CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

FCA 2013/xx
(2) the firm's own funds requirement for the general and specific risk in its
equity instruments should be adjusted by making:
(a)
(b)
an addition equal to the current value of any loss which the
firm would make if it did convert to equity; or
a deduction equal to the current value of any profit which the
firm would make if it did convert to equity (subject to a
maximum deduction equal to the own funds requirements on
the notional position underlying the convertible).
Use of internal approaches
6.1.16 G A significant IFPRU firm should consider developing internal specific risk
assessment capacity and to increase use of internal models for calculating
own funds requirements for specific risk of debt instruments in the trading
book, together with internal models to calculate own funds requirements for
default and migration risk where its exposures to specific risk are material in
absolute terms and where it holds a large number of material positions in debt
instruments of different issuers. This provision is without prejudice to the
fulfilment of the criteria laid down in Part Three, Title IV, Chapter 5,
Sections 1 to 5, of the EU CRR (Market risk).
[Note: article 77(3) of CRD]
6.2 Guidance on market risk
Offsetting derivative instruments
6.2.1 G Article 331(2) of the EU CRR (Interest rate risk in derivative instruments)
states conditions that must be met before a firm not using interest rate preprocessing
models can fully offset interest-rate risk on derivative instruments.
One condition is that the reference rate (for floating-rate positions) or coupon
(for fixed-rate positions) should be closely matched. The FCA will normally
consider a difference of less than 15 basis points as indicative of the reference
rate or coupon being closely matched for the purposes of this requirement.
Exclusion of backtesting exceptions when determining multiplication factor
addends
6.2.2 G The FCA’s starting assumption is that all overshootings should be taken into
account for the purpose of the calculation of addends. If a firm believes that
an overshooting should not count for that purpose, then it should seek a
variation of its VaR model permission under article 363 of the EU CRR
(Permission to use internal models) to exclude that particular backtesting
exception. The FCA will then decide whether to agree to such a variation.
One example of when a firm's overshooting might properly be disregarded is
when it has arisen as a result of a risk that is not captured in its VaR model
but against which own funds are already held.
Futures, forwards or synthetic futures on a basket or index of debt securities
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