# Regulation (EU) No 575/2013 of the European Parliament and of the CouncilShow full title

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit            institutions and investment firms and amending Regulation (EU) No 648/2012 (Text with EEA relevance)         

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# [X1Regulation (EU) No 575/2013 of the European Parliament and of the Council

# of 26 June 2013

# on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012

# (Text with EEA relevance)]

[X1THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,                         

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,                         

Having regard to the proposal from the European Commission,                         

After transmission of the draft legislative act to the national parliaments,                         

Having regard to the opinion of the European Central Bank (1) ,                         

Having regard to the opinion of the European Economic and Social Committee (2) ,                         

Acting in accordance with the ordinary legislative procedure,                         

Whereas:                         

(1)The G-20 Declaration of 2 April 2009 on Strengthening of the Financial System called for internationally consistent efforts that are aimed at strengthening transparency,                                 accountability and regulation by improving the quantity and quality of capital in the banking system once the economic recovery                                 is assured. That declaration also called for introduction of a supplementary non-risk based measure to contain the build-up                                 of leverage in the banking system, and the development of a framework for stronger liquidity buffers. In response to the mandate                                 given by the G-20, in September 2009 the Group of Central Bank Governors and Heads of Supervision (GHOS) agreed on a number                                 of measures to strengthen the regulation of the banking sector. Those measures were endorsed by the G-20 leaders at their                                 Pittsburgh Summit of 24-25 September 2009 and were set out in detail in December 2009. In July and September 2010, GHOS issued two further announcements on design                                 and calibration of those new measures, and in December 2010, the Basel Committee on Banking Supervision (BCBS) published the                                 final measures, that are referred to as the Basel III framework.

(2)The High Level Group on Financial Supervision in the EU chaired by Jacques de Larosière (the ‘de Larosière group’) invited the Union to develop a more harmonised set of financial regulations. In the context of the future European supervisory                                 architecture, the European Council of 18 and 19 June 2009 also stressed the need to establish a European single rule book applicable to all credit institutions and investment firms                                 in the internal market.

(3)As stated in the de Larosière group's report of 25 February 2009 (the ‘de Larosière report’), ‘a Member State should be able to adopt more stringent national regulatory measures considered to be domestically appropriate                                 for safeguarding financial stability as long as the principles of the internal market and agreed minimum core standards are                                 respected’.

(4)Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (3)  and Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (4)  have been significantly amended on several occasions. Many provisions of Directives 2006/48/EC and 2006/49/EC are applicable                                 to both credit institutions and investment firms. For the sake of clarity and in order to ensure a coherent application of                                 those provisions, they should be merged into new legislative acts that are applicable to both credit institutions and investment                                 firms, namely this Regulation and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 (5) . For greater accessibility, the provisions of the Annexes to Directives 2006/48/EC and 2006/49/EC should be integrated into                                 the enacting terms of Directive 2013/36/EU and this Regulation.

(5)Together, this Regulation and Directive 2013/36/EU should form the legal framework governing the access to the activity, the                                 supervisory framework and the prudential rules for credit institutions and investment firms (referred to collectively as ‘institutions’). This Regulation should therefore be read together with that Directive

(6)Directive 2013/36/EU, based on Article 53(1) of the Treaty on the Functioning of the European Union (TFEU), should, inter                                 alia, contain the provisions concerning the access to the activity of institutions, the modalities for their governance, and                                 their supervisory framework, such as provisions governing the authorisation of the business, the acquisition of qualifying                                 holdings, the exercise of the freedom of establishment and of the freedom to provide services, the powers of the competent                                 authorities of the home and the host Member States in this regard and the provisions governing the initial capital and the                                 supervisory review of institutions.

(7)This Regulation should, inter alia, contain the prudential requirements for institutions that relate strictly to the functioning                                 of banking and financial services markets and are meant to ensure the financial stability of the operators on those markets                                 as well as a high level of protection of investors and depositors. This Regulation aims at contributing in a determined manner                                 to the smooth functioning of the internal market and should, consequently, be based on the provisions of Article 114 TFEU,                                 as interpreted in accordance with the consistent case-law of the Court of Justice of the European Union.

(8)Directives 2006/48/EC and 2006/49/EC, although having harmonised the rules of Member States in the area of prudential supervision                                 to a certain degree, include a significant number of options and possibilities for Member States to impose stricter rules                                 than those laid down by those Directives. This results in divergences between national rules, which might hamper the cross-border                                 provision of services and the freedom of establishment and so create obstacles to the smooth functioning of the internal market.

(9)For reasons of legal certainty and because of the need for a level playing field within the Union, a single set of regulations                                 for all market participants is a key element for the functioning of the internal market. In order to avoid market distortions                                 and regulatory arbitrage, minimum prudential requirements should therefore ensure maximum harmonisation. As a consequence,                                 the transitional periods provided for in this Regulation are essential for the smooth implementation of this Regulation and                                 to avoid uncertainty for the markets.

(10)Having regard to the work of the BCBS Standards Implementation Group in monitoring and reviewing member countries' implementation                                 of the Basel III framework, the Commission should provide update reports on an ongoing basis, and at least following the publication                                 of each Progress Report by BCBS, on the implementation and domestic adoption of the Basel III framework in other major jurisdictions,                                 including an assessment of the consistency of other countries' legislation or regulations with the international minimum standards,                                 in order to identify differences that could raise level playing field concerns.

(11)In order to remove obstacles to trade and distortions of competition resulting from divergences between national laws and                                 to prevent further likely obstacles to trade and significant distortions of competition from arising, it is therefore necessary                                 to adopt a regulation establishing uniform rules applicable in all Member States.

(12)Shaping prudential requirements in the form of a regulation would ensure that those requirements will be directly applicable.                                 This would ensure uniform conditions by preventing diverging national requirements as a result of the transposition of a directive.                                 This Regulation would entail that all institutions follow the same rules in all the Union, which would also boost confidence                                 in the stability of institutions, especially in times of stress. A regulation would also reduce regulatory complexity and                                 firms' compliance costs, especially for institutions operating on a cross-border basis, and contribute to eliminating competitive                                 distortions. With regard to the peculiarity of immovable property markets, which are characterised by economic developments                                 and jurisdictional differences that are specific to Member States, regions or local areas, competent authorities should be                                 allowed to set higher risks weights or to apply stricter criteria based on default experience and expected market developments                                 to exposures secured by mortgages on immovable property in specific areas.

(13)In areas not covered by this Regulation, such as dynamic provisioning, provisions on national covered bonds schemes not related                                 to the treatment of covered bonds under the rules established by this Regulation, acquisition and holding of participations                                 in both the financial and non-financial sector for purposes not related to prudential requirements specified in this Regulation,                                 competent authorities or Member States should be able to impose national rules, provided that they are not inconsistent with                                 this Regulation.

(14)The most important recommendations advocated in the de Larosière report and later implemented in the Union were the establishment                                 of a single rulebook and a European framework for macroprudential supervision where both elements in combination were aimed                                 at ensuring financial stability. The single rulebook ensures a robust and uniform regulatory framework facilitating the functioning                                 of the internal market and prevents regulatory arbitrage opportunities. Within the internal market for financial services,                                 macroprudential risks may however differ in a number of ways with a range of national specificities resulting in variances                                 being observed for example with regard to the structure and size of the banking sector compared to the wider economy and the                                 credit cycle.

(15)A number of tools to prevent and mitigate macroprudential and systemic risks have been built into this Regulation and Directive                                 2013/36/EU ensuring flexibility while at the same time ensuring that the use of those tools are subject to appropriate control                                 in order not to harm the functioning of the internal market while also ensuring that the use of such tools is transparent                                 and consistent.

(16)Beyond the systemic risk buffer tool included in Directive 2013/36/EU, where macroprudential or systemic risks concern a Member                                 State, the competent or designated authorities of the relevant Member State should have the possibility to address those risks                                 by certain specific national macroprudential measures, when this is considered more effective to tackle those risks. The European                                 Systemic Risk Board (‘ESRB’) established by Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 (6)  and the European Supervisory Authority (European Banking Authority) (‘EBA’) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 (7)  should have the opportunity to provide their opinions on whether the conditions for such national macroprudential measures                                 are met and there should be a Union mechanism to prevent national measures from proceeding, where there is very strong evidence                                 that the relevant conditions are not satisfied. Whilst this Regulation establishes uniform microprudential rules for institutions,                                 Member States retain a leading role in macroprudential oversight because of their expertise and their existing responsibilities                                 in relation to financial stability. In that specific case, since the decision to adopt any national macroprudential measures                                 includes certain assessments in relation to risks which may ultimately affect the macroeconomic, fiscal and budgetary situation of the relevant Member State, it is necessary that                                 the power to reject the proposed national macroprudential measures is conferred on the Council in accordance with Article                                 291 TFEU, acting on a proposal by the Commission.

(17)Where the Commission has submitted to the Council a proposal to reject national macroprudential measures, the Council should                                 examine that proposal without delay and decide whether or not to reject the national measures. A vote could be taken in accordance                                 with the Rules of Procedure of the Council (8)  at the request of a Member State or of the Commission. In accordance with Article 296 TFEU, the Council should state the                                 reasons for its decision with respect to the conditions laid down in this Regulation for its intervention. Considering the                                 importance of the macroprudential and systemic risk for the financial market of the Member State concerned and, therefore,                                 the need for rapid reaction, it is important that the time limit for such a Council decision is set to one month. If the Council,                                 after having examined the proposal by the Commission to reject the proposed national measures in depth, comes to the conclusion                                 that the conditions laid down in this Regulation for the rejection of the national measures were not fulfilled, it should                                 always provide its reasons in a clear and unambiguous manner.

(18)Until the harmonisation of liquidity requirements in 2015 and the harmonisation of a leverage ratio in 2018, Member States                                 should be able to apply such measures as they consider appropriate, including measures to mitigate macroprudential or systemic                                 risk in a specific Member State.

(19)It should be possible to apply systemic risk buffers or individual measures taken by Member States to address systemic risks                                 concerning those Member States, to the banking sector in general or to one or more subsets of the sector, meaning subsets                                 of institutions that exhibit similar risk profiles in their business activities, or to the exposures to one or several domestic                                 economic or geographic sectors across the banking sector.

(20)If two or more Member States' designated authorities identify the same changes in the intensity of systemic or macroprudential                                 risk posing a risk to financial stability at the national level in each Member State which the designated authorities consider                                 would better be addressed by means of national measures, the Member States may submit a joint notification to the Council,                                 the Commission, the ESRB and EBA. When notifying the Council, the Commission, the ESRB and EBA, Member States should submit                                 relevant evidence, including a justification of the joint notification.

(21)The Commission should furthermore be empowered to adopt a delegated act temporarily increasing the level of own funds requirements,                                 requirements for large exposures and public disclosure requirements. Such provisions should be applicable for a period of one year, unless the European Parliament or the Council has objected to the delegated act within a period                                 of three months. The Commission should state the reasons for the use of such a procedure. The Commission should only be empowered                                 to impose stricter prudential requirements for exposures which arise from market developments in the Union or outside the                                 Union affecting all Member States.

(22)A review of the macroprudential rules is justified in order for the Commission to assess, among other things, whether the                                 macroprudential tools in this Regulation or Directive 2013/36/EU are effective, efficient and transparent, whether new instruments                                 should be proposed, whether the coverage and the possible degrees of overlap of the macroprudential tools for targeting similar                                 risks in this Regulation or Directive 2013/36/EU are appropriate and how internationally agreed standards for systemically                                 important institutions interacts with this Regulation or Directive 2013/36/EU.

(23)Where Member States adopt guidelines of general scope, in particular in areas where the adoption by the Commission of draft                                 technical standards is pending, those guidelines shall neither contradict Union law nor undermine its application.

(24)This Regulation does not prevent Member States from imposing, where appropriate, equivalent requirements on undertakings that                                 do not fall within its scope.

(25)The general prudential requirements set out in this Regulation are supplemented by individual arrangements that are decided                                 by the competent authorities as a result of their ongoing supervisory review of individual institutions. The range of such                                 supervisory arrangements should, inter alia, be set out in Directive 2013/36/EU since the competent authorities should be                                 able to exert their judgment as to which arrangements should be imposed.

(26)This Regulation should not affect the ability of competent authorities to impose specific requirements under the supervisory                                 review and evaluation process set out in Directive 2013/36/EU that should be tailored to the specific risk profile of institutions.

(27)Regulation (EU) No 1093/2010 aims at upgrading the quality and consistency of national supervision and strengthening oversight                                 of cross-border groups.

(28)Given the increase in the number of tasks conferred on EBA by this Regulation and by Directive 2013/36/EU, the European Parliament,                                 the Council and the Commission should ensure that adequate human and financial resources are made available without delay.

(29)Regulation (EU) No 1093/2010 requires EBA to act within the scope of Directives 2006/48/EC and 2006/49/EC. EBA is also required                                 to act in the field of activities of institutions in relation to issues not directly covered in those Directives, provided                                 that such actions are necessary to ensure the effective and consistent application of those Directives. This Regulation should                                 take into account the role and function of EBA and facilitate the exercise of EBA's powers set out in Regulation (EU) No 1093/2010.

(30)After the observation period and the full implementation of a liquidity coverage requirement in accordance with this Regulation,                                 the Commission should assess whether granting EBA a power of initiative to intervene with binding mediation in relation to                                 the reaching of joint decisions by the competent authorities under Articles 20 and 21 of this Regulation would facilitate                                 the practical formation and operation of single liquidity sub-groups as well as the determination of whether criteria for                                 a specific intragroup treatment for cross-border institutions are met. Therefore, at that time, as part of one of the regular                                 reports on the operation of EBA under Article 81 of Regulation (EU) No 1093/2010, the Commission should specifically examine                                 the need to grant EBA such powers and include the results of this examination in its report, which should be accompanied by                                 appropriate legislative proposals, where appropriate.

(31)The de Larosière report stated that microprudential supervision cannot effectively safeguard financial stability without adequately                                 taking account of developments at macro level, while macroprudential oversight is not meaningful unless it can somehow impact                                 on supervision at the micro level. Close cooperation between EBA and the ESRB is essential to give full effectiveness to the                                 functioning of the ESRB and follow up to its warnings and recommendations. In particular, EBA should be able to transmit to                                 the ESRB all relevant information gathered by competent authorities in accordance with the reporting obligations set out in                                 this Regulation.

(32)Considering the devastating effects of the latest financial crisis the overall objectives of this Regulation are to encourage                                 economically useful banking activities that serve the general interest and to discourage unsustainable financial speculation                                 without real added value. This implies a comprehensive reform of the ways savings are channelled into productive investments.                                 In order to safeguard a sustainable and diverse banking environment in the Union, competent authorities should be empowered                                 to impose higher capital requirements for systemically important institutions that are able, due to their business activities,                                 to pose a threat to the global economy.

(33)Equivalent financial requirements for institutions holding money or securities belonging to their clients are necessary to                                 ensure similar safeguards for savers and fair conditions of competition between comparable groups of institutions.

(34)Since institutions in the internal market are engaged in direct competition, monitoring requirements should be equivalent                                 throughout the Union taking into account the different risk profiles of the institutions.

(35)Whenever in the course of supervision it is necessary to determine the amount of the consolidated own funds of a group of                                 institutions, the calculation should be effected in accordance with this Regulation.

(36)According to this Regulation own funds requirements apply on an individual and consolidated basis, unless competent authorities                                 do not apply supervision on an individual basis where they deem this appropriate. Individual, consolidated and cross-border consolidated supervision are useful tools in overseeing institutions.

(37)In order to ensure adequate solvency of institutions within a group it is essential that the capital requirements apply on                                 the basis of the consolidated situation of those institutions within the group. In order to ensure that own funds are appropriately                                 distributed within the group and available to protect savings where needed, the capital requirements should apply to individual                                 institutions within a group, unless this objective can be effectively achieved otherwise.

(38)The minority interests arising from intermediate financial holding companies that are subject to the requirements of this                                 Regulation on a sub-consolidated basis may also be eligible, within the relevant limits, as Common Equity Tier 1 capital of                                 the group on a consolidated basis, as the Common Equity Tier 1 capital of an intermediate financial holding company attributable                                 to minority interests and the part of that same capital attributable to the parent company support both pari passu the losses                                 of their subsidiaries when they occur.

(39)The precise accounting technique to be used for the calculation of own funds, their adequacy for the risk to which an institution                                 is exposed, and for the assessment of the concentration of exposures should take account of the provisions of Council Directive                                 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (9) , which incorporates certain adaptations of the provisions of Seventh Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts (10) , or of Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (11) , whichever governs the accounting of the institutions under national law.

(40)For the purposes of ensuring adequate solvency it is important to lay down capital requirements which weight assets and off-balance                                 sheet items according to the degree of risk.

(41)On 26 June 2004, the BCBS adopted a framework agreement on the international convergence of capital measurement and capital requirements                                 (‘Basel II framework’). The provisions in Directives 2006/48/EC and 2006/49/EC that this Regulation has taken over are equivalent to the provisions                                 of the Basel II framework. Consequently, by incorporating the supplementary elements of the Basel III framework this Regulation                                 is equivalent to the provisions of the Basel II and III frameworks.

(42)It is essential to take account of the diversity of institutions in the Union by providing alternative approaches to the calculation                                 of capital requirements for credit risk incorporating different levels of risk-sensitivity and requiring different degrees                                 of sophistication. Use of external ratings and institutions' own estimates of individual credit risk parameters represents                                 a significant enhancement in the risk-sensitivity and prudential soundness of the credit risk rules. Institutions should be                                 encouraged to move towards the more risk-sensitive approaches. In producing the estimates needed to apply the approaches to                                 credit risk of this Regulation, institutions should enhance their credit risk measurement and management processes to make                                 available methods for determining regulatory own funds requirements that reflect the nature, scale, and complexity of individual                                 institutions' processes. In this regard, the processing of data in connection with the incurring and management of exposures                                 to customers should be considered to include the development and validation of credit risk management and measurement systems.                                 That serves not only to fulfil the legitimate interests of institutions but also the purpose of this Regulation, to use better                                 methods for risk measurement and management and also use them for regulatory own funds purposes. Notwithstanding this, the                                 more risk-sensitive approaches require considerable expertise and resources as well as data of high quality and sufficient                                 volume. Institutions should therefore comply with high standards before applying those approaches for regulatory own funds                                 purposes. Given the ongoing work on ensuring appropriate backstops to internal models, the Commission should prepare a report                                 on the possibility of extending the Basel I floor together with a legislative proposal, if appropriate.

(43)The capital requirements should be proportionate to the risks addressed. In particular the reduction in risk levels deriving                                 from having a large number of relatively small exposures should be reflected in the requirements.

(44)Small and medium-sized enterprises (SMEs) are one of the pillars of the Union economy given their fundamental role in creating                                 economic growth and providing employment. The recovery and future growth of the Union economy depends largely on the availability                                 of capital and funding to SMEs established in the Union to carry out the necessary investments to adopt new technologies and                                 equipment to increase their competitiveness. The limited amount of alternative sources of funding has made SMEs established                                 in the Union even more sensitive to the impact of the banking crisis. It is therefore important to fill the existing funding                                 gap for SMEs and ensure an appropriate flow of bank credit to SMEs in the current context. Capital charges for exposures to                                 SMEs should be reduced through the application of a supporting factor equal to 0,7619 to allow credit institutions to increase                                 lending to SMEs. To achieve this objective, credit institutions should effectively use the capital relief produced through                                 the application of the supporting factor for the exclusive purpose of providing an adequate flow of credit to SMEs established in the Union. Competent authorities should monitor periodically                                 the total amount of exposures to SMEs of credit institutions and the total amount of capital deduction.

(45)In line with the decision of the BCBS, as endorsed by the GHOS on 10 January 2011, all additional Tier 1 and Tier 2 instruments of an institution should be capable of being fully and permanently written                                 down or converted fully into Common Equity Tier 1 capital at the point of non-viability of the institution. Necessary legislation                                 to ensure that own funds instruments are subject to the additional loss absorption mechanism should be incorporated into Union                                 law as part of the requirements in relation to the recovery and resolution of institutions. If by 31 December 2015, Union law governing the requirement that capital instruments should be capable of being fully and permanently written down                                 to zero or converted into Common Equity Tier 1 instruments in the event that an institution is no longer considered viable                                 has not been adopted, the Commission should review and report on whether such a provision should be included in this Regulation                                 and, in light of that review, submit appropriate legislative proposals.

(46)The provisions of this Regulation respect the principle of proportionality, having regard in particular to the diversity in                                 size and scale of operations and to the range of activities of institutions. Respect for the principle of proportionality                                 also means that the simplest possible rating procedures, even in the Internal Ratings Based Approach (‘IRB Approach’), are recognised for retail exposures. Member States should ensure that the requirements laid down in this Regulation apply                                 in a manner proportionate to the nature, scale and complexity of the risks associated with an institution's business model                                 and activities. The Commission should ensure that delegated and implementing acts, regulatory technical standards and implementing                                 technical standards are consistent with the principle of proportionality, so as to guarantee that this Regulation is applied                                 in a proportionate manner. EBA should therefore ensure that all regulatory and implementing technical standards are drafted                                 in such a way that they are consistent with and uphold the principle of proportionality.

(47)Competent authorities should pay appropriate attention to cases where they suspect that information is regarded as proprietary                                 or confidential in order to avoid disclosure of such information. Although an institution may opt not to disclose information                                 as the information is regarded as proprietary or confidential, the fact that information is being regarded as proprietary                                 or confidential should not discharge liability arising from non-disclosure of that information when such non-disclosure is                                 found to have material effect.

(48)The ‘evolutionary’ nature of this Regulation enables institutions to choose amongst three approaches to credit risk of varying complexity. In                                 order to allow especially small institutions to opt for the more risk-sensitive IRB Approach, the relevant provisions should be read so that exposure classes include all exposures that are, directly or indirectly, put on a par with                                 them throughout this Regulation. As a general rule, the competent authorities should not discriminate between the three approaches                                 with regard to the supervisory review process, i.e. institutions operating according to the provisions of the Standardised                                 Approach should not, for that reason alone, be supervised on a stricter basis.

(49)Increased recognition should be given to techniques of credit risk mitigation within a framework of rules designed to ensure                                 that solvency is not undermined by undue recognition. The relevant Member States' current customary banking collateral for                                 mitigating credit risks should wherever possible be recognised in the Standardised Approach, but also in the other approaches.

(50)In order to ensure that the risks and risk reductions arising from institutions' securitisation activities and investments                                 are appropriately reflected in the capital requirements of institutions it is necessary to include rules providing for a risk-sensitive                                 and prudentially sound treatment of such activities and investments. To this end, a clear and encompassing definition of securitisation                                 is needed that captures any transaction or scheme whereby the credit risk associated with an exposure or pool of exposures                                 is tranched. An exposure that creates a direct payment obligation for a transaction or scheme used to finance or operate physical                                 assets should not be considered an exposure to a securitisation, even if the transaction or scheme has payment obligations                                 of different seniority.

(51)Alongside surveillance aimed at ensuring financial stability, there is a need for mechanisms designed to enhance and develop                                 an effective surveillance and prevention of potential bubbles in order to ensure optimum allocation of capital in the light                                 of the macroeconomic challenges and objectives, in particular with respect to long term investment in the real economy.

(52)Operational risk is a significant risk faced by institutions requiring coverage by own funds. It is essential to take account                                 of the diversity of institutions in the Union by providing alternative approaches to the calculation of operational risk requirements                                 incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. There should be appropriate                                 incentives for institutions to move towards the more risk-sensitive approaches. In view of the emerging state of the art for                                 the measurement and management of operational risk the rules should be kept under review and updated as appropriate including                                 in relation to the charges for different business lines and the recognition of risk mitigation techniques. Particular attention                                 should be paid in this regard to taking insurance into account in the simple approaches to calculating capital requirements                                 for operational risk.

(53)The monitoring and control of an institution's exposures should be an integral part of its supervision. Therefore, excessive                                 concentration of exposures to a single client or group of connected clients may result in an unacceptable risk of loss. Such                                 a situation can be considered prejudicial to the solvency of an institution.

(54)In determining the existence of a group of connected clients and thus exposures constituting a single risk, it is also important                                 to take into account risks arising from a common source of significant funding provided by the institution itself, its financial                                 group or its connected parties.

(55)While it is desirable to base the calculation of the exposure value on that provided for the purposes of own funds requirements,                                 it is appropriate to adopt rules for the monitoring of large exposures without applying risk weightings or degrees of risk.                                 Moreover, the credit risk mitigation techniques applied in the solvency regime were designed with the assumption of a well-diversified                                 credit risk. In the case of large exposures dealing with single name concentration risk, credit risk is not well diversified.                                 The effects of those techniques should therefore be subject to prudential safeguards. In this context, it is necessary to                                 provide for an effective recovery of credit protection for the purposes of large exposures.

(56)Since a loss arising from an exposure to an institution can be as severe as a loss from any other exposure, such exposures                                 should be treated and reported in the same manner as any other exposures. An alternative quantitative limit has been introduced                                 to alleviate the disproportionate impact of such an approach on smaller institutions. In addition, very short-term exposures                                 related to money transmission including the execution of payment services, clearing, settlement and custody services to clients                                 are exempt to facilitate the smooth functioning of financial markets and of the related infrastructure. Those services cover,                                 for example, the execution of cash clearing and settlement and similar activities to facilitate settlement. The related exposures                                 include exposures which might not be foreseeable and are therefore not under the full control of a credit institution, inter                                 alia, balances on inter-bank accounts resulting from client payments, including credited or debited fees and interest, and                                 other payments for client services, as well as collateral given or received.

(57)It is important that the interests of undertakings that ‘re-package’ loans into tradable securities and other financial instruments (originators or sponsors) and undertakings that invest in                                 these securities or instruments (investors) are aligned. To achieve this, the originator or sponsor should retain a significant                                 interest in the underlying assets. It is therefore important for the originators or the sponsors to retain exposure to the                                 risk of the loans in question. More generally, securitisation transactions should not be structured in such a way as to avoid                                 the application of the retention requirement, in particular through any fee or premium structure or both. Such retention should be applicable                                 in all situations where the economic substance of a securitisation is applicable, whatever legal structures or instruments                                 are used to obtain this economic substance. In particular where credit risk is transferred by securitisation, investors should                                 make their decisions only after conducting thorough due diligence, for which they need adequate information about the securitisations.

(58)This Regulation also provides that there be no multiple applications of the retention requirement. For any given securitisation                                 it suffices that only the originator, the sponsor or the original lender is subject to the requirement. Similarly, where securitisation                                 transactions contain other securitisations as an underlying, the retention requirement should be applied only to the securitisation                                 which is subject to the investment. Purchased receivables should not be subject to the retention requirement if they arise                                 from corporate activity where they are transferred or sold at a discount to finance such activity. Competent authorities should                                 apply the risk weight in relation to non-compliance with due diligence and risk management obligations in relation to securitisation                                 for non-trivial breaches of policies and procedures which are relevant to the analysis of the underlying risks. The Commission                                 should also review whether avoidance of multiple applications of the retention requirement could be conducive to practices                                 circumventing the retention requirement and whether the rules on securitisations are enforced effectively by the competent                                 authorities.

(59)Due diligence should be used in order to properly assess the risks arising from securitisation exposures for both the trading                                 book and the non-trading book. In addition, due diligence obligations need to be proportionate. Due diligence procedures should                                 contribute to building greater confidence between originators, sponsors and investors. It is therefore desirable that relevant                                 information concerning the due diligence procedures is properly disclosed.

(60)When an institution incurs an exposure to its own parent undertaking or to other subsidiaries of its parent undertaking, particular                                 prudence is necessary. The management of such exposures incurred by institutions should be carried out in a fully autonomous                                 manner, in accordance with the principles of sound management, without regard to any other considerations. This is especially                                 important in the case of large exposures and in cases not simply related to intragroup administration or usual intragroup                                 transactions. Competent authorities should pay particular attention to such intragroup exposures. Such standards need not,                                 however be applied where the parent undertaking is a financial holding company or a credit institution or where the other                                 subsidiaries are either credit or financial institutions or undertakings offering ancillary services, provided that all such                                 undertakings are covered by the supervision of the credit institution on a consolidated basis.

(61)In view of the risk-sensitivity of the rules relating to capital requirements, it is desirable to keep under review whether                                 these have significant effects on the economic cycle. The Commission, taking into account the contribution of the European Central                                 Bank (ECB), should report on these aspects to the European Parliament and to the Council.

(62)The capital requirements for commodity dealers, including those dealers currently exempt from the requirements of Directive                                 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (12) , should be reviewed.

(63)The goal of liberalisation of gas and electricity markets is both economically and politically important for the Union. With                                 this in mind, the capital requirements and other prudential rules to be applied to firms active in those markets should be                                 proportionate and should not unduly interfere with achievement of the goal of liberalisation. This goal should, in particular,                                 be kept in mind when reviews of this Regulation are carried out.

(64)Institutions investing in re-securitisations should exercise due diligence also with regard to the underlying securitisations                                 and the non-securitisation exposures ultimately underlying the former. Institutions should assess whether exposures in the                                 context of asset-backed commercial paper programmes constitute re-securitisation exposures, including those in the context                                 of programmes which acquire senior tranches of separate pools of whole loans where none of those loans is a securitisation                                 or re-securitisation exposure, and where the first-loss protection for each investment is provided by the seller of the loans.                                 In the latter situation, a pool- specific liquidity facility should generally not be considered a re-securitisation exposure                                 because it represents a tranche of a single asset pool (that is, the applicable pool of whole loans) which contains no securitisation                                 exposures. By contrast, a programme-wide credit enhancement covering only some of the losses above the seller-provided protection                                 across the various pools generally would constitute a tranching of the risk of a pool of multiple assets containing at least                                 one securitisation exposure, and would therefore be a re-securitisation exposure. Nevertheless, if such a programme funds                                 itself entirely with a single class of commercial paper, and if either the programme-wide credit enhancement is not a re-securitisation                                 or the commercial paper is fully supported by the sponsoring institution, leaving the commercial paper investor effectively                                 exposed to the default risk of the sponsor instead of the underlying pools or assets, then that commercial paper generally                                 should not be considered a re-securitisation exposure.

(65)The provisions on prudent valuation for the trading book should apply to all instruments measured at fair value, whether in                                 the trading book or non- trading book of institutions. It should be clarified that, where the application of prudent valuation                                 would lead to a lower carrying value than actually recognised in the accounting, the absolute value of the difference should be                                 deducted from own funds.

(66)Institutions should have a choice whether to apply a capital requirement to or deduct from Common Equity Tier 1 items those                                 securitisation positions that receive a 1 250 % risk weight under this Regulation, irrespective of whether the positions are in the trading or the non-trading book.

(67)Originator or sponsor institutions should not be able to circumvent the prohibition of implicit support by using their trading                                 books in order to provide such support.

(68)Without prejudice to the disclosures explicitly required by this Regulation, the aim of the disclosure requirements should                                 be to provide market participants with accurate and comprehensive information regarding the risk profile of individual institutions.                                 Institutions should therefore be required to disclose additional information not explicitly listed in this Regulation where                                 such disclosure is necessary to meet that aim. At the same time, competent authorities should pay appropriate attention to                                 cases where they suspect that information is regarded as proprietary or confidential by an institution in order to avoid disclosure                                 of such information.

(69)Where an external credit assessment for a securitisation position incorporates the effect of credit protection provided by                                 the investing institution itself, the institution should not be able to benefit from the lower risk weight resulting from                                 that protection. The securitisation position should not be deducted from capital if there are other ways to determine a risk                                 weight in line with the actual risk of the position which does not take that credit protection into account.

(70)Given their recent weak performance, the standards for internal models to calculate market risk capital requirements should                                 be strengthened. In particular, their capture of risks should be completed regarding credit risks in the trading book. Furthermore,                                 capital charges should include a component adequate to stress conditions to strengthen capital requirements in view of deteriorating                                 market conditions and in order to reduce the potential for pro-cyclicality. Institutions should also carry out reverse stress                                 tests to examine what scenarios could challenge the viability of the institution unless they can prove that such a test is                                 dispensable. Given the recent particular difficulties of treating securitisation positions using approaches based on internal                                 models, the recognition of institutions' modelling of securitisation risks to calculate capital requirements in the trading                                 book should be limited and a standardised capital charge for securitisation positions in the trading book should be required                                 by default.

(71)This Regulation lays down limited exceptions for certain correlation trading activities, in accordance with which an institution                                 may be permitted by its supervisor to calculate a comprehensive risk capital charge subject to strict requirements. In such                                 cases the institution should be required to subject those activities to a capital charge equal to the higher of the capital                                 charge in accordance with that internally developed approach and 8 % of the capital charge for specific risk in accordance                                 with the standardised measurement method. It should not be required to subject those exposures to the incremental risk charge                                 but they should be incorporated into both the value-at-risk measures and the stressed value-at-risk measures.

