Prudential Regulation Authority Rulebook

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[Note: Refer to rule 3.3]

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[Note: Refer to rule 1.1]

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[Note: The definition of “exposures” formerly contained in Article 389 of the CRR is in rule 1.2]

1.

The total exposures to a group of connected clients shall be calculated by adding together the exposures to individual clients in that group.

2.

The overall exposures to individual clients shall be calculated by adding the exposures in the trading book and the exposures in the non-trading book.

3.

For exposures in the trading book, institutions may:

1. (a) offset their long positions and short positions in the same financial instruments issued by a given client, with the net position in each of the different instruments being calculated in accordance with the methods laid down in Chapter 2 of Title IV of Part Three;
2. (b) offset their long positions and short positions in different financial instruments issued by a given client, but only where the financial instrument underlying the short position is junior to the financial instrument underlying the long position or where the underlying instruments are of the same seniority.

For the purposes of points (a) and (b), financial instruments may be allocated into buckets on the basis of different degrees of seniority in order to determine the relative seniority of positions.

4.

Institutions shall calculate the exposure values of the derivative contracts listed in Annex II of the CRR and of credit derivative contracts directly entered into with a client in accordance with one of the methods set out in Sections 3, 4 and 5 of Chapter 6 of Title II of Part Three, as applicable. The exposure value for securities financing transactions shall be calculated in accordance with the methods referred to in Section 4 of Chapter 4 of Title II of Part Three, as applicable. Exposure resulting from the transactions referred to in Articles 378, 379 and 380 shall be calculated in the manner laid down in those Articles.

When calculating the exposure value for the contracts referred to in the first subparagraph, where those contracts are allocated to the trading book, institutions shall also comply with the principles set out in Article 299.

By way of derogation from the first subparagraph, institutions with permission to use the method referred to in Section 6 of Chapter 6 of Title II of Part Three may use that method for calculating the exposure value for securities financing transactions.

5.

Institutions shall add to the total exposure to a client the exposures arising from derivative contracts listed in Annex II of the CRR and credit derivative contracts, where the contract was not directly entered into with that client but the underlying debt or equity instrument was issued by that client.

6.

Exposures shall not include any of the following:

2. (a) in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two business days following payment;
3. (b) in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five business days following payment or delivery of the securities, whichever is the earlier;
4. (c) in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed receipts in funding and other exposures arising from client activity which do not last longer than the following business day;
5. (d) in the case of the provision of money transmission including the execution of payment services, clearing and settlement in any currency and correspondent banking, intra-day exposures to institutions providing those services;
6. (e) exposures deducted from Common Equity Tier 1 items or Additional Tier 1 items in accordance with Articles 36 and 56 or any other deduction from those items that reduces the solvency ratio.

7.

To determine the overall exposure to a client or a group of connected clients, in respect of clients to which the institution has exposures through transactions referred to in points (m) and (o) of Article 112 or through other transactions where there is an exposure to underlying assets, an institution shall assess its underlying exposures taking into account the economic substance of the structure of the transaction and the risks inherent in the structure of the transaction itself, in order to determine whether it constitutes an additional exposure.

8.

[Note: Provision left blank. Rules for determining the overall exposure to a client or a group of connected clients corresponding to Delegated Regulation 2014/1187 are set out in Chapter 5 of this Part]

9.

[Note: Provision left blank]

[Note: This rule corresponds to Article 390 of the CRR as it applied immediately before revocation by the Treasury.]

[Note: Article 391 is enacted in rule 1.3 of this Part]

[Note: Article 392 is enacted in the definition of large exposure in rule 1.2 of this Part]

An institution shall have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying, managing, monitoring, reporting and recording all large exposures and subsequent changes to them, in accordance with this Part.

[Note: This rule corresponds to Article 393 of the CRR as it applied immediately before revocation by the Treasury.]

1.

Institutions shall report the following information to their competent authority for each large exposure that they hold, including large exposures exempted from the application of Article 395(1):

1. (a) the identity of the client or the group of connected clients to which the institution has a large exposure;
2. (b) the exposure value before taking into account the effect of the credit risk mitigation, where applicable;
3. (c) where used, the type of funded or unfunded credit protection;
4. (d) the exposure value, after taking into account the effect of the credit risk mitigation calculated for the purposes of Article 395(1), where applicable.

