Prudential Regulation Authority Rulebook

1.

Institutions shall assign a 150% risk weight to exposures that are associated with particularly high risks.

2.

For the purposes of this Article, institutions shall treat any of the following exposures as exposures associated with particularly high risks:

1. (a) investments in venture capital firms, except where those investments are treated in accordance with Article 132;
2. (b) investments in private equity, except where those investments are treated in accordance with Article 132;
3. (c) speculative immovable property financing.

3.

When assessing whether an exposure other than exposures referred to in paragraph 2 is associated with particularly high risks, institutions shall take into account the following risk characteristics:

1. (a) there is a high risk of loss as a result of a default of the obligor;
2. (b) it is impossible to assess adequately whether the exposure falls under point (a).

[Note: This rule corresponds to Article 128 of the CRR as it applied immediately before revocation by the Treasury.]

[Note: Articles 129 to 131 remain in the CRR]

1.

Institutions shall calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU's exposures, calculated in accordance with the approaches referred to in the first subparagraph of paragraph 2, with the percentage of units or shares held by those institutions.

2.

Where the conditions set out in paragraph 3 of this Article are met, institutions may apply the look-through approach in accordance with Article 132a(1) or the mandate-based approach in accordance with Article 132a(2).

Subject to Article 132b (2), institutions that do not apply the look-through approach or the mandate-based approach shall assign a risk weight of 1,250% ('fall-back approach') to their exposures in the form of units or shares in a CIU.

Institutions may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in this paragraph, provided that the conditions for using those approaches are met.

3.

Institutions may determine the risk-weighted exposure amount of a CIU's exposures in accordance with the approaches set out in Article 132a where all the following conditions are met:

1. (a) [Note: provision left blank];
2. (b) the CIU's prospectus or equivalent document includes the following:
1. (i) the categories of assets in which the CIU is authorised to invest;
2. (ii) where investment limits apply, the relative limits and the methodologies to calculate them;
3. (c) reporting by the CIU or the CIU management company to the institution complies with the following requirements:
1. (i) the exposures of the CIU are reported at least quarterly;
2. (ii) the granularity of the financial information is sufficient to allow the institution to calculate the CIU's risk-weighted exposure amount in accordance with the approach chosen by the institution;
3. (iii) where the institution applies the look-through approach, information about the underlying exposures is verified by an independent third party.

By way of derogation from point (c)(i) of the first subparagraph, where the institution determines the risk-weighted exposure amount of a CIU's exposures in accordance with the mandate- based approach, the reporting by the CIU or the CIU management company to the institution may be limited to the investment mandate of the CIU and any changes thereof and may be done only when the institution incurs the exposure to the CIU for the first time and when there is a change in the investment mandate of the CIU.

4.

Institutions that do not have adequate data or information to calculate the risk-weighted exposure amount of a CIU's exposures in accordance with the approaches set out in Article 132a may rely on the calculations of a third party, provided that all the following conditions are met:

1. (a) the third party is one of the following:
1. (i) the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution;
2. (ii) for CIUs not covered by point (i) of this point, the CIU management company;
2. (b) the third party carries out the calculation in accordance with the approaches set out in Article 132a(1), (2) or (3), as applicable;
3. (c) an external auditor has confirmed the correctness of the third party's calculation.

Institutions that rely on third-party calculations shall multiply the risk-weighted exposure amount of a CIU's exposures resulting from those calculations by a factor of 1.2.

By way of derogation from the second subparagraph, where the institution has unrestricted access to the detailed calculations carried out by the third party, the factor of 1.2 shall not apply. The institution shall provide those calculations to its competent authority upon request.

5.

Where an institution applies the approaches referred to in Article 132a for the purpose of calculating the risk-weighted exposure amount of a CIU's exposures ('level 1 CIU'), and any of the underlying exposures of the level 1 CIU is an exposure in the form of units or shares in another CIU ('level 2 CIU'), the risk-weighted exposure amount of the level 2 CIU's exposures may be calculated by using any of the three approaches described in paragraph 2 of this Article. The institution may use the look-through approach to calculate the risk-weighted exposure amounts of CIUs' exposures in level 3 and any subsequent level only where it used that approach for the calculation in the preceding level. In any other scenario it shall use the fall-back approach.

