Prudential Regulation Authority Rulebook

7.1

This Chapter does not apply to a pure reinsurer.

7.2

A firm must calculate the amount of the deduction from total capital required by stage L in the capital resources table in respect of assets in excess of market risk and counterparty limits as the aggregate amount by which its counterparty exposures and asset exposures exceed the relevant limits set out in 7.4.

7.3

Except where the contrary is expressly stated, whenever:

1. (1) a rule refers to assets of a firm, or of any part of a firm, or of any fund or part of a fund within a firm, which are assets of a kind referred to in any of the limits in 7.4; and
2. (2) the firm's counterparty exposure (or aggregate exposure arising from the counterparty exposures to each member of a group of closely related persons) or asset exposure in respect of those assets exceeds any of the limits in 7.4

the firm must deduct from the measure of the value of those assets (as determined in accordance with Insurance Company – Overall Resources and Valuation 3 to 8) the amount by which that exposure exceeds the relevant limit in 7.4, or that portion of the deduction that relates to the part of the firm or fund or part of a fund in question.

7.4

The limits referred to in 7.2 and 7.3 are the following, expressed as a percentage of the firm's business amount:

1. (1) for a counterparty exposure to an individual, unincorporated body of individuals or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related individuals or unincorporated bodies of individuals:
1. (a) 0.25% for that part of the exposure that arises from unsecured debt; and
2. (b) 1% for the whole exposure (after deduction of the excess arising from the limit in (a));
2. (2) for a counterparty exposure to an approved counterparty or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related approved counterparties:
1. (a) 40% for that part of the exposure arising from covered bonds;
2. (b) (i) subject to (ii), 5% for that part of the exposure not arising from covered bonds or, if the counterparty is an CRD credit institution, from short term deposits; and
1. (ii) the limit in (i) is increased to 10% if the total of such exposures which are greater than 5% arising from applying a 10% limit, when taken together with any exposures arising from covered bonds which are within the 40% limit in (a), does not exceed 40%;
3. (c) 20% or £2 million, if larger, for the whole exposure (but excluding any exposure arising from covered bonds and after deduction of the excess arising from the limit in (b));
3. (3) for a counterparty exposure to a person, or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related persons, who do not fall into the categories of counterparty to whom (1) and (2) apply:
1. (a) (i) subject to (ii), 1% for that part of the exposure arising from unsecured debt;
1. (ii) the limit in (i) is increased to 2.5% in the case of an exposure to a regulated institution;
2. (b) (i) subject to (ii), 1% for that part of the exposure arising from shares and other variable yield participations, bonds, debt securities and other money-market instruments and capital market instruments from the same counterparty that are not dealt in on a regulated market, or a beneficial interest in a collective investment scheme to which 9.5 applies;
1. (ii) the limit in (i) for that part of the exposure arising from debt securities (other than hybrid securities) issued by the same regulated institution is increased to 5%; and
3. (c) 5% for the whole exposure (after deduction of the excesses arising from the limits in (a) and (b));
4. (4) 5% for the aggregate of all counterparty exposures that fall within (3)(a) whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (3)(a);
5. (5) 10% for the aggregate of all counterparty exposures and asset exposures that fall within (3)(b) above or (10) below, whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (3)(b) above or, in the case of an asset exposure, (10) below;
6. (6) 5% for the aggregate of all counterparty exposures arising from unsecured loans, other than those falling within (2);
7. (7) 3% for the asset exposure arising from all cash in hand;
8. (8) 10% for the asset exposure (including an exposure arising from a reversionary interest) arising from any one piece of land or building, or a number of pieces of land or buildings close enough to each other to be considered effectively as one investment;
9. (9) 5% for the asset exposure arising from a beneficial interest in any single non-UCITS retail scheme or recognised scheme which does not fall within the UCITS Directive; and
10. (10) 1% for the asset exposure arising from a beneficial interest in any single collective investment scheme which does not fall within the UCITS Directive and is not a non-UCITS retail scheme or a recognised scheme.