Institutions that are subject to Chapter 3 of Title II of Part Three shall report their 20 largest exposures to their competent authority on a consolidated basis, excluding the exposures exempted from the application of Article 395(1).

Institutions shall also report exposures of a value greater than or equal to GBP 260 million but less than 10% of the institution's Tier 1 capital to their competent authority on a consolidated basis.

2.

In addition to the information referred to in paragraph 1 of this Article, institutions shall report the following information to their competent authority in relation to their 10 largest exposures to institutions on a consolidated basis, as well as their 10 largest exposures to shadow banking entities which carry out banking activities outside the regulated framework on a consolidated basis, including large exposures exempted from the application of Article 395(1):

1. (a) the identity of the client or the group of connected clients to which an institution has a large exposure;
2. (b) the exposure value before taking into account the effect of the credit risk mitigation, when applicable;
3. (c) where used, the type of funded or unfunded credit protection;
4. (d) the exposure value after taking into account the effect of the credit risk mitigation calculated for the purpose of Article 395(1), where applicable.

3.

Institutions shall report the information referred to in paragraphs 1 and 2 to their competent authority on at least a semi-annual basis.

4.

[Note: Provision left blank]

[Note: This rule corresponds to Article 394 of the CRR as it applied immediately before revocation by the Treasury.]

1.

An institution shall not incur an exposure, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to a client or group of connected clients the value of which exceeds 25% of its Tier 1 capital. Where that client is an institution or an investment firm or where a group of connected clients includes one or more institutions or investment firms, that value shall not exceed 25% of the institution's Tier 1 capital or GBP 130 million, whichever is higher, provided that the sum of exposure values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to all connected clients that are not institutions does not exceed 25% of the institution's Tier 1 capital.

[Note: IFR 2019/2033 added “or an investment firm” and “or investment firms” to 1]

Where the amount of GBP 130 million is higher than 25% of the institution's Tier 1 capital, the value of the exposure, after having taken into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of this Part, shall not exceed a reasonable limit in terms of the institution's Tier 1 capital. That limit shall be determined by the institution in accordance with the policies and procedures referred to in Internal Capital Adequacy Assessment 6.1 required to address and control concentration risk. That limit shall not exceed 100% of the institution's Tier 1 capital.

By way of derogation from the first subparagraph of this paragraph, a G-SII shall not incur an exposure to another G-SII or to a non-UK G-SII, the value of which, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, exceeds 15% of its Tier 1 capital. A G-SII shall comply with such limit no later than 12 months from the date on which it came to be identified as a G-SII. Where the G-SII has an exposure to another institution or group which comes to be identified as a G-SII or as a non-UK G-SII, it shall comply with such limit no later than 12 months from the date on which that other institution or group came to be identified as a G-SII or as a non-UK G-SII.

1A.

[Note: Provision left blank]

3.

Subject to Article 396, an institution shall at all times comply with the relevant limit laid down in paragraph 1.

4.

Assets constituting claims and other exposures to third-country investment firms may be subject to the same treatment as set out in paragraph 1.

5.

The limits laid down in this Article may be exceeded for the exposures in the institution's trading book, provided that all the following conditions are met:

1. (a) the exposure in the non-trading book to the client or group of connected clients in question does not exceed the limit laid down in paragraph 1, this limit being calculated with reference to Tier 1 capital, so that the excess arises entirely in the trading book;
2. (b) the institution meets an additional own funds requirement on the part of the exposure in excess of the limit laid down in paragraph 1 of this Article which is calculated in accordance with Articles 397 and 398;
3. (c) where 10 days or less have elapsed since the excess referred to in point (b) occurred, the trading-book exposure to the client or group of connected clients in question does not exceed 500% of the institution's Tier 1 capital;
4. (d) any excesses that have persisted for more than 10 days do not, in aggregate, exceed 600% of the institution's Tier 1 capital.

Each time the limit has been exceeded, the institution shall report to the competent authority without delay the amount of the excess and the name of the client concerned and, where applicable, the name of the group of connected clients concerned.