(72)In light of the nature and magnitude of unexpected losses experienced by institutions during the financial and economic crisis,                                 it is necessary to improve further the quality and harmonisation of own funds that institutions are required to hold. This                                 should include the introduction of a new definition of the core elements of capital available to absorb unexpected losses                                 as they arise, enhancements to the definition of hybrid capital and uniform prudential adjustments to own funds. It is also                                 necessary to raise significantly the level of own funds, including new capital ratios focusing on the core elements of own                                 funds available to absorb losses as they arise. It is expected that institutions whose shares are admitted to trading on a                                 regulated market should meet their capital requirements regarding the core elements of capital with such shares that meet                                 a strict set of criteria for the core capital instruments and the disclosed reserves of the institution only. In order to                                 adequately take into account the diversity of legal forms under which institutions within the Union are operating, the strict                                 set of criteria for the core capital instruments should ensure that core capital instruments for institutions whose shares                                 are not admitted to trading on a regulated market are of the highest quality. This should not prevent institutions from paying,                                 on shares that have differentiated or no voting rights, distributions that are a multiple of those paid on shares which have                                 relatively higher levels of voting rights, provided that, irrespective of the level of voting rights, the strict criteria                                 for Common Equity Tier 1 instruments are met, including those relating to the flexibility of payments, and provided that where                                 a distribution is paid it is to be paid on all shares issued by the institution concerned.

(73)Trade finance exposures are diverse in nature but share characteristics such as being small in value and short in duration                                 and having an identifiable source of repayment. They are underpinned by movements of goods and services that support the real                                 economy and in most cases help small companies in their day-to-day needs, thereby creating economic growth and job opportunities.                                 Inflows and outflows are usually matched and liquidity risk is therefore limited.

(74)It is appropriate that EBA keeps an up-to-date list of all of the forms of capital instruments in each Member State that qualify                                 as Common Equity Tier 1 instruments. EBA should remove from that list non-State aid instruments issued after the date of entry                                 into force of this Regulation not meeting the criteria specified in this Regulation and should publicly announce such removal.                                 Where instruments removed by EBA from the list continue to be recognised after EBA's announcement, EBA should fully exercise                                 its powers, in particular those conferred by Article 17 of Regulation (EU) No 1093/2010 concerning breaches of Union law.                                 It is recalled that a three-step mechanism applies for a proportionate response to instances of incorrect or insufficient                                 application of Union law, whereby, as a first step, EBA is empowered to investigate alleged incorrect or insufficient application                                 of Union law obligations by national authorities in their supervisory practice, concluded by a recommendation. Second, where                                 the competent national authority does not follow the recommendation, the Commission is empowered to issue a formal opinion                                 taking into account the EBA's recommendation, requiring the competent authority to take the actions necessary to ensure compliance                                 with Union law. Third, to overcome exceptional situations of persistent inaction by the competent authority concerned, EBA                                 is empowered, as a last resort, to adopt decisions addressed to individual financial institutions. Moreover, it is recalled                                 that, under Article 258 TFEU, where the Commission considers that a Member State has failed to fulfil an obligation under                                 the Treaties, it has the power to bring the matter before the Court of Justice of the European Union.

(75)This Regulation should not affect the ability of competent authorities to maintain pre-approval processes regarding the contracts                                 governing Additional Tier 1 and Tier 2 capital instruments. In those cases such capital instruments should only be computed                                 towards the institution's Additional Tier 1 capital or Tier 2 capital once they have successfully completed these approval                                 processes.

(76)For the purposes of strengthening market discipline and enhancing financial stability it is necessary to introduce more detailed                                 requirements for disclosure of the form and nature of regulatory capital and prudential adjustments made in order to ensure                                 that investors and depositors are sufficiently well informed about the solvency of institutions.

(77)It is further necessary for competent authorities to have knowledge of the level, at least in aggregate terms, of repurchase                                 agreements, securities lending and all forms of encumbrance of assets. Such information should be reported to the competent                                 authorities. For the purposes of strengthening market discipline, there should be more detailed requirements for disclosure                                 of repurchase agreements and secured funding.

(78)The new definition of capital and regulatory capital requirements should be introduced in a manner that takes account of the                                 fact that there are different national starting points and circumstances, with initial variance around the new standards being                                 reduced over the transitional period. In order to ensure the appropriate continuity in the level of own funds, instruments                                 issued within the context of a recapitalisation measure pursuant to State aid rules and issued prior to the date of application of this                                 Regulation will be grandfathered for the extent of the transitional period. Reliance on State aid should be reduced as much                                 as possible in the future. However, to the extent that State aid proves necessary in certain situations, this Regulation should                                 provide for a framework to deal with such situations. In particular, this Regulation should specify what should be the treatment                                 for own funds instruments issued within the context of a recapitalisation measure pursuant to State aid rules. The possibility                                 for institutions to benefit from such treatment should be subject to strict conditions. Furthermore, to the extent that such                                 treatment allows for deviations from the new criteria on the quality of own funds instruments those deviations should be limited                                 to the largest extent possible. The treatment for existing capital instruments issued within the context of a recapitalisation                                 measure pursuant to State aid- rules, should clearly distinguish between those capital instruments that comply with the requirements                                 of this Regulation and those that do not. Appropriate transitional provisions for the latter case should therefore be laid                                 down in this Regulation.

(79)Directive 2006/48/EC required credit institutions to provide own funds that are at least equal to specified minimum amounts                                 until 31 December 2011. In the light of the continuing effects of the financial crisis in the banking sector and the extension of the transitional                                 arrangements for capital requirements adopted by the BCBS, it is appropriate to reintroduce a lower limit for a limited period                                 of time until sufficient amounts of own funds have been established in accordance with the transitional arrangements for own                                 funds provided for in this Regulation that will be progressively phased in from the date of application of this Regulation                                 to 2019.

(80)For groups which include significant banking or investment business and insurance business, Directive 2002/87/EC of the European                                 Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (13) , provides specific rules to address such ‘double counting’ of capital. Directive 2002/87/EC is based on internationally agreed principles for dealing with risk across sectors. This                                 Regulation strengthens the way those financial conglomerates rules shall apply to bank and investment firm groups, ensuring                                 their robust and consistent application. Any further changes that are necessary will be addressed in the review of Directive                                 2002/87/EC, which is expected in 2015.

(81)The financial crisis highlighted that institutions greatly underestimated the level of counterparty credit risk associated                                 with over-the-counter (OTC) derivatives. This prompted the G-20, in September 2009, to call for more OTC derivatives to be                                 cleared through a central counterparty (CCP). Furthermore, they asked for those OTC derivatives that could not be cleared centrally                                 to be subject to higher own funds requirements in order to properly reflect the higher risks associated with them.

(82)Following the G-20 call, the BCBS, as part of the Basel III framework, materially changed the counterparty credit risk regime.                                 The Basel III framework is expected to significantly increase the own funds requirements associated with institutions' OTC                                 derivatives and securities financing transactions and to create important incentives for institutions to use CCPs. The Basel                                 III framework is also expected to provide further incentives to strengthen the risk management of counterparty credit exposures                                 and to revise the current regime for the treatment of counterparty credit risk exposures to CCPs.

(83)Institutions should hold additional own funds due to credit valuation adjustment risk arising from OTC derivatives. Institutions                                 should also apply a higher asset value correlation in the calculation of the own funds requirements for counterparty credit                                 risk exposures arising from OTC derivatives and securities-financing transactions to certain financial institutions. Institutions                                 should also be required to considerably improve measurement and management of counterparty credit risk by better addressing                                 wrong-way risk, highly leveraged counterparties and collateral, accompanied by the corresponding enhancements in the areas                                 of back-testing and stress testing.

(84)Trade exposures to CCPs usually benefit from the multilateral netting and loss-sharing mechanism provided by CCPs. As a consequence,                                 they involve a very low counterparty credit risk and should therefore be subject to a very low own funds requirement. At the                                 same time, this requirement should be positive in order to ensure that institutions track and monitor their exposures to CCPs                                 as part of good risk management and to reflect that even trade exposures to CCPs are not risk-free.

(85)A CCP's default fund is a mechanism that allows the sharing (mutualisation) of losses among the CCP's clearing members. It                                 is used where the losses incurred by the CCP following the default of a clearing member are greater than the margins and default                                 fund contributions provided by that clearing member and any other defence the CCP may use before recurring to the default                                 fund contributions of the remaining clearing members. In view of this, the risk of loss associated with exposures from default                                 fund contributions is higher than that associated with trade exposures. Therefore, this type of exposures should be subject                                 to a higher own funds requirement.

(86)The ‘hypothetical capital’ of a CCP should be a variable needed to determine the own funds requirement for a clearing member's exposures from its contributions                                 to a CCP's default fund. It should not be understood as anything else. In particular, it should not be understood as the amount                                 of capital that a CCP is required to hold by its competent authority.

(87)The review of the treatment of counterparty credit risk, and in particular putting in place higher own funds requirements                                 for bilateral derivative contracts in order to reflect the higher risk that such contracts pose to the financial system, forms                                 an integral part of the Commission's efforts to ensure efficient, safe and sound derivatives markets. Consequently, this Regulation                                 complements Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (14) .

(88)The Commission should review the relevant exemptions for large exposures by 31 December 2015. Pending the outcome of that review, Member States should continue being allowed to decide on the exemption of certain large                                 exposures from those rules for a sufficiently long transitional period. Building on the work done in the context of the preparation                                 and negotiation of Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own                                 funds items, large exposures, supervisory arrangements, and crisis management (15)  and taking into account international and Union developments on those issues, the Commission should review whether those                                 exemptions should continue to be applied in a discretionary or in a more general way and on whether the risks related to those                                 exposures are addressed by other effective means laid down in this Regulation.

(89)In order to ensure that exemptions of exposures by competent authorities do not jeopardise the coherence of the uniform rules                                 established by this Regulation on a permanent basis, after a transitional period, and in the absence of any outcome of that                                 review, the competent authorities should consult EBA on whether or not it is appropriate to continue making use of the possibility                                 to exempt certain exposures.

(90)The years preceding the financial crisis were characterised by an excessive build up in institutions' exposures in relation                                 to their own funds (leverage). During the financial crisis, losses and the shortage of funding forced institutions to reduce                                 significantly their leverage over a short period of time. This amplified downward pressures on asset prices, causing further                                 losses for institutions which in turn led to further declines in their own funds. The ultimate results of this negative spiral                                 were a reduction in the availability of credit to the real economy and a deeper and longer crisis.

(91)Risk-based own funds requirements are essential to ensure sufficient own funds to cover unexpected losses. However, the crisis                                 has shown that those requirements alone are not sufficient to prevent institutions from taking on excessive and unsustainable                                 leverage risk.

(92)In September 2009, the G-20 leaders committed to developing internationally-agreed rules to discourage an excessive leverage.                                 To that end, they supported the introduction of a leverage ratio as a supplementary measure to the Basel II framework.

(93)In December 2010, the BCBS published guidelines defining the methodology for calculating the leverage ratio. Those rules provide                                 for an observation period that will run from 1 January 2013 until 1 January 2017 during which the leverage ratio, its components and its behaviour relative to the risk-based requirement will be monitored.                                 Based on the results of the observation period the BCBS intends to make any final adjustments to the definition and calibration                                 of the leverage ratio in the first half of 2017, with a view to migrating to a binding requirement on 1 January 2018 based on appropriate review and calibration. The BCBS guidelines also provide for disclosure of the leverage ratio and its                                 components starting from 1 January 2015.

(94)A leverage ratio is a new regulatory and supervisory tool for the Union. In line with international agreements, it should                                 be introduced first as an additional feature that can be applied on individual institutions at the discretion of supervisory                                 authorities. Reporting obligations for institutions would allow appropriate review and calibration, with a view to migrating                                 to a binding measure in 2018.

(95)When reviewing the impact of the leverage ratio on different business models, particular attention should be paid to business                                 models which are considered to entail low risk, such as mortgage lending and specialised lending to regional governments,                                 local authorities or public sector entities. EBA, on the basis of data received and the findings of the supervisory review                                 during an observation period, should in cooperation with competent authorities develop a classification of business models                                 and risks. Based on appropriate analysis, and also taking into account historical data or stress scenarios, there should be                                 an assessment of the appropriate levels of the leverage ratio that safeguard the resilience of the respective business models                                 and whether the levels of the leverage ratio should be set as thresholds or ranges. After the observation period and the calibration                                 of the respective levels of the leverage ratio, and on the basis of the assessment, EBA can publish an appropriate statistical                                 review, including averages and standard deviations, of the leverage ratio. After adoption of the leverage ratio requirements,                                 EBA should publish an appropriate statistical review, including averages and standard deviations, of the leverage ratio in                                 relation to the identified categories of institutions.

(96)Institutions should monitor the level and changes in the leverage ratio as well as leverage risk as part of the internal capital                                 adequacy assessment process (ICAAP). Such monitoring should be included in the supervisory review process. In particular,                                 after the entry into force of the leverage ratio requirements, competent authorities should monitor the developments in the                                 business model and corresponding risk profile in order to ensure up to date and proper classification of institutions.

(97)Good governance structures, transparency and disclosure are essential for sound remuneration policies. In order to ensure                                 adequate transparency to the market of their remuneration structures and the associated risk, institutions should disclose                                 detailed information on their remuneration policies, practices and, for reasons of confidentiality, aggregated amounts for                                 those members of staff whose professional activities have a material impact on the risk profile of the institution. That information                                 should be made available to all stakeholders. Those particular requirements should be without prejudice to more general disclosure                                 requirements concerning remuneration policies applicable horizontally across sectors. Moreover, Member States should be allowed                                 to require institutions to make available more detailed information on remuneration.

(98)The recognition of a credit rating agency as an external credit assessment institution (ECAI) should not increase the foreclosure                                 of a market already dominated by three main undertakings. EBA and ESCB central banks, without making the process easier or                                 less demanding, should provide for the recognition of more credit rating agencies as ECAIs as a way to open the market to                                 other undertakings.

(99)Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (16)  and Regulation (EC) No 45/2001 of the European Parliament and of the Council of 18 December 2000 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies                                 and on the free movement of such data (17) , should be fully applicable to the processing of personal data for the purposes of this Regulation.

(100)Institutions should hold a diversified buffer of liquid assets that they can use to cover liquidity needs in a short term                                 liquidity stress. As it is not possible to know ex ante with certainty which specific assets within each asset class might                                 be subject to shocks ex post, it is appropriate to promote a diversified and high-quality liquidity buffer consisting of different asset categories.                                 A concentration of assets and overreliance on market liquidity creates systemic risk to the financial sector and should be                                 avoided. A broad set of quality assets should therefore be taken into consideration during an initial observation period which                                 will be used for the development of a definition of a liquidity coverage requirement. When making a uniform definition of                                 liquid assets at least government bonds, and covered bonds traded on transparent markets with an ongoing turnover would be                                 expected to be considered assets of extremely high liquidity and credit quality. It would also be appropriate that assets                                 corresponding to Article 416(1)(a) to (c) should be included in the buffer without limitations. When institutions use the                                 liquidity stock, they should put in place a plan to restore their holdings of liquid assets and competent authorities should                                 ensure the adequacy of the plan and its implementation.

(101)The stock of liquid assets should be available at any time to meet the liquidity outflows. The level of liquidity needs in                                 a short-term liquidity stress should be determined in a standardised manner so as to ensure a uniform soundness standard and                                 a level playing field. It should be ensured that such a standardised determination has no unintended consequences for financial                                 markets, credit extension and economic growth, also taking into account different business and investment models and funding                                 environments of institutions across the Union. To this end, the liquidity coverage requirement should be subject to an observation                                 period. Based on the observations and supported by reports from EBA, the Commission should be empowered to adopt a delegated                                 act to introduce in a timely manner a detailed and harmonised liquidity coverage requirement for the Union. In order to ensure                                 global harmonisation in the area of regulation of liquidity any delegated act to introduce the liquidity coverage requirement                                 should be comparable to the liquidity coverage ratio set out in the final international framework for liquidity risk measurement,                                 standards and monitoring of the BCBS taking into account Union and national specificities.

(102)To that end, during the observation period, EBA should review and assess, inter alia the appropriateness of a threshold of                                 60 % on level 1 liquid assets, a cap of 75 % of inflows to outflows and the phase-in of the liquidity coverage requirement                                 from 60 % from 1 January 2015 increasing on a graduated basis to 100 %. When assessing and reporting on the uniform definitions of the stock of liquid                                 assets, EBA should have regard to the BCBS definition of high-quality liquid assets (HQLA) for the basis of its analysis,                                 taking Union and national specificities into account. While EBA should identify those currencies where the needs of institutions                                 established in the Union for liquid assets exceeds the availability of those liquid assets in that currency, EBA should also                                 annually examine whether derogations, including those identified in this Regulation, should be applied. In addition, EBA should assess annually whether in relation to any such derogation as well as derogations already identified in this Regulation,                                 any additional conditions should be attached to their use by institutions established in the Union or whether existing conditions                                 should be revised. EBA should submit the results of its analysis in an annual report to the Commission.

(103)With a view to increasing efficiency and reducing the administrative burden, EBA should set up a coherent reporting framework                                 on the basis of a harmonised set of standards for liquidity requirements that should be applied across the Union. To this                                 end, EBA should develop uniform reporting formats and IT solutions that take into account the provisions of this Regulation                                 and Directive 2013/36/EU. Until the date of application of the full liquidity requirements, institutions should continue to                                 meet their national reporting requirements.

(104)EBA, in cooperation with the ESRB, should issue guidance on the principles for use of liquid stock in a stress situation.

(105)It should not be taken for granted that institutions will receive liquidity support from other institutions belonging to the                                 same group when they experience difficulties in meeting their payment obligations. However, subject to stringent conditions                                 and the individual agreement of all competent authorities involved, competent authorities should be able to waive the application                                 of the liquidity requirement for individual institutions and subject those institutions to a consolidated requirement, in                                 order to allow them to manage their liquidity centrally at group or sub-group level.

(106)In the same vein, where no waiver is granted, liquidity flows between two institutions belonging to the same group and which                                 are subject to consolidated supervision, should, when the liquidity requirement becomes a binding measure, receive preferential                                 inflow and outflow rates only in those cases where all the necessary safeguards are in place. Such specific preferential treatments                                 should be narrowly defined and linked to the fulfilment of a number of stringent and objective conditions. The specific treatment                                 applicable to a given intragroup flow should be obtained through a methodology using objective criteria and parameters in                                 order to determine specific levels of inflows and outflows between the institution and the counterparty. Based on the observations                                 and supported by the EBA report, the Commission should, as appropriate and as part of the delegated act which it adopts pursuant                                 to this Regulation to specify the liquidity coverage requirement, be empowered to adopt delegated acts to lay down those specific                                 intragroup treatments, the methodology and the objective criteria to which they are linked as well as joint decision modalities                                 for the assessment of those criteria.

(107)Bonds issued by the National Asset Management Agency (NAMA) in Ireland are of particular importance to the Irish banking recovery                                 and their issue has been granted prior approval by the Member States, and approved as a State aid by the Commission as a support measure introduced to remove impaired assets from the balance sheets of certain credit institutions.                                 The issuance of such bonds, a transitional measure supported by the Commission and the ECB, is an integral part in the restructuring                                 of the Irish banking system. Such bonds are guaranteed by the Irish government and are eligible collateral with monetary authorities.                                 The Commission should address specific grandfathering mechanisms of transferable assets issued or guaranteed by entities with                                 Union State aid approval, as part of the delegated act which it adopts pursuant to this Regulation to specify the liquidity                                 coverage requirement. In that regard the Commission should take into account the fact that institutions calculating the liquidity                                 coverage requirements in accordance with this Regulation should be permitted to include NAMA senior bonds as assets of extremely                                 high liquidity and credit quality until December 2019.

(108)Similarly, the bonds issued by the Spanish Asset Management Company are of particular importance to the Spanish banking recovery                                 and are a transitional measure supported by the Commission and the ECB, as an integral part in the restructuring of the Spanish                                 banking system. Since their issuance is provided for in the Memorandum of Understanding on Financial Sector Policy Conditionality                                 signed by the Commission and the Spanish Authorities on 23 July 2012, and the transfer of assets requires approval by the Commission as a State aid measure introduced to remove impaired assets                                 from the balance sheets of certain credit institutions, and to the extent they are guaranteed by the Spanish government and                                 are eligible collateral with monetary authorities. The Commission should address specific grandfathering mechanisms of transferable                                 assets issued or guaranteed by entities with Union State aid approval as part of the delegated act which it adopts pursuant                                 to this Regulation to specify the liquidity coverage requirement. In that regard the Commission should take into account the                                 fact that institutions calculating the liquidity coverage requirements in accordance with this Regulation should be permitted                                 to include Spanish Asset Management Company senior bonds as assets of extremely high liquidity and credit quality until at                                 least December 2023.

(109)On the basis of the reports which EBA is required to submit and when preparing the proposal for a delegated act on liquidity                                 requirements, the Commission should also consider if senior bonds issued by legal entities similar to NAMA in Ireland or the                                 Spanish Asset Management Company, established for the same purpose and of particular importance for bank recovery in any other                                 Member State, should be granted such treatment, to the extent they are guaranteed by the central government of the relevant                                 Member State and are eligible collateral with monetary authorities.

(110)In developing draft regulatory technical standards to determine methods for the measurement of additional outflow, EBA should consider a historical look back standardised approach as a method of such measurement.

(111)Pending the introduction of the net stable funding ratio (NSFR) as a binding minimum standard, institutions should observe                                 a general funding obligation. The general funding obligation should not be a ratio requirement. If, pending the introduction                                 of the NSFR, a stable funding ratio is introduced as a minimum standard by way of a national provision, institutions should                                 comply with this minimum standard accordingly.

(112)Apart from short-term liquidity needs, institutions should also adopt funding structures that are stable over a longer term                                 horizon. In December 2010, the BCBS agreed that the NSFR will move to a minimum standard by 1 January 2018 and that the BCBS will put in place rigorous reporting processes to monitor the ratio during a transitional period and will                                 continue to review the implications of these standards for financial markets, credit extension and economic growth, addressing                                 unintended consequences as necessary. The BCBS thus agreed that the NSFR will be subject to an observation period and will                                 include a review clause. In that context, EBA should, based on reporting required by this Regulation, evaluate how a stable                                 funding requirement should be designed. Based on this evaluation, the Commission should report to the European Parliament                                 and the Council together with any appropriate proposals in order to introduce such a requirement by 2018.

(113)Weaknesses in corporate governance in a number of institutions have contributed to excessive and imprudent risk-taking in                                 the banking sector which led to the failure of individual institutions and systemic problems.

(114)In order to facilitate the monitoring of institutions' corporate governance practices and improve market discipline, institutions                                 should publicly disclose their corporate governance arrangements. Their management bodies should approve and publicly disclose                                 a statement providing assurance to the public that these arrangements are adequate and efficient.

(115)In order to take account of the diversity of business models of institutions in the internal market certain long-term structural                                 requirements such as the NSFR and the leverage ratio should be examined closely with a view of promoting a variety of sound                                 banking structures which have been and should continue to of service to the Union's economy.

(116)For the continuous provision of financial services to households and firms a stable funding structure is necessary. Long-term                                 funding flows in bank-based financial systems in many Member States may generally possess different characteristics than those                                 found in other international markets. In addition, specific funding structures may have developed in Member States to provide                                 stable financing for long-term investment, including decentralised banking structures to channel liquidity or specialised                                 mortgage securities which trade on highly liquid markets or are a welcome investment for long-term investors. Those structural factors should be carefully considered. It                                 is essential to that purpose that, once international standards are finalised, EBA and the ESRB, based on reporting required                                 by this Regulation, evaluate how a stable funding requirement should be designed fully taking into account the diversity of                                 funding structures in the banking market in the Union.

(117)In order to ensure progressive convergence between the level of own funds and the prudential adjustments applied to the definition                                 of own funds across the Union and to the definition of own funds laid down in this Regulation during a transitional period,                                 the phasing in of the own funds requirements of this Regulation should occur gradually. It is vital to ensure that this phasing                                 in is consistent with the recent enhancements made by Member States to the required levels of own funds and to the definition                                 of own funds in place in the Member States. To that end, during the transitional period the competent authorities should determine                                 within defined lower and upper limits how rapidly to introduce the required level of own funds and prudential adjustments                                 laid down in this Regulation.

(118)In order to facilitate a smooth transition from divergent prudential adjustments currently applied in Member States to the                                 set of prudential adjustments laid down in this Regulation, competent authorities should be able during a transitional period                                 to continue to require institutions, to a limited extent, to make prudential adjustments to own funds that derogate from this                                 Regulation.

(119)In order to ensure that institutions have sufficient time to meet the new required levels and definition of own funds, certain                                 capital instruments that do not comply with the definition of own funds laid down in this Regulation should be phased out                                 between 1 January 2013 and 31 December 2021. In addition, certain state-injected instruments should be recognised fully in own funds for a limited period. Furthermore,                                 share premium accounts related to items that qualified as own funds under national transposition measures for Directive 2006/48/EC                                 should under certain circumstances qualify as Common Equity Tier 1.

(120)In order to ensure progressive convergence towards uniform rules on disclosure by institutions to provide market participants                                 with accurate and comprehensive information regarding the risk profile of individual institutions, disclosure requirements                                 should be phased in gradually.

(121)In order to take account of market developments and experience in the application of this Regulation, the Commission should                                 be required to submit reports to the European Parliament and to the Council, together with legislative proposals, where appropriate,                                 on the possible effect of capital requirements on the economic cycle of minimum own funds requirements for exposures in the                                 form of covered bonds, large exposures, liquidity requirements, leverage, exposures to transferred credit risk, counterparty                                 credit risk and the original exposure method, retail exposures, on the definition of eligible capital, and the level of application                                 of this Regulation.

(122)The primary purpose of the legal framework for credit institutions should be to ensure the operation of vital services to                                 the real economy while limiting the risk of moral hazard. The structural separation of retail and investment banking activities                                 within a banking group could be one of the key tools to support this objective. No provision in the current regulatory framework                                 should therefore prevent the introduction of measures to effect such a separation. The Commission should be required to analyse                                 the issue of structural separation in the Union and submit a report, together with legislative proposals, if appropriate,                                 to the European Parliament and the Council.

(123)Similarly, with a view to protecting depositors and preserving financial stability, Member States should also be permitted                                 to adopt structural measures that require credit institutions authorised in that Member State to reduce their exposures to                                 different legal entities depending on their activities, irrespective of where those activities are located. However, because                                 such measures could have a negative impact by fragmenting the internal market, they should only be approved subject to strict                                 conditions pending the entry into force of a future legal act explicitly harmonising such measures.

(124)In order to specify the requirements set out in this Regulation, the power to adopt acts in accordance with Article 290 TFEU                                 should be delegated to the Commission in respect of technical adjustments to this Regulation to clarify definitions to ensure                                 uniform application of this Regulation or to take account of developments on financial markets, to align terminology on, and                                 frame definitions in accordance with, subsequent relevant acts, to adjust the provisions of this Regulation on own funds to                                 reflect developments in accounting standards or Union law, or with regard to the convergence of supervisory practices, to                                 expand the lists of exposure classes for the purposes of the Standardised Approach or the IRB Approach to take account of                                 developments on financial markets, to adjust certain amounts relevant to those exposure classes to take into account the effects                                 of inflation; to adjust the list and classification of off- balance sheet items and to adjust specific provisions and technical                                 criteria on the treatment of counterparty credit risk, the Standardised Approach and the IRB Approach, credit risk mitigation,                                 securitisation, operational risk, market risk, liquidity, leverage and disclosure in order to take account of developments                                 on financial markets or in accounting standards or Union law, or with regard to the convergence of supervisory practices and                                 risk measurement and to take account of the outcome of the review of various matters relating to the scope of Directive 2004/39/EC.

(125)The power to adopt acts in accordance with Article 290 TFEU should also be delegated to the Commission in respect of prescribing                                 a temporary reduction in the level of own funds or risk weights specified under this Regulation in order to take account of                                 specific circumstances, to clarify the exemption of certain exposures from the application of provisions of this Regulation                                 on large exposures, to specify amounts relevant to the calculation of capital requirements for the trading book to take account                                 of developments in the economic and monetary field, to adjust the categories of investment firms eligible for certain derogations from required levels of own funds to take account                                 of developments on financial markets, to clarify the requirement that investment firms hold own funds equivalent to one quarter                                 of their fixed overheads of the preceding year to ensure uniform application of this Regulation, to determine the elements                                 of own funds from which deductions of an institution's holdings of the instruments of relevant entities should be made, to                                 introduce additional transitional provisions relating to the treatment of actuarial gains and losses in measuring defined                                 benefit pension liabilities of institutions. It is of particular importance that the Commission carry out appropriate consultations                                 during its preparatory work, including at expert level. The Commission, when preparing and drawing up delegated acts, should                                 ensure a simultaneous, timely and appropriate transmission of relevant documents to the European Parliament and to the Council.

(126)In accordance with Declaration No 39 on Article 290 TFEU, the Commission should continue to consult experts appointed by the                                 Member States in the preparation of draft delegated acts in the financial services area, in accordance with its established                                 practice.

(127)Technical standards in financial services should ensure harmonisation, uniform conditions and adequate protection of depositors,                                 investors and consumers across the Union. As a body with highly specialised expertise, it would be efficient and appropriate                                 to entrust EBA with the elaboration of draft regulatory and implementing technical standards which do not involve policy choices,                                 for submission to the Commission. EBA should ensure efficient administrative and reporting processes when drafting technical                                 standards. The reporting formats should be proportionate to the nature, scale and complexity of the activities of the institutions.

(128)The Commission should adopt draft regulatory technical standards developed by EBA in the areas of mutuals, cooperative societies,                                 savings institutions or similar institutions, certain own funds instruments, prudential adjustments, deductions from own funds,                                 additional own funds instruments, minority interests, services ancillary to banking, the treatment of credit risk adjustment,                                 probability of default, loss given default, approaches to risk-weighting of assets, convergence of supervisory practices,                                 liquidity, and transitional arrangements for own funds, by means of delegated acts pursuant to Article 290 TFEU and in accordance                                 with Articles 10 to 14 of Regulation (EU) No 1093/2010. It is of particular importance that the Commission carry out appropriate                                 consultations during its preparatory work, including at expert level. The Commission and EBA should ensure that those standards                                 and requirements can be applied by all institutions concerned in a manner that is proportionate to the nature, scale and complexity                                 of those institutions and their activities.

(129)The implementation of some delegated acts provided for in this Regulation, such as the delegated act concerning the liquidity                                 coverage requirement, may potentially have a substantial impact on supervised institutions and the real economy. The Commission                                 should ensure that the European Parliament and the Council are always well informed about relevant developments at international                                 level and current thinking within the Commission well before the publication of delegated acts.

(130)The Commission should also be empowered to adopt implementing technical standards developed by EBA with regard to consolidation,                                 joint decisions, reporting, disclosure, exposures secured by mortgages, risk assessment, approaches to risk-weighting of assets,                                 risk-weights and specification of certain exposures, the treatment of options and warrants, positions in equity instruments                                 and foreign exchange, the use of internal models, leverage, and off-balance sheet items by means of implementing acts pursuant                                 to Article 291 TFEU and in accordance with Article 15 of Regulation (EU) No 1093/2010.

(131)Given the detail and number of regulatory technical standards that are to be adopted pursuant to this Regulation, where the                                 Commission adopts a regulatory technical standard which is the same as the draft regulatory technical standard submitted by                                 EBA, the period within which the European Parliament or the Council may object to a regulatory technical standard, should,                                 where appropriate, be further extended by one month. Moreover, the Commission should aim to adopt the regulatory technical                                 standards in good time to permit the European Parliament and the Council to exercise full scrutiny, taking account of the                                 volume and complexity of regulatory technical standards and the details of the European Parliament's and the Council's rules                                 of procedure, calendar of work and composition.

(132)In order to ensure a high degree of transparency, EBA should launch consultations relating to the draft technical standards                                 referred to in this Regulation. EBA and the Commission should start preparing their reports on liquidity requirements and                                 leverage, as provided for in this Regulation, as soon as possible.

(133)In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on                                 the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament                                 and of the Council of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by the Member States of the Commission's exercise                                 of implementing powers (18) .

(134)In accordance with Article 345 TFEU, which provides that the Treaties are in no way to prejudice the rules in Member States                                 governing the system of property ownership, this Regulation neither favours nor discriminates against types of ownership which                                 are within its scope.

(135)The European Data Protection Supervisor has been consulted in accordance with Article 28(2) of Regulation (EC) No 45/2001                                 and has adopted an opinion (19) .

(136)Regulation (EU) No 648/2012 should be amended accordingly,

HAVE ADOPTED THIS REGULATION:                         

Editorial Information

X1Substituted by Corrigendum to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements                                 for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

# PART ONEU.K.GENERAL PROVISIONS

## TITLE IU.K.SUBJECT MATTER, SCOPE AND DEFINITIONS

### Article 1U.K.Scope

This Regulation lays down uniform rules concerning general prudential requirements that institutions supervised under Directive                        2013/36/EU shall comply with in relation to the following items:                   

own funds requirements relating to entirely quantifiable, uniform and standardised elements of credit risk, market risk, operational                                 risk and settlement risk;                            

requirements limiting large exposures;                            

after the delegated act referred to in Article 460 has entered into force, liquidity requirements relating to entirely quantifiable,                                 uniform and standardised elements of liquidity risk;                            

reporting requirements related to points (a), (b) and (c) and to leverage;                            

public disclosure requirements.                            

