Prudential Regulation Authority Rulebook

SYSC 7.1

SYSC 7.1.1

See Notes

SYSC 7.1.2

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A common platform firm must establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify the risks relating to the firm's activities, processes and systems, and where appropriate, set the level of risk tolerated by the firm.

[Note: article 7(1)(a) of the MiFID implementing Directive, article 13(5) second paragraph of MiFID]

SYSC 7.1.2A

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SYSC 7.1.3

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A common platform firm must adopt effective arrangements, processes and mechanisms to manage the risk relating to the firm's activities, processes and systems, in light of that level of risk tolerance.

[Note: article 7(1)(b) of the MiFID implementing Directive]

SYSC 7.1.4

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The management body of a common platform firm must approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the firm is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.

[Note: article 76(1) of CRD]

SYSC 7.1.4A

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SYSC 7.1.4B

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SYSC 7.1.5

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A common platform firm must monitor the following:

1. (1) the adequacy and effectiveness of the firm's risk management policies and procedures;
2. (2) the level of compliance by the firm and its relevant persons with the arrangements, processes and mechanisms adopted in accordance with SYSC 7.1.3 R;
3. (3) the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons to comply with such arrangements or processes and mechanisms or follow such policies and procedures.

[Note: article 7(1)(c) of the MiFID implementing Directive]

SYSC 7.1.6

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A common platform firm must, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of the investment services and activities undertaken in the course of that business, establish and maintain a risk management function that operates independently and carries out the following tasks:

1. (1) implementation of the policies and procedures referred to in SYSC 7.1.2 R to SYSC 7.1.5 R; and
2. (2) provision of reports and advice to senior personnel in accordance with SYSC 4.3.2 R.

[Note: MiFID implementing Directive Article 7(2) first paragraph]

SYSC 7.1.7

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Where a common platform firm is not required under SYSC 7.1.6 R to maintain a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with SYSC 7.1.2 R to SYSC 7.1.5 R satisfy the requirements of those rules and are consistently effective.

[Note: article 7(2) second paragraph of the MiFID implementing Directive]

SYSC 7.1.7A

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SYSC 7.1.7B

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SYSC 7.1.7C

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SYSC 7.1.8

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1. (1) [deleted]
2. (2) The term 'risk management function' in SYSC 7.1.6 R and SYSC 7.1.7 R refers to the generally understood concept of risk assessment within a firm , that is, the function of setting and controlling risk exposure. The risk management function is not a controlled function itself, but is part of the systems and controls function (CF28).

SYSC 7.1.9

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A BIPRU firm must base credit-granting on sound and well-defined criteria and clearly establish the process for approving, amending, renewing, and re-financing credits.

[Note: annex V paragraph 3 of the Banking Consolidation Directive]

SYSC 7.1.10

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A BIPRU firm must operate through effective systems the ongoing administration and monitoring of its various credit risk-bearing portfolios and exposures, including for identifying and managing problem credits and for making adequate value adjustments and provisions.

[Note: annex V paragraph 4 of the Banking Consolidation Directive]

SYSC 7.1.11

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A BIPRU firm must adequately diversify credit portfolios given its target market and overall credit strategy.

[Note: annex V paragraph 5 of the Banking Consolidation Directive]

SYSC 7.1.12

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SYSC 7.1.13

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A BIPRU firm must address and control by means of written policies and procedures the risk that recognised credit risk mitigation techniques used by it prove less effective than expected.

[Note: annex V paragraph 6 of the Banking Consolidation Directive]

SYSC 7.1.14

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A BIPRU firm must implement policies and processes for the measurement and management of all material sources and effects of market risks.

[Note: annex V paragraph 10 of the Banking Consolidation Directive]

SYSC 7.1.15

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A BIPRU firm must implement systems to evaluate and manage the risk arising from potential changes in interest rates as they affect a BIPRU firm's non-trading activities.

