Prudential Regulation Authority Rulebook

1.1

Unless otherwise stated, this Part applies to a ring-fenced body.

1.2

In this Part, the following definitions shall apply:

arm’s length policy

means the policy established in accordance with 12.2.

arm’s length procedures

means the procedures established in accordance with 12.2.

central securities depository

has the meaning set out in Article 2.1(1) of Regulation (EU) No 909/2014, and includes a ‘securities settlement system’ as defined in that regulation.

close family tie

means a relationship:

1. (1) of marriage or civil partnership; or
2. (2) which has the characteristics of a relationship of marriage or of civil partnership; or
3. (3) between a person referred to in 1.3(2)(d) and his or her parent, sibling, child, grandparent or grandchild, including a step-relationship in each case.

common equity tier 1 capital ratio

has the meaning in Article 92(2)(a) of the CRR.

collateral exception

means:

1. (1) in relation to an excluded activity, the exception provided for in Article 6(3)(b) of the Excluded Activities and Prohibitions Order; or
2. (2) in relation to a prohibition, the exception provided for in Article 14(5) of the Excluded Activities and Prohibitions Order.

collateral exceptions policy

means a policy document setting out in detail how a ring-fenced body makes use of the collateral exceptions and which meets the requirements of 17.

collateral exception transaction

means a transaction entered into by making use of a collateral exception.

conduit vehicle

has the meaning in Article 1 of the Excluded Activities and Prohibitions Order.

distribution

has the meaning in section 829 of the Companies Act 2006.

exception

means:

1. (1) the hedging exception;
2. (2) the liquid asset exception; and
3. (3) the collateral exception.

exceptions policy

means:

1. (1) the hedging exceptions policy;
2. (2) the liquid asset exceptions policy; and
3. (3) the collateral exceptions policy.

exception transaction

means a transaction entered into in accordance with any of the following:

1. (1) hedging exception;
2. (2) liquid asset exception; and
3. (3) collateral exception.

extraordinary vacancy

means a vacancy on the governing body of a ring-fenced body arising from the resignation, dismissal or death of an independent non-executive director before the expiry of his or her term of appointment as a director.

FMI

means any of the following: an interbank payment system, a central securities depository or a central counterparty.

group services entity

in relation to a ring-fenced body, means an entity within the same group as the ring-fenced body, whose only business is to provide services or facilities to any other person.

hedging exception

means:

1. (1) in relation to an excluded activity, the exception provided for in Article 6(1) of the Excluded Activities and Prohibitions Order; or
2. (2) in relation to a prohibition, the exception provided for in Article 14(2) of the Excluded Activities and Prohibitions Order.

hedging exceptions policy

means a policy document setting out in detail how a ring-fenced body makes use of the hedging exceptions and which meets the requirements of 17.

hedging exception transaction

means a transaction entered into in accordance with a hedging exception.

income-dependent

means a state in which the ring-fenced body would be unable to continue to carry on core activities if income to the ring-fenced body or any member of the sub-consolidation group were to reduce as a result of the acts, omissions or insolvency of a member of the ring-fenced body’s group that is not a ring-fenced affiliate.

interbank payment system

has the meaning in Article 13(11) of the Excluded Activities and Prohibitions Order.

intragroup transaction

has the meaning in Article 3 of Regulation (EU) No 648/2012.

liquid asset exception

means:

1. (1) in relation to an excluded activity, the exception provided for in Article 6(3)(a) of the Excluded Activities and Prohibitions Order; or
2. (2) in relation to a prohibition, the exceptions provided for in Article 14(3A) and Article 18(b) of the Excluded Activities and Prohibitions Order.

liquid asset exceptions policy

means a policy document setting out in detail how a ring-fenced body makes use of the liquid asset exceptions and which meets the requirements of 17.

liquid asset exception transaction

means a transaction entered into in accordance with a liquid asset exception.

participant

has the meaning set out in Article 2.1(19) of Regulation (EU) No 909/2014.

permitted supplier

means a person that provides services or facilities to any other person and that is:

1. (1) a group services entity; or
2. (2) a ring-fenced affiliate.

prohibition

means a prohibition imposed under the Excluded Activities and Prohibitions Order.