6.

The risk-weighted exposure amount of a CIU's exposures calculated in accordance with the look-through approach and the mandate-based approach set out in Article 132a(1) and (2) shall be capped at the risk-weighted amount of that CIU's exposures calculated in accordance with the fall-back approach.

7.

By way of derogation from paragraph 1 of this Article, institutions that apply the look-through approach in accordance with Article 132a(1) may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures, calculated in accordance with Article 111, with the risk weight (RW*_i ) calculated in accordance with the formula set out in Article 132c, provided that the following conditions are met:

1. (a) the institutions measure the value of their holdings of units or shares in a CIU at historical cost but measure the value of the underlying assets of the CIU at fair value if they apply the look-through approach;
2. (b) a change in the market value of the units or shares for which institutions measure the value at historical cost changes neither the amount of own funds of those institutions nor the exposure value associated with those holdings.

8.

1. (a) An institution must notify the competent authority if either:
1. (i) the total risk weighted exposure amounts for all of its exposures in the form of units or shares in relevant CIUs exceed 0.5% of the institution's total risk weighted exposures for credit risk and dilution risk calculated in accordance with Title II of Part Three of the CRR; or
2. (ii) the total exposure values for all of its exposures in the form of units or shares in relevant CIUs exceed £500 million;
2. in each case calculated on an individual or consolidated basis.
3. (b) Institutions must make the notification in (a) promptly if:
1. (i) at any time either of the thresholds in (a) (i) or (ii) is reached; and
2. (ii) until such time as it makes a notification under (c), on an annual basis thereafter.
4. (c) Institutions which have made or are required to have made a notification under (a) must also notify the competent authority promptly when both the total risk weighted exposure amounts and total exposure values are below the relevant thresholds set out in (a) (i) and (ii).
5. (d) Institutions must include in the notification made under (a):
1. (i) a list of the countries in which fund managers of all relevant CIUs to which it is exposed are located; and
2. (ii) the total exposure values and total risk weighted exposure amounts in respect of its exposures in the form of units or shares in relevant CIUs for each of those countries.

[Note: This rule corresponds to Article 132 of the CRR as it applied immediately before revocation by the Treasury.]

1.

Where the conditions set out in Article 132(3) are met, institutions that have sufficient information about the individual underlying exposures of a CIU shall look through to those exposures to calculate the risk-weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by those institutions.

2.

Where the conditions set out in Article 132(3) are met, institutions that do not have sufficient information about the individual underlying exposures of a CIU to use the look-through approach may calculate the risk-weighted exposure amount of those exposures in accordance with the limits set in the CIU's mandate and relevant law.

Institutions shall carry out the calculations referred to in the first subparagraph under the assumption that the CIU first incurs exposures to the maximum extent allowed under its mandate or relevant law in the exposures attracting the highest own funds requirement and then continues incurring exposures in descending order until the maximum total exposure limit is reached, and that the CIU applies leverage to the maximum extent allowed under its mandate or relevant law, where applicable.

Institutions shall carry out the calculations referred to in the first subparagraph in accordance with the methods set out in Chapter 2, in Chapter 5, and in Section 3, 4 or 5 of Chapter 6 of Title Three.

3.

By way of derogation from point (d) of Article 92(3), institutions that calculate the risk-weighted exposure amount of a CIU's exposures in accordance with paragraph 1 or 2 of this Article may calculate the own funds requirement for the credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50% of the own funds requirement for those derivative exposures calculated in accordance with Section 3, 4 or 5 of Chapter 6 of Title Two, as applicable.

By way of derogation from the first subparagraph, an institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivative exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.

[Note: Provision left blank]

5.

Where institutions calculate the risk-weighted exposure amount of a CIU's exposures in accordance with paragraph 2 of this Article, and where one or more of the inputs required for the calculation in Section 3, 4 or 5 of Chapter 6 of Title Two is not available, institutions shall carry out the calculation as follows:

Where the replacement cost is unknown, institutions shall set the replacement cost as referred to in Articles 274(2) and 282(2) equal to the sum of the notional amounts of the derivatives in the netting set, and where relevant the multiplier referred to in Article 278(1) shall be set equal to 1.

