Prudential Regulation Authority Rulebook

1.1

This Part applies to:

1. (1) every firm that is a CRR firm; and
2. (2) a CRR consolidation entity.

1.1A

1. (1) a firm must comply with this Part on an individual basis.
2. (2) a CRR consolidation entity must comply with this Part on a consolidated basis, and for this purpose, references to a firm in this Part (other than in 1.1 and 1.1A) mean a CRR consolidation entity.

1.2

In this Part the following definitions shall apply:

Capital Buffers Regulations

means the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 (SI 2014/894).

exposure

has the meaning it has in the Large Exposures (CRR) Part.

French NFC

means a counterparty that has its registered office in France, and which, at its level and at the highest level of consolidation of its group, belongs to the non-financial corporations sector as defined in point 2.45 of Annex A to Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union.

group of connected French NFCs

means

(a) where a French NFC is part of a group and the ultimate parent of the group has its registered office in France, the group and all its connected entities within the meaning of point (39) of Article 4(1) of the CRR;

(b) where a French NFC is part of a group and the ultimate parent of the group has its registered office outside France, the set of French NFCs in the same group and all other entities in France or abroad over which those French NFCs have direct or indirect control, or which are economically dependent on them, within the meaning of point (39) of Article 4(1) of the CRR.

highly indebted

in relation to a French NFC or a group of connected French NFCs, means that, at the highest level of group consolidation, the following two conditions are met, each condition being calculated based on accounting items defined in accordance with the applicable standard, as presented in the group's financial statements, such statements certified where appropriate by a chartered accountant:

(a) the first condition is that the leverage ratio is greater than 100%, where the leverage ratio is the ratio between total debt net of cash, and equity; and

(b) the second condition is that the financial charges coverage ratio is less than 3, where the financial charges coverage ratio is the ratio between, on the one hand, earnings before interest and tax (EBIT), and, on the other hand, interest and similar charges.

non-core large exposures group or NCLEG

means all counterparties that:

1. (a) are listed in a firm's NCLEG non-trading book permission or NCLEG trading book permission; and
2. (b) in relation to a firm, satisfy the conditions in 2.1 or 2.2.

NCLEG non-trading book exemption

means the exemption in 2.1.

NCLEG non-trading book permission

means a permission given by the PRA to apply the NCLEG non-trading book exemption under one of the following:

1. (a) prior to IP completion day, Article 400(2)(c) of Regulation of the European Parliament and of the Council (575/2013/EU) on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012;
2. (b) from IP completion day to 31 December 2021, Article 400(2)(c) of the CRR; or
3. (c) on or after 1 January 2022, Article 400(2)(c) of the Large Exposures (CRR) Part.

NCLEG trading book exemption

means the exemption in 2.2.

NCLEG trading book permission

means a permission given by the PRA to apply the NCLEG trading book exemption under one of the following:

1. (a) prior to IP completion day, Article 400(2)(c) of Regulation of the European Parliament and of the Council (575/2013/EU) on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012;
2. (b) from IP completion day to 31 December 2021, Article 400(2)(c) of the CRR; or
3. (c) on or after 1 January 2022, Article 400(2)(c) of the Large Exposures (CRR) Part.

qualifying exposure

means an exposure which has an original exposure value greater than or equal to €300 million, calculated in accordance with Articles 389 and 390 of the CRR before taking into account the effect of credit risk mitigation techniques and exemptions set out in Articles 399 to 403 of the CRR (and as required to be reported in accordance with Article 9 of the Supervisory Reporting ITS).

resolution exemption

means the exemption in 2.4

resolution exposure

means an exposure to resolution liabilities that ensures that losses can be absorbed and passed from the firm to its resolution entity.

resolution liabilities

means liabilities that meet the following criteria:

