Prudential Regulation Authority Rulebook

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.