Prudential Regulation Authority Rulebook

7.1

This Chapter does not apply to a pure reinsurer.

7.2

1. (1) A firm must cover an obligation to transfer assets or pay monetary amounts that arise from:
1. (a) a derivative or quasi-derivative; or
2. (b) a contract (other than a contract of insurance) for the purchase, sale or exchange of assets.
2. (2) Cover used for one transaction must not be used for cover in respect of another transaction or any other agreement to acquire, or dispose of, assets or to pay or repay money.

7.3

For the purposes of 7.2, an obligation to transfer assets or pay monetary amounts must be covered:

1. (1) by assets, a liability or a provision; or
2. (2) by an offsetting transaction.

7.4

For the purposes of 7.2, an obligation to transfer assets (other than money) or to pay monetary amounts based on the value of, or income from, assets is covered if the firm holds:

1. (1) those assets; or
2. (2) in the case of an index or basket of assets, a reasonable approximation to those assets.

7.5

For the purposes of 7.2, an obligation to pay a monetary amount (whether or not falling in 7.4) is covered if:

1. (1) the firm holds admissible assets or linked assets, that are sufficient in value so that the firm reasonably believes that following reasonably foreseeable adverse variations (relying solely on cashflows from, or from realising, those assets) it could pay the monetary amount in the right currency when it falls due; or
2. (2) the obligation to pay the monetary amount is offset by a liability. An obligation is offset by a liability where an increase in the amount of that obligation would be offset by a decrease in the amount of that liability; or
3. (3) a provision at least equal to the value of the assets in (1) is, in accordance with 7.6, implicitly or explicitly set up.

7.6

For the purposes of 7.5(3), a provision is:

1. (1) implicitly set up to the extent that the obligation to pay the monetary amount is recognised under Insurance Company – Overall Resources and Valuation 3 to 7 either by offset against an asset or as a separate liability; and
2. (2) explicitly set up if it is in addition to an implicit provision.

7.7

A firm must implicitly or explicitly set up a provision equal to the value of the assets or offsetting transactions held to cover a non-approved derivative or quasi-derivative transaction.

7.8

For the purposes of 7.3(2), an offsetting transaction offsets an obligation to transfer assets away from the firm only if it provides for the transfer to the firm of those assets, or their value, at the time, or before, the obligation falls due.

7.9

For the purposes of 7.3(2), an offsetting transaction offsets an obligation to pay a monetary amount only if it provides for that monetary amount to be paid to the firm at or before the earliest date on which the obligation might fall due.

7.10

For the purposes of this Chapter, assets that have been lent by the firm are not available for cover, unless:

1. (1) they are non-monetary assets that have been lent under a transaction that fulfils the conditions in 8.2; and
2. (2) the firm reasonably believes the assets to be obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.

7.11

For the purposes of this Chapter, assets that have been borrowed by the firm are not available for cover except as allowed by 7.12.

7.12

For the purposes of this Chapter, borrowed money may be used as cover only where:

1. (1) the money has been advanced or an approved credit institution has committed itself to advance the money; and
2. (2) the borrowing is or would be covered.