This Regulation does not govern publication requirements for competent authorities in the field of prudential regulation and                        supervision of institutions as set out in Directive 2013/36/EU.                   

### Article 2U.K.Supervisory powers

For the purposes of ensuring compliance with this Regulation, competent authorities shall have the powers and shall follow                        the procedures set out in Directive 2013/36/EU.                   

### Article 3U.K.Application of stricter requirements by institutions

This Regulation shall not prevent institutions from holding own funds and their components in excess of, or applying measures                        that are stricter than those required by this Regulation.                   

### Article 4U.K.Definitions

1.For the purposes of this Regulation, the following definitions shall apply:                  

‘credit institution’ means an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits                                 for its own account;                            

‘investment firm’ means a person as defined in point (1) of Article 4(1) of Directive 2004/39/EC, which is subject to the requirements imposed                                 by that Directive, excluding the following:                            

credit institutions;                                     

local firms;                                     

firms which are not authorised to provide the ancillary service referred to in point (1) of Section B of Annex I to Directive                                          2004/39/EC, which provide only one or more of the investment services and activities listed in points 1, 2, 4 and 5 of Section                                          A of Annex I to that Directive, and which are not permitted to hold money or securities belonging to their clients and which                                          for that reason may not at any time place themselves in debt with those clients;                                     

‘institution’ means a credit institution or an investment firm;                            

‘local firm’ means a firm dealing for its own account on markets in financial futures or options or other derivatives and on cash markets                                 for the sole purpose of hedging positions on derivatives markets, or dealing for the accounts of other members of those markets                                 and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts                                 entered into by such a firm is assumed by clearing members of the same markets;                            

‘insurance undertaking’ means insurance undertaking as defined in point (1) of Article 13 of Directive 2009/138/EC of the European Parliament and                                 of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (20) ;                            

‘reinsurance undertaking’ means reinsurance undertaking as defined in point (4) of Article 13 of Directive 2009/138/EC;                            

‘collective investment undertaking’ or ‘CIU’ means a UCITS as defined in Article 1(2) of Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment                                 in transferable securities (UCITS) (21) , including, unless otherwise provided, third-country entities which carry out similar activities, which are subject to supervision                                 pursuant to Union law or to the law of a third country which applies supervisory and regulatory requirements at least equivalent                                 to those applied in the Union, an AIF as defined in Article 4(1)(a) of Directive 2011/61/EU of the European Parliament and                                 of the Council of 8 June 2011 on Alternative Investment Fund Managers (22) , or a non-EU AIF as defined in Article 4(1)(aa) of that Directive;                            

‘public sector entity’ means a non-commercial administrative body responsible to central governments, regional governments or local authorities,                                 or to authorities that exercise the same responsibilities as regional governments and local authorities, or a non-commercial                                 undertaking that is owned by or set up and sponsored by central governments, regional governments or local authorities, and                                 that has explicit guarantee arrangements, and may include self-administered bodies governed by law that are under public supervision;                            

‘management body’ means management body as defined in point (7) of Article 3(1) of Directive 2013/36/EU;                            

‘senior management’ means senior management as defined in point (9) of Article 3(1) of Directive 2013/36/EU;                            

‘systemic risk’ means systemic risk as defined in point (10) of Article 3(1) of Directive 2013/36/EU;                            

‘model risk’ means model risk as defined in point (11) of Article 3(1) of Directive 2013/36/EU;                            

‘originator’ means an entity which:                            

itself or through related entities, directly or indirectly, was involved in the original agreement which created the obligations                                          or potential obligations of the debtor or potential debtor giving rise to the exposure being securitised; or                                     

purchases a third party's exposures for its own account and then securitises them;                                     

‘sponsor’ means an institution other than an originator institution that establishes and manages an asset-backed commercial paper programme                                 or other securitisation scheme that purchases exposures from third-party entities;                            

‘parent undertaking’ means:                            

a parent undertaking within the meaning of Articles 1 and 2 of Directive 83/349/EEC;                                     

for the purposes of Section II of Chapters 3 and 4 of Title VII and Title VIII of Directive 2013/36/EU and Part Five of this                                          Regulation, a parent undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking which effectively                                          exercises a dominant influence over another undertaking;                                     

‘subsidiary’ means:                            

a subsidiary undertaking within the meaning of Articles 1 and 2 of Directive 83/349/EEC;                                     

a subsidiary undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking over which a parent                                          undertaking effectively exercises a dominant influence.                                     

Subsidiaries of subsidiaries shall also be considered to be subsidiaries of the undertaking that is their original parent                                 undertaking;                            

‘branch’ means a place of business which forms a legally dependent part of an institution and which carries out directly all or some                                 of the transactions inherent in the business of institutions;                            

‘ancillary services undertaking’ means an undertaking the principal activity of which consists of owning or managing property, managing data-processing services,                                 or a similar activity which is ancillary to the principal activity of one or more institutions;                            

‘asset management company’ means an asset management company as defined in point (5) of Article 2 of Directive 2002/87/EC or an AIFM as defined in Article                                 4(1)(b) of Directive 2011/61/EU, including, unless otherwise provided, third-country entities that carry out similar activities                                 and that are subject to the laws of a third country which applies supervisory and regulatory requirements at least equivalent                                 to those applied in the Union;                            

‘financial holding company’ means a financial institution, the subsidiaries of which are exclusively or mainly institutions or financial institutions,                                 at least one of such subsidiaries being an institution, and which is not a mixed financial holding company;                            

‘mixed financial holding company’ means mixed financial holding company as defined in point (15) of Article 2 of Directive 2002/87/EC;                            

‘mixed activity holding company’ means a parent undertaking, other than a financial holding company or an institution or a mixed financial holding company,                                 the subsidiaries of which include at least one institution;                            

‘third-country insurance undertaking’ means third-country insurance undertaking as defined in point (3) of Article 13 of Directive 2009/138/EC;                            

‘third-country reinsurance undertaking’ means third-country reinsurance undertaking as defined in point (6) of Article 13 of Directive 2009/138/EC;                            

‘recognised third-country investment firm’ means a firm meeting all of the following conditions:                            

if it were established within the Union, it would be covered by the definition of an investment firm;                                     

it is authorised in a third country;                                     

it is subject to and complies with prudential rules considered by the competent authorities at least as stringent as those                                          laid down in this Regulation or in Directive 2013/36/EU;                                     

‘financial institution’ means an undertaking other than an institution, the principal activity of which is to acquire holdings or to pursue one or                                 more of the activities listed in points 2 to 12 and point 15 of Annex I to Directive 2013/36/EU, including a financial holding                                 company, a mixed financial holding company, a payment institution within the meaning of Directive 2007/64/EC of the European                                 Parliament and of the Council of 13 November 2007 on payment services in the internal market (23) , and an asset management company, but excluding insurance holding companies and mixed-activity insurance holding companies                                 as defined, respectively, in points (f) and (g) of Article 212(1) of Directive 2009/138/EC;                            

‘financial sector entity’ means any of the following:                            

an institution;                                     

a financial institution;                                     

an ancillary services undertaking included in the consolidated financial situation of an institution;                                     

an insurance undertaking;                                     

a third-country insurance undertaking;                                     

a reinsurance undertaking;                                     

a third-country reinsurance undertaking;                                     

an insurance holding company as defined in point (f) of Article 212(1) of Directive 2009/138/EC;                                     

an undertaking excluded from the scope of Directive 2009/138/EC in accordance with Article 4 of that Directive;                                     

a third-country undertaking with a main business comparable to any of the entities referred to in points (a) to (k);                                     

‘parent institution in a Member State’ means an institution in a Member State which has a institution or a financial institution as a subsidiary or which holds                                 a participation in such an institution or financial institution, and which is not itself a subsidiary of another institution                                 authorised in the same Member State, or of a financial holding company or mixed financial holding company set up in the same                                 Member State;                            

‘EU parent institution’ means a parent institution in a Member State which is not a subsidiary of another institution authorised in any Member State,                                 or of a financial holding company or mixed financial holding company set up in any Member State;                            

‘parent financial holding company in a Member State’ means a financial holding company which is not itself a subsidiary of an institution authorised in the same Member State,                                 or of a financial holding company or mixed financial holding company set up in the same Member State;                            

‘EU parent financial holding company’ means a parent financial holding company in a Member State which is not a subsidiary of an institution authorised in any                                 Member State or of another financial holding company or mixed financial holding company set up in any Member State;                            

‘parent mixed financial holding company in a Member State’ means a mixed financial holding company which is not itself a subsidiary of an institution authorised in the same Member                                 State, or of a financial holding company or mixed financial holding company set up in that same Member State;                            

‘EU parent mixed financial holding company’ means a parent mixed financial holding company in a Member State which is not a subsidiary of an institution authorised in                                 any Member State or of another financial holding company or mixed financial holding company set up in any Member State;                            

‘central counterparty’ or ‘CCP’ means a CCP as defined in point (1) of Article 2 of Regulation (EU) No 648/2012;                            

‘participation’ means participation within the meaning of the first sentence of Article 17 of Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies (24) , or the ownership, direct or indirect, of 20 % or more of the voting rights or capital of an undertaking;                            

‘qualifying holding’ means a direct or indirect holding in an undertaking which represents 10 % or more of the capital or of the voting rights                                 or which makes it possible to exercise a significant influence over the management of that undertaking;                            

‘control’ means the relationship between a parent undertaking and a subsidiary, as defined in Article 1 of Directive 83/349/EEC, or                                 the accounting standards to which an institution is subject under Regulation (EC) No 1606/2002, or a similar relationship                                 between any natural or legal person and an undertaking;                            

‘close links’ means a situation in which two or more natural or legal persons are linked in any of the following ways:                            

participation in the form of ownership, direct or by way of control, of 20 % or more of the voting rights or capital of an                                          undertaking;                                     

control;                                     

a permanent link of both or all of them to the same third person by a control relationship;                                     

‘group of connected clients’ means any of the following:                            

two or more natural or legal persons who, unless it is shown otherwise, constitute a single risk because one of them, directly                                          or indirectly, has control over the other or others;                                     

two or more natural or legal persons between whom there is no relationship of control as described in point (a) but who are                                          to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial                                          problems, in particular funding or repayment difficulties, the other or all of the others would also be likely to encounter                                          funding or repayment difficulties.                                     

Notwithstanding points (a) and (b), where a central government has direct control over or is directly interconnected with                                 more than one natural or legal person, the set consisting of the central government and all of the natural or legal persons                                 directly or indirectly controlled by it in accordance with point (a), or interconnected with it in accordance with point (b),                                 may be considered as not constituting a group of connected clients. Instead the existence of a group of connected clients                                 formed by the central government and other natural or legal persons may be assessed separately for each of the persons directly                                 controlled by it in accordance with point (a), or directly interconnected with it in accordance with point (b), and all of                                 the natural and legal persons which are controlled by that person according to point (a) or interconnected with that person                                 in accordance with point (b), including the central government. The same applies in cases of regional governments or local                                 authorities to which Article 115(2) applies;                            

‘competent authority’ means a public authority or body officially recognised by national law, which is empowered by national law to supervise institutions                                 as part of the supervisory system in operation in the Member State concerned;                            

‘consolidating supervisor’ means a competent authority responsible for the exercise of supervision on a consolidated basis of EU parent institutions                                 and of institutions controlled by EU parent financial holding companies or EU parent mixed financial holding companies;                            

‘authorisation’ means an instrument issued in any form by the authorities by which the right to carry out the business is granted;                            

‘home Member State’ means the Member State in which an institution has been granted authorisation;                            

‘host Member State’ means the Member State in which an institution has a branch or in which it provides services;                            

‘ESCB central banks’ means the national central banks that are members of the European System of Central Banks (ESCB), and the European Central                                 Bank (ECB);                            

‘central banks’ means the ESCB central banks and the central banks of third countries;                            

‘consolidated situation’ means the situation that results from applying the requirements of this Regulation in accordance with Part One, Title II,                                 Chapter 2 to an institution as if that institution formed, together with one or more other entities, a single institution;                            

‘consolidated basis’ means on the basis of the consolidated situation;                            

‘sub-consolidated basis’ means on the basis of the consolidated situation of a parent institution, financial holding company or mixed financial holding                                 company, excluding a sub-group of entities, or on the basis of the consolidated situation of a parent institution, financial                                 holding company or mixed financial holding company that is not the ultimate parent institution, financial holding company                                 or mixed financial holding company;                            

‘financial instrument’ means any of the following:                            

a contract that gives rise to both a financial asset of one party and a financial liability or equity instrument of another                                          party;                                     

an instrument specified in Section C of Annex I to Directive 2004/39/EC;                                     

a derivative financial instrument;                                     

a primary financial instrument;                                     

a cash instrument.                                     

The instruments referred to in points (a), (b) and (c) are only financial instruments if their value is derived from the price                                 of an underlying financial instrument or another underlying item, a rate, or an index;                            

‘initial capital’ means the amount and types of own funds specified in Article 12 of Directive 2013/36/EU for credit institutions and in Title                                 IV of that Directive for investment firms;                            

‘operational risk’ means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events,                                 and includes legal risk;                            

‘dilution risk’ means the risk that an amount receivable is reduced through cash or non-cash credits to the obligor;                            

‘probability of default’ or ‘PD’ means the probability of default of a counterparty over a one-year period;                            

‘loss given default’ or ‘LGD’ means the ratio of the loss on an exposure due to the default of a counterparty to the amount outstanding at default;                            

‘conversion factor’ means the ratio of the currently undrawn amount of a commitment that could be drawn and that would therefore be outstanding                                 at default to the currently undrawn amount of the commitment, the extent of the commitment being determined by the advised                                 limit, unless the unadvised limit is higher;                            

‘credit risk mitigation’ means a technique used by an institution to reduce the credit risk associated with an exposure or exposures which that institution                                 continues to hold;                            

‘funded credit protection’ means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of an institution derives                                 from the right of that institution, in the event of the default of the counterparty or on the occurrence of other specified                                 credit events relating to the counterparty, to liquidate, or to obtain transfer or appropriation of, or to retain certain                                 assets or amounts, or to reduce the amount of the exposure to, or to replace it with, the amount of the difference between                                 the amount of the exposure and the amount of a claim on the institution;                            

‘unfunded credit protection’ means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of an institution derives                                 from the obligation of a third party to pay an amount in the event of the default of the borrower or the occurrence of other                                 specified credit events;                            

‘cash assimilated instrument’ means a certificate of deposit, a bond, including a covered bond, or any other non-subordinated instrument, which has been                                 issued by an institution, for which the institution has already received full payment and which shall be unconditionally reimbursed                                 by the institution at its nominal value;                            

‘securitisation’ means a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having                                 both of the following characteristics:                            

payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures;                                     

the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;                                     

‘securitisation position’ means an exposure to a securitisation;                            

‘re-securitisation’ means securitisation where the risk associated with an underlying pool of exposures is tranched and at least one of the underlying                                 exposures is a securitisation position;                            

‘re-securitisation position’ means an exposure to a re-securitisation;                            

‘credit enhancement’ means a contractual arrangement whereby the credit quality of a position in a securitisation is improved in relation to what                                 it would have been if the enhancement had not been provided, including the enhancement provided by more junior tranches in                                 the securitisation and other types of credit protection;                            

‘securitisation special purpose entity’ or ‘SSPE’ means a corporation trust or other entity, other than an institution, organised for carrying out a securitisation or securitisations,                                 the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended                                 to isolate the obligations of the SSPE from those of the originator institution, and in which the holders of the beneficial                                 interests have the right to pledge or exchange those interests without restriction;                            

‘tranche’ means a contractually established segment of the credit risk associated with an exposure or a number of exposures, where                                 a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in each other                                 such segment, without taking account of credit protection provided by third parties directly to the holders of positions in                                 the segment or in other segments;                            

‘marking to market’ means the valuation of positions at readily available close out prices that are sourced independently, including exchange                                 prices, screen prices or quotes from several independent reputable brokers;                            

‘marking to model’ means any valuation which has to be benchmarked, extrapolated or otherwise calculated from one or more market inputs;                            

‘independent price verification’ means a process by which market prices or marking to model inputs are regularly verified for accuracy and independence;                            

‘eligible capital’ means the following:                            

for the purposes of Title III of Part Two it means the sum of the following:                                     

Tier 1 capital as referred to in Article 25, without applying the deduction in Article 36(1)(k)(i);                                              

Tier 2 capital as referred to in Article 71 that is equal to or less than one third of Tier 1 capital as calculated pursuant                                                   to point (i) of this point;                                              

for the purposes of Article 97 and Part Four it means the sum of the following:                                     

Tier 1 capital as referred to in Article 25;                                              

Tier 2 capital as referred to in Article 71 that is equal to or less than one third of Tier 1 capital;                                              

‘recognised exchange’ means an exchange which meets all of the following conditions:                            

it is a regulated market;                                     

it has a clearing mechanism whereby contracts listed in Annex II are subject to daily margin requirements which, in the opinion                                          of the competent authorities, provide appropriate protection;                                     

‘discretionary pension benefits’ means enhanced pension benefits granted on a discretionary basis by an institution to an employee as part of that employee's                                 variable remuneration package, which do not include accrued benefits granted to an employee under the terms of the company                                 pension scheme;                            

‘mortgage lending value’ means the value of immovable property as determined by a prudent assessment of the future marketability of the property taking                                 into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative                                 appropriate uses of the property;                            

‘residential property’ means a residence which is occupied by the owner or the lessee of the residence, including the right to inhabit an apartment                                 in housing cooperatives located in Sweden;                            

‘market value’ means, for the purposes of immovable property, the estimated amount for which the property should exchange on the date of                                 valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties                                 had each acted knowledgeably, prudently and without compulsion;                            

‘applicable accounting framework’ means the accounting standards to which the institution is subject under Regulation (EC) No 1606/2002 or Directive 86/635/EEC;                            

‘one-year default rate’ means the ratio between the number of defaults occurred during a period that starts from one year prior to a date T and the                                 number of obligors assigned to this grade or pool one year prior to that date;                            

‘speculative immovable property financing’ means loans for the purposes of the acquisition of or development or construction on land in relation to immovable property,                                 or of and in relation to such property, with the intention of reselling for profit;                            

‘trade finance’ means financing, including guarantees, connected to the exchange of goods and services through financial products of fixed                                 short-term maturity, generally of less than one year, without automatic rollover;                            

‘officially supported export credits’ means loans or credits to finance the export of goods and services for which an official export credit agency provides guarantees,                                 insurance or direct financing;                            

‘repurchase agreement’ and ‘reverse repurchase agreement’ mean any agreement in which an institution or its counterparty transfers securities or commodities or guaranteed rights relating                                 to title to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the                                 securities or commodities and the agreement does not allow an institution to transfer or pledge a particular security or commodity                                 to more than one counterparty at one time, subject to a commitment to repurchase them, or substituted securities or commodities                                 of the same description at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase                                 agreement for the institution selling the securities or commodities and a reverse repurchase agreement for the institution                                 buying them;                            

‘repurchase transaction’ means any transaction governed by a repurchase agreement or a reverse repurchase agreement;                            

‘simple repurchase agreement’ means a repurchase transaction of a single asset, or of similar, non-complex assets, as opposed to a basket of assets;                            

‘positions held with trading intent’ means any of the following:                            

proprietary positions and positions arising from client servicing and market making;                                     

positions intended to be resold short term;                                     

positions intended to benefit from actual or expected short-term price differences between buying and selling prices or from                                          other price or interest rate variations;                                     

‘trading book’ means all positions in financial instruments and commodities held by an institution either with trading intent, or in order                                 to hedge positions held with trading intent;                            

‘multilateral trading facility’ means multilateral trading facility as defined in point 15 of Article 4 of Directive 2004/39/EC;                            

‘qualifying central counterparty’ or ‘QCCP’ means a central counterparty that has been either authorised in accordance with Article 14 of Regulation (EU) No 648/2012                                 or recognised in accordance with Article 25 of that Regulation;                            

‘default fund’ means a fund established by a CCP in accordance with Article 42 of Regulation (EU) No 648/2012 and used in accordance with                                 Article 45 of that Regulation;                            

‘pre-funded contribution to the default fund of a CCP’ means a contribution to the default fund of a CCP that is paid in by an institution;                            

‘trade exposure’ means a current exposure, including a variation margin due to the clearing member or to the client, but not yet received,                                 and any potential future exposure of a clearing member or a client, to a CCP arising from contracts and transactions listed                                 in points (a) to (e) of Article 301(1), as well as initial margin;                            

‘regulated market’ means regulated market as defined in point (14) of Article 4 of Directive 2004/39/EC;                            

‘leverage’ means the relative size of an institution's assets, off-balance sheet obligations and contingent obligations to pay or to                                 deliver or to provide collateral, including obligations from received funding, made commitments, derivatives or repurchase                                 agreements, but excluding obligations which can only be enforced during the liquidation of an institution, compared to that                                 institution's own funds;                            

‘risk of excessive leverage’ means the risk resulting from an institution's vulnerability due to leverage or contingent leverage that may require unintended                                 corrective measures to its business plan, including distressed selling of assets which might result in losses or in valuation                                 adjustments to its remaining assets;                            

‘credit risk adjustment’ means the amount of specific and general loan loss provision for credit risks that has been recognised in the financial statements                                 of the institution in accordance with the applicable accounting framework;                            

‘internal hedge’ means a position that materially offsets the component risk elements between a trading book and a non-trading book position                                 or sets of positions;                            

‘reference obligation’ means an obligation used for the purposes of determining the cash settlement value of a credit derivative;                            

‘external credit assessment institution’ or ‘ECAI’ means a credit rating agency that is registered or certified in accordance with Regulation (EC) No 1060/2009 of the European                                 Parliament and of the Council of 16 September 2009 on credit rating agencies (25)  or a central bank issuing credit ratings which are exempt from the application of Regulation (EC) No 1060/2009;                            

‘nominated ECAI’ means an ECAI nominated by an institution;                            

‘accumulated other comprehensive income’ has the same meaning as under International Accounting Standard (IAS) 1, as applicable under Regulation (EC) No 1606/2002;                            

‘basic own funds’ means basic own funds within the meaning of Article 88 of Directive 2009/138/EC;                            

‘Tier 1 own-fund insurance items’ means basic own-fund items of undertakings subject to the requirements of Directive 2009/138/EC where those items are classified                                 in Tier 1 within the meaning of Directive 2009/138/EC in accordance with Article 94(1) of that Directive;                            

‘additional Tier 1 own-fund insurance items’ means basic own-fund items of undertakings subject to the requirements of Directive 2009/138/EC where those items are classified                                 in Tier 1 within the meaning of Directive 2009/138/EC in accordance with Article 94(1) of that Directive and the inclusion                                 of those items is limited by the delegated acts adopted in accordance with Article 99 of that Directive;                            

‘Tier 2 own-fund insurance items’ means basic own-fund items of undertakings subject to the requirements of Directive 2009/138/EC where those items are classified                                 in Tier 2 within the meaning of Directive 2009/138/EC in accordance with Article 94(2) of that Directive;                            

‘Tier 3 own-fund insurance items’ means basic own-fund insurance items of undertakings subject to the requirements of Directive 2009/138/EC where those items                                 are classified in Tier 3 within the meaning of Directive 2009/138/EC in accordance with Article 94(3) of that Directive;                            

‘deferred tax assets’ has the same meaning as under the applicable accounting framework;                            

‘deferred tax assets that rely on future profitability’ means deferred tax assets the future value of which may be realised only in the event the institution generates taxable profit                                 in the future;                            

‘deferred tax liabilities’ has the same meaning as under the applicable accounting framework;                            

‘defined benefit pension fund assets’ means the assets of a defined pension fund or plan, as applicable, calculated after they have been reduced by the amount                                 of obligations under the same fund or plan;                            

‘distributions’ means the payment of dividends or interest in any form;                            

‘financial undertaking’ has the same meaning as under points (25)(b) and (d) of Article 13 of Directive 2009/138/EC;                            

‘funds for general banking risk’ has the same meaning as under Article 38 of Directive 86/635/EEC;                            

‘goodwill’ has the same meaning as under the applicable accounting framework;                            

‘indirect holding’ means any exposure to an intermediate entity that has an exposure to capital instruments issued by a financial sector entity                                 where, in the event the capital instruments issued by the financial sector entity were permanently written off, the loss that                                 the institution would incur as a result would not be materially different from the loss the institution would incur from a                                 direct holding of those capital instruments issued by the financial sector entity;                            

‘intangible assets’ has the same meaning as under the applicable accounting framework and includes goodwill;                            

‘other capital instruments’ means capital instruments issued by financial sector entities that do not qualify as Common Equity Tier 1, Additional Tier                                 1 or Tier 2 instruments or Tier 1 own-fund insurance items, additional Tier 1 own-fund insurance items, Tier 2 own-fund insurance                                 items or Tier 3 own-fund insurance items;                            

‘other reserves’ means reserves within the meaning of the applicable accounting framework that are required to be disclosed under the applicable                                 accounting standard, excluding any amounts already included in accumulated other comprehensive income or retained earnings;                            

‘own funds’ means the sum of Tier 1 capital and Tier 2 capital;                            

‘own funds instruments’ means capital instruments issued by the institution that qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments;                            

‘minority interest’ means the amount of Common Equity Tier 1 capital of a subsidiary of an institution that is attributable to natural or legal                                 persons other than those included in the prudential scope of consolidation of the institution;                            

‘profit’ has the same meaning as under the applicable accounting framework;                            

‘reciprocal cross holding’ means a holding by an institution of the own funds instruments or other capital instruments issued by financial sector entities                                 where those entities also hold own funds instruments issued by the institution;                            

‘retained earnings’ means profits and losses brought forward as a result of the final application of profit or loss under the applicable accounting                                 framework;                            

‘share premium account’ has the same meaning as under the applicable accounting framework;                            

‘temporary differences’ has the same meaning as under the applicable accounting framework;                            

‘synthetic holding’ means an investment by an institution in a financial instrument the value of which is directly linked to the value of the                                 capital instruments issued by a financial sector entity;                            

‘cross-guarantee scheme’ means a scheme that meets all the following conditions:                            

the institutions fall within the same institutional protection scheme as referred to in Article 113(7);                                     

the institutions are fully consolidated in accordance with Article 1(1)(b), (c) or (d) or Article 1(2) of Directive 83/349/EEC                                          and are included in the supervision on a consolidated basis of an institution which is a parent institution in a Member State                                          in accordance with Part One, Title II, Chapter 2 of this Regulation and subject to own funds requirements;                                     

the parent institution in a Member State and the subsidiaries are established in the same Member State and are subject to                                          authorisation and supervision by the same competent authority;                                     

the parent institution in a Member State and the subsidiaries have entered into a contractual or statutory liability arrangement                                          which protects those institutions and in particular ensures their liquidity and solvency, in order to avoid bankruptcy in                                          the case that it becomes necessary;                                     

arrangements are in place to ensure the prompt provision of financial means in terms of capital and liquidity if required                                          under the contractual or statutory liability arrangement referred to in point (d);                                     

the adequacy of the arrangements referred to in points (d) and (e) is monitored on a regular basis by the competent authority;                                     

the minimum period of notice for a voluntary exit of a subsidiary from the liability arrangement is 10 years;                                     

the competent authority is empowered to prohibit a voluntary exit of a subsidiary from the liability arrangement;                                     

‘distributable items’ means the amount of the profits at the end of the latest financial year plus any profits brought forward and reserves available                                 for that purpose before distributions to holders of own funds instruments less any losses brought forward, profits which are                                 non-distributable pursuant to provisions in legislation or the institution's bye-laws and sums placed to non-distributable                                 reserves in accordance with applicable national law or the statutes of the institution, those losses and reserves being determined                                 on the basis of the individual accounts of the institution and not on the basis of the consolidated accounts.                            

2.Where reference in this Regulation is made to immovable property, to residential property or commercial immovable property                           or to a mortgage on such property, it shall include shares in Finnish residential housing companies operating in accordance                           with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation. Member States or their competent authorities                           may allow shares constituting an equivalent indirect holding of immovable property to be treated as a direct holding of immovable                           property provided that such an indirect holding is specifically regulated in the national law of the Member State concerned                           and that, when pledged as collateral, it provides equivalent protection to creditors.                  

3.Trade finance as referred to in point (80) of paragraph 1 is generally uncommitted and requires satisfactory supporting transactional                           documentation for each drawdown request enabling refusal of the finance in the event of any doubt about creditworthiness or                           the supporting transactional documentation. Repayment of trade finance exposures is usually independent of the borrower, the                           funds instead coming from cash received from importers or resulting from proceeds of the sales of the underlying goods.                  

### Article 5U.K.Definitions specific to capital requirements for credit risk

For the purposes of Part Three, Title II, the following definitions shall apply:                   

‘exposure’ means an asset or off-balance sheet item;                            

‘loss’ means economic loss, including material discount effects, and material direct and indirect costs associated with collecting                                 on the instrument;                            

‘expected loss’ or ‘EL’ means the ratio of the amount expected to be lost on an exposure from a potential default of a counterparty or dilution over                                 a one-year period to the amount outstanding at default.                            

## TITLE IIU.K.LEVEL OF APPLICATION OF REQUIREMENTS

### CHAPTER 1U.K.Application of requirements on an individual basis

#### Article 6U.K.General principles

1.Institutions shall comply with the obligations laid down in Parts Two to Five and Eight on an individual basis.                  

2.No institution which is either a subsidiary in the Member State where it is authorised and supervised, or a parent undertaking,                           and no institution included in the consolidation pursuant to Article 18, shall be required to comply with the obligations                           laid down in Articles 89, 90 and 91 on an individual basis.                  

3.No institution which is either a parent undertaking or a subsidiary, and no institution included in the consolidation pursuant                           to Article 18, shall be required to comply with the obligations laid down in Part Eight on an individual basis.                  

4.Credit institutions and investment firms that are authorised to provide the investment services and activities listed in points                           (3) and (6) of Section A of Annex I to Directive 2004/39/EC shall comply with the obligations laid down in Part Six on an                           individual basis. Pending the report from the Commission in accordance with Article 508(3), competent authorities may exempt                           investment firms from compliance with the obligations laid down in Part Six taking into account the nature, scale and complexity                           of the investment firms' activities.                  

5.Institutions, except for investment firms referred to in Article 95(1) and Article 96(1) and institutions for which competent                           authorities have exercised the derogation specified in Article 7(1) or (3), shall comply with the obligations laid down in                           Part Seven on an individual basis.                  

#### Article 7U.K.Derogation from the application of prudential requirements on an individual basis

1.Competent authorities may waive the application of Article 6(1) to any subsidiary of an institution, where both the subsidiary                           and the institution are subject to authorisation and supervision by the Member State concerned, and the subsidiary is included                           in the supervision on a consolidated basis of the institution which is the parent undertaking, and all of the following conditions                           are satisfied, in order to ensure that own funds are distributed adequately between the parent undertaking and the subsidiary:                  

(a)there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of                           liabilities by its parent undertaking;                  

(b)either the parent undertaking satisfies the competent authority regarding the prudent management of the subsidiary and has                           declared, with the permission of the competent authority, that it guarantees the commitments entered into by the subsidiary,                           or the risks in the subsidiary are of negligible interest;                  

(c)the risk evaluation, measurement and control procedures of the parent undertaking cover the subsidiary;                  

(d)the parent undertaking holds more than 50 % of the voting rights attached to shares in the capital of the subsidiary or has                           the right to appoint or remove a majority of the members of the management body of the subsidiary.                  

2.Competent authorities may exercise the option provided for in paragraph 1 where the parent undertaking is a financial holding                           company or a mixed financial holding company set up in the same Member State as the institution, provided that it is subject                           to the same supervision as that exercised over institutions, and in particular to the standards laid down in Article 11(1).                  

3.Competent authorities may waive the application of Article 6(1) to a parent institution in a Member State where that institution                           is subject to authorisation and supervision by the Member State concerned, and it is included in the supervision on a consolidated                           basis, and all the following conditions are satisfied, in order to ensure that own funds are distributed adequately among                           the parent undertaking and the subsidiaries:                  

(a)there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of                           liabilities to the parent institution in a Member State;                  

(b)the risk evaluation, measurement and control procedures relevant for consolidated supervision cover the parent institution                           in a Member State.                  

The competent authority which makes use of this paragraph shall inform the competent authorities of all other Member States.                   

#### Article 8U.K.Derogation from the application of liquidity requirements on an individual basis

1.The competent authorities may waive in full or in part the application of Part Six to an institution and to all or some of                           its subsidiaries in the Union and supervise them as a single liquidity sub-group so long as they fulfil all of the following                           conditions:                  

(a)the parent institution on a consolidated basis or a subsidiary institution on a sub-consolidated basis complies with the obligations                           laid down in Part Six;                  

(b)the parent institution on a consolidated basis or the subsidiary institution on a sub-consolidated basis monitors and has                           oversight at all times over the liquidity positions of all institutions within the group or sub-group, that are subject to                           the waiver and ensures a sufficient level of liquidity for all of these institutions;                  

(c)the institutions have entered into contracts that, to the satisfaction of the competent authorities, provide for the free                           movement of funds between them to enable them to meet their individual and joint obligations as they become due;                  

(d)there is no current or foreseen material practical or legal impediment to the fulfilment of the contracts referred to in (c).                  