[Note: annex V paragraph 11 of the Banking Consolidation Directive]

SYSC 7.1.16

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A BIPRU firm must implement policies and processes to evaluate and manage the exposure to operational risk, including to low-frequency high severity events. Without prejudice to the definition of operational risk, BIPRU firms must articulate what constitutes operational risk for the purposes of those policies and procedures.

[Note: annex V paragraph 12 of the Banking Consolidation Directive]

SYSC 7.1.16A

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In meeting the general standard referred to in SYSC 7.1.16 R, a BIPRU firm that undertakes market-related activities should be able to demonstrate to the appropriate regulator:

1. (1) in the case of a BIPRU firm calculating its ORCR using the basic indicator approach or standardised approach, that it has considered; or
2. (2) in the case of a BIPRU firm with an AMA permission, compliance with

the Committee of European Banking Supervisors Guidelines on the management of operational risk in market-related activities, published in October 2010. These can be found at http://www.eba.europa.eu/documents/Publications/Standards---Guidelines/2010/Management-of-op-risk/CEBS-2010-216-(Guidelines-on-the-management-of-op-.aspx

SYSC 7.1.16B

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SYSC 7.1.17

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[Note: article 76(2) of CRD]

SYSC 7.1.18

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1. (1) A CRR firm that is significant must establish a risk committee composed of members of the management body who do not perform any executive function in the firm. Members of the risk committee must have appropriate knowledge, skills and expertise to fully understand and monitor the risk strategy and the risk appetite of the firm.
2. (2) The risk committee must advise the management body on the institution's overall current and future risk appetite and assist the management body in overseeing the implementation of that strategy by senior management.
3. (3) The risk committee must review whether prices of liabilities and assets offered to clients take fully into account the firm's business model and risk strategy. Where prices do not properly reflect risks in accordance with the business model and risk strategy, the risk committee must present a remedy plan to the management body.

[Note: article 76(3) of CRD]

SYSC 7.1.18A

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SYSC 7.1.19

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1. (1) A CRR firm must ensure that the management body in its supervisory function and, where a risk committee has been established, the risk committee have adequate access to information on the risk profile of the firm and, if necessary and appropriate, to the risk management function and to external expert advice.
2. (2) The management body in its supervisory function and, where one has been established, the risk committee must determine the nature, the amount, the format, and the frequency of the information on risk which it is to receive.

[Note: article 76(4) of CRD]

SYSC 7.1.20

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In order to assist in the establishment of sound remuneration policies and practices, the risk committee must, without prejudice to the tasks of the remuneration committee, examine whether incentives provided by the remuneration system take into consideration risk, capital, liquidity and the likelihood and timing of earnings.

[Note: article 76(4) of CRD]

SYSC 7.1.21

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1. (1) A CRR firm's risk management function (SYSC 7.1.6 R) must be independent from the operational functions and have sufficient authority, stature, resources and access to the management body.
2. (2) The risk management function must ensure that all material risks are identified, measured and properly reported. It must be actively involved in elaborating the firm's risk strategy and in all material risk management decisions and it must be able to deliver a complete view of the whole range of risks of the firm.
3. (3) A CRR firm must ensure that the risk management function is able to report directly to the management body in its supervisory function, independent from senior management and that it can raise concerns and warn the management body, where appropriate, where specific risk developments affect or may affect the firm, without prejudice to the responsibilities of the management body in its supervisory and/or managerial functions pursuant to the CRD and the CRR.

[Note: article 76(5) of CRD]

SYSC 7.1.22

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The head of the risk management function must be an independent senior manager with distinct responsibility for the risk management function. Where the nature, scale and complexity of the activities of the CRR firm do not justify a specially appointed person, another senior person within the firm may fulfil that function, provided there is no conflict of interest. The head of the risk management function must not be removed without prior approval of the management body and must be able to have direct access to the management body where necessary.

[Note: article 76(5) of CRD]