6.

[Note: Provision left blank]

[Note: This rule corresponds to Article 395 of the CRR as it applied immediately before revocation by the Treasury.]

1.

If, in an exceptional case, exposures exceed the limit set out in Article 395(1), the institution shall report the value of the exposure without delay to the competent authority which may, where the circumstances warrant it, allow the institution a limited period of time in which to comply with the limit.

[Note: This is a permission under section 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

Where the amount of GBP 130 million referred to in Article 395(1) is applicable, the competent authority may allow the 100% limit in terms of the institution's Tier 1 capital to be exceeded on a case-by-case basis.

[Note: This is a permission under section 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

Where, in the exceptional cases referred to in the first and second subparagraph of this paragraph, a competent authority allows an institution to exceed the limit set out in Article 395(1) for a period longer than three months, the institution shall present a satisfactory plan for a timely return to compliance with that limit and shall carry out that plan within the period agreed with the competent authority.

2.

Where compliance by an institution on an individual or sub-consolidated basis with the obligations imposed in this Part is waived under Article 7(1), or the provisions of Article 9 are applied in the case of parent institutions, measures shall be taken to ensure the satisfactory allocation of risks within the group.

[Note: This rule corresponds to Article 396 of the CRR as it applied immediately before revocation by the Treasury.]

1.

The excess referred to in Article 395(5)(b) shall be calculated by selecting those components of the total trading exposure to the client or group of connected clients in question which attract the highest specific-risk requirements in Part Three, Title IV, Chapter 2 and/or requirements in Article 299 and Part Three, Title V, the sum of which equals the amount of the excess referred to in point (a) of Article 395(5).

2.

Where the excess has not persisted for more than 10 days, the additional capital requirement shall be 200% of the requirements referred to in paragraph 1, on these components.

3.

As from 10 days after the excess has occurred, the components of the excess, selected in accordance with paragraph 1, shall be allocated to the appropriate line in Column 1 of Table 1 in ascending order of specific-risk requirements in Part Three, Title IV, Chapter 2 and/or requirements in Article 299 and Part Three, Title V. The additional own funds requirement shall be equal to the sum of the specific-risk requirements in Part Three, Title IV, Chapter 2 and/or the Article 299 and Part Three, Title V requirements on these components, multiplied by the corresponding factor in Column 2 of Table 1.

Table 1:

[Note: This rule corresponds to Article 397 of the CRR as it applied immediately before revocation by the Treasury.]

Institutions shall not deliberately avoid the additional own funds requirements set out in Article 397 that they would otherwise incur, on exposures exceeding the limit laid down in Article 395(1) once those exposures have been maintained for more than 10 days, by means of temporarily transferring the exposures in question to another company, whether within the same group or not, and/or by undertaking artificial transactions to close out the exposure during the 10-day period and create a new exposure.

Institutions shall maintain systems which ensure that any transfer which has the effect referred to in the first subparagraph is immediately reported to the competent authority.

[Note: This rule corresponds to Article 398 of the CRR as it applied immediately before revocation by the Treasury.]

1.

An institution shall use a credit risk mitigation technique in the calculation of an exposure where it has used that technique to calculate capital requirements for credit risk in accordance with Title II of Part Three, provided that the credit risk mitigation technique meets the conditions set out in this Article.

For the purposes of Articles 400 to 403 the term ‘guarantee’ shall include credit derivatives recognised under Chapter 4 of Title II of Part Three other than credit linked notes.

2.

Subject to paragraph 3 of this Article, where, under Articles 400 to 403 the recognition of funded or unfunded credit protection is permitted, this shall be subject to compliance with the eligibility requirements and other requirements set out in Part Three, Title II, Chapter 4.

3.

Credit risk mitigation techniques which are available only to institutions using one of the IRB approaches shall not be used to reduce exposure values for large exposure purposes, except for exposures secured by immovable properties in accordance with Article 402.

4.

Institutions shall analyse, to the extent possible, their exposures to collateral issuers, providers of unfunded credit protection and underlying assets pursuant to Article 390(7) for possible concentrations and where appropriate take action and report any significant findings to their competent authority.

[Note: This rule corresponds to Article 399 of the CRR as it applied immediately before revocation by the Treasury.]