By 1 January 2014, the Commission shall report to the European Parliament and the Council on any legal obstacles which are capable of rendering                        impossible the application of point (c) of the first subparagraph and is invited to make a legislative proposal, if appropriate,                        by 31 December 2015, on which of those obstacles should be removed.                   

2.The competent authorities may waive in full or in part the application of Part Six to an institution and to all or some of                           its subsidiaries where all institutions of the single liquidity sub-group are authorised in the same Member State and provided                           that the conditions in paragraph 1 are fulfilled.                  

3.Where institutions of the single liquidity sub-group are authorised in several Member States, paragraph 1 shall only be applied                           after following the procedure laid down in Article 21 and only to the institutions whose competent authorities agree about                           the following elements:                  

(a)their assessment of the compliance of the organisation and of the treatment of liquidity risk with the conditions set out                           in Article 86 of Directive 2013/36/EU across the single liquidity sub-group;                  

(b)the distribution of amounts, location and ownership of the required liquid assets to be held within the single liquidity sub-group;                  

(c)the determination of minimum amounts of liquid assets to be held by institutions for which the application of Part Six will                           be waived;                  

(d)the need for stricter parameters than those set out in Part Six;                  

(e)unrestricted sharing of complete information between the competent authorities;                  

(f)a full understanding of the implications of such a waiver.                  

4.Competent authorities may also apply paragraphs 1, 2 and 3 to institutions which are members of the same institutional protection                           scheme as referred to in Article 113(7) provided that they meet all the conditions laid down therein, and to other institutions                           linked by a relationship referred to in Article 113(6) provided that they meet all the conditions laid down therein. Competent                           authorities shall in that case determine one of the institutions subject to the waiver to meet Part Six on the basis of the                           consolidated situation of all institutions of the single liquidity sub-group.                  

5.Where a waiver has been granted under paragraph 1 or paragraph 2, the competent authorities may also apply Article 86 of Directive                           2013/36/EU, or parts thereof, at the level of the single liquidity sub-group and waive the application of Article 86 of Directive                           2013/36/EU, or parts thereof, on an individual basis.                  

#### Article 9U.K.Individual consolidation method

1.Subject to paragraphs 2 and 3 of this Article and to Article 144(3) of Directive 2013/36/EU, the competent authorities may                           permit on a case-by-case basis parent institutions to incorporate in the calculation of their requirement under Article 6(1),                           subsidiaries which meet the conditions laid down in points (c) and (d) of Article 7(1) and whose material exposures or material                           liabilities are to that parent institution.                  

2.The treatment set out in paragraph 1 shall be permitted only where the parent institution demonstrates fully to the competent                           authorities the circumstances and arrangements, including legal arrangements, by virtue of which there is no current or foreseen                           material practical or legal impediment to the prompt transfer of own funds, or repayment of liabilities when due by the subsidiary                           to its parent undertaking.                  

3.Where a competent authority exercises the discretion laid down in paragraph 1, it shall on a regular basis and not less than                           once a year inform the competent authorities of all the other Member States of the use made of paragraph 1 and of the circumstances                           and arrangements referred to in paragraph 2. Where the subsidiary is in a third country, the competent authorities shall provide                           the same information to the competent authorities of that third country as well.                  

#### Article 10U.K.Waiver for credit institutions permanently affiliated to a central body

1.Competent authorities may, in accordance with national law, partially or fully waive the application of the requirements set                           out in Parts Two to Eight to one or more credit institutions situated in the same Member State and which are permanently affiliated                           to a central body which supervises them and which is established in the same Member State, if the following conditions are                           met:                  

(a)the commitments of the central body and affiliated institutions are joint and several liabilities or the commitments of its                           affiliated institutions are entirely guaranteed by the central body;                  

(b)the solvency and liquidity of the central body and of all the affiliated institutions are monitored as a whole on the basis                           of consolidated accounts of these institutions;                  

(c)the management of the central body is empowered to issue instructions to the management of the affiliated institutions.                  

Member States may maintain and make use of existing national legislation regarding the application of the waiver referred                        to in the first subparagraph as long as it does not conflict with this Regulation or Directive 2013/36/EU.                   

2.Where the competent authorities are satisfied that the conditions set out in paragraph 1 are met, and where the liabilities                           or commitments of the central body are entirely guaranteed by the affiliated institutions, the competent authorities may waive                           the application of Parts Two to Eight to the central body on an individual basis.                  

### CHAPTER 2U.K.Prudential consolidation

#### Section 1U.K.Application of requirements on a consolidated basis

##### Article 11U.K.General treatment

1.Parent institutions in a Member State shall comply, to the extent and in the manner prescribed in Article 18, with the obligations                           laid down in Parts Two to Four and Part Seven on the basis of their consolidated situation. The parent undertakings and their                           subsidiaries subject to this Regulation shall set up a proper organisational structure and appropriate internal control mechanisms                           in order to ensure that the data required for consolidation are duly processed and forwarded. In particular, they shall ensure                           that subsidiaries not subject to this Regulation implement arrangements, processes and mechanisms to ensure a proper consolidation.                  

2.Institutions controlled by a parent financial holding company or a parent mixed financial holding company in a Member State                           shall comply, to the extent and in the manner prescribed in Article 18, with the obligations laid down in Parts Two to Four                           and Part Seven on the basis of the consolidated situation of that financial holding company or mixed financial holding company.                  

Where more than one institution is controlled by a parent financial holding company or by a parent mixed financial holding                        company in a Member State, the first subparagraph shall apply only to the institution to which supervision on a consolidated                        basis applies in accordance with Article 111 of Directive 2013/36/EU.                   

3.EU parent institutions, institutions controlled by an EU parent financial holding company and institutions controlled by an                           EU parent mixed financial holding company shall comply with the obligations laid down in Part Six on the basis of the consolidated                           situation of that parent institution, financial holding company or mixed financial holding company, if the group comprises                           one or more credit institutions or investment firms that are authorised to provide the investment services and activities                           listed in points (3) and (6) of Section A of Annex I to Directive 2004/39/EC. Pending the report from the Commission in accordance                           with Article 508(2) of this Regulation, and if the group comprises only investment firms, competent authorities may exempt                           investment firms from compliance with the obligations laid down in Part Six on a consolidated basis, taking into account the                           nature, scale and complexity of the investment firm's activities.                  

4.Where Article 10 is applied, the central body referred to in that Article shall comply with the requirements of Parts Two                           to Eight on the basis of the consolidated situation of the whole as constituted by the central body together with its affiliated                           institutions.                  

5.In addition to the requirements in paragraphs 1 to 4, and without prejudice to other provisions of this Regulation and Directive                           2013/36/EU, when it is justified for supervisory purposes by the specificities of the risk or of the capital structure of                           an institution or where Member States adopt national laws requiring the structural separation of activities within a banking                           group, competent authorities may require the structurally separated institutions to comply with the obligations laid down                           in Parts Two to Four and Parts Six to Eight of this Regulation and in Title VII of Directive 2013/36/EU on a sub-consolidated                           basis.                  

Applying the approach set out in the first subparagraph shall be without prejudice to effective supervision on a consolidated                        basis and shall neither entail disproportionate adverse effects on the whole or parts of the financial system in other Member                        States or in the Union as a whole nor form or create an obstacle to the functioning of the internal market.                   

##### Article 12U.K.Financial holding company or mixed financial holding company with both a subsidiary credit institution and a subsidiary investment                           firm

Where a financial holding company or a mixed financial holding company has at least one credit institution and one investment                        firm as subsidiaries, the requirements that apply on the basis of the consolidated situation of the financial holding company                        or of the mixed financial holding company shall apply to the credit institution.                   

##### Article 13U.K.Application of disclosure requirements on a consolidated basis

1.EU parent institutions shall comply with the obligations laid down in Part Eight on the basis of their consolidated situation.                  

Significant subsidiaries of EU parent institutions and those subsidiaries which are of material significance for their local                        market shall disclose the information specified in Articles 437, 438, 440, 442, 450, 451 and 453, on an individual or sub-consolidated                        basis.                   

2.Institutions controlled by an EU parent financial holding company or EU parent mixed financial holding company shall comply                           with the obligations laid down in Part Eight on the basis of the consolidated situation of that financial holding company                           or mixed financial holding company.                  

Significant subsidiaries of EU parent financial holding companies or EU parent mixed holding companies and those subsidiaries                        which are of material significance for their local market shall disclose the information specified in Articles 437, 438, 440,                        442, 450, 451 and 453 on an individual or sub-consolidated basis.                   

3.Paragraphs 1 and 2 shall not apply in full or in part to EU parent institutions, institutions controlled by an EU parent financial                           holding company or EU parent mixed financial holding company, to the extent that they are included within equivalent disclosures                           provided on a consolidated basis by a parent undertaking established in a third country.                  

4.Where Article 10 is applied, the central body referred to in that Article shall comply with the requirements of Part Eight                           on the basis of the consolidated situation of the central body. Article 18(1) shall apply to the central body and the affiliated                           institutions shall be treated as the subsidiaries of the central body.                  

##### Article 14U.K.Application of requirements of Part Five on a consolidated basis

1.Parent undertakings and their subsidiaries subject to this Regulation shall meet the obligations laid down in Part Five on                           a consolidated or sub-consolidated basis, to ensure that their arrangements, processes and mechanisms required by those provisions                           are consistent and well-integrated and that any data and information relevant to the purpose of supervision can be produced.                           In particular, they shall ensure that subsidiaries not subject to this Regulation implement arrangements, processes and mechanisms                           to ensure compliance with those provisions.                  

2.Institutions shall apply an additional risk weight in accordance with Article 407 when applying Article 92 on a consolidated                           or sub-consolidated basis if the requirements of Article 405 or 406 are breached at the level of an entity established in                           a third country included in the consolidation in accordance with Article 18 if the breach is material in relation to the overall                           risk profile of the group.                  

3.Obligations resulting from Part Five concerning subsidiaries, not themselves subject to this Regulation, shall not apply if                           the EU parent institution or institutions controlled by an EU parent financial holding company or EU parent mixed financial                           holding company, can demonstrate to the competent authorities that the application of Part Five is unlawful under the laws                           of the third country where the subsidiary is established.                  

##### Article 15U.K.Derogation from the application of own funds requirements on a consolidated basis for groups of investment firms

1.The consolidating supervisor may waive, on a case-by-case basis, the application of Part Three of this Regulation and Title                           VII, Chapter 4 of Directive 2013/36/EU on a consolidated basis provided that the following conditions exist:                  

(a)each EU investment firm in the group uses the alternative calculation of total risk exposure amount referred to in Article                           95(2) or 96(2);                  

(b)all investment firms in the group fall within the categories in Article 95(1) or 96(1);                  

(c)each EU investment firm in the group meets the requirements imposed in Article 95 or 96 on an individual basis and at the                           same time deducts from its Common Equity Tier 1 items any contingent liability in favour of investment firms, financial institutions,                           asset management companies and ancillary services undertakings, which would otherwise be consolidated;                  

(d)any financial holding company which is the parent financial holding company in a Member State of any investment firm in the                           group holds at least enough capital, defined here as the sum of the items referred to in Articles 26(1), 51(1) and 62(1),                           to cover the sum of the following:                  

the sum of the full book value of any holdings, subordinated claims and instruments referred to in Article 36(1)(h) and (i),                                 Article 56(1)(c) and (d), and Article 66(1)(c) and (d) in investment firms, financial institutions, asset management companies                                 and ancillary services undertakings which would otherwise be consolidated; and                            

the total amount of any contingent liability in favour of investment firms, financial institutions, asset management companies                                 and ancillary services undertakings which would otherwise be consolidated;                            

(e)the group does not include credit institutions.                  

Where the criteria in the first subparagraph are met, each EU investment firm shall have in place systems to monitor and control                        the sources of capital and funding of all financial holding companies, investment firms, financial institutions, asset management                        companies and ancillary services undertakings within the group.                   

2.The competent authorities may also apply the waiver if the financial holding companies holds a lower amount of own funds than                           the amount calculated under paragraph 1(d), but no lower than the sum of the own funds requirements imposed on an individual                           basis to investment firms, financial institutions, asset management companies and ancillary services undertakings which would                           otherwise be consolidated and the total amount of any contingent liability in favour of investment firms, financial institutions,                           asset management companies and ancillary services undertakings which would otherwise be consolidated. For the purposes of                           this paragraph, the own funds requirement for investment undertakings of third countries, financial institutions, asset management                           companies and ancillary services undertakings is a notional own funds requirement.                  

##### Article 16U.K.Derogation from the application of the leverage ratio requirements on a consolidated basis for groups of investment firms

Where all entities in a group of investment firms, including the parent entity, are investment firms that are exempt from                        the application of the requirements laid down in Part Seven on an individual basis in accordance with Article 6(5), the parent                        investment firm may choose not to apply the requirements laid down in Part Seven on a consolidated basis.                   

##### Article 17U.K.Supervision of investment firms waived from the application of own funds requirements on a consolidated basis

1.Investment firms in a group which has been granted the waiver provided for in Article 15 shall notify the competent authorities                           of the risks which could undermine their financial positions, including those associated with the composition and sources                           of their own funds, internal capital and funding.                  

2.Where the competent authorities responsible for the prudential supervision of the investment firm waive the obligation of                           supervision on a consolidated basis as provided for in Article 15, they shall take other appropriate measures to monitor the                           risks, in particular large exposures, of the whole group, including any undertakings not located in a Member State.                  

3.Where the competent authorities responsible for the prudential supervision of the investment firm waive the application of                           own funds requirements on a consolidated basis as provided for in Article 15, the requirements of Part Eight shall apply on                           an individual basis.                  

#### Section 2U.K.Methods for prudential consolidation

##### Article 18U.K.Methods for prudential consolidation

1.The institutions that are required to comply with the requirements referred to in Section 1 on the basis of their consolidated                           situation shall carry out a full consolidation of all institutions and financial institutions that are its subsidiaries or,                           where relevant, the subsidiaries of the same parent financial holding company or parent mixed financial holding company. Paragraphs                           2 to 8 of this Article shall not apply where Part Six applies on the basis of an institution's consolidated situation.                  

2.However, the competent authorities may on a case-by-case basis permit proportional consolidation according to the share of                           capital that the parent undertaking holds in the subsidiary. Proportional consolidation may only be permitted where all of                           the following conditions are fulfilled:                  

(a)the liability of the parent undertaking is limited to the share of capital that the parent undertaking holds in the subsidiary                           in view of the liability of the other shareholders or members;                  

(b)the solvency of those other shareholders or members is satisfactory;                  

(c)the liability of the other shareholders and members is clearly established in a legally binding way.                  

3.Where undertakings are linked by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC, the competent                           authorities shall determine how consolidation is to be carried out.                  

4.The consolidating supervisor shall require the proportional consolidation according to the share of capital held of participations                           in institutions and financial institutions managed by an undertaking included in the consolidation together with one or more                           undertakings not included in the consolidation, where the liability of those undertakings is limited to the share of the capital                           they hold.                  

5.In the case of participations or capital ties other than those referred to in paragraphs 1 and 4, the competent authorities                           shall determine whether and how consolidation is to be carried out. In particular, they may permit or require use of the equity                           method. That method shall not, however, constitute inclusion of the undertakings concerned in supervision on a consolidated                           basis.                  

6.The competent authorities shall determine whether and how consolidation is to be carried out in the following cases:                  

(a)where, in the opinion of the competent authorities, an institution exercises a significant influence over one or more institutions                           or financial institutions, but without holding a participation or other capital ties in these institutions; and                  

(b)where two or more institutions or financial institutions are placed under single management other than pursuant to a contract                           or clauses of their memoranda or articles of association.                  

In particular, the competent authorities may permit, or require use of, the method provided for in Article 12 of Directive                        83/349/EEC. That method shall not, however, constitute inclusion of the undertakings concerned in consolidated supervision.                   

7.EBA shall develop draft regulatory technical standards to specify conditions according to which consolidation shall be carried                           out in the cases referred to in paragraphs 2 to 6 of this Article.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2016.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

8.Where consolidated supervision is required pursuant to Article 111 of Directive 2013/36/EU, ancillary services undertakings                           and asset management companies as defined in point (5) of Article 2 of Directive 2002/87/EC shall be included in consolidations                           in the cases, and in accordance with the methods, laid down in this Article.                  

#### Section 3U.K.Scope of prudential consolidation

##### Article 19U.K.Entities excluded from the scope of prudential consolidation

1.An institution, a financial institution or an ancillary services undertaking which is a subsidiary or an undertaking in which                           a participation is held, need not to be included in the consolidation where the total amount of assets and off-balance sheet                           items of the undertaking concerned is less than the smaller of the following two amounts:                  

(a)EUR 10 million;                  

(b)1 % of the total amount of assets and off-balance sheet items of the parent undertaking or the undertaking that holds the                           participation.                  

2.The competent authorities responsible for exercising supervision on a consolidated basis pursuant to Article 111 of Directive                           2013/36/EU may on a case-by-case basis decide in the following cases that an institution, financial institution or ancillary                           services undertaking which is a subsidiary or in which a participation is held need not be included in the consolidation:                  

(a)where the undertaking concerned is situated in a third country where there are legal impediments to the transfer of the necessary                           information;                  

(b)where the undertaking concerned is of negligible interest only with respect to the objectives of monitoring institutions;                  

(c)where, in the opinion of the competent authorities responsible for exercising supervision on a consolidated basis, the consolidation                           of the financial situation of the undertaking concerned would be inappropriate or misleading as far as the objectives of the                           supervision of credit institutions are concerned.                  

3.Where, in the cases referred to in paragraph 1 and point (b) of paragraph 2, several undertakings meet the criteria set out                           therein, they shall nevertheless be included in the consolidation where collectively they are of non-negligible interest with                           respect to the specified objectives.                  

##### Article 20U.K.Joint decisions on prudential requirements

1.The competent authorities shall work together, in full consultation:                  

(a)in the case of applications for the permissions referred to in Article 143(1), Article 151(4) and (9), Article 283, Article                           312(2) and Article363 respectively submitted by an EU parent institution and its subsidiaries, or jointly by the subsidiaries                           of an EU parent financial holding company or EU parent mixed financial holding company, to decide whether or not to grant                           the permission sought and to determine the terms and conditions, if any, to which such permission should be subject;                  

(b)for the purposes of determining whether the criteria for a specific intragroup treatment as referred to in Article 422(9)                           and Article 425(5) complemented by the EBA regulatory technical standards referred to in Article 422(10) and Article 425(6)                           are met.                  

Applications shall be submitted only to the consolidating supervisor.                   

The application referred to in Article 312(2), shall include a description of the methodology used for allocating operational                        risk capital between the different entities of the group. The application shall indicate whether and how diversification effects                        are intended to be factored in the risk measurement system.                   

2.The competent authorities shall do everything within their power to reach a joint decision within six months on:                  

(a)the application referred to in point (a) of paragraph 1;                  

(b)the assessment of the criteria and the determination of the specific treatment referred to in point (b) of paragraph 1.                  

This joint decision shall be set out in a document containing the fully reasoned decision which shall be provided to the applicant                        by the competent authority referred to in paragraph 1.                   

3.The period referred to in paragraph 2 shall begin:                  

(a)on the date of receipt of the complete application referred to in point (a) of paragraph 1 by the consolidating supervisor.                           The consolidating supervisor shall forward the complete application to the other competent authorities without delay;                  

(b)on the date of receipt by competent authorities of a report prepared by the consolidating supervisor analysing intragroup                           commitments within the group.                  

4.In the absence of a joint decision between the competent authorities within six months, the consolidating supervisor shall                           make its own decision on point (a) of paragraph 1. The decision of the consolidating supervisor shall not limit the powers                           of the competent authorities under Article 105 of Directive 2013/36/EU.                  

The decision shall be set out in a document containing the fully reasoned decision and shall take into account the views and                        reservations of the other competent authorities expressed during the six months period.                   

The decision shall be provided to the EU parent institution, the EU parent financial holding company or to the EU parent mixed                        financial holding company and the other competent authorities by the consolidating supervisor.                   

If, at the end of the six-month period, any of the competent authorities concerned has referred the matter to EBA in accordance                        with Article 19 of Regulation (EU) No 1093/2010, the consolidating supervisor shall defer its decision on point (a) of paragraph                        1 of this Article and await any decision that EBA may take in accordance with Article 19(3) of that Regulation on its decision,                        and shall take its decision in conformity with the decision of EBA. The six-month period shall be deemed the conciliation                        period within the meaning of that Regulation. EBA shall take its decision within one month. The matter shall not be referred                        to EBA after the end of the six-month period or after a joint decision has been reached.                   

5.In the absence of a joint decision between the competent authorities within six months, the competent authority responsible                           for the supervision of the subsidiary on an individual basis shall make its own decision on point (b) of paragraph 1.                  

The decision shall be set out in a document containing the fully reasoned decision and shall take into account the views and                        reservations of the other competent authorities expressed during the six-month period.                   

The decision shall be provided to the consolidating supervisor that informs the EU parent institution, the EU parent financial                        holding company or the EU parent mixed financial holding company.                   

If, at the end of the six-month period, the consolidating supervisor has referred the matter to EBA in accordance with Article                        19 of Regulation (EU) No 1093/2010, the competent authority responsible for the supervision of the subsidiary on an individual                        basis shall defer its decision on point (b) of paragraph 1 of this Article and await any decision that EBA may take in accordance                        with Article 19(3) of that Regulation on its decision, and shall take its decision in conformity with the decision of EBA.                        The six-month period shall be deemed the conciliation period within the meaning of that Regulation. EBA shall take its decision                        within one month. The matter shall not be referred to EBA after the end of the six-month period or after a joint decision                        has been reached.                   

6.Where an EU parent institution and its subsidiaries, the subsidiaries of an EU parent financial holding company or an EU parent                           mixed financial holding company use an Advanced Measurement Approach referred to in Article 312(2) or an IRB Approach referred                           to in Article 143 on a unified basis, the competent authorities shall allow the qualifying criteria set out in Articles 321                           and 322 or in Part Three, Title II, Chapter 3, Section 6 respectively to be met by the parent and its subsidiaries considered                           together, in a way that is consistent with the structure of the group and its risk management systems, processes and methodologies.                  

7.The decisions referred to in paragraphs 2, 4 and 5 shall be recognised as determinative and applied by the competent authorities                           in the Member States concerned.                  

8.EBA shall develop draft implementing technical standards to specify the joint decision process referred to in point (a) of                           paragraph 1 with regard to the applications for permissions referred to in Article 143(1), Article 151(4) and (9), Article                           283, Article 312(2), and Article 363 with a view to facilitating joint decisions.                  

EBA shall submit those draft implementing technical standards to the Commission by 31 December 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

##### Article 21U.K.Joint decisions on the level of application of liquidity requirements

1.Upon application of an EU parent institution or an EU parent financial holding company or EU parent mixed financial holding                           company or a sub-consolidating subsidiary of an EU parent institution or an EU parent financial holding company or EU parent                           mixed financial holding company, the consolidating supervisor and the competent authorities responsible for the supervision of subsidiaries of an EU parent institution or an EU parent financial                           holding company or EU parent mixed financial holding company in a Member State shall do everything within their power to reach                           a joint decision on whether the conditions in points (a) to (d) of Article 8(1) are met and identifying a single liquidity                           sub-group for the application of Article 8.                  

The joint decision shall be reached within six months after submission by the consolidating supervisor of a report identifying                        single liquidity sub-groups on the basis of the criteria laid down in Article 8. In the event of disagreement during the six-month                        period, the consolidating supervisor shall consult EBA at the request of any of the other competent authorities concerned.                        The consolidating supervisor may consult EBA on its own initiative.                   

The joint decision may also impose constraints on the location and ownership of liquid assets and require minimum amounts                        of liquid assets to be held by institutions that are exempt from the application of Part Six.                   

The joint decision shall be set out in a document containing the fully reasoned decision which shall be submitted to the parent                        institution of the liquidity subgroup by the consolidating supervisor.                   

2.In the absence of a joint decision within six months, each competent authority responsible for supervision on an individual                           basis shall take its own decision.                  

However, any competent authority may during the six-month period refer to EBA the question whether the conditions in points                        (a) to (d) of Article 8(1) are met. In that case, EBA may carry out its non-binding mediation in accordance with Article 31(c)                        of Regulation (EU) No 1093/2010 and all the competent authorities involved shall defer their decisions pending the conclusion                        of the non-binding mediation. Where, during the mediation, no agreement has been reached by the competent authorities within                        three months, each competent authority responsible for supervision on an individual basis shall take its own decision taking                        into account the proportionality of benefits and risks at the level of the Member State of the parent institution and the                        proportionality of benefits and risks at the level of the Member State of the subsidiary. The matter shall not be referred                        to EBA after the end of the six-month period or after a joint decision has been reached.                   

The joint decision referred to in paragraph 1 and the decisions referred to in the second subparagraph of this paragraph shall                        be binding.                   

3.Any relevant competent authority may also during the six-month period consult EBA in the event of a disagreement on the conditions                           in points (a) to (d) of Article 8(3). In that case, EBA may carry out its non-binding mediation in accordance with Article                           31(c) of Regulation (EU) No 1093/2010, and all the competent authorities involved shall defer their decisions pending the                           conclusion of the non-binding mediation. Where, during the mediation, no agreement has been reached by the competent authorities                           within three months, each competent authority responsible for supervision on an individual basis shall take its own decision.                  

##### Article 22U.K.Sub-consolidation in cases of entities in third countries

Subsidiary institutions shall apply the requirements laid down in Articles 89 to 91 and Parts Three and Four on the basis                        of their sub-consolidated situation if those institutions, or the parent undertaking where it is a financial holding company                        or mixed financial holding company, have an institution or a financial institution as a subsidiary in a third country, or                        hold a participation in such an undertaking.                   

##### Article 23U.K.Undertakings in third countries

For the purposes of applying supervision on a consolidated basis in accordance with this Chapter, the terms ‘investment firm’, ‘credit institution’, financial institution', and ‘institution’ shall also apply to undertakings established in third countries, which, were they established in the Union, would fulfil                        the definitions of those terms in Article 4.                   

##### Article 24U.K.Valuation of assets and off-balance sheet items

1.The valuation of assets and off-balance sheet items shall be effected in accordance with the applicable accounting framework.                  

2.By way of derogation from paragraph 1, competent authorities may require that institutions effect the valuation of assets                           and off-balance sheet items and the determination of own funds in accordance with the international accounting standards as                           applicable under Regulation (EC) No 1606/2002.                  

# PART TWOU.K.OWN FUNDS

## TITLE IU.K.ELEMENTS OF OWN FUNDS

### CHAPTER 1U.K.Tier 1 capital

#### Article 25U.K.Tier 1 capital

The Tier 1 capital of an institution consists of the sum of the Common Equity Tier 1 capital and Additional Tier 1 capital                        of the institution.                   

### CHAPTER 2U.K.Common Equity Tier 1 capital

#### Section 1U.K.Common Equity Tier 1 items and instruments

##### Article 26U.K.Common Equity Tier 1 items

1.Common Equity Tier 1 items of institutions consist of the following:                  

(a)capital instruments, provided that the conditions laid down in Article 28 or, where applicable, Article 29 are met;                  

(b)share premium accounts related to the instruments referred to in point (a);                  

(c)retained earnings;                  

(d)accumulated other comprehensive income;                  

(e)other reserves;                  

(f)funds for general banking risk.                  

The items referred to in points (c) to (f) shall be recognised as Common Equity Tier 1 only where they are available to the                        institution for unrestricted and immediate use to cover risks or losses as soon as these occur.                   

2.For the purposes of point (c) of paragraph 1, institutions may include interim or year-end profits in Common Equity Tier 1                           capital before the institution has taken a formal decision confirming the final profit or loss of the institution for the                           year only with the prior permission of the competent authority. The competent authority shall grant permission where the following                           conditions are met:                  

(a)those profits have been verified by persons independent of the institution that are responsible for the auditing of the accounts                           of that institution;                  

(b)the institution has demonstrated to the satisfaction of the competent authority that any foreseeable charge or dividend has                           been deducted from the amount of those profits.                  

A verification of the interim or year-end profits of the institution shall provide an adequate level of assurance that those                        profits have been evaluated in accordance with the principles set out in the applicable accounting framework.                   

3.Competent authorities shall evaluate whether issuances of Common Equity Tier 1 instruments meet the criteria set out in Article                           28 or, where applicable, Article 29. With respect to issuances after 28 June 2013, institutions shall classify capital instruments as Common Equity Tier 1 instruments only after permission is granted by                           the competent authorities, which may consult EBA.                  

For capital instruments, with the exception of State aid, that are approved as eligible for classification as Common Equity                        Tier 1 instruments by the competent authority but where, in the opinion of EBA, compliance with the criteria in Article 28                        or, where applicable, Article 29, is materially complex to ascertain, the competent authorities shall explain their reasoning                        to EBA.                   

On the basis of information from each competent authority, EBA shall establish, maintain and publish a list of all the forms                        of capital instruments in each Member State that qualify as Common Equity Tier 1 instruments. EBA shall establish that list                        and publish it for the first time by 28 July 2013.                   

EBA may, after the review process set out in Article 80 and, where there is significant evidence of those instruments not                        meeting the criteria set out in Article 28 or, where applicable, Article 29, decide to remove non-State aid capital instruments                        issued after 28 June 2013 from the list and may make an announcement to that effect.                   

4.EBA shall develop draft regulatory technical standards to specify the meaning of foreseeable when determining whether any                           foreseeable charge or dividend has been deducted.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 27U.K.Capital instruments of mutuals, cooperative societies, savings institutions or similar institutions in Common Equity Tier                           1 items

1.Common Equity Tier 1 items shall include any capital instrument issued by an institution under its statutory terms provided                           that the following conditions are met:                  

(a)the institution is of a type that is defined under applicable national law and which competent authorities consider to qualify                           as any of the following:                  

a mutual;                            

a cooperative society;                            

a savings institution;                            

a similar institution;                            

a credit institution which is wholly owned by one of the institutions referred to in points (i) to (iv) and has approval from                                 the relevant competent authority to make use of the provisions in this Article, provided that, and for as long as, 100 % of                                 the ordinary shares in issue in the credit institution are held directly or indirectly by an institution referred to in those                                 points;                            

(b)the conditions laid down in Articles 28 or, where applicable, Article 29, are met.                  

Those mutuals, cooperative societies or savings institutions recognised as such under applicable national law prior to 31 December 2012 shall continue to be classified as such for the purposes of this Part, provided that they continue to meet the criteria that                        determined such recognition.                   

2.EBA shall develop draft regulatory technical standards to specify the conditions according to which competent authorities                           may determine that a type of undertaking recognised under applicable national law qualifies as a mutual, cooperative society,                           savings institution or similar institution for the purposes of this Part.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 28U.K.Common Equity Tier 1 instruments

1.Capital instruments shall qualify as Common Equity Tier 1 instruments only if all the following conditions are met:                  

(a)the instruments are issued directly by the institution with the prior approval of the owners of the institution or, where                           permitted under applicable national law, the management body of the institution;                  

(b)the instruments are paid up and their purchase is not funded directly or indirectly by the institution;                  

(c)the instruments meet all the following conditions as regards their classification:                  

they qualify as capital within the meaning of Article 22 of Directive 86/635/EEC;                            

they are classified as equity within the meaning of the applicable accounting framework;                            

they are classified as equity capital for the purposes of determining balance sheet insolvency, where applicable under national                                 insolvency law;                            

(d)the instruments are clearly and separately disclosed on the balance sheet in the financial statements of the institution;                  

(e)the instruments are perpetual;                  

(f)the principal amount of the instruments may not be reduced or repaid, except in either of the following cases:                  

the liquidation of the institution;                            

discretionary repurchases of the instruments or other discretionary means of reducing capital, where the institution has received                                 the prior permission of the competent authority in accordance with Article 77;                            

(g)the provisions governing the instruments do not indicate expressly or implicitly that the principal amount of the instruments                           would or might be reduced or repaid other than in the liquidation of the institution, and the institution does not otherwise                           provide such an indication prior to or at issuance of the instruments, except in the case of instruments referred to in Article                           27 where the refusal by the institution to redeem such instruments is prohibited under applicable national law;                  

(h)the instruments meet the following conditions as regards distributions:                  

there is no preferential distribution treatment regarding the order of distribution payments, including in relation to other                                 Common Equity Tier 1 instruments, and the terms governing the instruments do not provide preferential rights to payment of                                 distributions;                            

distributions to holders of the instruments may be paid only out of distributable items;                            

the conditions governing the instruments do not include a cap or other restriction on the maximum level of distributions,                                 except in the case of the instruments referred to in Article 27;                            

the level of distributions is not determined on the basis of the amount for which the instruments were purchased at issuance,                                 except in the case of the instruments referred to in Article 27;                            

the conditions governing the instruments do not include any obligation for the institution to make distributions to their                                 holders and the institution is not otherwise subject to such an obligation;                            

non-payment of distributions does not constitute an event of default of the institution;                            

the cancellation of distributions imposes no restrictions on the institution;                            

(i)compared to all the capital instruments issued by the institution, the instruments absorb the first and proportionately greatest                           share of losses as they occur, and each instrument absorbs losses to the same degree as all other Common Equity Tier 1 instruments;                  

(j)the instruments rank below all other claims in the event of insolvency or liquidation of the institution;                  

(k)the instruments entitle their owners to a claim on the residual assets of the institution, which, in the event of its liquidation                           and after the payment of all senior claims, is proportionate to the amount of such instruments issued and is not fixed or                           subject to a cap, except in the case of the capital instruments referred to in Article 27;                  

(l)the instruments are neither secured nor subject to a guarantee that enhances the seniority of the claim by any of the following:                  

the institution or its subsidiaries;                            

the parent undertaking of the institution or its subsidiaries;                            

the parent financial holding company or its subsidiaries;                            

the mixed activity holding company or its subsidiaries;                            

the mixed financial holding company and its subsidiaries;                            

any undertaking that has close links with the entities referred to in points (i) to (v);                            

(m)the instruments are not subject to any arrangement, contractual or otherwise, that enhances the seniority of claims under                           the instruments in insolvency or liquidation.                  