Where the potential future exposure is unknown, institutions shall set the potential future exposure as referred to in Articles 274(2) and 282(2) equal to 15% of the sum of the notional amounts of the derivatives in the netting set.

1.

Institutions may exclude from the calculations referred to in Article 132 Common Equity Tier 1, Additional Tier 1, Tier 2 instruments and eligible liabilities instruments held by a CIU which institutions shall deduct in accordance with Article 36(1) and Articles 56, 66 and 72e respectively.

2.

Institutions may exclude from the calculations referred to in Article 132 exposures in the form of units or shares in CIUs referred to in points (g) and (h) of Article 150(1) and instead apply the treatment set out in Article 133 to those exposures.

1.

Institutions shall calculate the risk-weighted exposure amount for their off-balance-sheet items with the potential to be converted into exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures calculated in accordance with Article 111, with the following risk weight:

1. (a) for all exposures for which institutions use one of the approaches set out in Article 132a:

5. where:
   
   1. RW_i* = the risk weight;
6. 1. i = the index denoting the CIU:
7. 1. RWAE_i = the amount calculated in accordance with Article 132a for a CIU_i;
9. 1. E_i = the exposure value of the exposures of CIU_i;
   2. A_i = the accounting value of assets of CIU_i; and
   3. EQ_i = the accounting value of the equity of CIU_i.
11. (b) for all other exposures, RW_i*=1,250%

[Note: Articles 133 to 151 remain in the CRR]

1.

Institutions shall calculate the risk-weighted exposure amounts for their exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU, calculated in accordance with the approaches set out in paragraphs 2 and 5, with the percentage of units or shares held by those institutions.

2.

Where the conditions set out in Article 132(3) are met, institutions that have sufficient information about the individual underlying exposures of a CIU shall look through to those underlying exposures to calculate the risk-weighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by the institutions.

3.

By way of derogation from point (d) of Article 92(3), institutions that calculate the risk-weighted exposure amount of the CIU in accordance with paragraph 1 or 2 of this Article may calculate the own funds requirement for credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50% of the own funds requirement for those derivative exposures calculated in accordance with Section 3, 4 or 5 of Chapter 6 of Title Two, as applicable.

By way of derogation from the first subparagraph, an institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivative exposures which would not be subject to that requirement if they were incurred directly by the institution.

4.

Institutions that apply the look-through approach in accordance with paragraphs 2 and 3 of this Article and that meet the conditions for permanent partial use in accordance with Article 150, or that do not meet the conditions for using the methods set out in Chapter 3 or one or more of the methods set out in Chapter 5 for all or parts of the underlying exposures of the CIU, shall calculate risk-weighted exposure amounts and expected loss amounts in accordance with the following principles:

1. (a) for exposures assigned to the equity exposure class referred to in point (e) of Article 147(2), institutions shall apply the simple risk-weight approach set out in Article 155(2);
2. (b) for exposures assigned to the items representing securitisation positions referred to in point (f) of Article 147(2), institutions shall apply the treatment set out in Article 254 as if those exposures were directly held by those institutions;
3. (c) for all other underlying exposures, institutions shall apply the Standardised Approach laid down in Chapter 2 of Title Two.

For the purposes of point (a) of the first subparagraph, where the institution is unable to differentiate between private equity exposures, exchange-traded exposures and other equity exposures, it shall treat the exposures concerned as other equity exposures.

5.

Where the conditions set out in Article 132(3) are met, institutions that do not have sufficient information about the individual underlying exposures of a CIU may calculate the risk-weighted exposure amount for those exposures in accordance with the mandate-based approach set out in Article 132a(2). However, for the exposures listed in points (a), (b) and (c) of paragraph 4 of this Article, institutions shall apply the approaches set out therein.

6.

Subject to Article 132b(2), institutions that do not apply the look-through approach in accordance with paragraphs 2 and 3 of this Article or the mandate-based approach in accordance with paragraph 5 of this Article shall apply the fall-back approach referred to in Article 132(2).