1.

The following exposures shall be exempted from the application of Article 395(1):

1. (a) asset items constituting claims on central governments, central banks or public sector entities which, unsecured, would be assigned a 0% risk weight under Part Three, Title II, Chapter 2;
2. (b) asset items constituting claims on international organisations or multilateral development banks which, unsecured, would be assigned a 0% risk weight under Part Three, Title II, Chapter 2;
3. (c) asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations, multilateral development banks or public sector entities, where unsecured claims on the entity providing the guarantee would be assigned a 0% risk weight under Part Three, Title II, Chapter 2;
4. (d) other exposures attributable to, or guaranteed by, central governments, central banks, international organisations, multilateral development banks or public sector entities, where unsecured claims on the entity to which the exposure is attributable or by which it is guaranteed would be assigned a 0% risk weight under Part Three, Title II, Chapter 2;
5. (e) asset items constituting claims on regional governments or local authorities of the United Kingdom where those claims would be assigned a 0% risk weight under Part Three, Title II, Chapter 2 and other exposures to or guaranteed by those regional governments or local authorities, claims on which would be assigned a 0% risk weight under Part Three, Title II, Chapter 2;
6. (f) exposures to counterparties referred to in Article 113(6) or (7) if they would be assigned a 0% risk weight under Part Three, Title II, Chapter 2. Exposures that do not meet those criteria, whether or not exempted from Article 395(1) shall be treated as exposures to a third party;
7. (g) asset items and other exposures secured by collateral in the form of cash deposits placed with the lending institution or with an institution which is the parent undertaking or a subsidiary of the lending institution;
8. (h) asset items and other exposures secured by collateral in the form of certificates of deposit issued by the lending institution or by an institution which is the parent undertaking or a subsidiary of the lending institution and lodged with either of them;
9. (i) exposures arising from undrawn credit facilities that are classified as low-risk off-balance sheet items in Annex I of the CRR and provided that an agreement has been concluded with the client or group of connected clients under which the facility may be drawn only if it has been ascertained that it will not cause the limit applicable under Article 395(1) to be exceeded;
10. (j) clearing members' trade exposures and default fund contributions to qualified central counterparties;
11. (k) exposures to the UK deposit guarantee scheme arising from the funding of that scheme;
12. (l) clients' trade exposures referred to in Article 305(2) or (3).

Cash received under a credit linked note issued by the institution and loans and deposits of a counterparty to or with the institution which are subject to an on-balance sheet netting agreement recognised under Part Three, Title II, Chapter 4 shall be deemed to fall under point (g).

2.

The competent authority may permit an institution to treat as fully or partially exempt from the application of Article 395(1) the following types of exposures:

1. (a) [Note: Provision left blank];
2. (b) [Note: Provision left blank];
3. (c) exposures incurred by an institution, including through participations or other kinds of holdings, to its parent undertaking, to other subsidiaries of that parent undertaking, or to its own subsidiaries and qualifying holdings, in so far as those undertakings are covered by the supervision on a consolidated basis to which the institution itself is subject, in accordance with the CRR, United Kingdom enactments and rules which implemented Directive 2002/87/EC or with equivalent standards in force in a third country; exposures that do not meet those criteria, whether or not exempted from Article 395(1), shall be treated as exposures to a third party;
4. [Note: "NCLEG trading book permissions" and "NCLEG non-trading book permissions" (as defined in rule 1.2 of the Large Exposures Part) are granted by the PRA under this subparagraph]
5. (d) [Note: Provision left blank];
6. (e) [Note: Provision left blank];
7. (f) [Note: Provision left blank];
8. (g) asset items constituting claims on central banks in the form of required minimum reserves held at those central banks which are denominated in their national currencies;
9. [Note: "Sovereign large exposures permissions" (as defined in rule 1.2 of the Large Exposures Part) are granted by the PRA under subparagraph (g)]
10. (h) asset items constituting claims on central governments in the form of statutory liquidity requirements held in government securities which are denominated and funded in their national currencies provided that the credit assessment of those central governments assigned by a nominated ECAI is investment grade;
11. [Note: "Sovereign large exposures permissions" (as defined in rule 1.2 of the Large Exposures Part) are granted by the PRA under subparagraph (h)]
12. (i) [Note: Provision left blank];
13. (j) [Note: Provision left blank];
14. (k) [Note: Provision left blank].