The condition set out in point (j) of the first subparagraph shall be deemed to be met, notwithstanding the instruments are                        included in Additional Tier 1 or Tier 2 by virtue of Article 484(3), provided that they rank pari passu.                   

2.The conditions laid down in point (i) of paragraph 1 shall be deemed to be met notwithstanding a write down on a permanent                           basis of the principal amount of Additional Tier 1 or Tier 2 instruments.                  

The condition laid down in point (f) of paragraph 1 shall be deemed to be met notwithstanding the reduction of the principal                        amount of the capital instrument within a resolution procedure or as a consequence of a write down of capital instruments                        required by the resolution authority responsible for the institution.                   

The condition laid down in point (g) of paragraph 1 shall be deemed to be met notwithstanding the provisions governing the                        capital instrument indicating expressly or implicitly that the principal amount of the instrument would or might be reduced                        within a resolution procedure or as a consequence of a write down of capital instruments required by the resolution authority                        responsible for the institution.                   

3.The condition laid down in point (h)(iii) of paragraph 1 shall be deemed to be met notwithstanding the instrument paying a                           dividend multiple, provided that such a dividend multiple does not result in a distribution that causes a disproportionate                           drag on own funds.                  

4.For the purposes of point (h)(i) of paragraph 1, differentiated distributions shall only reflect differentiated voting rights.                           In this respect, higher distributions shall only apply to Common Equity Tier 1 instruments with fewer or no voting rights.                  

5.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the applicable forms and nature of indirect funding of own funds instruments;                  

(b)whether and when multiple distributions would constitute a disproportionate drag on own funds;                  

(c)the meaning of preferential distributions.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 29U.K.Capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions

1.Capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions shall qualify                           as Common Equity Tier 1 instruments only if the conditions laid down in Article 28 with modifications resulting from the application                           of this Article are met.                  

2.The following conditions shall be met as regards redemption of the capital instruments:                  

(a)except where prohibited under applicable national law, the institution shall be able to refuse the redemption of the instruments;                  

(b)where the refusal by the institution of the redemption of instruments is prohibited under applicable national law, the provisions                           governing the instruments shall give the institution the ability to limit their redemption;                  

(c)refusal to redeem the instruments, or the limitation of the redemption of the instruments where applicable, may not constitute                           an event of default of the institution.                  

3.The capital instruments may include a cap or restriction on the maximum level of distributions only where that cap or restriction                           is set out under applicable national law or the statute of the institution.                  

4.Where the capital instruments provide the owner with rights to the reserves of the institution in the event of insolvency                           or liquidation that are limited to the nominal value of the instruments, such a limitation shall apply to the same degree                           to the holders of all other Common Equity Tier 1 instruments issued by that institution.                  

The condition laid down in the first subparagraph is without prejudice to the possibility for a mutual, cooperative society,                        savings institution or a similar institution to recognise within Common Equity Tier 1 instruments that do not afford voting                        rights to the holder and that meet all the following conditions:                   

(a)the claim of the holders of the non-voting instruments in the insolvency or liquidation of the institution is proportionate                           to the share of the total Common Equity Tier 1 instruments that those non-voting instruments represent;                  

(b)the instruments otherwise qualify as Common Equity Tier 1 instruments.                  

5.Where the capital instruments entitle their owners to a claim on the assets of the institution in the event of its insolvency                           or liquidation that is fixed or subject to a cap, such a limitation shall apply to the same degree to all holders of all Common                           Equity Tier 1 instruments issued by the institution.                  

6.EBA shall develop draft regulatory technical standards to specify the nature of the limitations on redemption necessary where                           the refusal by the institution of the redemption of own funds instruments is prohibited under applicable national law.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 30U.K.Consequences of the conditions for Common Equity Tier 1 instruments ceasing to be met

The following shall apply where, in the case of a Common Equity Tier 1 instrument, the conditions laid down in Article 28                        or, where applicable, Article 29 cease to be met:                   

that instrument shall immediately cease to qualify as a Common Equity Tier 1 instrument;                            

the share premium accounts that relate to that instrument shall immediately cease to qualify as Common Equity Tier 1 items.                            

##### Article 31U.K.Capital instruments subscribed by public authorities in emergency situations

1.In emergency situations, competent authorities may permit institutions to include in Common Equity Tier 1 capital instruments                           that comply at least with the conditions laid down in points (b) to (e) of Article 28(1) where all the following conditions                           are met:                  

(a)the capital instruments are issued after 1 January 2014;                  

(b)the capital instruments are considered State aid by the Commission;                  

(c)the capital instruments are issued within the context of recapitalisation measures pursuant to State aid- rules existing at                           the time;                  

(d)the capital instruments are fully subscribed and held by the State or a relevant public authority or public-owned entity;                  

(e)the capital instruments are able to absorb losses;                  

(f)except for the capital instruments referred to in Article 27, in the event of liquidation, the capital instruments entitle                           their owners to a claim on the residual assets of the institution after the payment of all senior claims;                  

(g)there are adequate exit mechanisms of the State or, where applicable, a relevant public authority or public-owned entity;                  

(h)the competent authority has granted its prior permission and has published its decision together with an explanation of that                           decision.                  

2.Upon reasoned request by, and in cooperation with, the relevant competent authority, EBA shall consider the capital instruments                           referred to in paragraph 1 as equivalent to Common Equity Tier 1 instruments for the purposes of this Regulation.                  

#### Section 2U.K.Prudential filters

##### Article 32U.K.Securitised assets

1.An institution shall exclude from any element of own funds any increase in its equity under the applicable accounting framework                           that results from securitised assets, including the following:                  

(a)such an increase associated with future margin income that results in a gain on sale for the institution;                  

(b)where the institution is the originator of a securitisation, net gains that arise from the capitalisation of future income                           from the securitised assets that provide credit enhancement to positions in the securitisation.                  

2.EBA shall develop draft regulatory technical standards to specify further the concept of a gain on sale referred to in point                           (a) of paragraph 1.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 33U.K.Cash flow hedges and changes in the value of own liabilities

1.Institutions shall not include the following items in any element of own funds:                  

(a)the fair value reserves related to gains or losses on cash flow hedges of financial instruments that are not valued at fair                           value, including projected cash flows;                  

(b)gains or losses on liabilities of the institution that are valued at fair value that result from changes in the own credit                           standing of the institution;                  

(c)fair value gains and losses on derivative liabilities of the institution that result from changes in the own credit standing                           of the institution.                  

2.For the purposes of point (c) of paragraph 1, institutions shall not offset the fair value gains and losses arising from the                           institution's own credit risk with those arising from its counterparty credit risk.                  

3.Without prejudice to point (b) of paragraph 1, institutions may include the amount of gains and losses on their liabilities                           in own funds where all the following conditions are met:                  

(a)the liabilities are in the form of bonds as referred to in Article 52(4) of Directive 2009/65/EC;                  

(b)the changes in the value of the institution's assets and liabilities are due to the same changes in the institution's own                           credit standing;                  

(c)there is a close correspondence between the value of the bonds referred to in point (a) and the value of the institution's                           assets;                  

(d)it is possible to redeem the mortgage loans by buying back the bonds financing the mortgage loans at market or nominal value.                  

4.EBA shall develop draft regulatory technical standards to specify what constitutes close correspondence between the value                           of the bonds and the value of the assets, as referred to in point (c) of paragraph 3.                  

EBA shall submit those draft regulatory technical standards to the Commission by 30 September 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 34U.K.Additional value adjustments

Institutions shall apply the requirements of Article 105 to all their assets measured at fair value when calculating the amount                        of their own funds and shall deduct from Common Equity Tier 1 capital the amount of any additional value adjustments necessary.                   

##### Article 35U.K.Unrealised gains and losses measured at fair value

Except in the case of the items referred to in Article 33, institutions shall not make adjustments to remove from their own                        funds unrealised gains or losses on their assets or liabilities measured at fair value.                   

#### Section 3U.K.Deductions from Common Equity Tier 1 items, exemptions and alternatives

##### Sub-Section 1U.K.Deductions from Common Equity Tier 1 items

###### Article 36U.K.Deductions from Common Equity Tier 1 items

1.Institutions shall deduct the following from Common Equity Tier 1 items:                  

(a)losses for the current financial year;                  

(b)intangible assets;                  

(c)deferred tax assets that rely on future profitability;                  

(d)for institutions calculating risk-weighted exposure amounts using the Internal Ratings Based Approach (the IRB Approach),                           negative amounts resulting from the calculation of expected loss amounts laid down in Articles 158 and 159;                  

(e)defined benefit pension fund assets on the balance sheet of the institution;                  

(f)direct, indirect and synthetic holdings by an institution of own Common Equity Tier 1 instruments, including own Common Equity                           Tier 1 instruments that an institution is under an actual or contingent obligation to purchase by virtue of an existing contractual                           obligation;                  

(g)direct, indirect and synthetic holdings of the Common Equity Tier 1 instruments of financial sector entities where those entities                           have a reciprocal cross holding with the institution that the competent authority considers to have been designed to inflate                           artificially the own funds of the institution;                  

(h)the applicable amount of direct, indirect and synthetic holdings by the institution of Common Equity Tier 1 instruments of                           financial sector entities where the institution does not have a significant investment in those entities;                  

(i)the applicable amount of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1 instruments                           of financial sector entities where the institution has a significant investment in those entities;                  

(j)the amount of items required to be deducted from Additional Tier 1 items pursuant to Article 56 that exceeds the Additional                           Tier 1 capital of the institution;                  

(k)the exposure amount of the following items which qualify for a risk weight of 1 250 %, where the institution deducts that exposure amount from the amount of Common Equity Tier 1 items as an alternative to                           applying a risk weight of 1 250 %:                  

qualifying holdings outside the financial sector;                            

securitisation positions, in accordance with Article 243(1)(b), Article 244(1)(b) and Article 258;                            

free deliveries, in accordance with Article 379(3);                            

positions in a basket for which an institution cannot determine the risk weight under the IRB Approach, in accordance with                                 Article 153(8);                            

equity exposures under an internal models approach, in accordance with Article 155(4).                            

(l)any tax charge relating to Common Equity Tier 1 items foreseeable at the moment of its calculation, except where the institution                           suitably adjusts the amount of Common Equity Tier 1 items insofar as such tax charges reduce the amount up to which those                           items may be used to cover risks or losses.                  

2.EBA shall develop draft regulatory technical standards to specify the application of the deductions referred to in points                           (a), (c), (e), (f), (h), (i) and (l) of paragraph 1 of this Article and related deductions referred to in points (a), (c),                           (d) and (f) of Article 56 and points (a), (c) and (d) of Article 66.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

3.EBA shall develop draft regulatory technical standards to specify the types of capital instruments of financial institutions                           and, in consultation with the European Supervisory Authority (European Insurance and Occupational Pensions Authority) (EIOPA)                           established by Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 (26) , of third country insurance and reinsurance undertakings, and of undertakings excluded from the scope of Directive 2009/138/EC                           in accordance with Article 4 of that Directive that shall be deducted from the following elements of own funds:                  

(a)Common Equity Tier 1 items;                  

(b)Additional Tier 1 items;                  

(c)Tier 2 items.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 37U.K.Deduction of intangible assets

Institutions shall determine the amount of intangible assets to be deducted in accordance with the following:                   

the amount to be deducted shall be reduced by the amount of associated deferred tax liabilities that would be extinguished                                 if the intangible assets became impaired or were derecognised under the applicable accounting framework;                            

the amount to be deducted shall include goodwill included in the valuation of significant investments of the institution.                            

###### Article 38U.K.Deduction of deferred tax assets that rely on future profitability

1.Institutions shall determine the amount of deferred tax assets that rely on future profitability that require deduction in                           accordance with this Article.                  

2.Except where the conditions laid down in paragraph 3 are met, the amount of deferred tax assets that rely on future profitability                           shall be calculated without reducing it by the amount of the associated deferred tax liabilities of the institution.                  

3.The amount of deferred tax assets that rely on future profitability may be reduced by the amount of the associated deferred                           tax liabilities of the institution, provided the following conditions are met:                  

(a)the entity has a legally enforceable right under applicable national law to set off those current tax assets against current                           tax liabilities;                  

(b)the deferred tax assets and the deferred tax liabilities relate to taxes levied by the same tax authority and on the same                           taxable entity.                  

4.Associated deferred tax liabilities of the institution used for the purposes of paragraph 3 may not include deferred tax liabilities                           that reduce the amount of intangible assets or defined benefit pension fund assets required to be deducted.                  

5.The amount of associated deferred tax liabilities referred to in paragraph 4 shall be allocated between the following:                  

(a)deferred tax assets that rely on future profitability and arise from temporary differences that are not deducted in accordance                           with Article 48(1);                  

(b)all other deferred tax assets that rely on future profitability.                  

Institutions shall allocate the associated deferred tax liabilities according to the proportion of deferred tax assets that                        rely on future profitability that the items referred to in points (a) and (b) represent.                   

###### Article 39U.K.Tax overpayments, tax loss carry backs and deferred tax assets that do not rely on future profitability

1.The following items shall not be deducted from own funds and shall be subject to a risk weight in accordance with Chapter                           2 or 3 of Title II of Part Three, as applicable:                  

(a)overpayments of tax by the institution for the current year;                  

(b)current year tax losses of the institution carried back to previous years that give rise to a claim on, or a receivable from,                           a central government, regional government or local tax authority.                  

2.Deferred tax assets that do not rely on future profitability shall be limited to deferred tax assets arising from temporary                           differences, where all the following conditions are met:                  

(a)they are automatically and mandatorily replaced without delay with a tax credit in the event that the institution reports                           a loss when the annual financial statements of the institution are formally approved, or in the event of liquidation or insolvency                           of the institution;                  

(b)an institution is able under the applicable national tax law to offset a tax credit referred to in point (a) against any tax                           liability of the institution or any other undertaking included in the same consolidation as the institution for tax purposes                           under that law or any other undertaking subject to the supervision on a consolidated basis in accordance with Chapter 2 of                           Title II of Part One;                  

(c)where the amount of tax credits referred to in point (b) exceeds the tax liabilities referred to in that point, any such excess                           is replaced without delay with a direct claim on the central government of the Member State in which the institution is incorporated.                  

Institutions shall apply a risk weight of 100 % to deferred tax assets where the conditions laid down in points (a), (b) and                        (c) are met.                   

###### Article 40U.K.Deduction of negative amounts resulting from the calculation of expected loss amounts

The amount to be deducted in accordance with point (d) of Article 36(1) shall not be reduced by a rise in the level of deferred                        tax assets that rely on future profitability, or other additional tax effects, that could occur if provisions were to rise                        to the level of expected losses referred to in Section 3 of Chapter 3 of Title II of Part Three.                   

###### Article 41U.K.Deduction of defined benefit pension fund assets

1.For the purposes of point (e) of Article 36(1), the amount of defined benefit pension fund assets to be deducted shall be                           reduced by the following:                  

(a)the amount of any associated deferred tax liability which could be extinguished if the assets became impaired or were derecognised                           under the applicable accounting framework;                  

(b)the amount of assets in the defined benefit pension fund which the institution has an unrestricted ability to use, provided                           that the institution has received the prior permission of the competent authority.                  

Those assets used to reduce the amount to be deducted shall receive a risk weight in accordance with Chapter 2 or 3 of Title                        II of Part Three, as applicable.                   

2.EBA shall develop draft regulatory technical standards to specify the criteria according to which a competent authority shall                           permit an institution to reduce the amount of assets in the defined benefit pension fund as specified in point (b) of paragraph                           1.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 42U.K.Deduction of holdings of own Common Equity Tier 1 instruments

For the purposes of point (f) of Article 36(1), institutions shall calculate holdings of own Common Equity Tier 1 instruments                        on the basis of gross long positions subject to the following exceptions:                   

institutions may calculate the amount of holdings of own Common Equity Tier 1 instruments on the basis of the net long position                                 provided that both the following conditions are met:                            

the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;                                     

either both the long and the short positions are held in the trading book or both are held in the non-trading book;                                     

institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by                                 calculating the underlying exposure to own Common Equity Tier 1 instruments included in those indices;                            

institutions may net gross long positions in own Common Equity Tier 1 instruments resulting from holdings of index securities                                 against short positions in own Common Equity Tier 1 instruments resulting from short positions in the underlying indices,                                 including where those short positions involve counterparty risk, provided that both the following conditions are met:                            

the long and short positions are in the same underlying indices;                                     

either both the long and the short positions are held in the trading book or both are held in the non-trading book.                                     

###### Article 43U.K.Significant investment in a financial sector entity

For the purposes of deduction, a significant investment of an institution in a financial sector entity shall arise where any                        of the following conditions is met:                   

the institution owns more than 10 % of the Common Equity Tier 1 instruments issued by that entity;                            

the institution has close links with that entity and owns Common Equity Tier 1 instruments issued by that entity;                            

the institution owns Common Equity Tier 1 instruments issued by that entity and the entity is not included in consolidation                                 pursuant to Chapter 2 of Title II of Part One but is included in the same accounting consolidation as the institution for                                 the purposes of financial reporting under the applicable accounting framework.                            

###### Article 44U.K.Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities and where an institution has a reciprocal                           cross holding designed artificially to inflate own funds

Institutions shall make the deductions referred to in points (g), (h) and (i) of Article 36(1) in accordance with the following:                   

holdings of Common Equity Tier 1 instruments and other capital instruments of financial sector entities shall be calculated                                 on the basis of the gross long positions;                            

Tier 1 own-fund insurance items shall be treated as holdings of Common Equity Tier 1 instruments for the purposes of deduction.                            

###### Article 45U.K.Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities

Institutions shall make the deductions required by points (h) and (i) of Article 36(1) in accordance with the following provisions:                   

they may calculate direct, indirect and synthetic holdings of Common Equity Tier 1 instruments of the financial sector entities                                 on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:                            

the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year;                                     

either both the long position and the short position are held in the trading book or both are held in the non-trading book;                                     

they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating                                 the underlying exposure to the capital instruments of the financial sector entities in those indices.                            

###### Article 46U.K.Deduction of holdings of Common Equity Tier 1 instruments where an institution does not have a significant investment in a                           financial sector entity

1.For the purposes of point (h) of Article 36(1), institutions shall calculate the applicable amount to be deducted by multiplying                           the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b)                           of this paragraph:                  

(a)the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1,                           Additional Tier 1 and Tier 2 instruments of financial sector entities in which the institution does not have a significant                           investment exceeds 10 % of the aggregate amount of Common Equity Tier 1 items of the institution calculated after applying                           the following to Common Equity Tier 1 items:                  

Articles 32 to 35;                            

the deductions referred to in points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding the amount                                 to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences;                            

Articles 44 and 45;                            

(b)the amount of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1 instruments of those                           financial sector entities in which the institution does not have a significant investment divided by the aggregate amount                           of direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments                           of those financial sector entities.                  

2.Institutions shall exclude underwriting positions held for five working days or fewer from the amount referred to in point                           (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.                  

3.The amount to be deducted pursuant to paragraph 1 shall be apportioned across all Common Equity Tier 1 instruments held. Institutions                           shall determine the amount of each Common Equity Tier 1 instrument that is deducted pursuant to paragraph 1 by multiplying                           the amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:                  

(a)the amount of holdings required to be deducted pursuant to paragraph 1;                  

(b)the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the Common Equity                           Tier 1 instruments of financial sector entities in which the institution does not have a significant investment represented                           by each Common Equity Tier 1 instrument held.                  

4.The amount of holdings referred to in point (h) of Article 36(1) that is equal to or less than 10 % of the Common Equity Tier                           1 items of the institution after applying the provisions laid down in points (a)(i) to (iii) of paragraph 1 shall not be deducted                           and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements                           laid down in Title IV of Part Three, as applicable.                  

5.Institutions shall determine the amount of each Common Equity Tier 1 instrument that is risk weighted pursuant to paragraph                           4 by multiplying the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:                  

(a)the amount of holdings required to be risk weighted pursuant to paragraph 4;                  

(b)the proportion resulting from the calculation in point (b) of paragraph 3.                  

###### Article 47U.K.Deduction of holdings of Common Equity Tier 1 instruments where an institution has a significant investment in a financial                           sector entity

For the purposes of point (i) of Article 36(1), the applicable amount to be deducted from Common Equity Tier 1 items shall                        exclude underwriting positions held for five working days or fewer and shall be determined in accordance with Articles 44                        and 45 and Sub-section 2.                   

##### Sub-Section 2U.K.Exemptions from and alternatives to deduction from Common Equity Tier 1 items

###### Article 48U.K.Threshold exemptions from deduction from Common Equity Tier 1 items

1.In making the deductions required pursuant to points (c) and (i) of Article 36(1), institutions are not required to deduct                           the amounts of the items listed in points (a) and (b) of this paragraph which in aggregate are equal to or less than the threshold                           amount referred to in paragraph 2:                  

(a)deferred tax assets that are dependent on future profitability and arise from temporary differences, and in aggregate are                           equal to or less than 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:                  

Articles 32 to 35;                            

points (a) to (h), points (k)(ii) to (v) and point (l) of Article 36(1), excluding deferred tax assets that rely on future                                 profitability and arise from temporary differences.                            

(b)where an institution has a significant investment in a financial sector entity, the direct, indirect and synthetic holdings                           of that institution of the Common Equity Tier 1 instruments of those entities that in aggregate are equal to or less than                           10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:                  

Article 32 to 35;                            

points (a) to (h), points (k)(ii) to (v) and point (l), of Article 36(1) excluding deferred tax assets that rely on future                                 profitability and arise from temporary differences.                            

2.For the purposes of paragraph 1, the threshold amount shall be equal to the amount referred to in point (a) of this paragraph                           multiplied by the percentage referred to in point (b) of this paragraph:                  

(a)the residual amount of Common Equity Tier 1 items after applying the adjustments and deductions in Articles 32 to 36 in full                           and without applying the threshold exemptions specified in this Article;                  

(b)17,65 %.                  

3.For the purposes of paragraph 1, an institution shall determine the portion of deferred tax assets in the total amount of                           items that is not required to be deducted by dividing the amount specified in point (a) of this paragraph by the amount specified                           in point (b) of this paragraph:                  

(a)the amount of deferred tax assets that are dependent on future profitability and arise from temporary differences, and in                           aggregate are equal to or less than 10 % of the Common Equity Tier 1 items of the institution;                  

(b)the sum of the following:                  

the amount referred to in point (a);                            

the amount of direct, indirect and synthetic holdings by the institution of the own funds instruments of financial sector                                 entities in which the institution has a significant investment, and in aggregate are equal to or less than 10 % of the Common                                 Equity Tier 1 items of the institution.                            

The proportion of significant investments in the total amount of items that is not required to be deducted is equal to one                        minus the proportion referred to in the first subparagraph.                   

4.The amounts of the items that are not deducted pursuant to paragraph 1 shall be risk weighted at 250 %.                  

###### Article 49U.K.Requirement for deduction where consolidation, supplementary supervision or institutional protection schemes are applied

1.For the purposes of calculating own funds on an individual basis, a sub-consolidated basis and a consolidated basis, where                           the competent authorities require or permit institutions to apply method 1, 2 or 3 of Annex I to Directive 2002/87/EC, the                           competent authorities may permit institutions not to deduct the holdings of own funds instruments of a financial sector entity                           in which the parent institution, parent financial holding company or parent mixed financial holding company or institution                           has a significant investment, provided that the conditions laid down in points (a) to (e) of this paragraph are met:                  

(a)the financial sector entity is an insurance undertaking, a re-insurance undertaking or an insurance holding company;                  

(b)that insurance undertaking, re-insurance undertaking or insurance holding company is included in the same supplementary supervision                           under Directive 2002/87/EC as the parent institution, parent financial holding company or parent mixed financial holding company                           or institution that has the holding;                  

(c)the institution has received the prior permission of the competent authorities;                  

(d)prior to granting the permission referred to in point (c), and on a continuing basis, the competent authorities are satisfied                           that the level of integrated management, risk management and internal control regarding the entities that would be included                           in the scope of consolidation under method 1, 2 or 3 is adequate;                  

(e)the holdings in the entity belong to one of the following:                  

the parent credit institution;                            

the parent financial holding company;                            

the parent mixed financial holding company;                            

the institution;                            

a subsidiary of one of the entities referred to in points (i) to (iv) that is included in the scope of consolidation pursuant                                 to Chapter 2 of Title II of Part One.                            

The method chosen shall be applied in a consistent manner over time.                   

2.For the purposes of calculating own funds on an individual basis and a sub-consolidated basis, institutions subject to supervision                           on a consolidated basis in accordance with Chapter 2 of Title II of Part One shall not deduct holdings of own funds instruments                           issued by financial sector entities included in the scope of consolidated supervision, unless the competent authorities determine                           those deductions to be required for specific purposes, in particular structural separation of banking activities and resolution                           planning.                  

Applying the approach referred to in the first subparagraph shall not entail disproportionate adverse effects on the whole                        or parts of the financial system in other Member States or in the Union as a whole forming or creating an obstacle to the                        functioning of the internal market.                   

3.Competent authorities may, for the purposes of calculating own funds on an individual or sub-consolidated basis permit institutions                           not to deduct holdings of own funds instruments in the following cases:                  

(a)where an institution has a holding in another institution and the conditions referred to in points (i) to (v) are met:                  

the institutions fall within the same institutional protection scheme referred to in Article 113(7);                            

the competent authorities have granted the permission referred to in Article 113(7);                            

the conditions laid down in Article 113(7) are satisfied;                            

the institutional protection scheme draws up a consolidated balance sheet referred to in point (e) of Article 113(7) or, where                                 it is not required to draw up consolidated accounts, an extended aggregated calculation that is, to the satisfaction of the                                 competent authorities, equivalent to the provisions of Directive 86/635/EEC, which incorporates certain adaptations of the                                 provisions of Directive 83/349/EEC or of Regulation (EC) No 1606/2002, governing the consolidated accounts of groups of credit                                 institutions. The equivalence of that extended aggregated calculation shall be verified by an external auditor and in particular                                 that the multiple use of elements eligible for the calculation of own funds as well as any inappropriate creation of own funds                                 between the members of the institutional protection scheme is eliminated in the calculation. The consolidated balance sheet                                 or the extended aggregated calculation shall be reported to the competent authorities no less frequently than the frequency                                 laid down in Article 99;                            

the institutions included in an institutional protection scheme meet together on a consolidated or extended aggregated basis                                 the requirements laid down in Article 92 and carry out reporting of compliance with those requirements in accordance with                                 Article 99. Within an institutional protection scheme the deduction of the interest owned by co-operative members or legal                                 entities, which are not members of the institutional protection scheme, is not required, provided that the multiple use of                                 elements eligible for the calculation of own funds as well as any inappropriate creation of own funds between the members                                 of the institutional protection scheme and the minority shareholder, when it is an institution, is eliminated.                            

(b)where a regional credit institution has a holding in its central or another regional credit institution and the conditions                           laid down in points (a)(i) to (v) are met.                  

4.The holdings in respect of which deduction is not made in accordance with paragraph 1, 2 or 3 shall qualify as exposures and                           shall be risk weighted in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable.                  

5.Where an institution applies method 1, 2 or 3 of Annex I to Directive 2002/87/EC, the institution shall disclose the supplementary                           own funds requirement and capital adequacy ratio of the financial conglomerate as calculated in accordance with Article 6                           of and Annex I to that Directive.                  

6.EBA, EIOPA and the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation                           (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 (27)  shall, through the Joint Committee, develop draft regulatory technical standards to specify for the purposes of this Article                           the conditions of application of the calculation methods listed in Annex I, Part II of Directive 2002/87/EC for the purposes                           of the alternatives to deduction referred to in paragraph 1 of this Article.                  

EBA, EIOPA and ESMA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010, of Regulation (EU) No 1094/2010 and of Regulation (EU)                        No 1095/2010 respectively.                   

#### Section 4U.K.Common Equity Tier 1 capital

##### Article 50U.K.Common Equity Tier 1 capital

The Common Equity Tier 1 capital of an institution shall consist of Common Equity Tier 1 items after the application of the                        adjustments required by Articles 32 to 35, the deductions pursuant to Article 36 and the exemptions and alternatives laid                        down in Articles 48, 49 and 79.                   

### CHAPTER 3U.K.Additional Tier 1 capital

#### Section 1U.K.Additional Tier 1 items and instruments

##### Article 51U.K.Additional Tier 1 items

Additional Tier 1 items shall consist of the following:                   

capital instruments, where the conditions laid down in Article 52(1) are met;                            

the share premium accounts related to the instruments referred to in point (a).                            

Instruments included under point (a) shall not qualify as Common Equity Tier 1 or Tier 2 items.                   

##### Article 52U.K.Additional Tier 1 instruments

1.Capital instruments shall qualify as Additional Tier 1 instruments only if the following conditions are met:                  

(a)the instruments are issued and paid up;                  

(b)the instruments are not purchased by any of the following:                  

the institution or its subsidiaries;                            

an undertaking in which the institution has a participation in the form of ownership, direct or by way of control, of 20 %                                 or more of the voting rights or capital of that undertaking;                            

(c)the purchase of the instruments is not funded directly or indirectly by the institution;                  

(d)the instruments rank below Tier 2 instruments in the event of the insolvency of the institution;                  

(e)the instruments are neither secured nor subject to a guarantee that enhances the seniority of the claims by any of the following:                  

the institution or its subsidiaries;                            

the parent undertaking of the institution or its subsidiaries;                            

the parent financial holding company or its subsidiaries;                            

the mixed activity holding company or its subsidiaries;                            

the mixed financial holding company or its subsidiaries;                            

any undertaking that has close links with entities referred to in points (i) to (v);                            

(f)the instruments are not subject to any arrangement, contractual or otherwise, that enhances the seniority of the claim under                           the instruments in insolvency or liquidation;                  

(g)the instruments are perpetual and the provisions governing them include no incentive for the institution to redeem them;                  

(h)where the provisions governing the instruments include one or more call options, the option to call may be exercised at the                           sole discretion of the issuer;                  

(i)the instruments may be called, redeemed or repurchased only where the conditions laid down in Article 77 are met, and not                           before five years after the date of issuance except where the conditions laid down in Article 78(4) are met;                  

(j)the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would or might be called,                           redeemed or repurchased and the institution does not otherwise provide such an indication, except in the following cases:                  

the liquidation of the institution;                            

discretionary repurchases of the instruments or other discretionary means of reducing the amount of Additional Tier 1 capital,                                 where the institution has received the prior permission of the competent authority in accordance with Article 77;                            

(k)the institution does not indicate explicitly or implicitly that the competent authority would consent to a request to call,                           redeem or repurchase the instruments;                  

(l)distributions under the instruments meet the following conditions:                  

they are paid out of distributable items;                            

the level of distributions made on the instruments will not be amended on the basis of the credit standing of the institution                                 or its parent undertaking;                            

the provisions governing the instruments give the institution full discretion at all times to cancel the distributions on                                 the instruments for an unlimited period and on a non-cumulative basis, and the institution may use such cancelled payments                                 without restriction to meet its obligations as they fall due;                            

cancellation of distributions does not constitute an event of default of the institution;                            

the cancellation of distributions imposes no restrictions on the institution;                            

(m)the instruments do not contribute to a determination that the liabilities of an institution exceed its assets, where such                           a determination constitutes a test of insolvency under applicable national law;                  

(n)the provisions governing the instruments require that, upon the occurrence of a trigger event, the principal amount of the                           instruments be written down on a permanent or temporary basis or the instruments be converted to Common Equity Tier 1 instruments;                  

(o)the provisions governing the instruments include no feature that could hinder the recapitalisation of the institution;                  

(p)where the instruments are not issued directly by an institution, both the following conditions shall be met:                  

the instruments are issued through an entity within the consolidation pursuant to Chapter 2 of Title II of Part One;                            

the proceeds are immediately available to the institution without limitation and in a form that satisfies the conditions laid                                 down in this paragraph.                            