related undertaking

has the meaning in Article 1(4) of the Excluded Activities and Prohibitions Order.

relevant person

means:

1. (1) a ring-fenced body;
2. (2) any other firm that is a member of a sub-consolidation group; or
3. (3) a ring-fenced holding company.

ring-fenced affiliate

means:

1. (1) in relation to a ring-fenced body, any member of the sub-consolidation group of which the ring-fenced body is a member, other than the ring-fenced body itself; and
2. (2) in relation to a relevant person, any member of the sub-consolidation group of which the relevant person is a member, other than the relevant person itself.

ring-fencing obligation

means any obligation, prohibition or other requirement imposed on a ring-fenced body by or under FSMA by virtue of it being a ring-fenced body, including any statutory instrument made under FSMA and any ring-fencing rule, but not including any rule made by the FCA.

shared collateral

means collateral on which both the ring-fenced body and a member of its group that is not a ring-fenced affiliate have a claim.

specified factor

means:

1. (1) in relation to an excluded activity, any of the factors set out in Article 6(2) of the Excluded Activities and Prohibitions Order; or
2. (2) in relation to a prohibition, any of the factors set out in Article 14(3) of the Excluded Activities and Prohibitions Order.

sponsored structured finance vehicle

has the meaning in Article 1 of the Excluded Activities and Prohibitions Order.

tier 1 capital ratio

has the meaning in Article 92(2)(b) of the CRR.

total capital ratio

has the meaning in Article 92(2)(c) of the CRR.

transaction

includes any contract, transaction, or arrangement, which may or may not contain contractual terms.

1.3

For the purposes of this Part:

1. (1) a director is regarded as independent if he or she is not disqualified by virtue of falling within any of 1.3(2)(a) to (h).
2. (2) a director is not regarded as independent if he or she:
1. (a) has been an employee of the ring-fenced body or of any other member of its group within the period of five years before his or her appointment as a director (but a non-executive director is not to be regarded as an employee for this purpose);
2. (b) has, or has had, within the period of three years before appointment, a material business relationship with the ring-fenced body or any other member of its group either directly, or as a partner, shareholder, director or as a member of senior management or equivalent of an undertaking that has such a relationship with the ring-fenced body or other member of its group, as the case may be;
3. (c) has received or receives fixed or variable remuneration from the ring-fenced body or any other member of its group, other than a director’s fee or remuneration attributable to a period of service that concluded five years before his or her appointment as a director;
4. (d) has a close family tie with any of the following:
1. (i) an individual who provides or has provided professional or business advice (whether in his or her individual capacity or otherwise) to the ring-fenced body or any other member of its group;
2. (ii) a director of the ring-fenced body or of any other member of its group; or
3. (iii) a member of senior management or equivalent of the ring-fenced body or of any other member of its group;
5. (e) holds a directorship in any other undertaking that is not a member of the ring-fenced body’s group of which any other director of the ring-fenced body is also a director;
6. (f) has a link, of a nature that might reasonably be expected to give rise to a conflict that is to be identified under 3.2, with any other director of the ring-fenced body through involvement in any other undertaking that is not a member of the ring-fenced body’s group;
7. (g) can reasonably be identified as representing or otherwise associated with the interests of a particular shareholder or shareholders of a parent undertaking of the ring-fenced body where that shareholder is or those shareholders are able to exercise significant influence over the management of the parent undertaking; or
8. (h) has served on the governing body of the ring-fenced body or of any other member of its group for more than nine years from the date of first election.

1.4

Unless otherwise defined, any italicised expression used in this Part and in the CRR has the same meaning as in the CRR.

2.1

In this Chapter, “relevant rule” refers to each of the rules in:

1. (1) 3.5;
2. (2) 9.1; and
3. (3) 11, 12, 13, 14, 15 and 16.

2.2

Subject to 2.3 and 2.4:

1. (1) a relevant person that is not a ring-fenced body must comply with each relevant rule as if it were a ring-fenced body; and
2. (2) a relevant person must ensure each of its ring-fenced affiliates that is not a relevant person complies with each relevant rule as if it were a ring-fenced body.

2.3

In applying this Chapter to 11, the notice required under 11.1 must be provided only by a relevant person.