1. (a) the instrument that creates the liabilities must be issued and fully paid up;
2. (b) the liabilities are not secured or guaranteed by, the firm, its parent undertaking or any subsidiaries of the firm or its parent undertaking;
3. (c) the liabilities have a minimum effective remaining maturity of one year (where liabilities include an incentive to redeem, the maturity date shall, for the purposes of determining eligibility, be considered to be the date at which the incentive arises);
4. (d) the liabilities do not depend on derivatives for their value (put or call options will not in and of themselves be sufficient to disqualify a liability for this purpose absent any other dependency on derivatives);
5. (e) the liabilities are not subject to contractual set-off or netting arrangements;
6. (f) the liabilities are able to absorb losses and recapitalise the issuer of the liability, such as through being written down and/or converted to equity, without the use of stabilisation or resolution powers at the level of the issuer of the liability;
7. (g) the liabilities are subordinated to the operating liabilities of the issuer; and
8. (h) the liabilities do not take the form of equity.

sovereign large exposures exemption

means the exemption in 3.1.

sovereign large exposures permission

means a permission given by the PRA to apply the sovereign large exposures exemption under one of the following:

1. (a) prior to IP completion day, Article 400(2)(g) or (h) of Regulation of the European Parliament and of the Council (575/2013/EU) on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012;
2. (b) from IP completion day to 31 December 2021, Article 400(2)(g) or (h) of the CRR; or
3. (c) on or after 1 January 2022, Article 400(2)(g) or (h) of the Large Exposures (CRR) Part.

trading book exposure allocation

means the allocation in 2.2

1.3

Unless otherwise defined:

1. (1) any italicised expression used in this Part and in the CRR has the same meaning as in the CRR; and
2. (2) any italicised expression used in this Part and in the CRD has the same meaning as in the CRD.

2.1

1. (1) A firm with an NCLEG non-trading book permission may (in accordance with that permission) exempt, from the application of Article 395(1) of the CRR, non-trading book exposures, including participations or other kinds of holdings, incurred by the firm to members of its NCLEG that are:
1. (a) its parent undertaking;
2. (b) other subsidiaries of that parent undertaking; or
3. (c) its own subsidiaries,
2. in so far as those undertakings are covered by the supervision on a consolidated basis to which the firm itself is subject, in accordance with the CRR, provisions implementing Directive 2002/87/EC or with equivalent standards in force in a third country.
3. (2) A firm may only use the NCLEG non-trading book exemption where the total amount of non-trading book exposures (whether or not exempted from Article 395(1) of the CRR) from the firm to its NCLEG does not exceed 100% of the firm's Tier 1 capital.
4. A firm may calculate the total amount of such exposures after taking into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of the CRR.
5. (3) With respect to the application of requirements laid down in Part Four of the CRR on a consolidated basis, a firm may treat the total amount of exposures that are exempt in accordance with an NCLEG non-trading book permission on an individual basis as exempt from the limit in Article 395(1) of the CRR on a consolidated basis.

[Note: Art 400(2)(c) of the CRR]

2.2

1. (1) A firm with an NCLEG trading book permission may (in accordance with that permission) exempt, from the application of Article 395(1) of the CRR, trading book exposures up to its trading book exposure allocation, including participations or other kinds of holdings, incurred by the firm to members of its NCLEG that are:
1. (a) its parent undertaking;
2. (b) other subsidiaries of that parent undertaking; or
3. (c) its own subsidiaries,
2. in so far as those undertakings are covered by the supervision on a consolidated basis to which the firm itself is subject, in accordance with the CRR, provisions implementing Directive 2002/87/EC or with equivalent standards in force in a third country;
3. (2) The trading book exposure allocation for a firm is 100% of the firm's Tier 1 capital less the total amount of non-trading book exposures (whether or not exempted from Article 395(1) of the CRR) from the firm to its NCLEG.
4. (3) [deleted.]
5. (4) A firm may calculate its trading book exposure allocation after taking into account the effect of credit risk mitigation in accordance with Articles 399 to 403 of the CRR.
6. (5) A firm must allocate the trading book exposures it has to its NCLEG to its trading book exposure allocation 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 of the CRR.
7. (6) With respect to the application of requirements laid down in Part Four of the CRR on a consolidated basis, a firm may treat the amount of exposures that are exempt in accordance with an NCLEG trading book permission on an individual basis as exempt from the limit in Article 395(1) of the CRR on a consolidated basis.