The condition set out in point (d) of the first subparagraph shall be deemed to be met notwithstanding the fact that the instruments                        are included in Additional Tier 1 or Tier 2 by virtue of Article 484(3), provided that they rank pari passu.                   

2.EBA shall develop draft regulatory technical standards to specify all the following:                  

(a)the form and nature of incentives to redeem;                  

(b)the nature of any write up of the principal amount of an Additional Tier 1 instrument following a write down of its principal                           amount on a temporary basis;                  

(c)the procedures and timing for the following:                  

determining that a trigger event has occurred;                            

writing up the principal amount of an Additional Tier 1 instrument following a write down of its principal amount on a temporary                                 basis;                            

(d)features of instruments that could hinder the recapitalisation of the institution;                  

(e)the use of special purpose entities for indirect issuance of own funds instruments.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 53U.K.Restrictions on the cancellation of distributions on Additional Tier 1 instruments and features that could hinder the recapitalisation                           of the institution

For the purposes of points (l)(v) and (o) of Article 52(1), the provisions governing Additional Tier 1 instruments shall,                        in particular, not include the following:                   

a requirement for distributions on the instruments to be made in the event of a distribution being made on an instrument issued                                 by the institution that ranks to the same degree as, or more junior than, an Additional Tier 1 instrument, including a Common                                 Equity Tier 1 instrument;                            

a requirement for the payment of distributions on Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments to be cancelled                                 in the event that distributions are not made on those Additional Tier 1 instruments;                            

an obligation to substitute the payment of interest or dividend by a payment in any other form. The institution shall not                                 otherwise be subject to such an obligation.                            

##### Article 54U.K.Write down or conversion of Additional Tier 1 instruments

1.For the purposes of point (n) of Article 52(1), the following provisions shall apply to Additional Tier 1 instruments:                  

(a)a trigger event occurs when the Common Equity Tier 1 capital ratio of the institution referred to in point (a) of Article                           92(1) falls below either of the following:                  

5,125 %;                            

a level higher than 5,125 %, where determined by the institution and specified in the provisions governing the instrument;                            

(b)institutions may specify in the provisions governing the instrument one or more trigger events in addition to that referred                           to in point (a);                  

(c)where the provisions governing the instruments require them to be converted into Common Equity Tier 1 instruments upon the                           occurrence of a trigger event, those provisions shall specify either of the following:                  

the rate of such conversion and a limit on the permitted amount of conversion;                            

a range within which the instruments will convert into Common Equity Tier 1 instruments;                            

(d)where the provisions governing the instruments require their principal amount to be written down upon the occurrence of a                           trigger event, the write down shall reduce all the following:                  

the claim of the holder of the instrument in the insolvency or liquidation of the institution;                            

the amount required to be paid in the event of the call or redemption of the instrument;                            

the distributions made on the instrument.                            

2.Write down or conversion of an Additional Tier 1 instrument shall, under the applicable accounting framework, generate items                           that qualify as Common Equity Tier 1 items.                  

3.The amount of Additional Tier 1 instruments recognised in Additional Tier 1 items is limited to the minimum amount of Common                           Equity Tier 1 items that would be generated if the principal amount of the Additional Tier 1 instruments were fully written                           down or converted into Common Equity Tier 1 instruments.                  

4.The aggregate amount of Additional Tier 1 instruments that is required to be written down or converted upon the occurrence                           of a trigger event shall be no less than the lower of the following:                  

(a)the amount required to restore fully the Common Equity Tier 1 ratio of the institution to 5,125 %;                  

(b)the full principal amount of the instrument.                  

5.When a trigger event occurs institutions shall do the following:                  

(a)immediately inform the competent authorities;                  

(b)inform the holders of the Additional Tier 1 instruments;                  

(c)write down the principal amount of the instruments, or convert the instruments into Common Equity Tier 1 instruments without                           delay, but no later than within one month, in accordance with the requirement laid down in this Article.                  

6.An institution issuing Additional Tier 1 instruments that convert to Common Equity Tier 1 on the occurrence of a trigger event                           shall ensure that its authorised share capital is at all times sufficient, for converting all such convertible Additional                           Tier 1 instruments into shares if a trigger event occurs. All necessary authorisations shall be obtained at the date of issuance                           of such convertible Additional Tier 1 instruments. The institution shall maintain at all times the necessary prior authorisation                           to issue the Common Equity Tier 1 instruments into which such Additional Tier 1 instruments would convert upon occurrence                           of a trigger event.                  

7.An institution issuing Additional Tier 1 instruments that convert to Common Equity Tier 1 on the occurrence of a trigger event                           shall ensure that there are no procedural impediments to that conversion by virtue of its incorporation or statutes or contractual                           arrangements.                  

##### Article 55U.K.Consequences of the conditions for Additional Tier 1 instruments ceasing to be met

The following shall apply where, in the case of an Additional Tier 1 instrument, the conditions laid down in Article 52(1)                        cease to be met:                   

that instrument shall immediately cease to qualify as an Additional Tier 1 instrument;                            

the part of the share premium accounts that relates to that instrument shall immediately cease to qualify as an Additional                                 Tier 1 item.                            

#### Section 2U.K.Deductions from Additional Tier 1 items

##### Article 56U.K.Deductions from Additional Tier 1 items

Institutions shall deduct the following from Additional Tier 1 items:                   

direct, indirect and synthetic holdings by an institution of own Additional Tier 1 instruments, including own Additional Tier                                 1 instruments that an institution could be obliged to purchase as a result of existing contractual obligations;                            

direct, indirect and synthetic holdings of the Additional Tier 1 instruments of financial sector entities with which the institution                                 has reciprocal cross holdings that the competent authority considers to have been designed to inflate artificially the own                                 funds of the institution;                            

the applicable amount determined in accordance with Article 60 of direct, indirect and synthetic holdings of the Additional                                 Tier 1 instruments of financial sector entities, where an institution does not have a significant investment in those entities;                            

direct, indirect and synthetic holdings by the institution of the Additional Tier 1 instruments of financial sector entities                                 where the institution has a significant investment in those entities, excluding underwriting positions held for five working                                 days or fewer;                            

the amount of items required to be deducted from Tier 2 items pursuant to Article 66 that exceed the Tier 2 capital of the                                 institution;                            

any tax charge relating to Additional Tier 1 items foreseeable at the moment of its calculation, except where the institution                                 suitably adjusts the amount of Additional Tier 1 items insofar as such tax charges reduce the amount up to which those items                                 may be applied to cover risks or losses.                            

##### Article 57U.K.Deductions of holdings of own Additional Tier 1 instruments

For the purposes of point (a) of Article 56, institutions shall calculate holdings of own Additional Tier 1 instruments on                        the basis of gross long positions subject to the following exceptions:                   

institutions may calculate the amount of holdings of own Additional Tier 1 instruments on the basis of the net long position                                 provided that both the following conditions are met:                            

the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;                                     

either both the long and the short positions are held in the trading book or both are held in the non-trading book;                                     

institutions shall determine the amount to be deducted for direct, indirect or synthetic holdings of index securities by calculating                                 the underlying exposure to own Additional Tier 1 instruments in those indices;                            

institutions may net gross long positions in own Additional Tier 1 instruments resulting from holdings of index securities                                 against short positions in own Additional Tier 1 instruments resulting from short positions in the underlying indices, including                                 where those short positions involve counterparty risk, provided that both the following conditions are met:                            

the long and short positions are in the same underlying indices;                                     

either both the long and the short positions are held in the trading book or both are held in the non-trading book;                                     

##### Article 58U.K.Deduction of holdings of Additional Tier 1 instruments of financial sector entities and where an institution has a reciprocal                           cross holding designed artificially to inflate own funds

Institutions shall make the deductions required by points (b), (c) and (d) of Article 56 in accordance with the following:                   

holdings of Additional Tier 1 instruments shall be calculated on the basis of the gross long positions;                            

Additional Tier 1 own-fund insurance items shall be treated as holdings of Additional Tier 1 instruments for the purposes                                 of deduction.                            

##### Article 59U.K.Deduction of holdings of Additional Tier 1 instruments of financial sector entities

Institutions shall make the deductions required by points (c) and (d) of Article 56 in accordance with the following:                   

they may calculate direct, indirect and synthetic holdings of Additional Tier 1 instruments of the financial sector entities                                 on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:                            

the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year;                                     

either both the short position and the long position are held in the trading book or both are held in the non-trading book.                                     

they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by calculating                                 the underlying exposure to the capital instruments of the financial sector entities in those indices.                            

##### Article 60U.K.Deduction of holdings of Additional Tier 1 instruments where an institution does not have a significant investment in a financial                           sector entity

1.For the purposes of point (c) of Article 56, institutions shall calculate the applicable amount to be deducted by multiplying                           the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b)                           of this paragraph:                  

(a)the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1,                           Additional Tier 1 and Tier 2 instruments of financial sector entities in which the institution does not have a significant                           investment exceeds 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:                  

Article 32 to 35;                            

points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding deferred tax assets that rely on future                                 profitability and arise from temporary differences;                            

Articles 44 and 45;                            

(b)the amount of direct, indirect and synthetic holdings by the institution of the Additional Tier 1 instruments of those financial                           sector entities in which the institution does not have a significant investment divided by the aggregate amount of all direct,                           indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of                           those financial sector entities.                  

2.Institutions shall exclude underwriting positions held for five working days or fewer from the amount referred to in point                           (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.                  

3.The amount to be deducted pursuant to paragraph 1 shall be apportioned across all Additional Tier 1 instruments held. Institutions                           shall determine the amount of each Additional Tier 1 instrument to be deducted pursuant to paragraph 1 by multiplying the                           amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:                  

(a)the amount of holdings required to be deducted pursuant to paragraph 1;                  

(b)the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the Additional Tier                           1 instruments of financial sector entities in which the institution does not have a significant investment represented by                           each Additional Tier 1 instrument held.                  

4.The amount of holdings referred to in point (c) of Article 56 that is equal to or less than 10 % of the Common Equity Tier                           1 items of the institution after applying the provisions laid down in points (a)(i), (ii) and (iii) of paragraph 1 shall not                           be deducted and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three                           and the requirements laid down in Title IV of Part Three, as applicable.                  

5.Institutions shall determine the amount of each Additional Tier 1 instrument that is risk weighted pursuant to paragraph 4                           by multiplying the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:                  

(a)the amount of holdings required to be risk weighted pursuant to paragraph 4;                  

(b)the proportion resulting from the calculation in point (b) of paragraph 3.                  

#### Section 3U.K.Additional Tier 1 capital

##### Article 61U.K.Additional Tier 1 capital

The Additional Tier 1 capital of an institution shall consist of Additional Tier 1 items after the deduction of the items                        referred to in Article 56 and the application of Article 79.                   

### CHAPTER 4U.K.Tier 2 capital

#### Section 1U.K.Tier 2 items and instruments

##### Article 62U.K.Tier 2 items

Tier 2 items shall consist of the following:                   

capital instruments and subordinated loans where the conditions laid down in Article 63 are met;                            

the share premium accounts related to instruments referred to in point (a);                            

for institutions calculating risk-weighted exposure amounts in accordance with Chapter 2 of Title II of Part Three, general                                 credit risk adjustments, gross of tax effects, of up to 1,25 % of risk-weighted exposure amounts calculated in accordance                                 with Chapter 2 of Title II of Part Three;                            

for institutions calculating risk-weighted exposure amounts under Chapter 3 of Title II of Part Three, positive amounts, gross                                 of tax effects, resulting from the calculation laid down in Articles 158 and 159 up to 0,6 % of risk-weighted exposure amounts                                 calculated under Chapter 3 of Title II of Part Three.                            

Items included under point (a) shall not qualify as Common Equity Tier 1 or Additional Tier 1 items.                   

##### Article 63U.K.Tier 2 instruments

Capital instruments and subordinated loans shall qualify as Tier 2 instruments provided that the following conditions are                        met:                   

the instruments are issued or the subordinated loans are raised, as applicable, and fully paid-up;                            

the instruments are not purchased or the subordinated loans are not granted, as applicable, by any of the following:                            

the institution or its subsidiaries;                                     

an undertaking in which the institution has participation in the form of ownership, direct or by way of control, of 20 % or                                          more of the voting rights or capital of that undertaking;                                     

the purchase of the instruments or the granting of the subordinated loans, as applicable, is not funded directly or indirectly                                 by the institution;                            

the claim on the principal amount of the instruments under the provisions governing the instruments or the claim of the principal                                 amount of the subordinated loans under the provisions governing the subordinated loans, as applicable, is wholly subordinated                                 to claims of all non-subordinated creditors;                            

the instruments or subordinated loans, as applicable, are neither secured, nor subject to a guarantee that enhances the seniority                                 of the claim by any of the following:                            

the institution or its subsidiaries;                                     

the parent undertaking of the institution or its subsidiaries;                                     

the parent financial holding company or its subsidiaries;                                     

the mixed activity holding company or its subsidiaries;                                     

the mixed financial holding company or its subsidiaries;                                     

any undertaking that has close links with entities referred to in points (i) to (v);                                     

the instruments or subordinated loans, as applicable, are not subject to any arrangement that otherwise enhances the seniority                                 of the claim under the instruments or subordinated loans respectively;                            

the instruments or subordinated loans, as applicable, have an original maturity of at least five years;                            

the provisions governing the instruments or subordinated loans, as applicable, do not include any incentive for their principal                                 amount to be redeemed or repaid, as applicable by the institution prior to their maturity;                            

where the instruments or subordinated loans, as applicable, include one or more call options or early repayment options, as                                 applicable, the options are exercisable at the sole discretion of the issuer or debtor, as applicable;                            

the instruments or subordinated loans, as applicable, may be called, redeemed or repurchased or repaid early only where the                                 conditions laid down in Article 77 are met, and not before five years after the date of issuance or raising, as applicable,                                 except where the conditions laid down in Article 78(4) are met;                            

the provisions governing the instruments or subordinated loans, as applicable, do not indicate explicitly or implicitly that                                 the instruments or subordinated loans, as applicable, would or might be called, redeemed, repurchased or repaid early, as                                 applicable by the institution other than in the insolvency or liquidation of the institution and the institution does not                                 otherwise provide such an indication;                            

the provisions governing the instruments or subordinated loans, as applicable, do not give the holder the right to accelerate                                 the future scheduled payment of interest or principal, other than in the insolvency or liquidation of the institution;                            

the level of interest or dividend payments, as applicable, due on the instruments or subordinated loans, as applicable, will                                 not be amended on the basis of the credit standing of the institution or its parent undertaking;                            

where the instruments are not issued directly by an institution, or where the subordinated loans are not raised directly by                                 an institution, as applicable, both of the following conditions are met:                            

the instruments are issued or subordinated loans are raised, as applicable, through an entity, which is part of the consolidation                                          pursuant to Chapter 2 of Title II of Part One;                                     

the proceeds are immediately available to the institution without limitation in a form that satisfies the conditions laid                                          down in this paragraph.                                     

##### Article 64U.K.Amortisation of Tier 2 instruments

The extent to which Tier 2 instruments qualify as Tier 2 items during the final five years of maturity of the instruments                        is calculated by multiplying the result derived from the calculation in point (a) by the amount referred to in point (b) as                        follows:                   

the nominal amount of the instruments or subordinated loans on the first day of the final five year period of their contractual                                 maturity divided by the number of calendar days in that period;                            

the number of remaining calendar days of contractual maturity of the instruments or subordinated loans.                            

##### Article 65U.K.Consequences of the conditions for Tier 2 instruments ceasing to be met

Where in the case of a Tier 2 instrument the conditions laid down in Article 63 cease to be met, the following shall apply:                   

that instrument shall immediately cease to qualify as a Tier 2 instrument;                            

the part of the share premium accounts that relate to that instrument shall immediately cease to qualify as Tier 2 items.                            

#### Section 2U.K.Deductions from Tier 2 items

##### Article 66U.K.Deductions from Tier 2 items

The following shall be deducted from Tier 2 items:                   

direct, indirect and synthetic holdings by an institution of own Tier 2 instruments, including own Tier 2 instruments that                                 an institution could be obliged to purchase as a result of existing contractual obligations;                            

direct, indirect and synthetic holdings of the Tier 2 instruments of financial sector entities with which the institution                                 has reciprocal cross holdings that the competent authority considers to have been designed to inflate artificially the own                                 funds of the institution;                            

the applicable amount determined in accordance with Article 70 of direct, indirect and synthetic holdings of the Tier 2 instruments                                 of financial sector entities, where an institution does not have a significant investment in those entities;                            

direct, indirect and synthetic holdings by the institution of the Tier 2 instruments of financial sector entities where the                                 institution has a significant investment in those entities, excluding underwriting positions held for fewer than five working                                 days.                            

##### Article 67U.K.Deductions of holdings of own Tier 2 instruments

For the purposes of point (a) of Article 66, institutions shall calculate holdings on the basis of the gross long positions                        subject to the following exceptions:                   

institutions may calculate the amount of holdings on the basis of the net long position provided that both the following conditions                                 are met:                            

the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk;                                     

either both the long and the short positions are held in the trading book or both are held in the non-trading book;                                     

institutions shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by                                 calculating the underlying exposure to own Tier 2 instruments in those indices;                            

institutions may net gross long positions in own Tier 2 instruments resulting from holdings of index securities against short                                 positions in own Tier 2 instruments resulting from short positions in the underlying indices, including where those short                                 positions involve counterparty risk, provided that both the following conditions are met:                            

the long and short positions are in the same underlying indices;                                     

either both the long and the short positions are held in the trading book or both are held in the non-trading book.                                     

##### Article 68U.K.Deduction of holdings of Tier 2 instruments of financial sector entities and where an institution has a reciprocal cross holding                           designed artificially to inflate own funds

Institutions shall make the deductions required by points (b), (c) and (d) of Article 66 in accordance with the following                        provisions:                   

holdings of Tier 2 instruments shall be calculated on the basis of the gross long positions;                            

holdings of Tier 2 own-fund insurance items and Tier 3 own-fund insurance items shall be treated as holdings of Tier 2 instruments                                 for the purposes of deduction.                            

##### Article 69U.K.Deduction of holdings of Tier 2 instruments of financial sector entities

Institutions shall make the deductions required by points (c) and (d) of Article 66 in accordance with the following:                   

they may calculate direct, indirect and synthetic holdings of Tier 2 instruments of the financial sector entities on the basis                                 of the net long position in the same underlying exposure provided that both the following conditions are met:                            

the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year;                                     

either both the long position and the short position are held in the trading book or both are held in the non-trading book;                                     

they shall determine the amount to be deducted for direct, indirect and synthetic holdings of index securities by looking                                 through to the underlying exposure to the capital instruments of the financial sector entities in those indices.                            

##### Article 70U.K.Deduction of Tier 2 instruments where an institution does not have a significant investment in a relevant entity

1.For the purposes of point (c) of Article 66, institutions shall calculate the applicable amount to be deducted by multiplying                           the amount referred to in point (a) of this paragraph by the factor derived from the calculation referred to in point (b)                           of this paragraph:                  

(a)the aggregate amount by which the direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1,                           Additional Tier 1 and Tier 2 instruments of financial sector entities in which the institution does not have a significant                           investment exceeds 10 % of the Common Equity Tier 1 items of the institution calculated after applying the following:                  

Articles 32 to 35;                            

points (a) to (g), points (k)(ii) to (v) and point (l) of Article 36(1), excluding the amount to be deducted for deferred                                 tax assets that rely on future profitability and arise from temporary differences;                            

Articles 44 and 45;                            

(b)the amount of direct, indirect and synthetic holdings by the institution of the Tier 2 instruments of financial sector entities                           in which the institution does not have a significant investment divided by the aggregate amount of all direct, indirect and                           synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of those financial                           sector entities.                  

2.Institutions shall exclude underwriting positions held for five working days or fewer from the amount referred to in point                           (a) of paragraph 1 and from the calculation of the factor referred to in point (b) of paragraph 1.                  

3.The amount to be deducted pursuant to paragraph 1 shall be apportioned across each Tier 2 instrument held. Institutions shall                           determine the amount to be deducted from each Tier 2 instrument that is deducted pursuant to paragraph 1 by multiplying the                           amount specified in point (a) of this paragraph by the proportion specified in point (b) of this paragraph:                  

(a)the total amount of holdings required to be deducted pursuant to paragraph 1;                  

(b)the proportion of the aggregate amount of direct, indirect and synthetic holdings by the institution of the Tier 2 instruments                           of financial sector entities in which the institution does not have a significant investment represented by each Tier 2 instrument                           held.                  

4.The amount of holdings referred to in point (c) of Article 66(1) that is equal to or less than 10 % of the Common Equity Tier                           1 items of the institution after applying the provisions laid down in points (a)(i) to (iii) of paragraph 1 shall not be deducted                           and shall be subject to the applicable risk weights in accordance with Chapter 2 or 3 of Title II of Part Three and the requirements                           laid down in Title IV of Part Three, as applicable.                  

5.Institutions shall determine the amount of each Tier 2 instrument that is risk weighted pursuant to paragraph 4 by multiplying                           the amount specified in point (a) of this paragraph by the amount specified in point (b) of this paragraph:                  

(a)the amount of holdings required to be risk weighted pursuant to paragraph 4;                  

(b)the proportion resulting from the calculation in point (b) of paragraph 3.                  

#### Section 3U.K.Tier 2 capital

##### Article 71U.K.Tier 2 capital

The Tier 2 capital of an institution shall consist of the Tier 2 items of the institution after the deductions referred to                        in Article 66 and the application of Article 79.                   

### CHAPTER 5U.K.Own funds

#### Article 72U.K.Own funds

The own funds of an institution shall consist of the sum of its Tier 1 capital and Tier 2 capital.                   

### CHAPTER 6U.K.General requirements

#### Article 73U.K.Distributions on own funds instruments

1.Capital instruments for which an institution has the sole discretion to decide to pay distributions in a form other than cash                           or an own funds instrument shall not be capable of qualifying as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments                           unless the institution has received the prior permission of the competent authorities.                  

2.Competent authorities shall grant the permission referred to in paragraph 1 only where they consider all the following conditions                           to be met:                  

(a)the ability of the institution to cancel payments under the instrument would not be adversely affected by the discretion referred                           to in paragraph 1, or by the form in which distributions could be made;                  

(b)the ability of the instrument to absorb losses would not be adversely affected by the discretion referred to in paragraph                           1, or by the form in which distributions could be made;                  

(c)the quality of the capital instrument would not otherwise be reduced by the discretion referred to in paragraph 1, or by the                           form in which distributions could be made.                  

3.Capital instruments for which a legal person other than the institution issuing them has the discretion to decide or require                           that the payment of distributions on the instrument shall be made in a form other than cash or an own funds instrument shall                           not be capable of qualifying as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments.                  

4.Institutions may use a broad market index as one of the bases for determining the level of distributions on Additional Tier                           1 and Tier 2 instruments.                  

5.Paragraph 4 shall not apply where the institution is a reference entity in that broad market index unless both the following                           conditions are met:                  

(a)the institution considers movements in that broad market index not to be significantly correlated to the credit standing of                           the institution, its parent institution or parent financial holding company or parent mixed financial holding company or parent                           mixed activity holding company;                  

(b)the competent authority has not reached a different determination from that referred to in point (a).                  

6.Institutions shall report and disclose the broad market indices on which their capital instruments rely.                  

7.EBA shall develop draft regulatory technical standards to specify the conditions according to which indices shall be deemed                           to qualify as broad market indices for the purposes of paragraph 4.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 74U.K.Holdings of capital instruments issued by regulated financial sector entities that do not qualify as regulatory capital

Institutions shall not deduct from any element of own funds direct, indirect or synthetic holdings of capital instruments                        issued by a regulated financial sector entity that do not qualify as regulatory capital of that entity. Institutions shall                        apply risk weights to such holdings in accordance with Chapter 2 or 3 of Title II of Part Three, as applicable.                   

#### Article 75U.K.Deduction and maturity requirements for short positions

The maturity requirements for short positions referred to in point (a) of Article 45, point (a) of Article 59 and point (a)                        of Article 69 shall be deemed to be met in respect of positions held where the following conditions are met:                   

the institution has the contractual right to sell on a specific future date to the counterparty providing the hedge the long                                 position that is being hedged;                            

the counterparty providing the hedge to the institution is contractually obliged to purchase from the institution on that                                 specific future date the long position referred to in point (a).                            

#### Article 76U.K.Index holdings of capital instruments

1.For the purposes of point (a) of Article 42, point (a) of Article 45, point (a) of Article 57, point (a) of Article 59, point                           (a) of Article 67 and point (a) of Article 69, institutions may reduce the amount of a long position in a capital instrument                           by the portion of an index that is made up of the same underlying exposure that is being hedged, provided that the following                           conditions are met:                  

(a)either both the long position being hedged and the short position in an index used to hedge that long position are held in                           the trading book or both are held in the non-trading book;                  

(b)the positions referred to in point (a) are held at fair value on the balance sheet of the institution;                  

(c)the short position referred to in point (a) qualifies as an effective hedge under the internal control processes of the institution;                  

(d)the competent authorities assess the adequacy of the control processes referred to in point (c) on at least an annual basis                           and are satisfied with their continuing appropriateness.                  

2.Where the competent authority has given its prior permission, an institution may use a conservative estimate of the underlying                           exposure of the institution to capital instruments included in indices as an alternative to an institution calculating its                           exposure to the items referred to in either or both of points (a) and (b):                  

(a)own Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments included in indices;                  

(b)Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities, included in indices.                  

3.Competent authorities shall grant the permission referred to in paragraph 2 only where the institution has demonstrated to                           their satisfaction that it would be operationally burdensome for the institution to monitor its underlying exposure to the                           items referred to in one or both of point (a) or (b) of paragraph 2, as applicable.                  

4.EBA shall develop draft regulatory technical standards to specify:                  

(a)when an estimate used as an alternative to the calculation of underlying exposure referred to in paragraph 2 is sufficiently                           conservative;                  

(b)the meaning of operationally burdensome for the purposes of paragraph 3.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 77U.K.Conditions for reducing own funds

An institution shall require the prior permission of the competent authority to do either or both of the following:                   

reduce, redeem or repurchase Common Equity Tier 1 instruments issued by the institution in a manner that is permitted under                                 applicable national law;                            

effect the call, redemption, repayment or repurchase of Additional Tier 1 instruments or Tier 2 instruments as applicable,                                 prior to the date of their contractual maturity.                            

#### Article 78U.K.Supervisory permission for reducing own funds

1.The competent authority shall grant permission for an institution to reduce, repurchase, call or redeem Common Equity Tier                           1, Additional Tier 1 or Tier 2 instruments where either of the following conditions is met:                  

(a)earlier than or at the same time as the action referred to in Article 77, the institution replaces the instruments referred                           to in Article 77 with own funds instruments of equal or higher quality at terms that are sustainable for the income capacity                           of the institution;                  

(b)the institution has demonstrated to the satisfaction of the competent authority that the own funds of the institution would,                           following the action in question, exceed the requirements laid down in Article 92(1) of this Regulation and the combined buffer                           requirement as defined in point (6) of Article 128 of Directive 2013/36/EU by a margin that the competent authority may consider                           necessary on the basis of Article 104(3) of Directive 2013/36/EU.                  

2.When assessing under point (a) of paragraph 1 the sustainability of the replacement instruments for the income capacity of                           the institution, competent authorities shall consider the extent to which those replacement capital instruments would be more                           costly for the institution than those they would replace.                  

3.Where an institution takes an action referred to in point (a) of Article 77 and the refusal of redemption of Common Equity                           Tier 1 instruments referred to in Article 27 is prohibited by applicable national law, the competent authority may waive the                           conditions laid down in paragraph 1 of this Article provided that the competent authority requires the institution to limit                           the redemption of such instruments on an appropriate basis.                  

4.The competent authorities may permit institutions to redeem Additional Tier 1 or Tier 2 instruments before five years of the                           date of issue only where the conditions laid down in paragraph 1 and point (a) or (b) of this paragraph are met:                  

(a)there is a change in the regulatory classification of those instruments that would be likely to result in their exclusion                           from own funds or reclassification as a lower quality form of own funds, and both the following conditions are met:                  

the competent authority considers such a change to be sufficiently certain;                            

the institution demonstrates to the satisfaction of the competent authorities that the regulatory reclassification of those                                 instruments was not reasonably foreseeable at the time of their issuance;                            

(b)there is a change in the applicable tax treatment of those instruments which the institution demonstrates to the satisfaction                           of the competent authorities is material and was not reasonably foreseeable at the time of their issuance.                  

5.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the meaning of sustainable for the income capacity of the institution;                  

(b)the appropriate bases of limitation of redemption referred to in paragraph 3;                  

(c)the process and data requirements for an application by an institution for the permission of the competent authority to carry                           out an action listed in Article 77, including the process to be applied in the case of redemption of shares issued to members                           of cooperative societies, and the time period for processing such an application.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 79U.K.Temporary waiver of deduction from own funds

1.Where an institution holds capital instruments or has granted subordinated loans, as applicable, that qualify as Common Equity                           Tier 1, Additional Tier 1 or Tier 2 instruments in a financial sector entity temporarily and the competent authority deems                           those holdings to be for the purposes of a financial assistance operation designed to reorganise and save that entity, the                           competent authority may waive on a temporary basis the provisions on deduction that would otherwise apply to those instruments.                  

2.EBA shall develop draft regulatory technical standards to specify the concept of temporary for the purposes of paragraph 1                           and the conditions according to which a competent authority may deem those temporary holdings to be for the purposes of a                           financial assistance operation designed to reorganise and save a relevant entity.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 80U.K.Continuing review of quality of own funds

1.EBA shall monitor the quality of own funds instruments issued by institutions across the Union and shall notify the Commission                           immediately where there is significant evidence of those instruments not meeting the criteria set out in Article 28 or, where                           applicable, Article 29.                  

Competent authorities shall, without delay, upon request by EBA, forward all information that EBA deems relevant concerning                        new capital instruments issued in order to enable EBA to monitor the quality of own funds instruments issued by institutions                        across the Union.                   

2.A notification shall include the following:                  

(a)a detailed explanation of the nature and extent of the shortfall identified;                  

(b)technical advice on the action by the Commission that EBA considers to be necessary;                  

(c)significant developments in the methodology of EBA for stress testing the solvency of institutions.                  

3.EBA shall provide technical advice to the Commission on any significant changes it considers to be required to the definition                           of own funds as a result of any of the following:                  

(a)relevant developments in market standards or practice;                  

(b)changes in relevant legal or accounting standards;                  

(c)significant developments in the methodology of EBA for stress testing the solvency of institutions.                  

4.EBA shall provide technical advice to the Commission by 1 January 2014 on possible treatments of unrealised gains measured at fair value other than including them in Common Equity Tier 1 without                           adjustment. Such recommendations shall take into account relevant developments in international accounting standards and in                           international agreements on prudential standards for banks.                  

## TITLE IIU.K.MINORITY INTEREST AND ADDITIONAL TIER 1 AND TIER 2 INSTRUMENTS ISSUED BY SUBSIDIARIES

### Article 81U.K.Minority interests that qualify for inclusion in consolidated Common Equity Tier 1 capital

1.Minority interests shall comprise the sum of Common Equity Tier 1 instruments, the share premium accounts related to those                           instruments, retained earnings and other reserves of a subsidiary where the following conditions are met:                  

(a)the subsidiary is one of the following:                  

an institution;                            

an undertaking that is subject by virtue of applicable national law to the requirements of this Regulation and Directive 2013/36/EU;                            

(b)the subsidiary is included fully in the consolidation pursuant to Chapter 2 of Title II of Part One;                  

(c)the Common Equity Tier 1 items, referred to in the introductory part of this paragraph are owned by persons other than the                           undertakings included in the consolidation pursuant to Chapter 2 of Title II of Part One.                  

2.Minority interests that are funded directly or indirectly, through a special purpose entity or otherwise, by the parent undertaking                           of the institution, or its subsidiaries shall not qualify as consolidated Common Equity Tier 1 capital.                  

### Article 82U.K.Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds

Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds shall comprise the minority interest, Additional                        Tier 1 or Tier 2 instruments, as applicable, plus the related retained earnings and share premium accounts, of a subsidiary                        where the following conditions are met:                   

the subsidiary is either of the following:                            

an institution;                                     

an undertaking that is subject by virtue of applicable national law to the requirements of this Regulation and Directive 2013/36/EU;                                     

the subsidiary is included fully in the scope of consolidation pursuant to Chapter 2 of Title II of Part One;                            

those instruments are owned by persons other than the undertakings included in the consolidation pursuant to Chapter 2 of                                 Title II of Part One.                            

