Prudential Regulation Authority Rulebook

1.

For the purposes of paragraph 2, institutions shall establish the relevant equity reference entities of the netting set in accordance with the following:

1. (a) there shall be one equity reference entity for each issuer of a reference equity instrument that underlies a single-name transaction allocated to the equity risk category; single-name transactions shall be assigned to the same equity reference entity only where the underlying reference equity instrument of those transactions is issued by the same issuer;
2. (b) there shall be one equity reference entity for each group of reference equity instruments or single-name equity derivatives that underlie a multi-name transaction allocated to the equity risk category; multi-names transactions shall be assigned to the same equity reference entity only where the group of underlying reference equity instruments or single-name equity derivatives of those transactions, as applicable, has the same constituents.

2.

For the purposes of Article 278, institutions shall calculate the equity risk category add-on for a given netting set as follows:

where:

AddOn^Equity = the equity risk category add-on;

j = the index that denotes all the equity risk hedging sets established in accordance with point (d) of Article 277a(1) and Article 277a(2) for the netting set; and

= the equity risk category add-on for hedging set j calculated in accordance with paragraph 3.

3.

Institutions shall calculate the equity risk category add-on for hedging set j as follows:

where:

= the equity risk category add-on for hedging set j;

ε_j = the hedging set supervisory factor coefficient of hedging set j determined in accordance with Article 280;

k = the index that denotes the equity reference entities of the netting set established in accordance with paragraph 1;

= the correlation factor of the equity reference entity k; where the equity reference entity k has been established in accordance with point (a) of paragraph 1, = 50%; where the equity reference has been established in accordance with point (b) of paragraph 1, = 80%; and

AddOn(Entity_k) = the add-on for the equity reference entity k determined in accordance with paragraph 4.

4.

Institutions shall calculate the add-on for the equity reference entity k as follows:

where:

AddOn(Entity_k) = the add-on for the equity reference entity k;

= the supervisory factor applicable to the equity reference entity k; where the equity reference entity k has been established in accordance with point (a) of paragraph 1, = 32%; where the equity reference entity k has been established in accordance with point (b) of paragraph 1, = 20%; and

= the effective notional amount of the equity reference entity k calculated as follows:

where:

l = the index that denotes the risk position.