2.4

In applying this Chapter to 12, compliance by a ring-fenced body (RB) with 12.2 to 12.4 in relation to a ring-fenced affiliate (RA) that is not a ring-fenced body is sufficient to establish compliance by any relevant person that is a ring-fenced affiliate of RB with those rules in relation to RA.

2.5

Without prejudice to 2.2, a ring-fenced body that is required under Article 11(5) of the CRR to comply with obligations on a sub-consolidated basis must ensure that:

1. (1) responsibility for the matters in 2.6 is allocated to:
1. (a) a single ring-fenced body in its sub-consolidation group; or
2. (b) the ring-fenced holding company but only if a person employed by it or an officer of it performs a PRA senior management function in relation to a ring-fenced body in the sub-consolidation group; and
2. (2) the allocation is documented and notified to the PRA.

2.6

The matters referred to in 2.5(1) are:

1. (1) ensuring the performance by each ring-fenced body of its ring-fencing obligations; and
2. (2) ensuring the performance by each relevant person in the sub-consolidation group of its obligations under 2.2.

2.7

Without prejudice to 2.2, the person allocated with responsibility under 2.5(1) must:

1. (1) discharge the responsibility; and
2. (2) document and keep updated the arrangements and processes that enable it to discharge the responsibility.

2.8

Without prejudice to 3.4, the person allocated with responsibility under 2.5(1) must be able to demonstrate to the PRA:

1. (1) compliance with ring-fencing obligations by any ring-fenced body within the sub-consolidation group;
2. (2) compliance with relevant rules by any ring-fenced affiliate, other than a ring-fenced body, as if it were a ring-fenced body, subject to 2.3 and 2.4;
3. (3) compliance with 10.1 by any ring-fenced affiliate that is not a ring-fenced body but is a CRR firm; and
4. (4) the extent to which any ring-fenced body within the sub-consolidation group and its ring-fenced affiliates have acted, if they have chosen to do so, in accordance with any guidance given by the PRA relating to ring-fenced bodies or ring-fenced affiliates.

3.1

A ring-fenced body must, in carrying on its business, ensure that it is able to take decisions independently of other members of its group.

3.2

A ring-fenced body must establish and maintain arrangements to identify and manage any conflict between:

1. (1) any duty a director or a member of senior management owes to the ring-fenced body; and
2. (2) any interest of the director or member of senior management.

3.3

A ring-fenced body must take all reasonable steps to identify and manage any conflict between its interests and those of one or more members of its group.

3.4

A ring-fenced body must be able to demonstrate to the PRA:

1. (1) its compliance with every ring-fencing obligation; and
2. (2) the extent to which it has acted, if it has chosen to do so, in accordance with any guidance given by the PRA to ring-fenced bodies and which relates to the operation of the ring-fencing obligations.

3.5

A ring-fenced body must ensure, as far as reasonably practicable, it applies the same standards to the management of its:

1. (1) exposures to any member of its group that is not a ring-fenced affiliate as it would to the management of its exposures to any person that is not a member of its group; and
2. (2) transactions with any member of its group that is not a ring-fenced affiliate as it would to the management of its transactions with any person that is not a member of its group,

to ensure that the carrying on of core activities is not adversely affected by the acts, omissions or insolvency of that other group member.

4.1

A ring-fenced body must ensure that at least half of the members for the time being of its governing body are independent non-executive directors.

4.2

For the purposes of 4.1:

1. (1) the chairperson of a ring-fenced body’s governing body is not to be counted as one of the number of independent non-executive directors or as one of the total number of members for the time being of the governing body; and
2. (2) where an extraordinary vacancy arises which, if not filled, would cause the ring-fenced body to fail to comply with 4.1, the ring-fenced body must fill the vacancy as soon as reasonably possible after the vacancy has arisen, and will not be in breach of 4.1 while it is in the course of so doing.

4.3

A ring-fenced body must ensure that the person performing the Chair of the Governing Body function:

1. (1) is an independent non-executive director; and
2. (2) does not chair the governing body of any other member of the ring-fenced body’s group, other than a ring-fenced affiliate.

4.4

A ring-fenced body must ensure that no more than one-third of the members of its governing body are employees or directors of any other member of the ring-fenced body’s group, other than of a ring-fenced affiliate.