### Article 83U.K.Qualifying Additional Tier 1 and Tier 2 capital issued by a special purpose entity

1.Additional Tier 1 and Tier 2 instruments issued by a special purpose entity, and the related share premium accounts, are included                           in qualifying Additional Tier 1, Tier 1 or Tier 2 capital or qualifying own funds, as applicable, only where the following                           conditions are met:                  

(a)the special purpose entity issuing those instruments is included fully in the consolidation pursuant to Chapter 2 of Title                           II of Part One;                  

(b)the instruments, and the related share premium accounts, are included in qualifying Additional Tier 1 capital only where the                           conditions laid down in Article 52(1) are satisfied;                  

(c)the instruments, and the related share premium accounts, are included in qualifying Tier 2 capital only where the conditions                           laid down in Article 63 are satisfied;                  

(d)the only asset of the special purpose entity is its investment in the own funds of the parent undertaking or a subsidiary                           thereof that is included fully in the consolidation pursuant to Chapter 2 of Title II of Part One, the form of which satisfies                           the relevant conditions laid down in Articles 52(1) or 63, as applicable.                  

Where the competent authority considers the assets of a special purpose entity other than its investment in the own funds                        of the parent undertaking or a subsidiary thereof that is included in the scope of consolidation pursuant to Chapter 2 of                        Title II of Part One, to be minimal and insignificant for such an entity, the competent authority may waive the condition                        specified in point (d) of the first subparagraph.                   

2.EBA shall develop draft regulatory technical standards to specify the types of assets that can relate to the operation of                           special purpose entities and the concepts of minimal and insignificant referred to in the second subparagraph of paragraph                           1.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 84U.K.Minority interests included in consolidated Common Equity Tier 1 capital

1.Institutions shall determine the amount of minority interests of a subsidiary that is included in consolidated Common Equity                           Tier 1 capital by subtracting from the minority interests of that undertaking the result of multiplying the amount referred                           to in point (a) by the percentage referred to in point (b):                  

(a)the Common Equity Tier 1 capital of the subsidiary minus the lower of the following:                  

the amount of Common Equity Tier 1 capital of that subsidiary required to meet the sum of the requirement laid down in point                                 (a) of Article 92(1), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to                                 in Article 104 of Directive 2013/36/EU the combined buffer requirement defined in point (6) of Article 128 of Directive 2013/36/EU,                                 the requirements referred to in Article 500 and any additional local supervisory regulations in third countries insofar as                                 those requirements are to be met by Common Equity Tier 1 capital;                            

the amount of consolidated Common Equity Tier 1 capital that relates to that subsidiary that is required on a consolidated                                 basis to meet the sum of the requirement laid down in point (a) of Article 92(1), the requirements referred to in Articles                                 458 and 459, the specific own funds requirements referred to in Article 104 of Directive 2013/36/EU, the combined buffer requirement                                 defined in point (6) of Article 128 of Directive 2013/36/EU, the requirements referred to in Article 500 and any additional                                 local supervisory regulations in third countries insofar as those requirements are to be met by Common Equity Tier 1 capital.                            

(b)the minority interests of the subsidiary expressed as a percentage of all Common Equity Tier 1 instruments of that undertaking                           plus the related share premium accounts, retained earnings and other reserves.                  

2.The calculation referred to in paragraph 1 shall be undertaken on a sub-consolidated basis for each subsidiary referred to                           in Article 81(1).                  

An institution may choose not to undertake this calculation for a subsidiary referred to in Article 81(1). Where an institution                        takes such a decision, the minority interest of that subsidiary may not be included in consolidated Common Equity Tier 1 capital.                   

3.Where a competent authority derogates from the application of prudential requirements on an individual basis, as laid down                           in Article 7, minority interest within the subsidiaries to which the waiver is applied shall not be recognised in own funds                           at the sub-consolidated or at the consolidated level, as applicable.                  

4.EBA shall develop draft regulatory technical standards to specify the sub-consolidation calculation required in accordance                           with paragraph 2 of this Article, Articles 85 and 87.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

5.Competent authorities may grant a waiver from the application of this Article to a parent financial holding company that satisfies                           all the following conditions:                  

(a)its principal activity is to acquire holdings;                  

(b)it is subject to prudential supervision on a consolidated basis;                  

(c)it consolidates a subsidiary institution in which it has only a minority holding by virtue of the control relationship defined                           in Article 1 of Directive 83/349/EEC;                  

(d)more than 90 % of the consolidated required Common Equity Tier 1 capital arises from the subsidiary institution referred to                           in point c) calculated on a sub-consolidated basis.                  

Where, after 28 June 2013, a parent financial holding company that meets the conditions laid down in the first subparagraph becomes a parent mixed                        financial holding company, competent authorities may grant the waiver referred to in the first subparagraph to that parent                        mixed financial holding company provided that it meets the conditions laid down in that subparagraph.                   

6.Where credit institutions permanently affiliated in a network to a central body and institutions established within an institutional                           protection scheme subject to the conditions laid down in Article 113(7) have set up a cross-guarantee scheme that provides                           that there is no current or foreseen material, practical or legal impediment to the transfer of the amount of own funds above                           the regulatory requirements from the counterparty to the credit institution, these institutions are exempted from the provisions                           of this Article regarding deductions and may recognise any minority interest arising within the cross-guarantee scheme in                           full.                  

### Article 85U.K.Qualifying Tier 1 instruments included in consolidated Tier 1 capital

1.Institutions shall determine the amount of qualifying Tier 1 capital of a subsidiary that is included in consolidated own                           funds by subtracting from the qualifying Tier 1 capital of that undertaking the result of multiplying the amount referred                           to in point (a) by the percentage referred to in point (b):                  

(a)the Tier 1 capital of the subsidiary minus the lower of the following:                  

the amount of Tier 1 capital of the subsidiary required to meet the sum of the requirement laid down in point (b) of Article                                 92(1), the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in Article 104                                 of Directive 2013/36/EU, the combined buffer requirement defined in point (6) of Article 128 of Directive 2013/36/EU, the                                 requirements referred to in Article 500 and any additional local supervisory regulations in third countries insofar as those                                 requirements are to be met by Tier 1 Capital;                            

the amount of consolidated Tier 1 capital that relates to the subsidiary that is required on a consolidated basis to meet                                 the sum of the requirement laid down in point (b) of Article 92(1), the requirements referred to in Articles 458 and 459,                                 the specific own funds requirements referred to in Article 104 of Directive 2013/36/EU, the combined buffer requirement defined                                 in point (6) of Article 128 of Directive 2013/36/EU, the requirements referred to in Article 500 and any additional local                                 supervisory regulations in third countries insofar as those requirements are to be met by Tier 1 Capital;                            

(b)the qualifying Tier 1 capital of the subsidiary expressed as a percentage of all Tier 1 instruments of that undertaking plus                           the related share premium accounts, retained earnings and other reserves.                  

2.The calculation referred to in paragraph 1 shall be undertaken on a sub-consolidated basis for each subsidiary referred to                           in Article 81(1).                  

An institution may choose not to undertake this calculation for a subsidiary referred to in Article 81(1). Where an institution                        takes such a decision, the qualifying Tier 1 capital of that subsidiary may not be included in consolidated Tier 1 capital.                   

3.Where a competent authority derogates from the application of prudential requirements on an individual basis, as laid down                           in Article 7, Tier 1 instruments within the subsidiaries to which the waiver is applied shall not be recognised as own funds                           at the sub-consolidated or at the consolidated level, as applicable.                  

### Article 86U.K.Qualifying Tier 1 capital included in consolidated Additional Tier 1 capital

Without prejudice to Article 84 (5) or (6), institutions shall determine the amount of qualifying Tier 1 capital of a subsidiary                        that is included in consolidated Additional Tier 1 capital by subtracting from the qualifying Tier 1 capital of that undertaking                        included in consolidated Tier 1 capital the minority interests of that undertaking that are included in consolidated Common                        Equity Tier 1 capital.                   

### Article 87U.K.Qualifying own funds included in consolidated own funds

1.Institutions shall determine the amount of qualifying own funds of a subsidiary that is included in consolidated own funds                           by subtracting from the qualifying own funds of that undertaking the result of multiplying the amount referred to in point                           (a) by the percentage referred to in point (b):                  

(a)the own funds of the subsidiary minus the lower of the following:                  

the amount of own funds of the subsidiary required to meet the sum of the requirement laid down in point (c) of Article 92(1),                                 the requirements referred to in Articles 458 and 459, the specific own funds requirements referred to in Article 104 of Directive                                 2013/36/EU, the combined buffer requirement defined in point (6) of Article 128 of Directive 2013/36/EU, the requirements                                 referred to in Article 500 and any additional local supervisory regulations in third countries;                            

the amount of own funds that relates to the subsidiary that is required on a consolidated basis to meet the sum of the requirement                                 laid down in point (c) of Article 92(1), the requirements referred to in Articles 458 and 459, the specific own funds requirements                                 referred to in Article 104 of Directive 2013/36/EU, the combined buffer requirement defined in point (6) of Article 128 of                                 Directive 2013/36/EU, the requirements referred to in Article 500 and any additional local supervisory own funds requirement                                 in third countries;                            

(b)the qualifying own funds of the undertaking, expressed as a percentage of all own funds instruments of the subsidiary that                           are included in Common Equity Tier 1, Additional Tier 1 and Tier 2 items and the related share premium accounts, the retained                           earnings and other reserves.                  

2.The calculation referred to in paragraph 1 shall be undertaken on a sub-consolidated basis for each subsidiary referred to                           in Article 81(1).                  

An institution may choose not to undertake this calculation for a subsidiary referred to in Article 81(1). Where an institution                        takes such a decision, the qualifying own funds of that subsidiary may not be included in consolidated own funds.                   

3.Where a competent authority derogates from the application of prudential requirements on an individual basis, as laid down                           in Article 7, own funds instruments within the subsidiaries to which the waiver is applied shall not be recognised as own                           funds at the sub-consolidated or at the consolidated level, as applicable.                  

### Article 88U.K.Qualifying own funds instruments included in consolidated Tier 2 capital

Without prejudice to Article 84(5) or (6), institutions shall determine the amount of qualifying own funds of a subsidiary                        that is included in consolidated Tier 2 capital by subtracting from the qualifying own funds of that undertaking that are                        included in consolidated own funds the qualifying Tier 1 capital of that undertaking that is included in consolidated Tier                        1 capital.                   

## TITLE IIIU.K.QUALIFYING HOLDINGS OUTSIDE THE FINANCIAL SECTOR

### Article 89U.K.Risk weighting and prohibition of qualifying holdings outside the financial sector

1.A qualifying holding, the amount of which exceeds 15 % of the eligible capital of the institution, in an undertaking which                           is not one of the following shall be subject to the provisions laid down in paragraph 3:                  

(a)a financial sector entity;                  

(b)an undertaking, that is not a financial sector entity, carrying on activities which the competent authority considers to be                           any of the following:                  

a direct extension of banking;                            

ancillary to banking;                            

leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity.                            

2.The total amount of the qualifying holdings of an institution in undertakings other than those referred to in points (a) and                           (b) of paragraph 1 that exceeds 60 % of its eligible capital shall be subject to the provisions laid down in paragraph 3.                  

3.Competent authorities shall apply the requirements laid down in point (a) or (b) to qualifying holdings of institutions referred                           to in paragraphs 1 and 2:                  

(a)for the purpose of calculating the capital requirement in accordance with Part Three, institutions shall apply a risk weight                           of 1 250 % to the greater of the following:                  

the amount of qualifying holdings referred to in paragraph 1 in excess of 15 % of eligible capital;                            

the total amount of qualifying holdings referred to in paragraph 2 that exceed 60 % of the eligible capital of the institution;                            

(b)the competent authorities shall prohibit institutions from having qualifying holdings referred to in paragraphs 1 and 2 the                           amount of which exceeds the percentages of eligible capital laid down in those paragraphs.                  

Competent authorities shall publish their choice of (a) or (b).                   

4.For the purposes of point (b) of paragraph 1, EBA shall issue guidelines specifying the following concepts:                  

(a)activities that are a direct extension of banking;                  

(b)activities ancillary to banking;                  

(c)similar activities.                  

Those guidelines shall be adopted in accordance with Article 16 of Regulation (EU) No 1093/2010.                   

### Article 90U.K.Alternative to 1 250 % risk weight

As an alternative to applying a 1 250 % risk weight to the amounts in excess of the limits specified in Article 89(1) and (2), institutions may deduct those amounts                        from Common Equity Tier 1 items in accordance with point (k) of Article 36(1).                   

### Article 91U.K.Exceptions

1.Shares of undertakings not referred to in points (a) and (b) of Article 89(1) shall not be included in calculating the eligible                           capital limits specified in that Article where any of the following conditions is met:                  

(a)those shares are held temporarily during a financial assistance operation as referred to in Article 79;                  

(b)the holding of those shares is an underwriting position held for five working days or fewer;                  

(c)those shares are held in the own name of the institution and on behalf of others.                  

2.Shares which are not financial fixed assets as referred to in Article 35(2) of Directive 86/635/EEC shall not be included                           in the calculation specified in Article 89.                  

# PART THREEU.K.CAPITAL REQUIREMENTS

## TITLE IU.K.GENERAL REQUIREMENTS, VALUATION AND REPORTING

### CHAPTER 1U.K.Required level of own funds

#### Section 1U.K.Own funds requirements for institutions

##### Article 92U.K.Own funds requirements

1.Subject to Articles 93 and 94, institutions shall at all times satisfy the following own funds requirements:                  

(a)a Common Equity Tier 1 capital ratio of 4,5 %;                  

(b)a Tier 1 capital ratio of 6 %;                  

(c)a total capital ratio of 8 %.                  

2.Institutions shall calculate their capital ratios as follows:                  

(a)the Common Equity Tier 1 capital ratio is the Common Equity Tier 1 capital of the institution expressed as a percentage of                           the total risk exposure amount;                  

(b)the Tier 1 capital ratio is the Tier 1 capital of the institution expressed as a percentage of the total risk exposure amount;                  

(c)the total capital ratio is the own funds of the institution expressed as a percentage of the total risk exposure amount.                  

3.Total risk exposure amount shall be calculated as the sum of points (a) to (f) of this paragraph after taking into account                           the provisions laid down in paragraph 4:                  

(a)the risk-weighted exposure amounts for credit risk and dilution risk, calculated in accordance with Title II and Article 379,                           in respect of all the business activities of an institution, excluding risk-weighted exposure amounts from the trading book                           business of the institution;                  

(b)the own funds requirements, determined in accordance with Title IV of this Part or Part Four, as applicable, for the trading-book                           business of an institution, for the following:                  

position risk;                            

large exposures exceeding the limits specified in Articles 395 to 401, to the extent an institution is permitted to exceed                                 those limits;                            

(c)the own funds requirements determined in accordance with Title IV or Title V with the exception of Article 379, as applicable,                           for the following:                  

foreign-exchange risk;                            

settlement risk;                            

commodities risk;                            

(d)the own funds requirements calculated in accordance with Title VI for credit valuation adjustment risk of OTC derivative instruments                           other than credit derivatives recognised to reduce risk-weighted exposure amounts for credit risk;                  

(e)the own funds requirements determined in accordance with Title III for operational risk;                  

(f)the risk-weighted exposure amounts determined in accordance with Title II for counterparty risk arising from the trading book                           business of the institution for the following types of transactions and agreements:                  

contracts listed in Annex II and credit derivatives;                            

repurchase transactions, securities or commodities lending or borrowing transactions based on securities or commodities;                            

margin lending transactions based on securities or commodities;                            

long settlement transactions.                            

4.The following provisions shall apply in the calculation of the total risk exposure amount referred to in paragraph 3:                  

(a)the own funds requirements referred to in points (c), (d) and (e) of that paragraph shall include those arising from all the                           business activities of an institution;                  

(b)institutions shall multiply the own funds requirements set out in points (b) to (e) of that paragraph by 12,5.                  

##### Article 93U.K.Initial capital requirement on going concern

1.The own funds of an institution may not fall below the amount of initial capital required at the time of its authorisation.                  

2.Credit institutions that were already in existence on 1 January 1993, the amount of own funds of which do not attain the amount of initial capital required may continue to carry out their activities.                           In that event, the amount of own funds of those institutions may not fall below the highest level reached with effect from                           22 December 1989.                  

3.Authorised investment firms and firms that were covered by Article 6 of Directive 2006/49/EC which were in existence before                           31 December 1995, the amount of own funds of which do not attain the amount of initial capital required may continue to carry out their activities.                           The own funds of such firms or investment firms shall not fall below the highest reference level calculated after the date                           of notification contained in Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investments firms and credit institutions (28) . That reference level shall be the average daily level of own funds calculated over a six month period preceding the date                           of calculation. It shall be calculated every six months in respect of the corresponding preceding period.                  

4.Where control of an institution falling within the category referred to in paragraph 2 or 3 is taken by a natural or legal                           person other than the person who controlled the institution previously, the amount of own funds of that institution shall                           attain the amount of initial capital required.                  

5.Where there is a merger of two or more institutions falling within the category referred to in paragraph 2 or 3, the amount                           of own funds of the institution resulting from the merger shall not fall below the total own funds of the merged institutions                           at the time of the merger, as long as the amount of initial capital required has not been attained.                  

6.Where competent authorities consider it necessary to ensure the solvency of an institution that the requirement laid down                           in paragraph 1 is met, the provisions laid down in paragraphs 2 to 5 shall not apply.                  

##### Article 94U.K.Derogation for small trading book business

1.Institutions may replace the capital requirement referred to in point (b) of Article 92(3) by a capital requirement calculated                           in accordance with point (a) of that paragraph in respect of their trading-book business, provided that the size of their                           on- and off-balance sheet trading-book business meets both the following conditions:                  

(a)it is normally less than 5 % of the total assets and EUR 15 million;                  

(b)it never exceeds 6 % of total assets and EUR 20 million.                  

2.In calculating the size of on- and off-balance sheet business, institutions shall apply the following:                  

(a)debt instruments shall be valued at their market prices or their nominal values, equities at their market prices and derivatives                           according to the nominal or market values of the instruments underlying them;                  

(b)the absolute value of long positions shall be summed with the absolute value of short positions.                  

3.Where an institution fails to meet the condition in point (b) of paragraph 1 it shall immediately notify the competent authority.                           If, following assessment by the competent authority, the competent authority determines and notifies the institution that                           the requirement in point (a) of paragraph 1 is not met, the institution shall cease to make use of paragraph 1 from the next                           reporting date.                  

#### Section 2U.K.Own funds requirements for investment firms with limited authorisation to provide investment services

##### Article 95U.K.Own funds requirements for investment firms with limited authorisation to provide investment services

1.For the purposes of Article 92(3), investment firms that are not authorised to provide the investment services and activities                           listed in points (3) and (6) of Section A of Annex I to Directive 2004/39/EC shall use the calculation of the total risk exposure                           amount specified in paragraph 2.                  

2.Investment firms referred to in paragraph 1 of this Article and firms referred to in point (2)(c) of Article 4(1) that provide                           the investment services and activities listed in points (2) and (4) of Section A of Annex I to Directive 2004/39/EC shall                           calculate the total risk exposure amount as the higher of the following:                  

(a)the sum of the items referred to in points (a) to (d) and (f) of Article 92(3) after applying Article 92(4);                  

(b)12,5 multiplied by the amount specified in Article 97.                  

Firms referred to in point (2)(c) of Article 4(1) that provide the investment services and activities listed in points (2)                        and (4) of Section A of Annex I to Directive 2004/39/EC shall meet the requirements in Article 92(1) and (2) based on the                        total risk exposure amount referred to in the first subparagraph.                   

Competent authorities may set the own funds requirements for firms referred to in point (2)(c) of Article 4(1) that provide                        the investment services and activities listed in points (2) and (4) of Section A of Annex I to Directive 2004/39/EC as the                        own funds requirements that would be binding on those firms according to the national transposition measures in force on 31 December 2013 for Directives 2006/49/EC and 2006/48/EC.                   

3.Investment firms referred to in paragraph 1 are subject to all other provisions regarding operational risk laid down in Title                           VII, Chapter 2, Section II, Sub-section 2 of Directive 2013/36/EU.                  

##### Article 96U.K.Own funds requirements for investment firms which hold initial capital as laid down in Article 28(2) of Directive 2013/36/EU

1.For the purposes of Article 92(3), the following categories of investment firm which hold initial capital in accordance with                           Article 28(2) of Directive 2013/36/EU shall use the calculation of the total risk exposure amount specified in paragraph 2                           of this Article:                  

(a)investment firms that deal on own account only for the purpose of fulfilling or executing a client order or for the purpose                           of gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing                           a client order;                  

(b)investment firms that meet all the following conditions:                  

they do not hold client money or securities;                            

they undertake only dealing on own account;                            

they have no external customers;                            

their execution and settlement transactions take place under the responsibility of a clearing institution and are guaranteed                                 by that clearing institution.                            

2.For investment firms referred to in paragraph 1, total risk exposure amount shall be calculated as the sum of the following:                  

(a)points (a) to (d) and (f) of Article 92(3) after applying Article 92(4);                  

(b)the amount referred to in Article 97 multiplied by 12,5.                  

3.Investment firms referred to in paragraph 1 are subject to all other provisions regarding operational risk laid down in Title                           VII, Chapter 3, Section II, Sub-section 1 of Directive 2013/36/EU.                  

##### Article 97U.K.Own Funds based on Fixed Overheads

1.In accordance with Articles 95 and 96, an investment firm and firms referred to in point (2)(c) of Article 4(1) that provide                           the investment services and activities listed in points (2) and (4) of Section A of Annex I to Directive 2004/39/EC shall                           hold eligible capital of at least one quarter of the fixed overheads of the preceding year.                  

2.Where there is a change in the business of an investment firm since the preceding year that the competent authority considers                           to be material, the competent authority may adjust the requirement laid down in paragraph 1.                  

3.Where an investment firm has not completed business for one year, starting from the day it starts up, an investment firm shall                           hold eligible capital of at least one quarter of the fixed overheads projected in its business plan, except where the competent                           authority requires the business plan to be adjusted.                  

4.EBA in consultation with ESMA shall develop draft regulatory technical standards to specify in greater detail the following:                  

(a)the calculation of the requirement to hold eligible capital of at least one quarter of the fixed overheads of the previous                           year;                  

(b)the conditions for the adjustment by the competent authority of the requirement to hold eligible capital of at least one quarter                           of the fixed overheads of the previous year;                  

(c)the calculation of projected fixed overheads in the case of an investment firm that has not completed business for one year.                  

EBA shall submit those draft regulatory technical standards to the Commission by 1 March 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 98U.K.Own funds for investment firms on a consolidated basis

1.In the case of the investment firms referred to in Article 95(1) in a group, where that group does not include credit institutions,                           a parent investment firm in a Member State shall apply Article 92 at a consolidated level as follows:                  

(a)using the calculation of total risk exposure amount specified in Article 95(2);                  

(b)own funds calculated on the basis of the consolidated situation of the parent investment firm or that of the financial holding                           company or mixed financial holding company, as applicable.                  

2.In the case of investment firms referred to in Article 96(1) in a group, where that group does not include credit institutions,                           a parent investment firm in a Member State and an investment firm controlled by a financial holding company or mixed financial                           holding company shall apply Article 92 on a consolidated basis as follows:                  

(a)it shall use the calculation of total risk exposure amount specified in Article 96(2);                  

(b)it shall use own funds calculated on the basis of the consolidated situation of the parent investment firm or that of the                           financial holding company or mixed financial holding company, as applicable, and in compliance with Chapter 2 of Title II                           of Part One.                  

### CHAPTER 2U.K.Calculation and reporting requirements

#### Article 99U.K.Reporting on own funds requirements and financial information

1.Reporting by institutions to the competent authorities on the obligations laid down in Article 92 shall be carried out at                           least on a semi-annual basis.                  

2.Institutions subject to Article 4 of Regulation (EC) No 1606/2002 and credit institutions other than those referred to in                           Article 4 of that Regulation that prepare their consolidated accounts in conformity with the international accounting standards                           adopted in accordance with the procedure laid down in Article 6(2) of that Regulation, shall also report financial information.                  

3.Competent authorities may require those credit institutions applying international accounting standards as applicable under                           Regulation (EC) No 1606/2002 for the reporting of own funds on a consolidated basis pursuant to Article 24(2) of this Regulation                           to also report financial information as laid down in paragraph 2 of this Article.                  

4.The financial information referred to in paragraphs 2 and 3 shall be reported to the extent this is necessary to obtain a                           comprehensive view of the risk profile of an institution's activities and a view on the systemic risks posed by institutions                           to the financial sector or the real economy in accordance with Regulation (EU) No 1093/2010.                  

5.EBA shall develop draft implementing technical standards to specify the uniform formats, frequencies, dates of reporting,                           definitions and the IT solutions to be applied in the Union for the reporting referred to in paragraphs 1 to 4.                  

The reporting requirements shall be proportionate to the nature, scale and complexity of the activities of the institutions.                   

EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

6.Where a competent authority considers that the financial information required by paragraph 2 is necessary to obtain a comprehensive                           view of the risk profile of the activities of, and a view of the systemic risks to the financial sector or the real economy                           posed by, institutions other than those referred to in paragraphs 2 and 3 that are subject to an accounting framework based                           on Directive 86/635/EEC, the competent authority shall consult EBA on the extension of the reporting requirements of financial                           information on a consolidated basis to those institutions, provided that they are not already reporting on such a basis.                  

EBA shall develop draft implementing technical standards to specify the formats to be used by institutions to which the competent                        authorities may extend the reporting requirements in accordance with the first subparagraph.                   

EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the second subparagraph                        in accordance with Article 15 of Regulation (EU) No 1093/2010.                   

7.Where a competent authority considers information not covered by the implementing technical standards referred to in paragraph                           5 to be necessary for the purposes set out in paragraph 4, it shall notify EBA and the ESRB of the additional information                           it deems necessary to include in the implementing technical standards referred to in paragraph 5.                  

#### Article 100U.K.Additional reporting requirements

Institutions shall report to the competent authorities the level, at least in aggregate terms, of their repurchase agreements,                        securities lending and all forms of encumbrance of assets.                   

EBA shall include this information in the implementing technical standards on reporting referred to in Article 99(5).                   

#### Article 101U.K.Specific reporting obligations

1.Institutions shall report on a semi-annual basis the following data to the competent authorities for each national immovable                           property market to which they are exposed:                  

(a)losses stemming from exposures for which an institution has recognised residential property as collateral, up to the lower                           of the pledged amount and 80 % of the market value or 80 % of the mortgage lending value unless otherwise decided under Article                           124(2);                  

(b)overall losses stemming from exposures for which an institution has recognised residential property as collateral, up to the                           part of the exposure treated as fully secured by residential property in accordance with Article 124(1);                  

(c)the exposure value of all outstanding exposures for which an institution has recognised residential property as collateral                           limited to the part treated as fully secured by residential property in accordance with Article 124(1);                  

(d)losses stemming from exposures for which an institution has recognised immovable commercial property as collateral, up to                           the lower of the pledged amount and 50 % of the market value or 60 % of the mortgage lending value unless otherwise decided                           under Article 124(2);                  

(e)overall losses stemming from exposures for which an institution has recognised immovable commercial property as collateral,                           up to the part of the exposure treated as fully secured by immovable commercial property in accordance with Article 124(1).                  

(f)the exposure value of all outstanding exposures for which an institution has recognised immovable commercial property as collateral                           limited to the part treated as fully secured by immovable commercial property in accordance with Article 124(1).                  

2.The data referred to in paragraph 1 shall be reported to the competent authority of the home Member State of the relevant                           institution. Where an institution has a branch in another Member State, the data relating to that branch shall also be reported                           to the competent authorities of the host Member State. The data shall be reported separately for each immovable property market                           within the Union to which the relevant institution is exposed.                  

3.The competent authorities shall publish annually on an aggregated basis the data specified in points (a) to (f) of paragraph                           1, together with historical data, where available. A competent authority shall, upon the request of another competent authority                           in a Member State or EBA provide to that competent authority or EBA more detailed information on the condition of the residential                           property or commercial immovable property markets in that Member State.                  

4.EBA shall develop draft implementing technical standards to specify the following:                  

(a)uniform formats, definitions, frequencies and dates of reporting, as well as the IT solutions, of the items referred to in                           paragraph 1;                  

(b)uniform formats, definitions, frequencies and dates of reporting, as well as IT solutions, of the aggregate data referred                           to in paragraph 2.                  

EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

### CHAPTER 3U.K.Trading book

#### Article 102U.K.Requirements for the trading book

1.Positions in the trading book shall be either free of restrictions on their tradability or able to be hedged.                  

2.Trading intent shall be evidenced on the basis of the strategies, policies and procedures set up by the institution to manage                           the position or portfolio in accordance with Article 103.                  

3.Institutions shall establish and maintain systems and controls to manage their trading book in accordance with Articles 104                           and 105.                  

4.Institutions may include internal hedges in the calculation of capital requirements for position risk provided that they are                           held with trading intent and that the requirements of Articles 103 to 106 are met.                  

#### Article 103U.K.Management of the trading book

In managing its positions or sets of positions in the trading book the institution shall comply with all of the following                        requirements:                   

the institution shall have in place a clearly documented trading strategy for the position/instrument or portfolios, approved                                 by senior management, which shall include the expected holding period;                            

the institution shall have in place clearly defined policies and procedures for the active management of positions entered                                 into on a trading desk. Those policies and procedures shall include the following:                            

which positions may be entered into by which trading desk;                                     

position limits are set and monitored for appropriateness;                                     

dealers have the autonomy to enter into and manage the position within agreed limits and according to the approved strategy;                                     

positions are reported to senior management as an integral part of the institution's risk management process;                                     

positions are actively monitored with reference to market information sources and an assessment made of the marketability                                          or hedgeability of the position or its component risks, including the assessment, the quality and availability of market inputs                                          to the valuation process, level of market turnover, sizes of positions traded in the market;                                     

active anti-fraud procedures and controls.                                     

the institution shall have in place clearly defined policies and procedures to monitor the positions against the institution's                                 trading strategy including the monitoring of turnover and positions for which the originally intended holding period has been                                 exceeded.                            

#### Article 104U.K.Inclusion in the trading book

1.Institutions shall have in place clearly defined policies and procedures for determining which position to include in the                           trading book for the purposes of calculating their capital requirements, in accordance with the requirements set out in Article                           102 and the definition of trading book in accordance with point (86) of Article 4(1), taking into account the institution's                           risk management capabilities and practices. The institution shall fully document its compliance with these policies and procedures                           and shall subject them to periodic internal audit.                  

2.Institutions shall have in place clearly defined policies and procedures for the overall management of the trading book. These                           policies and procedures shall at least address:                  

(a)the activities the institution considers to be trading and as constituting part of the trading book for own funds requirement                           purposes;                  

(b)the extent to which a position can be marked-to-market daily by reference to an active, liquid two-way market;                  

(c)for positions that are marked-to-model, the extent to which the institution can:                  

identify all material risks of the position;                            

hedge all material risks of the position with instruments for which an active, liquid two-way market exists;                            

derive reliable estimates for the key assumptions and parameters used in the model;                            

(d)the extent to which the institution can, and is required to, generate valuations for the position that can be validated externally                           in a consistent manner;                  

(e)the extent to which legal restrictions or other operational requirements would impede the institution's ability to effect                           a liquidation or hedge of the position in the short term;                  

(f)the extent to which the institution can, and is required to, actively manage the risks of positions within its trading operation;                  

(g)the extent to which the institution may transfer risk or positions between the non-trading and trading books and the criteria                           for such transfers.                  

#### Article 105U.K.Requirements for prudent valuation

1.All trading book positions shall be subject to the standards for prudent valuation specified in this Article. Institutions                           shall in particular ensure that the prudent valuation of their trading book positions achieves an appropriate degree of certainty                           having regard to the dynamic nature of trading book positions, the demands of prudential soundness and the mode of operation                           and purpose of capital requirements in respect of trading book positions.                  

2.Institutions shall establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.                           Those systems and controls shall include at least the following elements:                  

(a)documented policies and procedures for the process of valuation, including clearly defined responsibilities of the various                           areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines                           for the use of unobservable inputs reflecting the institution's assumptions of what market participants would use in pricing                           the position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end                           and ad-hoc verification procedures;                  

(b)reporting lines for the department accountable for the valuation process that are clear and independent of the front office,                           which shall ultimately be to the management body.                  

3.Institutions shall revalue trading book positions at least daily.                  

4.Institutions shall mark their positions to market whenever possible, including when applying trading book capital treatment.                  

5.When marking to market, an institution shall use the more prudent side of bid and offer unless the institution can close out                           at mid market. Where institutions make use of this derogation, they shall every six months inform their competent authorities                           of the positions concerned and furnish evidence that they can close out at mid-market.                  

6.Where marking to market is not possible, institutions shall conservatively mark to model their positions and portfolios, including                           when calculating own funds requirements for positions in the trading book.                  