7.

Institutions may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in this rule, provided that the conditions for using those approaches are met.

8.

Institutions that do not have adequate data or information to calculate the risk-weighted amount of a CIU in accordance with the approaches set out in paragraphs 2, 3, 4 and 5 may rely on the calculations of a third party, provided that all the following conditions are met:

1. (a) the third party is one of the following:
1. (i) the depository institution or the depository financial institution of the CIU, provided that the CIU exclusively invests in securities and deposits all securities at that depository institution or depository financial institution;
2. (ii) for CIUs not covered by point (i) of this point, the CIU management company;
2. (b) for exposures other than those listed in points (a), (b) and (c) of paragraph 4 of this rule, the third party carries out the calculation in accordance with the look-through approach set out in Article 132a(1);
3. (c) for exposures listed in points (a), (b) and (c) of paragraph 4, the third party carries out the calculation in accordance with the approaches set out therein;
4. (d) an external auditor has confirmed the correctness of the third party's calculation.

Institutions that rely on third party calculations shall multiply the risk weighted exposure amounts of a CIU's exposures resulting from those calculations by a factor of 1.2.

By way of derogation from the second subparagraph, where the institution has unrestricted access to the detailed calculations carried out by the third party, the 1.2 factor shall not apply. The institution shall provide those calculations to its competent authority upon request.

9.

For the purposes of this rule, Article 132(5) and (6) and Article 132b shall apply. For the purposes of this Article, Article 132c shall apply, using the risk weights calculated in accordance with Chapter 3 of Title Two.

[Note: This rule corresponds to Article 152 of the CRR as it applied immediately before revocation by the Treasury.]

[Note: Articles 153 to 157 remain in the CRR]

1.

Institutions shall calculate expected loss amounts based on the same input figures of PD, LGD and the exposure value for each exposure as are used for the calculation of risk-weighted exposure amounts in accordance with Article 151.

2.

Institutions shall calculate the expected loss amounts for securitised exposures in accordance with Chapter 5.

3.

For exposures belonging to the 'other non credit obligations assets' exposure class referred to in point (g) of Article 147(2) institutions shall apply an expected loss amount of zero.

4.

Institutions shall calculate the expected loss amounts for exposures in the form of shares or units of a CIU referred to in Article 152 in accordance with the methods set out in this rule.

5.

Institutions shall calculate the expected loss (EL) and expected loss amounts for exposures to corporates, institutions, central governments and central banks and retail exposures in accordance with the following formulae:

Expected loss (EL) = PD * LG

Expected loss amount = EL [multiplied by] exposure value.

For defaulted exposures (PD = 100%) where institutions use own estimates of LGDs, EL shall be ELBE, the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h).

For exposures subject to the treatment set out in Article 153(3), EL shall be 0%.

6.

Institutions shall assign the EL values for specialised lending exposures where institutions use the methods set out in Article 153(5) for assigning risk weights in accordance with Table 2.

Table 2:

7.

Institutions shall calculate the expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with the simple risk weight approach in accordance with the following formula:

Expected loss amount = EL ^. exposure value

The EL values shall be the following:

Expected loss (EL) = 0.8% for private equity exposures in sufficiently diversified portfolios

Expected loss (EL) = 0.8% for exchange traded equity exposures

Expected loss (EL) = 2.4% for all other equity exposures.

8.

Institutions shall calculate the expected loss and expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with the PD/LGD approach in accordance with the following formula:

Expected loss (EL) = PD ^. LGD

Expected loss amount = EL ^. exposure value

9.

For equity exposures where the risk-weighted exposure amounts are calculated in accordance with the internal models approach institutions shall apply an expected loss amount of zero.

10.

Institutions shall calculate expected loss amounts for dilution risk of purchased receivables in accordance with the following formula:

Expected loss (EL) = PD ^. LGD

Expected loss amount = EL ^. exposure value

[Note: This rule corresponds to Article 158 of the CRR as it applied immediately before revocation by the Treasury.]

[Note: Articles 159 to 191 remain in the CRR]