4.5

A ring-fenced body must ensure that it publicly advertises every vacancy for an independent non-executive director so as to bring the existence of the vacancy to the notice of those members of the public who might reasonably be expected to seek nomination.

4.6

4.5 does not apply if an extraordinary vacancy arises in the office held by the person performing the Chair of the Governing Body function of a ring-fenced body.

4.7

A ring-fenced body must ensure that none of its senior management who is a member of its governing body is an executive member of the governing body of any other member of the ring-fenced body’s group, other than a member that is:

1. (1) a body corporate falling within section 192JA(2) of FSMA; or
2. (2) a ring-fenced affiliate.

4.8

For the purpose of 4.7, ‘executive member’ means a person who performs any executive function in relation to the relevant member of the ring-fenced body’s group.

5.1

A ring-fenced body must ensure that its risk committee includes a person performing the Chair of Risk Committee function.

5.2

A ring-fenced body must ensure that the person performing the Chair of Risk Committee function does not chair any committee whose functions include oversight of the risk function of any other member of the ring-fenced body’s group, other than a ring-fenced affiliate.

5.3

A ring-fenced body must ensure that:

1. (1) its risk management function has sufficient resources to perform its role, including the identification, monitoring and management of risk;
2. (2) those resources are at all times identifiable as performing the risk management function for the ring-fenced body; and
3. (3) its risk management function supports the ability of the ring-fenced body to comply with 3.1.

5.4

A ring-fenced body must ensure that a person performing the Chief Risk function for the ring-fenced body is not also a person performing the Chief Risk function or function equivalent to the Chief Risk function (howsoever designated) for any other member of the ring-fenced body’s group or for the group, other than for a ring-fenced affiliate or for the sub-consolidation group.

6.1

A ring-fenced body must ensure that its audit committee includes a person performing the Chair of Audit Committee function.

6.2

A ring-fenced body must ensure that the person performing the Chair of Audit Committee function does not chair any committee whose functions include oversight of the audit function of any other member of the ring-fenced body’s group, other than a ring-fenced affiliate.

6.3

A ring-fenced body must ensure that:

1. (1) its internal audit function has sufficient resources to perform its role;
2. (2) those resources are at all times identifiable as performing the internal audit function for the ring-fenced body; and
3. (3) its internal audit function supports the ability of the ring-fenced body to comply with 3.1.

6.4

A ring-fenced body must ensure that a person performing the Head of Internal Audit function for the ring-fenced body:

1. (1) is not also a person performing the Head of Internal Audit function or function equivalent to the Head of Internal Audit function (howsoever designated) for any other member of the ring-fenced body’s group or for the group, other than for a ring-fenced affiliate or for the sub-consolidation group; and
2. (2) is able to have direct access to the management body of the ring-fenced body where he or she considers it necessary.

7.1

A ring-fenced body must ensure that its nomination committee includes a chairperson.

7.2

A ring-fenced body must ensure that the chairperson of its nomination committee does not chair any committee whose functions include nomination for any other member of the ring-fenced body’s group, other than a ring-fenced affiliate.

7.3

A ring-fenced body must ensure as far as reasonably practicable that, in carrying on its business, it does not depend on any employee who may cease to be available to undertake work for the ring-fenced body in the event of the insolvency of any other member of its group and that this is reflected in its human resources policy.

8.1

A ring-fenced body must establish a remuneration committee that comprises only members of its management body who do not perform any executive function in relation to the ring-fenced body.

8.2

A ring-fenced body must ensure that its remuneration committee includes a person performing the Chair of Remuneration Committee function.

8.3

A ring-fenced body must ensure that the person performing the Chair of Remuneration Committee function does not chair any committee whose functions include remuneration for any other member of the ring-fenced body’s group, other than for a ring-fenced affiliate.

8.4

When establishing, implementing and maintaining remuneration policies, practices and procedures for its employees, a ring-fenced body must ensure that these remuneration policies, practices and procedures:

1. (1) are consistent with and promote the sound and effective risk management of the ring-fenced body;
2. (2) do not encourage risk-taking that exceeds the level of tolerated risk of the ring-fenced body;
3. (3) are in line with the business strategy, objectives, values and long-term interests of the ring-fenced body; and
4. (4) do not encourage a ring-fenced body to bear any risk that would undermine its ability to comply with any ring-fencing obligation.

