIPRU apply instead. The main requirements are listed in BIPRU TP 3.17G.6.33RA firm must apply BIPRU 7.2.45R - BIPRU 7.2.47R (Using internal ratings to calculate specific risk and treatment of securitisations) to calculate the specific risk portion of the interest rate PRR to the extent that the obligor or exposure in question comes within the scope of its IRB permission.6.34RThe definition of qualifying debt security and qualifying equity in the Glossary apply if the security or obligor in question comes within the scope of a firm's IRB permission.

Commodities firm transitionals: Exemption from capital requirements

GENPRU and BIPRU provisions	A Y denotes that the provision generally does apply An N denotes that generally it does not apply	Remarks
GENPRU TP (Transitional provisions)	Y
GENPRU 1.1 (Application and scope)	Y
GENPRU 1.2 (Adequacy of financial resources)	N
GENPRU 1.3 (Valuation)	Y
GENPRU 1.4 (Actions for damages)	Y
GENPRU 1.5 (Application of GENPRU 1 to Lloyd's)	Not applicable as does not apply to BIPRU firms
GENPRU 2.1 (Calculation of capital resources requirements)	N
GENPRU 2.2 (Capital resources)	Y	This applies for the purposes of BIPRU 10. If BIPRU 10 does not apply this does not apply either.
GENPRU 2.3 (Application of GENPRU 2 to Lloyd's)	Not applicable as does not apply to BIPRU firms
GENPRU 3.1 (Cross sector groups)	Y	Only applies if the firm is a member of a financial conglomerate
GENPRU 3.2 (Third-country groups)	Y	Provisions about financial conglomerate only apply if the firm is a member of a financial conglomerate See remarks on BIPRU 8 for provisions about a third-country banking and investment group
BIPRU TP (Transitional provisions)	Y
BIPRU 1.1 (Application and scope)	Y
BIPRU 1.2 (Definition of the trading book)	Y
BIPRU 1.3 (Application for advanced approaches)	N	Provisions about BIPRU 2.1 and BIPRU 8 apply to the extent those parts of BIPRU apply. Otherwise does not apply.
BIPRU 1.4 (Actions for damages)	Y
BIPRU 2.1 (Solo consolidation)	Y	Applies for the purposes of BIPRU 10.
BIPRU 2.2 (Adequacy of financial resources)	N
BIPRU 2.3 (Interest rate risk in the non-trading book)	N
BIPRU 3 (Standardised approach to credit risk)	N
BIPRU 4 (The IRB approach)	N
BIPRU 5 (Credit risk mitigation)	N
BIPRU 6 (Operational risk)	N
BIPRU 7 (Market risk)	N	BIPRU 7.8.38 R and BIPRU 7.3.39 R (Risk management systems and controls) apply in theory although it is unlikely that a firm will be able to carry out these activities without losing the exemption in BIPRU TP 15.
BIPRU 8 (Group risk - consolidation)	Y	See BIPRU TP 15.13R to BIPRU TP 15.14G
BIPRU 9 (Securitisation)	N	BIPRU 9.1.6R to BIPRU 9.1.8G (Risk systems) apply
BIPRU 10 (Concentration risk)	Y	If firm also qualifies for exemption under BIPRU TP 16 (Commodities firm transitionals: large exposures) BIPRU 10 does not apply except as described in BIPRU TP 16.7G
BIPRU 11 (Disclosure)	Y
BIPRU 12	Chapter does not yet exist
BIPRU 13 (Financial derivatives, SFTs and long settlement transactions)	N
BIPRU 14 (Capital requirements for settlement and counterparty risk)	N

Commodities firm transitionals: large exposures