[Note: Art 400(2)(c) of the CRR]

2.3

1. (1) A firm with a core UK group permission and an NCLEG trading book permission and/or an NCLEG non-trading book permission must give the PRA written notice whenever the firm:
1. (a) [deleted]
2. (b) becomes aware that the total amount of exposures from the core UK group (including the firm) to a particular member of the firm's NCLEG are likely to exceed, or have exceeded, 25% of the Tier 1 capital of the PRA-regulated firm with the largest Tier 1 capital base in the core UK group;
3. (c) becomes aware that the total exposures from the members of its core UK group (which are not firms) to the firm's NCLEG are likely to exceed, or have exceeded, 25% of the Tier 1 capital of the PRA-regulated firm with the largest Tier 1 capital base in the core UK group.
2. (2) The written notice required under (1) must contain the following:
1. (a) details of the size and the expected duration of the relevant exposures; and
2. (b) an explanation of the reason for those exposures.
3. (3) [deleted.]

2.4

A firm must exclude from the limit in Article 395(1) of the CRR resolution exposures to:

1. (1) its parent undertaking;
2. (2) other subsidiaries of that parent undertaking; or
3. (3) its own subsidiaries,

in so far as those undertakings are covered by the supervision on a consolidated basis to which the firm itself is subject, in accordance with the CRR, provisions implementing Directive 2002/87/EC or with equivalent standards in force in a third country.

[Note: Art 400(2)(c) of the CRR]

3.1

1. (1) If a firm has a sovereign large exposures permission, the exposures specified in that permission are exempt from Article 395(1) of the CRR to the extent specified in that permission.
2. (2) For the purposes of the sovereign large exposures permission, and in relation to a firm, the exposures referred to in (1) are limited to the following:
1. (a) 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; and
2. (b) 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.

[Note: Art 400(2)(g)-(h) of the CRR]

4.1

[Deleted.]

5.1

This Chapter applies only to firms that are CRR firms and are, or are controlled by, a G-SII or an O-SII.

5.2

In 5.6 and 5.7, a reference to an exposure to multiple counterparties means the sum of the exposures to the individual counterparties.

5.3

A firm which is a UK parent institution must comply with this Chapter on the basis of its consolidated situation.

5.4

The changes to this rule are effective from 23:00 on 31/12/2020.

A firm controlled by a UK parent institution or a UK parent financial holding company or a UK parent mixed financial holding company must comply with this Chapter on the basis of the consolidated situation of that parent institution or holding company.

5.5

A firm to which 5.3 and 5.4 do not apply must comply with this Chapter on an individual basis.

5.6

The reduced limit in 5.7 does not apply unless a firm meets each of the following conditions on the applicable basis determined in accordance with 5.3 to 5.5:

1. (1) The sum of the firm’s exposures to all French NFCs is greater than €2 billion:
2. (2) The firm has a qualifying exposure to a French NFC or a group of connected French NFCs, but considering, in the case of a group of connected French NFCs the ultimate parent of which is outside France, only exposures to the French NFCs in the group as required to be reported in templates C 28.00 and C 29.00 of Annex VIII to the Supervisory Reporting ITS; and
3. (3) The firm has an exposure meeting the conditions in (2) which is greater than 5% of its Tier 1 capital, after taking into account the effect of the credit risk mitigation techniques and exemptions in accordance with Article 399 to 403 of the CRR.

5.7

The limit on exposures as a proportion of Tier 1 capital referred to in Article 395(1) of the CRR is reduced to 5% in respect of a qualifying exposure to a highly indebted French NFC or a highly indebted group of connected French NFCs.