8.5

Nothing in 8.4 restricts a ring-fenced body from enabling the receipt by its employees of remuneration in the form of shares or other instruments of another member of the ring-fenced body’s group, provided that the receipt of such remuneration is in accordance with 8.4.

9.1

1. (1) Where a ring-fenced body receives services and accesses facilities that it requires on a regular basis from an entity in its group, it may do so, whether directly or indirectly, only where that entity is a permitted supplier.
2. (2) (1) does not apply to the extent the group member is:
3. 1. (a) a direct participant in an FMI; and
   2. (b) acting as an intermediary for the ring-fenced body to access the FMI.
4. (3) For the avoidance of doubt:
5. 1. (a) the definition of central counterparty applies for the purposes of this Chapter whether or not the central counterparty is regulated by Regulation (EU) No. 648/2012, or is established in an EEA state or elsewhere; and
   2. (b) the definitions of central securities depository and participant apply for the purposes of this Chapter whether or not the central securities depository or participant is regulated by Regulation (EU) No. 909/2014, or is established in an EEA state or elsewhere.

9.2

A ring-fenced body must ensure the agreement and any related arrangement under which it receives services or accesses facilities it requires in relation to the carrying on of core activities does not permit any other party to terminate, suspend or materially alter the services or facilities or the agreement or arrangement as a result of an act, omission or deterioration in the financial circumstances of another entity within the same group as the ring-fenced body.

9.3

1. (1) 9.3(2) applies if the ability of a permitted supplier (PS1) that provides services or facilities referred to in 9.2 to a ring-fenced body is dependent upon the provision of services or facilities to PS1 by another permitted supplier (PS2), whether the provision of services or facilities to PS1 by PS2 is direct or indirect.
2. (2) 9.2 does not prevent the ring-fenced body agreeing PS1 may suspend or alter the provision of those services or facilities to the extent it is prevented from providing those services or facilities as a result of a deterioration in the financial circumstances of PS2, provided:
1. (a) the ring-fenced body takes all reasonable steps before and after entering into that agreement to reduce the probability and likely impact of such an alteration to the provision of those services or facilities; and
2. (b) the agreement requires PS1 to use its best efforts to eliminate or reduce the effect of any such suspension or alteration.

10.1

A ring-fenced body and a ring-fenced affiliate that is a CRR firm must include an intragroup transaction in its calculation of its own funds requirements for credit valuation adjustment risk in accordance with Part 3, Title VI of the CRR where the intragroup transaction is entered into with a member of its group that is not a ring-fenced affiliate.

10.2

A ring-fenced body that is required under Article 11(5) of the CRR to comply with obligations on a sub-consolidated basis must comply with 10.1 on that sub-consolidated basis.

[Note: Art. 382(4)(b) of the CRR]

11.1

A ring-fenced body must not make a distribution to any entity in its group that is not a ring-fenced affiliate unless it has given reasonable notice to the PRA of its intention to make the payment.

11.2

When a ring-fenced body gives notice under 11.1 it must include the following:

1. (1) the amount of the intended distribution;
2. (2) the date on which the distribution is intended to be paid;
3. (3) the current common equity tier 1 capital ratio, tier 1 capital ratio and total capital ratio held by each ring-fenced body in its group; and
4. (4) any relevant supporting information, including an assessment of any impact of the intended distribution on the current and forecast capital position of each ring-fenced body in its group.

11.3

The information in 11.2(3) and (4) must also be provided on a sub-consolidated basis in respect of any ring-fenced body that is required under Article 11(5) of the CRR to comply with obligations on a sub-consolidated basis.

11.4

The information in 11.2 must be approved by an appropriate PRA approved person who performs a controlled function in relation to a firm in the sub-consolidation group and that PRA approved person must be named in the notice.

12.1

A ring-fenced body must enter into a transaction with a member of its group which is not a ring-fenced affiliate only on arm’s length terms.

