Prudential Regulation Authority Rulebook

1.

Subject to the restriction set out in Article 237b(2), an institution may calculate the exposure value of its derivative positions in accordance with the method set out in Section 4, provided that the size of its on- and off-balance-sheet derivative business is equal to or less than both of the following thresholds on the basis of an assessment carried out on a monthly basis using the data as of the last day of the month:

1. (a) 10% of the institution's total assets;
2. (b) GBP 260 million.

2.

Subject to the restriction set out in Article 237b(2), an institution may calculate the exposure value of its derivative positions in accordance with the method set out in Section 5, provided that the size of its on- and off-balance-sheet derivative business is equal to or less than both of the following thresholds on the basis of an assessment carried out on a monthly basis using the data as of the last day of the month:

1. (a) 5% of the institution's total assets;
2. (b) GBP 88 million.

3.

For the purposes of paragraphs 1 and 2, institutions shall calculate the size of their on- and off-balance-sheet derivative business on the basis of data as of the last day of each month in accordance with the following requirements:

1. (a) derivative positions shall be valued at their market values on that given date; where the market value of a position is not available on a given date, institutions shall take a fair value for the position on that date; where the market value and fair value of a position are not available on a given date, institutions shall take the most recent of the market value or fair value for that position;
2. (b) the absolute value of long derivative positions shall be summed with the absolute value of short derivative positions;
3. (c) all derivative positions shall be included, except credit derivatives that are recognised as internal hedges against non-trading book credit risk exposures.

4.

By way of derogation from paragraph 1 or 2, as applicable, where the derivative business on a consolidated basis does not exceed the thresholds set out in paragraph 1 or 2, as applicable, an institution which is included in the consolidation and which would have to apply the method set out in Section 3 or 4 because it exceeds those thresholds on an individual basis, may, subject to the approval of competent authorities, instead choose to apply the method that would apply on a consolidated basis.

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

5.

Institutions shall notify the competent authorities of the methods set out in Section 4 or 5 that they use, or cease to use, as applicable, to calculate the exposure value of their derivative positions.

6.

Institutions shall not enter into a derivative transaction or buy or sell a derivative instrument for the sole purpose of complying with any of the conditions set out in paragraphs 1 and 2 during the monthly assessment.