[Note: This is a permission under section 144G and 192XC of FSMA to which Part 8 of the Capital Requirements Regulations applies]

3.

[Note: Provision left blank].

4.

The simultaneous application of more than one exemption set out in paragraphs 1 and 2 to the same exposure shall not be permitted.

[Note: This rule corresponds to Article 400 of the CRR as it applied immediately before revocation by the Treasury]

1.

For calculating the value of exposures for the purposes of Article 395(1), an institution may use the fully adjusted exposure value (E*) as calculated under Chapter 4 of Title II of Part Three taking into account the credit risk mitigation, volatility adjustments, and any maturity mismatch referred to in that Chapter.

2.

With the exception of institutions using the Financial Collateral Simple Method, for the purposes of the first paragraph, institutions shall use the Financial Collateral Comprehensive Method, regardless of the method used for calculating the own funds requirements for credit risk.

By way of derogation from paragraph 1, institutions with permission to use the methods referred to in Section 4 of Chapter 4 of Title II of Part Three and Section 6 of Chapter 6 of Title II of Part Three, may use those methods for calculating the exposure value of securities financing transactions.

3.

In calculating the value of exposures for the purposes of Article 395(1), institutions shall conduct periodic stress tests of their credit-risk concentrations, including in relation to the realisable value of any collateral taken.

These periodic stress tests referred to in the first subparagraph shall address risks arising from potential changes in market conditions that could adversely impact the institutions' adequacy of own funds and risks arising from the realisation of collateral in stressed situations.

The stress tests carried out shall be adequate and appropriate for the assessment of those risks.

Institutions shall include the following in their strategies to address concentration risk:

1. (a) policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those exposures;
2. (b) policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques, in particular from large indirect credit exposures, for example to a single issuer of securities taken as collateral.

4.

Where an institution reduces an exposure to a client using an eligible credit risk mitigation technique in accordance with Article 399(1), and Article 403 applies, the institution, in the manner set out in Article 403, shall treat the part of the exposure by which the exposure to the client has been reduced as having been incurred for the protection provider rather than for the client.

[Note: This rule corresponds to Article 401 of the CRR as it applied immediately before revocation by the Treasury.]

1.

For the calculation of exposure values for the purposes of Article 395, institutions may, except where prohibited by applicable national law, reduce the value of an exposure or any part of an exposure fully secured by residential property in accordance with Article 125(1) by the pledged amount of the market value or mortgage lending value of the property concerned, but by not more than 50% of the market or 60% of the mortgage lending value if rigorous criteria are in force at the time in the United Kingdom for the assessment of the mortgage lending value in statutory or regulatory provisions, provided that all of the following conditions are met:

1. (a) the competent authority has not, in rules, set a risk weight higher than 35% for exposures or parts of exposures secured by residential property in accordance with Article 124(2);
2. (b) the exposure or part of the exposure is fully secured by any of the following:
1. (i) one or more mortgages on residential property; or
2. (ii) a residential property in a leasing transaction under which the lessor retains full ownership of the residential property and the lessee has not yet exercised their option to purchase;
3. (c) the requirements laid down in Article 208 and Article 229(1) are met.

2.

For the calculation of exposure values for the purposes of Article 395, an institution may, except where prohibited by applicable national law, reduce the value of an exposure or any part of an exposure that is fully secured by commercial immovable property in accordance with Article 126(1) by the pledged amount of the market value or mortgage lending value of the property concerned, but not by more than 50% of the market value or 60% of the mortgage lending value if rigorous criteria are in force at the time in the United Kingdom for the assessment of the mortgage lending value in statutory or regulatory provisions, provided that all of the following conditions are met:

1. (a) the competent authority has not, in rules, set a risk weight higher than 50% for exposures or parts of exposures secured by commercial immovable property in accordance with Article 124(2);
2. (b) the exposure is fully secured by any of the following:
1. (i) one or more mortgages on offices or other commercial premises; or
2. (ii) one or more offices or other commercial premises and the exposuress related to property leasing transactions;
3. (c) the requirements in point (a) of Article 126(2) and in Article 208 and Article 229(1) are met;
4. (d) the commercial immovable property is fully constructed.