12.2

A ring-fenced body must establish, implement and maintain an effective policy and procedures to identify and evaluate transactions entered into with other members of its group which are not ring-fenced affiliates to enable compliance with 12.1.

12.3

A ring-fenced body’s arm’s length policy must at least:

1. (1) establish robust means for identification, timely recording and monitoring of all transactions entered into with other group members which are not ring-fenced affiliates;
2. (2) specify how the terms of a transaction will be determined, including pricing and settlement;
3. (3) specify appropriate governance arrangements for amendments to the policy and procedures;
4. (4) specify processes for approval and reporting of exceptions to the policy and procedures; and
5. (5) include procedures for dispute resolution between the ring-fenced body and members of its group which are not ring-fenced affiliates with which it transacts.

12.4

1. (1) A ring-fenced body’s arm’s length procedures must include at least:
1. (a) approval of the arm’s length policy by its governing body;
2. (b) review by the governing body of the arm’s length policy at least annually taking into account the report of the internal audit function under (e) and the reports under (c);
3. (c) the provision of internal reports to its governing body on the operation of the arm’s length policy including the extent to which the ring-fenced body’s transactions comply with its arm’s length policy;
4. (d) assessment of the following matters by its internal audit function at least annually in relation to an appropriate subset of transactions:
1. (i) the extent to which the arm’s length policy complies with the requirements of this Chapter;
2. (ii) the effectiveness of the arm’s length policy; and
3. (iii) the effectiveness of the procedures established in compliance with this Chapter.
5. (e) provision of a report from the internal audit function to the governing body at least annually on its assessment of the matters in 12.4(1)(d).
2. (2) A ring-fenced body must ensure the scope of its internal audit function’s assessment of the matters in (1)(d) includes all subsets of transactions at least once every three years.

13.1

A ring-fenced body must not, as far as reasonably practicable, become income-dependent due to income generated from:

1. (1) transactions entered into with members of its group that are not ring-fenced affiliates; or
2. (2) transactions entered into with a customer, or customers, where that income is contingent, or likely to be contingent, on services continuing to be provided to that customer, or customers, by members of the ring-fenced body’s group that are not ring-fenced affiliates.

14.1

A ring-fenced body must not enter into a netting arrangement if the effect of the netting arrangement is to permit a person, other than a member of the ring-fenced body’s group, to offset its liabilities to the ring-fenced body against its claims on any member of the ring-fenced body’s group that is not a ring-fenced affiliate in the event of default of any party to the netting arrangement.

15.1

A ring-fenced body must ensure that its share of any shared collateral provided by its counterparties would not cease to be available to the ring-fenced body as a result of the acts, omissions or insolvency of, or actions taken in relation to, a member of the ring-fenced body’s group that is not a ring-fenced affiliate.

16.1

This Chapter applies if a ring-fenced body accesses the services of:

1. (1) a central counterparty whether as a clearing member or otherwise; or
2. (2) a central securities depository whether as a participant or otherwise.

16.2

In this Chapter:

1. (1) the definitions of central counterparty and clearing member apply for the purposes of this Chapter whether or not the central counterparty or clearing member is regulated by Regulation (EU) No. 648/2012, or is established in an EEA state or elsewhere; and
2. (2) the definitions of central securities depository and participant apply for the purposes of this Chapter whether or not the central securities depository or participant is regulated by Regulation (EU) No. 909/2014, or is established in an EEA state or elsewhere.

16.3

For the purposes of this Chapter, if a ring-fenced body accesses the services of a central counterparty or a central securities depository not established in the UK or any part of whose operations are not subject to the law of the UK, the ring-fenced body will be considered to comply with the rules in this Chapter if it has taken necessary steps to ensure that its positions, if applicable, and assets are identifiable separately from the positions, if applicable, and assets of any other person by measures that deliver outcomes comparable to those set out in the rules in this Chapter.

16.4

If a ring-fenced body accesses the services of a central counterparty as a clearing member, it must ensure the positions and assets held for its account are distinguished in accounts at the central counterparty from the positions and assets held for the account of any other clearing member and of the central counterparty.

