Prudential Regulation Authority Rulebook

3.1

CRR 400(2)(c) permits the PRA to fully or partially exempt exposures incurred by a firm to certain intra-group undertakings from the large exposures limit stipulated in CRR Article 395(1). The PRA will consider exempting non-trading book and trading book exposures to intra-group undertakings that meet specified conditions set out in paragraph 3.1A, paragraph 3.8A, and the Large Exposure rules. Guidance in respect of these conditions is outlined below. Firms should note however that under CRR Article 400(2)(c) intra-group exposures that do not meet the criteria in Article 400(2)(c) are to be treated as exposures to a third party. 

3.1A

The PRA expects that the following conditions are met with respect to exposures incurred by the firm to members of its non-core large exposures group:

• the relationship between the firm and the counterparty eliminate or reduce the risk of the exposure; and
• any remaining concentration risk can be addressed by other equally effective means such as the arrangements, processes and mechanisms provided for in Rule 6.1 of the Internal Capital Adequacy Assessment Part of the PRA Rulebook.

3.2

For the purposes of assessing whether the relationship between the firm and the counterparty eliminate or reduce the risk of the exposure, the PRA expects that members of a non-core large exposures group meet the conditions set out in CRR Article 113(6) except for the condition to be established in the United Kingdom — CRR Article 113(6)(d). 

3.2A

For the purposes of assessing whether the condition in CRR Article 113(6)(e) is met, the PRA will consider the specific measures or restrictions, current or foreseen, that a regulator in other jurisdictions has placed or may place on the proposed member of the NCLEG and whether such measures constitute a material impediment.  The PRA expect firms to provide a description of any such specific measures or restrictions such as restrictions on dividend payment. The firm should confirm to the PRA that, insofar as it is aware, no such measures or restrictions are in place or foreseeable.  

3.3

The PRA’s rules fully exempt from the large exposures limit any non-trading book exposures from a firm to members of its non-core large exposures group, provided that the total such exposures are no greater than 100% of the firm’s Tier 1 capital.  

3.4

A firm can also apply for a non-core large exposures group trading book exemption. The amount of trading book exposures that may be exempted will depend on a firm’s trading book exposure allocation as defined in the PRA rules.  

3.5

Any trading book exposures of a firm to its non-core large exposures group above the firm’s trading book exposure exemption must be considered together with total exposures incurred by a firm to members of its group that are not included in a CUG permission, an NCLEG non-trading permission or an NCLEG trading book permission, and will be subject to the CRR large exposures regime (Part Four). This includes the ability to have trading book exposures that exceed the limits laid down in CRR Article 395 provided the conditions in this article are met, including the additional own funds requirement in CRR Article 395(5)(b). 

3.6

In addition to outlining how to calculate the size of the trading book exemption at any point in time, the PRA rules also specify that firms must allocate exposures to its trading book exposure allocation in order of ascending risk requirements. Therefore, a firm should first allocate the trading book exposures with the lowest risk requirements to its trading book exposure allocation. Once no further trading book exposures can be allocated within the firm’s trading book exposure allocation, any remaining trading book exposures are subject to the CRR large exposures regime. 

3.7

The PRA has judged that this approach represents the most appropriate way to retain our current intra-group large exposures policy under the CRR. Although there is a degree of additional complexity in calculating the amount of intra-group exposures that can be exempted under our rules the PRA judges that the policy outcome will be broadly similar to that under the current regime. The impact of this approach on the total own funds requirement for excess intra-group trading book exposures will depend on specific firm circumstances. 

3.8

In its review of a firm’s non-core large exposures group non-trading book exemption, and/or non-core large exposures group trading book exemption application, the PRA expects to assess:

• compliance with the conditions set out in paragraph 3.1A, paragraph 3.8A and the large exposures rules; and
• how the counterparties to be included in the non-core large exposures group meet the conditions for the core UK group except CRR Article 113(6)(d).

3.8A

For the purpose of assessing whether any remaining concentration risk can be addressed by other equally effective means as set out in paragraph 3.1A, the PRA will consider the following non exhaustive list of factors, including whether the: 

• firm has robust processes, procedures and controls, at individual level and at consolidated level, where relevant, to ensure that use of the exemption would not result in concentration risk that runs counter to its risk strategy and the principles of sound internal group risk management;
• concentration risk arising has been or will be clearly identified in the internal capital adequacy assessment process (ICAAP) of the firm and will be actively managed. The arrangements, processes and mechanisms to manage the concentration risk will be assessed in the supervisory review and evaluation process (SREP).

3.9

Firms should note that the PRA will still make a wider judgement whether it is appropriate to grant this treatment even where the above conditions are met. In making that judgement, the PRA will consider whether group entities are strongly incentivised to support each other. The PRA will also consider whether the treatment is consistent with the overall business model of the firm and furthers the PRA’s safety and soundness objective.

3.10

An RFB, or any other PRA-authorised person that is a member of a group containing an RFB, should note that the PRA will assess whether it remains appropriate to permit the treatment where the conditions as listed in paragraph 3.8 are met, including an assessment of the impact of the proposed treatment on the PRA’s general safety and soundness objective in relation to ringfencing.^[4]