We are making available a modification by consent of BIPRU 7.11.26 and BIPRU 7.11.39 – part of our Prudential sourcebook for Banks, Building Societies and Investment firms. This modification relates to credit derivatives in the trading book.

What does the modification affect?

The proposed modification by consent will effectively extend the current standard rules for credit derivatives in the trading book (as contained in the Interim Prudential Sourcebooks) which firms are required to comply with before 1 January 2008 until 31 December 2008 at the latest. The 'floor' for the capital requirements which maintains the directive minimum will apply.

Why are we making it available?

In designing the new BIPRU rules we acknowledged that the current requirements (in IPRU(BANK)/IPRU(INV)) are conservative. We initially expected the new BIPRU rules to significantly reduce the capital requirements in this area.

In the final BIPRU text, we put conservative multipliers into the rules on the understanding that we would realign them through the recalibration exercise. We have not yet finished the recalibration exercise, and the rules, as they stand, impose a significantly increased capital burden on firms doing business in this area.

Which firms does this apply to?

BIPRU 7.11 implements our new capital requirements for specific risk on credit derivatives in the trading book. These rules are effective from 1 January 2008 and apply to any BIPRU firm that does not have our approval to determine their specific risk charge for these instruments via a Value at Risk (VaR) model.

Direction [PDF]

How do firms apply?

If you want to take advantage of this modification, you should read the direction above and write to the Central Waivers Team, The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London, E14 5HS. Or you can email to centralwaiversteam@fsa.gov.uk and tell us you are applying for the modification.

We will write to you to confirm whether we have granted your waiver, and we will publish each waiver we grant on our website.