16.5

If a ring-fenced body accesses the services of a central counterparty through a clearing member, it must ensure the positions and assets held for its account are distinguished:

1. (1) in accounts at the central counterparty from the positions and assets held for the account of the clearing member and either:
1. (a) the positions and assets held for the account of the ring-fenced body are distinguished in accounts at the central counterparty from the positions and assets held for the account of all other clients of that clearing member; or
2. (b) the value of assets required by the central counterparty as margin to cover the positions held for the account of all clients of that clearing member including the ring-fenced body within the account at the central counterparty is calculated on a gross basis, such that the value is at least equal to the sum of the margin amounts that would be required by the central counterparty for each individual client within that account if each individual client were a clearing member; and
2. (2) in accounts at the clearing member from the positions and assets held for the account of the clearing member’s other clients and of the clearing member.

16.6

If a ring-fenced body accesses the services of a central securities depository as a participant, it must ensure any assets held for its account at the central securities depository are distinguished in accounts at the central securities depository from the assets held for the account of any other participant and of the central securities depository.

16.7

If a ring-fenced body accesses the services of a central securities depository through a participant, it must ensure any assets held for its account are distinguished:

1. (1) in accounts at the central securities depository from the assets held for the account of the participant and of all other clients of that participant; and
2. (2) in accounts at the participant from the assets held for the account of the participant’s other clients and of the participant.

17.1

For each exception separately, a ring-fenced body must establish, implement and maintain an effective policy that sets out at least the following:

1. (1) the types of exception transactions that are permitted to be entered into under the relevant exceptions policy including details on at least the following aspects:
1. (a) the specific types of instrument or contract which are permitted;
2. (b) the features of instruments or contracts which are permitted, including permitted underlying collateral where the instrument or contract references underlying collateral;
3. (c) permitted counterparties or types of counterparties; and
4. (d) the permitted terms or maturities of instruments or contracts;
2. (2) how the types of exception transactions that are permitted to be entered into and any related limit frameworks are integrated into the risk management framework of the ring-fenced body including its risk appetite;
3. (3) how the ring-fenced body determines that the sole or main purpose of an exception transaction is:
1. (a) for a hedging exception transaction, to limit the extent to which:
1. (i) the ring-fenced body,
2. (ii) any subsidiary undertaking of the ring-fenced body,
3. (iii) any sponsored structured finance vehicle of the ring-fenced body,
4. (iv) any conduit vehicle of the ring-fenced body,
5. (v) another ring-fenced body within the same group as the ring-fenced body,
6. (vi) a related undertaking within the same group as the ring-fenced body, or
7. (vii) any combination of the undertakings referred to in (i) to (vi)
2. will be adversely affected by the specified factor;
3. (b) for a liquid asset exception transaction, to manage the liquidity of the ring-fenced body; and
4. (c) for a collateral exception transaction, to provide collateral in relation to hedging exception transactions;
4. (4) which individual or committee within the ring-fenced body has day to day responsibility for approval and oversight for exception transactions including:
1. (a) how, or in which circumstances, any responsibility is shared or delegated; and
2. (b) which exception transactions are escalated for approval, and the approval route including any exception transactions that are required to be subject to direct approval by the governing body, or a subcommittee of the governing body or other senior executive committees;
5. (5) any differences in use of the exception transactions between the trading book and the non-trading book;
6. (6) third party documentation that the ring-fenced body requires to be in place prior to execution of an exception transaction;
7. (7) how the ring-fenced body identifies, manages and controls exception transactions separately from other transactions;
8. (8) how the ring-fenced body considers the likely performance of exception transactions in stress scenarios (both market wide and idiosyncratic); and
9. (9) a description of the internal reporting process, including significant internal reporting outputs, that the entity has put in place to monitor adherence to the exceptions policies.

17.2

A ring-fenced body must set out the policies in 17.1 in relation to the hedging exceptions separately for each specified factor.

