Prudential Regulation Authority Rulebook

This Chapter 5 of this Large Exposures (CRR) Part of the PRA Rules specifies the conditions and methodologies used to determine the overall exposure of an institution to a client or a group of connected clients in respect of exposures through transactions with underlying assets and the conditions under which the structure of transactions with underlying assets does not constitute an additional exposure.

[Note: This rule corresponds to Article 1 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury.]

[Note: The definitions formerly found at Article 2 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury can be found at rule 1.4 of this Part]

1.

An institution shall determine the contribution to the overall exposure to a certain client or group of connected clients that results from a certain transaction in accordance with the methodology set out in Articles 4, 5 and 6.

The institution shall determine separately for each of the underlying assets its exposure to this underlying asset in accordance with Article 5.

2.

An institution shall assess whether a certain transaction constitutes an additional exposure in accordance with Article 7.

[Note: This rule corresponds to Article 3 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury.]

1.

When assessing the underlying exposures of a transaction (transaction A) which itself has an underlying exposure to another transaction (transaction B) for the purpose of Articles 5 and 6, an institution shall treat the exposure to transaction B as replaced with the exposures underlying transaction B.

2.

Paragraph 1 shall apply as long as the underlying exposures are exposures to transactions with underlying assets.

[Note: This rule corresponds to Article 4 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury.]

1.

The exposure of an institution to an underlying asset of a transaction is the lower of the following:

1. (a) the exposure value of the exposure arising from the underlying asset;
2. (b) the total exposure value of the institution’s exposures to the underlying asset resulting from all exposures of the institution to the transaction.

2.

For each exposure of an institution to a transaction, the exposure value of the resulting exposure to an underlying asset shall be determined as follows:

1. (a) if the exposures of all investors in this transaction rank pari passu, the exposure value of the resulting exposure to an underlying asset shall be the pro rata ratio for the institution’s exposure to the transaction multiplied by the exposure value of the exposure formed by the underlying asset;
2. (b) in cases other than those referred to in point (a) the exposure value of the resulting exposure to an underlying asset shall be the pro rata ratio for the institution’s exposure to the transaction multiplied by the lower of:
1. (i) the exposure value of the exposure formed by the underlying asset;
2. (ii) the total exposure value of the institution’s exposure to the transaction together with all other exposures to this transaction that rank pari passu with the institution’s exposure.

3.

The pro rata ratio for an institution’s exposure to a transaction shall be the exposure value of the institution’s exposure divided by the total exposure value of the institution’s exposure together with all other exposures to this transaction that rank pari passu with the institution’s exposure.

[Note: This rule corresponds to Article 5 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury.]

1.

For each credit risk exposure for which the obligor is identified, an institution shall include the exposure value of its exposure to the relevant underlying asset when calculating the overall exposure to this obligor as an individual client or to the group of connected clients to which this obligor belongs.

2.

If an institution has not identified the obligor of an underlying credit risk exposure, or where an institution is unable to confirm that an underlying exposure is not a credit risk exposure, the institution shall assign this exposure as follows:

1. (a) where the exposure value does not exceed 0.25% of the institution’s Tier 1 capital, it shall assign this exposure to the transaction as a separate client;
2. (b) where the exposure value is equal to or exceeds 0.25% of the institution’s Tier 1 capital and the institution can ensure, by means of the transaction's mandate, that the underlying exposures of the transaction are not connected with any other exposures in its portfolio, including underlying exposures from other transactions, it shall assign this exposure to the transaction as a separate client;
3. (c) in cases other than those referred to in points (a) and (b), it shall assign this exposure to the unknown client.

3.

If an institution is not able to distinguish the underlying exposures of a transaction, the institution shall assign the total exposure value of its exposures to the transaction as follows:

1. (a) where this total exposure value does not exceed 0.25% of the institution’s Tier 1 capital, it shall assign this total exposure value to the transaction as a separate client;
2. (b) in cases other than those referred to in point (a), it shall assign this total exposure value to the unknown client.

4.

For the purposes of paragraphs 1 and 2, institutions shall regularly, and at least on a monthly basis, monitor such transactions for possible changes in the composition and the relative share of the underlying exposures.

[Note: This rule corresponds to Article 6 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury.]

1.

The structure of a transaction shalll not constitute an additional exposure if the transaction meets both of the following conditions:

1. (a) the legal and operational structure of the transaction is designed to prevent the manager of the transaction or a third party from redirecting any cash flows which result from the transaction to persons who are not otherwise entitled under the terms of the transaction to receive these cash flows;
2. (b) neither the issuer nor any other person can be required, under the transaction, to make a payment to the institution in addition to, or as an advance payment of, the cash flows from the underlying assets.

2.

The condition in point (a) of paragraph 1 shall be considered to be met where the transaction is one of the following:

1. (a) a UK UCITS (as defined in section 237 of FSMA);
2. (b) an undertaking established in a third country that carries out activities similar to those carried out by a UCITS and which is subject to supervision pursuant to legislation of a third country which applies supervisory and regulatory requirements which are at least equivalent to those applied in the UK to UK UCITS.

[Note: This rule corresponds to Article 7 of Part 2 of Regulation (EU) No 1187/2014 as it applied immediately before revocation by the Treasury.]

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