3.

An institution may treat an exposure to a counterparty that results from a reverse repurchase agreement under which the institution has purchased from the counterparty non-accessory independent mortgage liens on immovable property of third parties as a number of individual exposures to each of those third parties, provided that all of the following conditions are met:

1. (a) the counterparty is an institution or an investment firm;
2. (b) the exposure is fully secured by liens on the immovable property of those third parties that have been purchased by the institution and the institution is able to exercise those liens;
3. (c) the institution has ensured that the requirements in Article 208 and Article 229(1) are met;
4. (d) the institution becomes beneficiary of the claims that the counterparty has against the third parties in the event of default, insolvency or liquidation of the counterparty;
5. (e) the institution reports to the competent authority in accordance with Article 394 the total amount of exposures to each other institution or investment firm that are treated in accordance with this paragraph.

For these purposes, the institution shall assume that it has an exposure to each of those third parties for the amount of the claim that the counterparty has on the third party instead of the corresponding amount of the exposure to the counterparty. The remainder of the exposure to the counterparty, if any, shall continue to be treated as an exposure to the counter party.

[Note: This rule corresponds to Article 402 of the CRR as it applied immediately before revocation by the Treasury.]

1.

Where an exposure to a client is guaranteed by a third party or is secured by collateral issued by a third party, an institution may:

1. (a) treat the portion of the exposure which is guaranteed as an exposure to the guarantor rather than to the client, provided that the unsecured exposure to the guarantor would be assigned a risk weight that is equal to or lower than the risk weight of the unsecured exposure to the client under Chapter 2 of Title II of Part Three;
2. (b) treat the portion of the exposure collateralised by the market value of recognised collateral as exposure to the third party rather than to the client, provided that the exposure is secured by collateral and provided that the collateralised portion of the exposure would be assigned a risk weight that is equal to or lower than the risk weight of the unsecured exposure to the client under Chapter 2 of Title II of Part Three.

The approach referred to in point (b) of the first subparagraph shall not be used by an institution where there is a mismatch between the maturity of the exposure and the maturity of the protection.

For the purpose of this Part, an institution may use both the Financial Collateral Comprehensive Method and the treatment set out in point (b) of the first subparagraph of this paragraph only where it is permitted to use both the Financial Collateral Comprehensive Method and the Financial Collateral Simple Method for the purposes of Article 92.

2.

Where an institution applies point (a) of paragraph 1, the institution:

1. (a) where the guarantee is denominated in a currency different from that in which the exposure is denominated, shall calculate the amount of the exposure that is deemed to be covered in accordance with the provisions on the treatment of currency mismatch for unfunded credit protection set out in Part Three;
2. (b) shall treat any mismatch between the maturity of the exposure and the maturity of the protection in accordance with the provisions on the treatment of maturity mismatch set out in Chapter 4 of Title II of Part Three;
3. (c) may recognise partial coverage in accordance with the treatment set out in Chapter 4 of Title II of Part Three.

3.

For the purposes of point (b) of paragraph 1, an institution may replace the amount in point (a) of this paragraph with the amount in point (b) of this paragraph, provided that the conditions set out in points (c), (d) and (e) of this paragraph are met:

1. (a) the total amount of the institution's exposure to a collateral issuer due to tri-party repurchase agreements facilitated by a tri-party agent;
2. (b) the full amount of the limits that the institution has instructed the tri-party agent referred to in point (a) to apply to the securities issued by the collateral issuer referred to in that point;
3. (c) the institution has verified that the tri-party agent has in place appropriate safeguards to prevent breaches of the limits referred to in point (b);
4. (d) the competent authority has not, in a requirement imposed under FSMA, prohibited such replacement;
5. (e) the sum of the amount of the limit referred to in point (b) of this paragraph and any other exposures of the institution to the collateral issuer does not exceed the limit set out in Article 395(1).

[Note: This rule corresponds to Article 403 of the CRR as it applied immediately before revocation by the Treasury.]

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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