17.3

In addition to 17.1, a ring-fenced body must set out in its hedging exceptions policy separately for each specified factor:

1. (1) how the business of:
1. (a) the ring-fenced body;
2. (b) any subsidiary undertaking of the ring-fenced body;
3. (c) any sponsored structured finance vehicle of the ring-fenced body;
4. (d) any conduit vehicle of the ring-fenced body;
5. (e) another ring-fenced body within the same group as the ring-fenced body;
6. (f) a related undertaking within the same group as the ring-fenced body; or
7. (g) any combination of the undertakings referred to in (a) to (f)
2. results in exposures to the specified factor;
3. (2) how the ring-fenced body separately identifies, monitors and controls those hedging exception transactions it enters into which relate to customer derivative transactions for the purpose of monitoring the position risk requirement as required by Article 12(1)(a) of the Excluded Activities and Prohibitions Order;
4. (3) how the ring-fenced body assesses the effectiveness of hedging exception transactions including what quantitative assessments are performed; and
5. (4) the policies of the ring-fenced body in relation to hedging of anticipated transactions or exposures, including the limits it places on hedging exception transactions which relate to anticipated transactions or exposures and the process it follows to identify, monitor, control, report and assess hedging exception transactions which relate to anticipated transactions or exposures separately from other hedging exception transactions.

17.4

A ring-fenced body must ensure its exceptions policies are lawful and act in accordance with its exceptions policies as long as these policies are lawful.

17.5

A ring-fenced body must ensure its exceptions policies are:

1. (1) approved by the governing body; and
2. (2) reviewed by the governing body at least annually taking into account the reports under 17.7 and 17.8.

17.6

A ring-fenced body must put in place and implement procedures to operationalise its exceptions policies including internal reporting and oversight.

17.7

A ring-fenced body must ensure that its governing body receives internal reports on the operation of the exceptions policies at least annually, including:

1. (1) transactions entered into under each of the exceptions policies; and
2. (2) the extent to which these transactions comply with the exceptions policies.

17.8

1. (1) A ring-fenced body must ensure that its internal audit function assesses at least annually the following matters in relation to an appropriate subset of exceptions and specified factors and reports its findings at least annually to its governing body:
1. (a) the extent to which the exceptions policies comply with the requirements of this Chapter and with the ring-fenced body’s statutory obligations;
2. (b) the effectiveness of the exceptions policies; and
3. (c) the effectiveness of the procedures established in compliance with this Chapter.
2. (2) A ring-fenced body must ensure that its internal audit function assesses and includes in its reports under paragraph (1) all exceptions and specified factors at least once every three years.

18.1

A ring-fenced body that is required under Article 11(5) of the CRR to comply with obligations on a sub-consolidated basis must comply with the following provisions of the PRA Rulebook on that sub-consolidated basis:

1. (1) the ICAAP rules in the Internal Capital Adequacy Assessment Part;
2. (2) the risk control rules in the Internal Capital Adequacy Assessment Part;
3. (3) the overall financial adequacy rule in Internal Capital Adequacy Assessment 2.1;
4. (4) Internal Capital Adequacy Assessment 15;
5. (5) the Capital Buffers Part;
6. (6) the Internal Liquidity Adequacy Assessment Part;
7. (7) 2.1 (read with 2.2), 2.6, 2A.2, 5 and 6 of the General Organisational Requirements Part;
8. (8) 3.2 of the Skills, Knowledge and Expertise Part;
9. (9) 2.3, 2.7 and 3 of the Risk Control Part;
10. (10) 2.1(2) (read with 2.2) and 2.4 of the Group Risk Systems Part;
11. (11) the Remuneration Part;
12. (12) 2.1 of the Public Disclosure Part;
13. (13) the Benchmarking of Internal Approaches Part; and
14. (14) the Reporting Pillar 2 Part.

18.2

A ring-fenced body that is required under Article 11(5) of the CRR to comply with obligations on a sub-consolidated basis must comply with the obligations under the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (SI 2013/3118) on that sub-consolidated basis. For the avoidance of doubt, the treatment provided for in Regulations 4 and 5 of those regulations is available (with the necessary changes) to the ring-fenced body in its seeking to comply with this rule on a sub-consolidated basis.

[Note: Art. 71, 73-76, 78-96, 98, 123, 129, 130, 140-142 of the CRD.]

19.1

The PRA directs that any ring-fenced body wishing to apply for permission under Article 13 of the Excluded Activities and Prohibitions Order must:

1. (1) complete the relevant form on the PRA’s website;
2. (2) ensure the application is accompanied by information specified in the relevant form; and
3. (3) submit it in the manner set out in the relevant form.