7.Institutions shall comply with the following requirements when marking to model:                  

(a)senior management shall be aware of the elements of the trading book or of other fair-valued positions which are subject to                           mark to model and shall understand the materiality of the uncertainty thereby created in the reporting of the risk/performance                           of the business;                  

(b)institutions shall source market inputs, where possible, in line with market prices, and shall assess the appropriateness                           of the market inputs of the particular position being valued and the parameters of the model on a frequent basis;                  

(c)where available, institutions shall use valuation methodologies which are accepted market practice for particular financial                           instruments or commodities;                  

(d)where the model is developed by the institution itself, it shall be based on appropriate assumptions, which have been assessed                           and challenged by suitably qualified parties independent of the development process;                  

(e)institutions shall have in place formal change control procedures and shall hold a secure copy of the model and use it periodically                           to check valuations;                  

(f)risk management shall be aware of the weaknesses of the models used and how best to reflect those in the valuation output;                           and                  

(g)institutions' models shall be subject to periodic review to determine the accuracy of their performance, which shall include                           assessing the continued appropriateness of assumptions, analysis of profit and loss versus risk factors, and comparison of                           actual close out values to model outputs.                  

For the purposes of point (d), the model shall be developed or approved independently of the trading desk and shall be independently                        tested, including validation of the mathematics, assumptions and software implementation.                   

8.Institutions shall perform independent price verification in addition to daily marking to market or marking to model. Verification                           of market prices and model inputs shall be performed by a person or unit independent from persons or units that benefit from                           the trading book, at least monthly, or more frequently depending on the nature of the market or trading activity. Where independent                           pricing sources are not available or pricing sources are more subjective, prudent measures such as valuation adjustments may                           be appropriate.                  

9.Institutions shall establish and maintain procedures for considering valuation adjustments.                  

10.Institutions shall formally consider the following valuation adjustments: unearned credit spreads, close-out costs, operational                           risks, market price uncertainty, early termination, investing and funding costs, future administrative costs and, where relevant,                           model risk.                  

11.Institutions shall establish and maintain procedures for calculating an adjustment to the current valuation of any less liquid                           positions, which can in particular arise from market events or institution-related situations such as concentrated positions                           and/or positions for which the originally intended holding period has been exceeded. Institutions shall, where necessary,                           make such adjustments in addition to any changes to the value of the position required for financial reporting purposes and                           shall design such adjustments to reflect the illiquidity of the position. Under those procedures, institutions shall consider                           several factors when determining whether a valuation adjustment is necessary for less liquid positions. Those factors include                           the following:                  

(a)the amount of time it would take to hedge out the position or the risks within the position;                  

(b)the volatility and average of bid/offer spreads;                  

(c)the availability of market quotes (number and identity of market makers) and the volatility and average of trading volumes                           including trading volumes during periods of market stress;                  

(d)market concentrations;                  

(e)the ageing of positions;                  

(f)the extent to which valuation relies on marking-to-model;                  

(g)the impact of other model risks.                  

12.When using third party valuations or marking to model, institutions shall consider whether to apply a valuation adjustment.                           In addition, institutions shall consider the need to establish adjustments for less liquid positions and on an ongoing basis                           review their continued suitability. Institutions shall also explicitly assess the need for valuation adjustments relating                           to the uncertainty of parameter inputs used by models.                  

13.With regard to complex products, including securitisation exposures and n-th-to-default credit derivatives, institutions shall                           explicitly assess the need for valuation adjustments to reflect the model risk associated with using a possibly incorrect                           valuation methodology and the model risk associated with using unobservable (and possibly incorrect) calibration parameters                           in the valuation model.                  

14.EBA shall develop draft regulatory technical standards to specify the conditions according to which the requirements of Article                           105 shall be applied for the purposes of paragraph 1 of this Article.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 106U.K.Internal Hedges

1.An internal hedge shall in particular meet the following requirements:                  

(a)it shall not be primarily intended to avoid or reduce own funds requirements;                  

(b)it shall be properly documented and subject to particular internal approval and audit procedures;                  

(c)it shall be dealt with at market conditions;                  

(d)the market risk that is generated by the internal hedge shall be dynamically managed in the trading book within the authorised                           limits;                  

(e)it shall be carefully monitored in accordance with adequate procedures.                  

2.The requirements of paragraph 1 apply without prejudice to the requirements applicable to the hedged position in the non-trading                           book.                  

3.By way of derogation from paragraphs 1 and 2, when an institution hedges a non-trading book credit risk exposure or counterparty                           risk exposure using a credit derivative booked in its trading book using an internal hedge, the non-trading book exposure                           or counterparty risk exposure shall not be deemed to be hedged for the purposes of calculating risk-weighted exposure amounts                           unless the institution purchases from an eligible third party protection provider a corresponding credit derivative meeting                           the requirements for unfunded credit protection in the non-trading book. Without prejudice to point (h) of Article 299(2),                           where such third party protection is purchased and recognised as a hedge of a non-trading book exposure for the purposes of                           calculating capital requirements, neither the internal nor external credit derivative hedge shall be included in the trading                           book for the purposes of calculating capital requirements.                  

## TITLE IIU.K.CAPITAL REQUIREMENTS FOR CREDIT RISK

### CHAPTER 1U.K.General principles

#### Article 107U.K.Approaches to credit risk

1.Institutions shall apply either the Standardised Approach provided for in Chapter 2 or, if permitted by the competent authorities                           in accordance with Article 143, the Internal Ratings Based Approach provided for in Chapter 3 to calculate their risk-weighted                           exposure amounts for the purposes of points (a) and (f) of Article 92(3).                  

2.For trade exposures and for default fund contributions to a central counterparty, institutions shall apply the treatment set                           out in Chapter 6, Section 9 to calculate their risk-weighted exposure amounts for the purposes of points (a) and (f) of Article                           92(3). For all other types of exposures to a central counterparty, institutions shall treat those exposures as follows:                  

(a)as exposures to an institution for other types of exposures to a qualifying CCP;                  

(b)as exposures to a corporate for other types of exposures to a non-qualifying CCP.                  

3.For the purposes of this Regulation, exposures to third-country investment firms and exposures to third country credit institutions                           and exposures to third country clearing houses and exchanges shall be treated as exposures to an institution only if the third                           country applies prudential and supervisory requirements to that entity that are at least equivalent to those applied in the                           Union.                  

4.For the purposes of paragraph 3, the Commission may adopt, by way of implementing acts, and subject to the examination procedure                           referred to in Article 464(2), a decision as to whether a third country applies prudential supervisory and regulatory requirements                           at least equivalent to those applied in the Union. In the absence of such a decision, until 1 January 2015, institutions may continue to treat exposures to the entities referred to in paragraph 3 as exposures to institutions provided                           that the relevant competent authorities have approved the third country as eligible for that treatment before 1 January 2014.                  

#### Article 108U.K.Use of credit risk mitigation technique under the Standardised Approach and the IRB Approach

1.For an exposure to which an institution applies the Standardised Approach under Chapter 2 or applies the IRB Approach under                           Chapter 3 but without using its own estimates of loss given default (LGD) and conversion factors under Article 151, the institution may use credit risk mitigation in accordance with Chapter 4 in the                           calculation of risk-weighted exposure amounts for the purposes of points (a) and (f) of Article 92(3) or, as relevant, expected                           loss amounts for the purposes of the calculation referred to in point (d) of Article 36(1) and point (c) of Article 62.                  

2.For an exposure to which an institution applies the IRB Approach by using their own estimates of LGD and conversion factors                           under Article 151, the institution may use credit risk mitigation in accordance with Chapter 3.                  

#### Article 109U.K.Treatment of securitised exposures under the Standardised Approach and the IRB Approach

1.Where an institution uses the Standardised Approach under Chapter 2 for the calculation of risk-weighted exposure amounts                           for the exposure class to which the securitised exposures would be assigned under Article 112, it shall calculate the risk-weighted                           exposure amount for a securitisation position in accordance with Articles 245, 246 and 251 to 258. Institutions using the                           Standardised Approach may also use the Internal Assessment Approach where this has been permitted under Article 259(3).                  

2.Where an institution uses the IRB Approach under Chapter 3 for the calculation of risk-weighted exposures amounts for the                           exposure class to which the securitised exposure would be assigned under Article 147 it shall calculate the risk-weighted                           exposure amount in accordance with Articles 245, 246 and 259 to 266.                  

Except for the Internal Assessment Approach, where the IRB Approach is used only for a part of the securitised exposures underlying                        a securitisation, the institution shall use the approach corresponding to the predominant share of securitised exposures underlying                        this securitisation.                   

#### Article 110U.K.Treatment of credit risk adjustment

1.Institutions applying the Standardised Approach shall treat general credit risk adjustments in accordance with Article 62(c).                  

2.Institutions applying the IRB Approach shall treat general credit risk adjustments in accordance with Article 159, Article                           62(d) and Article 36(1)(d).                  

For the purposes of this Article and Chapters 2 and 3, general and specific credit risk adjustments shall exclude funds for                        general banking risk.                   

3.Institutions using the IRB Approach that apply the Standardised Approach for a part of their exposures on consolidated or                           individual basis, in accordance with Articles 148 and 150 shall determine the part of general credit risk adjustment that                           shall be assigned to the treatment of general credit risk adjustment under the Standardised Approach and to the treatment                           of general credit risk adjustment under the IRB Approach as follows:                  

(a)where applicable, when an institution included in the consolidation exclusively applies the IRB Approach, general credit risk                           adjustments of this institution shall be assigned to the treatment set out in paragraph 2;                  

(b)where applicable, when an institution included in the consolidation exclusively applies the Standardised Approach, general                           credit risk adjustment of this institution shall be assigned to the treatment set out in paragraph 1;                  

(c)the remainder of credit risk adjustment shall be assigned on a pro rata basis according to the proportion of risk weighted                           exposure amounts subject to the Standardised Approach and subject to the IRB Approach.                  

4.EBA shall develop draft regulatory technical standards to specify the calculation of specific credit risk adjustments and                           general credit risk adjustments under the applicable accounting framework for the following:                  

(a)exposure value under the Standardised Approach referred to in Article 111;                  

(b)exposure value under the IRB Approach referred to in Articles 166 to 168;                  

(c)treatment of expected loss amounts referred to in Article 159;                  

(d)exposure value for the calculation of the risk-weighted exposure amounts for securitisation position referred to in Articles                           246 and 266;                  

(e)the determination of default under Article 178.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### CHAPTER 2U.K.Standardised approach

#### Section 1U.K.General principles

##### Article 111U.K.Exposure value

1.The exposure value of an asset item shall be its accounting value remaining after specific credit risk adjustments, additional                           value adjustments in accordance with Articles 34 and 110 and other own funds reductions related to the asset item have been                           applied. The exposure value of an off-balance sheet item listed in Annex I shall be the following percentage of its nominal                           value after reduction of specific credit risk adjustments:                  

(a)100 % if it is a full-risk item;                  

(b)50 % if it is a medium-risk item;                  

(c)20 % if it is a medium/low-risk item;                  

(d)0 % if it is a low-risk item.                  

The off-balance sheet items referred to in the second sentence of the first subparagraph shall be assigned to risk categories                        as indicated in Annex I.                   

When an institution is using the Financial Collateral Comprehensive Method under Article 223, the exposure value of securities                        or commodities sold, posted or lent under a repurchase transaction or under a securities or commodities lending or borrowing                        transaction, and margin lending transactions shall be increased by the volatility adjustment appropriate to such securities                        or commodities as prescribed in Articles 223 to 225.                   

2.The exposure value of a derivative instrument listed in Annex II shall be determined in accordance with Chapter 6 with the                           effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance                           with Chapter 6. The exposure value of repurchase transaction, securities or commodities lending or borrowing transactions,                           long settlement transactions and margin lending transactions may be determined either in accordance with Chapter 6 or Chapter                           4.                  

3.Where an exposure is subject to funded credit protection, the exposure value applicable to that item may be amended in accordance                           with Chapter 4.                  

##### Article 112U.K.Exposure classes

Each exposure shall be assigned to one of the following exposure classes:                   

exposures to central governments or central banks;                            

exposures to regional governments or local authorities;                            

exposures to public sector entities;                            

exposures to multilateral development banks;                            

exposures to international organisations;                            

exposures to institutions;                            

exposures to corporates;                            

retail exposures;                            

exposures secured by mortgages on immovable property;                            

exposures in default;                            

exposures associated with particularly high risk;                            

exposures in the form of covered bonds;                            

items representing securitisation positions;                            

exposures to institutions and corporates with a short-term credit assessment;                            

exposures in the form of units or shares in collective investment undertakings (‘CIUs’);                            

equity exposures;                            

other items.                            

##### Article 113U.K.Calculation of risk-weighted exposure amounts

1.To calculate risk-weighted exposure amounts, risk weights shall be applied to all exposures, unless deducted from own funds,                           in accordance with the provisions of Section 2. The application of risk weights shall be based on the exposure class to which                           the exposure is assigned and, to the extent specified in Section 2, its credit quality. Credit quality may be determined by                           reference to the credit assessments of ECAIs or the credit assessments of export credit agencies in accordance with Section                           3.                  

2.For the purposes of applying a risk weight, as referred to in paragraph 1, the exposure value shall be multiplied by the risk                           weight specified or determined in accordance with Section 2.                  

3.Where an exposure is subject to credit protection the risk weight applicable to that item may be amended in accordance with                           Chapter 4.                  

4.Risk-weighted exposure amounts for securitised exposures shall be calculated in accordance with Chapter 5.                  

5.Exposures for which no calculation is provided in Section 2 shall be assigned a risk-weight of 100 %.                  

6.With the exception of exposures giving rise to Common Equity Tier 1, Additional Tier 1 or Tier 2 items, an institution may,                           subject to the prior approval of the competent authorities, decide not to apply the requirements of paragraph 1 of this Article                           to the exposures of that institution to a counterparty which is its parent undertaking, its subsidiary, a subsidiary of its                           parent undertaking or an undertaking linked by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC.                           Competent authorities are empowered to grant approval if the following conditions are fulfilled:                  

(a)the counterparty is an institution, a financial institution or an ancillary services undertaking subject to appropriate prudential                           requirements;                  

(b)the counterparty is included in the same consolidation as the institution on a full basis;                  

(c)the counterparty is subject to the same risk evaluation, measurement and control procedures as the institution;                  

(d)the counterparty is established in the same Member State as the institution;                  

(e)there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of                           liabilities from the counterparty to the institution.                  

Where the institution, in accordance with this paragraph, is authorised not to apply the requirements of paragraph 1, it may                        assign a risk weight of 0 %.                   

7.With the exception of exposures giving rise to Common Equity Tier 1, Additional Tier 1 and Tier 2 items, institutions may,                           subject to the prior permission of the competent authorities, not apply the requirements of paragraph 1 of this Article to                           exposures to counterparties with which the institution has entered into an institutional protection scheme that is a contractual                           or statutory liability arrangement which protects those institutions and in particular ensures their liquidity and solvency                           to avoid bankruptcy where necessary. Competent authorities are empowered to grant permission if the following conditions are                           fulfilled:                  

(a)the requirements set out in points (a), (d) and (e) of paragraph 6 are met;                  

(b)the arrangements ensure that the institutional protection scheme is able to grant support necessary under its commitment from                           funds readily available to it;                  

(c)the institutional protection scheme disposes of suitable and uniformly stipulated systems for the monitoring and classification                           of risk, which gives a complete overview of the risk situations of all the individual members and the institutional protection                           scheme as a whole, with corresponding possibilities to take influence; those systems shall suitably monitor defaulted exposures                           in accordance with Article 178(1);                  

(d)the institutional protection scheme conducts its own risk review which is communicated to the individual members;                  

(e)the institutional protection scheme draws up and publishes on an annual basis, a consolidated report comprising the balance                           sheet, the profit-and-loss account, the situation report and the risk report, concerning the institutional protection scheme                           as a whole, or a report comprising the aggregated balance sheet, the aggregated profit-and-loss account, the situation report                           and the risk report, concerning the institutional protection scheme as a whole;                  

(f)members of the institutional protection scheme are obliged to give advance notice of at least 24 months if they wish to end                           the institutional protection scheme;                  

(g)the multiple use of elements eligible for the calculation of own funds (hereinafter referred to as ‘multiple gearing’) as well as any inappropriate creation of own funds between the members of the institutional protection scheme shall be eliminated;                  

(h)the institutional protection scheme shall be based on a broad membership of credit institutions of a predominantly homogeneous                           business profile;                  

(i)the adequacy of the systems referred to in points (c) and (d) is approved and monitored at regular intervals by the relevant                           competent authorities.                  

Where the institution, in accordance with this paragraph, decides not to apply the requirements of paragraph 1, it may assign                        a risk weight of 0 %.                   

#### Section 2U.K.Risk weights

##### Article 114U.K.Exposures to central governments or central banks

1.Exposures to central governments and central banks shall be assigned a 100 % risk weight, unless the treatments set out in                           paragraphs 2 to 7 apply.                  

2.Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available shall be                           assigned a risk weight in accordance with Table 1 which corresponds to the credit assessment of the ECAI in accordance with                           Article 136.                  

###### Table 1

3.Exposures to the ECB shall be assigned a 0 % risk weight.                  

4.Exposures to Member States' central governments, and central banks denominated and funded in the domestic currency of that                           central government and central bank shall be assigned a risk weight of 0 %.                  

6.For exposures indicated in Article 495(2):                  

(a)in 2018 the risk weight applied to the exposure values shall be 20 % of the risk weight assigned to these exposures in accordance                           with paragraph 2;                  

(b)in 2019 the risk weight applied to the exposure values shall be 50 % of the risk weight assigned to these exposures in accordance                           with paragraph 2;                  

(c)in 2020 and onwards the risk weight applied to the exposure values shall be 100 % of the risk weight assigned to these exposures                           in accordance with paragraph 2.                  

7.When the competent authorities of a third country which apply supervisory and regulatory arrangements at least equivalent                           to those applied in the Union assign a risk weight which is lower than that indicated in paragraphs 1 and 2 to exposures to                           their central government and central bank denominated and funded in the domestic currency, institutions may risk weight such                           exposures in the same manner.                  

For the purposes of this paragraph, the Commission may adopt, by way of implementing acts, and subject to the examination                        procedure referred to in Article 464(2), a decision as to whether a third country applies supervisory and regulatory arrangements                        at least equivalent to those applied in the Union. In the absence of such a decision, until 1 January 2015, institutions may continue to apply the treatment set out in this paragraph to the exposures to the central government or                        central bank of the third country where the relevant competent authorities had approved the third country as eligible for                        that treatment before 1 January 2014.                   

##### Article 115U.K.Exposures to regional governments or local authorities

1.Exposures to regional governments or local authorities shall be risk-weighted as exposures to institutions unless they are                           treated as exposures to central governments under paragraphs 2 or 4 or receive a risk weight as specified in paragraph 5.                           The preferential treatment for short-term exposures specified in Article 119(2) and Article 120(2) shall not be applied.                  

2.Exposures to regional governments or local authorities shall be treated as exposures to the central government in whose jurisdiction                           they are established where there is no difference in risk between such exposures because of the specific revenue-raising powers                           of the former, and the existence of specific institutional arrangements the effect of which is to reduce their risk of default.                  

EBA shall maintain a publicly available database of all regional governments and local authorities within the Union which                        relevant competent authorities treat as exposures to their central governments.                   

3.Exposures to churches or religious communities constituted in the form of a legal person under public law shall, in so far                           as they raise taxes in accordance with legislation conferring on them the right to do so, be treated as exposures to regional                           governments and local authorities. In this case, paragraph 2 shall not apply and, for the purposes of Article 150(1)(a), permission                           to apply the Standardised Approach shall not be excluded.                  

4.When competent authorities of a third country jurisdiction which applies supervisory and regulatory arrangements at least                           equivalent to those applied in the Union treat exposures to regional governments or local authorities as exposures to their                           central government and there is no difference in risk between such exposures because of the specific revenue-raising powers                           of regional government or local authorities and to specific institutional arrangements to reduce the risk of default, institutions                           may risk weight exposures to such regional governments and local authorities in the same manner.                  

For the purposes of this paragraph, the Commission may adopt, by way of implementing acts, and subject to the examination                        procedure referred to in Article 464(2), a decision as to whether a third country applies supervisory and regulatory arrangements                        at least equivalent to those applied in the Union. In the absence of such a decision, until 1 January 2015, institutions may continue to apply the treatment set out in this paragraph to the third country where the relevant competent                        authorities had approved the third country as eligible for that treatment before 1 January 2014.                   

5.Exposures to regional governments or local authorities of the Member States that are not referred to in paragraphs 2 to 4                           and are denominated and funded in the domestic currency of that regional government and local authority shall be assigned                           a risk weight of 20 %.                  

##### Article 116U.K.Exposures to public sector entities

1.Exposures to public sector entities for which a credit assessment by a nominated ECAI is not available shall be assigned a                           risk weight in accordance with the credit quality step to which exposures to the central government of the jurisdiction in                           which the public sector entity is incorporated are assigned in accordance with the following Table 2:                  

###### Table 2

For exposures to public sector entities incorporated in countries where the central government is unrated, the risk weight                        shall be 100 %.                   

2.Exposures to public sector entities for which a credit assessment by a nominated ECAI is available shall be treated in accordance                           with Article 120. The preferential treatment for short-term exposures specified in Articles 119(2) and 120(2), shall not be                           applied to those entities.                  

3.For exposures to public sector entities with an original maturity of three months or less, the risk weight shall be 20 %.                  

4.In exceptional circumstances, exposures to public-sector entities may be treated as exposures to the central government, regional                           government or local authority in whose jurisdiction they are established where in the opinion of the competent authorities                           of this jurisdiction there is no difference in risk between such exposures because of the existence of an appropriate guarantee                           by the central government, regional government or local authority.                  

5.When competent authorities of a third country jurisdiction, which apply supervisory and regulatory arrangements at least equivalent                           to those applied in the Union, treat exposures to public sector entities in accordance with paragraph 1 or 2, institutions                           may risk weight exposures to such public sector entities in the same manner. Otherwise the institutions shall apply a risk                           weight of 100 %.                  

For the purposes of this paragraph, the Commission may adopt, by way of implementing acts, and subject to the examination                        procedure referred to in Article 464(2), a decision as to whether a third country applies supervisory and regulatory arrangements                        at least equivalent to those applied in the Union. In the absence of such a decision, until 1 January 2015, institutions may continue to apply the treatment set out in this paragraph to the third country where the relevant competent                        authorities had approved the third country as eligible for that treatment before 1 January 2014.                   

##### Article 117U.K.Exposures to multilateral development banks

1.Exposures to multilateral development banks that are not referred to in paragraph 2 shall be treated in the same manner as                           exposures to institutions. The preferential treatment for short-term exposures as specified in Articles 119(2), 120(2) and                           121(3) shall not be applied.                  

The Inter-American Investment Corporation, the Black Sea Trade and Development Bank, the Central American Bank for Economic                        Integration and the CAF-Development Bank of Latin America shall be considered multilateral development banks.                   

2.Exposures to the following multilateral development banks shall be assigned a 0 % risk weight:                  

(a)the International Bank for Reconstruction and Development;                  

(b)the International Finance Corporation;                  

(c)the Inter-American Development Bank;                  

(d)the Asian Development Bank;                  

(e)the African Development Bank;                  

(f)the Council of Europe Development Bank;                  

(g)the Nordic Investment Bank;                  

(h)the Caribbean Development Bank;                  

(i)the European Bank for Reconstruction and Development;                  

(j)the European Investment Bank;                  

(k)the European Investment Fund;                  

(l)the Multilateral Investment Guarantee Agency;                  

(m)the International Finance Facility for Immunisation;                  

(n)the Islamic Development Bank.                  

3.A risk weight of 20 % shall be assigned to the portion of unpaid capital subscribed to the European Investment Fund.                  

##### Article 118U.K.Exposures to international organisations

Exposures to the following international organisations shall be assigned a 0 % risk weight:                   

the Union;                            

the International Monetary Fund;                            

the Bank for International Settlements;                            

the European Financial Stability Facility;                            

the European Stability Mechanism;                            

an international financial institution established by two or more Member States, which has the purpose to mobilise funding                                 and provide financial assistance to the benefit of its members that are experiencing or threatened by severe financing problems.                            

##### Article 119U.K.Exposures to institutions

1.Exposures to institutions for which a credit assessment by a nominated ECAI is available shall be risk-weighted in accordance                           with Article 120. Exposures to institutions for which a credit assessment by a nominated ECAI is not available shall be risk-weighted                           in accordance with Article 121.                  

2.Exposures to institutions of a residual maturity of three months or less denominated and funded in the national currency of                           the borrower shall be assigned a risk weight that is one category less favourable than the preferential risk weight, as described                           in Article 114(4) to (7), assigned to exposures to the central government in which the institution is incorporated.                  

3.No exposures with a residual maturity of three months or less denominated and funded in the national currency of the borrower                           shall be assigned a risk weight less than 20 %.                  

4.Exposure to an institution in the form of minimum reserves required by the ECB or by the central bank of a Member State to                           be held by an institution may be risk-weighted as exposures to the central bank of the Member State in question provided:                  

(a)the reserves are held in accordance with Regulation (EC) No 1745/2003 of the European Central Bank of 12 September 2003 on the application of minimum reserves (29)  or in accordance with national requirements in all material respects equivalent to that Regulation;                  

(b)in the event of the bankruptcy or insolvency of the institution where the reserves are held, the reserves are fully repaid                           to the institution in a timely manner and are not made available to meet other liabilities of the institution.                  

5.Exposures to financial institutions authorised and supervised by the competent authorities and subject to prudential requirements                           comparable to those applied to institutions in terms of robustness shall be treated as exposures to institutions.                  

##### Article 120U.K.Exposures to rated institutions

1.Exposures to institutions with a residual maturity of more than three months for which a credit assessment by a nominated                           ECAI is available shall be assigned a risk weight in accordance with Table 3 which corresponds to the credit assessment of                           the ECAI in accordance with Article 136.                  

###### Table 3

2.Exposures to an institution of up to three months residual maturity for which a credit assessment by a nominated ECAI is available                           shall be assigned a risk-weight in accordance with Table 4 which corresponds to the credit assessment of the ECAI in accordance                           with Article 136:                  

###### Table 4

3.The interaction between the treatment of short term credit assessment under Article 131 and the general preferential treatment                           for short term exposures set out in paragraph 2 shall be as follows:                  

(a)If there is no short-term exposure assessment, the general preferential treatment for short-term exposures as specified in                           paragraph 2 shall apply to all exposures to institutions of up to three months residual maturity;                  

(b)If there is a short-term assessment and such an assessment determines the application of a more favourable or identical risk                           weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph 2, then the                           short-term assessment shall be used for that specific exposure only. Other short-term exposures shall follow the general preferential                           treatment for short-term exposures, as specified in paragraph 2;                  

(c)If there is a short-term assessment and such an assessment determines a less favourable risk weight than the use of the general                           preferential treatment for short-term exposures, as specified in paragraph 2, then the general preferential treatment for                           short-term exposures shall not be used and all unrated short-term claims shall be assigned the same risk weight as that applied                           by the specific short-term assessment.                  

##### Article 121U.K.Exposures to unrated institutions

1.Exposures to institutions for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight                           in accordance with the credit quality step to which exposures to the central government of the jurisdiction in which the institution                           is incorporated are assigned in accordance with Table 5.                  

###### Table 5

2.For exposures to unrated institutions incorporated in countries where the central government is unrated, the risk weight shall                           be 100 %.                  

3.For exposures to unrated institutions with an original effective maturity of three months or less, the risk weight shall be                           20 %.                  

4.Notwithstanding paragraphs 2 and 3, for trade finance exposures referred to in point (b) of the second subparagraph of Article                           162(3) to unrated institutions, the risk weight shall be 50 % and where the residual maturity of these trade finance exposures                           to unrated institutions is three months or less, the risk weight shall be 20 %.                  

##### Article 122U.K.Exposures to corporates

1.Exposures for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with                           Table 6 which corresponds to the credit assessment of the ECAI in accordance with Article 136.                  

###### Table 6

2.Exposures for which such a credit assessment is not available shall be assigned a 100 % risk weight or the risk weight of                           exposures to the central government of the jurisdiction in which the corporate is incorporated, whichever is the higher.                  

##### Article 123U.K.Retail exposures

Exposures that comply with the following criteria shall be assigned a risk weight of 75 %:                   

the exposure shall be either to a natural person or persons, or to a small or medium-sized enterprise (SME);                            

the exposure shall be one of a significant number of exposures with similar characteristics such that the risks associated                                 with such lending are substantially reduced;                            

the total amount owed to the institution and parent undertakings and its subsidiaries, including any exposure in default,                                 by the obligor client or group of connected clients, but excluding exposures fully and completely secured on residential property                                 collateral that have been assigned to the exposure class laid down in point (i) of Article 112, shall not, to the knowledge                                 of the institution, exceed EUR 1 million. The institution shall take reasonable steps to acquire this knowledge.                            

Securities shall not be eligible for the retail exposure class.                   

Exposures that do not comply with the criteria referred to in points (a) to (c) of the first subparagraph shall not be eligible                        for the retail exposures class.                   

The present value of retail minimum lease payments is eligible for the retail exposure class.                   

##### Article 124U.K.Exposures secured by mortgages on immovable property

1.An exposure or any part of an exposure fully secured by mortgage on immovable property shall be assigned a risk weight of                           100 %, where the conditions under Article 125 or 126 are not met, except for any part of the exposure which is assigned to                           another exposure class. The part of the exposure that exceeds the mortgage value of the immovable property shall be assigned                           the risk weight applicable to the unsecured exposures of the counterparty involved.                  

The part of an exposure treated as fully secured by immovable property shall not be higher than the pledged amount of the                        market value or in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value                        in statutory or regulatory provisions, the mortgage lending value of the property in question.                   

2.Based on the data collected under Article 101, and any other relevant indicators, the competent authorities shall periodically,                           and at least annually, assess whether the risk-weight of 35 % for exposures secured by mortgages on residential property referred                           to in Article 125 and the risk weight of 50 % for exposures secured on commercial immovable property referred to in Article                           126 located in their territory are appropriately based on:                  

(a)the loss experience of exposures secured by immovable property;                  

(b)forward-looking immovable property markets developments;                  

Competent authorities may set a higher risk weight or stricter criteria than those set out in Article 125(2) and Article 126(2),                        where appropriate, on the basis of financial stability considerations.                   

For exposures secured by mortgages on residential property, the competent authority shall set the risk weight at a percentage                        from 35 % through 150 %,                   

For exposures secured on commercial immovable property, the competent authority shall set the risk weight at a percentage                        from 50 % through 150 %,                   

Within these ranges, the higher risk weight shall be set based on loss experience and taking into account forward-looking                        markets developments and financial stability considerations. Where the assessment demonstrates that the risk weights set out                        in Article 125(2) and Article 126(2) do not reflect the actual risks related to one or more property segments of such exposures,                        fully secured by mortgages on residential property or on commercial immovable property located in one or more parts of its                        territory, the competent authorities shall set, for those property segments of exposures, a higher risk weight corresponding                        to the actual risks.                   

The competent authorities shall consult EBA on the adjustments to the risk weights and criteria applied, which will be calculated                        in accordance with the criteria set out in this paragraph as specified by the regulatory technical standards referred to in                        paragraph 4 of this Article. EBA shall publish the risk weights and criteria that the competent authorities set for exposures                        referred to in Articles 125, 126 and 199(1)(a).                   

3.When competent authorities set a higher risk weight or stricter criteria, institutions shall have a 6-month transitional period                           to apply the new risk weight.                  

4.EBA shall develop draft regulatory technical standards to specify:                  

(a)the rigorous criteria for the assessment of the mortgage lending value referred to in paragraph 1;                  

(b)the conditions referred to in paragraph 2 that competent authorities shall take into account when determining higher risk-weights,                           in particular the term of ‘financial stability considerations’.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

5.The institutions of one Member State shall apply the risk-weights and criteria that have been determined by the competent                           authorities of another Member State to exposures secured by mortgages on commercial and residential property located in that                           Member State.                  

##### Article 125U.K.Exposures fully and completely secured by mortgages on residential property

1.Unless otherwise decided by the competent authorities in accordance with Article 124(2), exposures fully and completely secured                           by mortgages on residential property shall be treated as follows:                  

(a)exposures or any part of an exposure fully and completely secured by mortgages on residential property which is or shall be                           occupied or let by the owner, or the beneficial owner in the case of personal investment companies, shall be assigned a risk                           weight of 35 %;                  

(b)exposures to a tenant under a property leasing transaction concerning residential property under which the institution is                           the lessor and the tenant has an option to purchase, shall be assigned a risk weight of 35 % provided that the exposure of                           the institution is fully and completely secured by its ownership of the property.                  

2.Institutions shall consider an exposure or any part of an exposure as fully and completely secured for the purposes of paragraph                           1 only if the following conditions are met:                  

(a)the value of the property shall not materially depend upon the credit quality of the borrower. Institutions may exclude situations                           where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination                           of the materiality of such dependence;                  

(b)the risk of the borrower shall not materially depend upon the performance of the underlying property or project, but on the                           underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility                           shall not materially depend on any cash flow generated by the underlying property serving as collateral. For those other sources,                           institutions shall determine maximum loan-to-income ratios as part of their lending policy and obtain suitable evidence of                           the relevant income when granting the loan;                  

(c)the requirements set out in Article 208 and the valuation rules set out in Article 229(1) are met;                  

(d)unless otherwise determined under Article 124(2), the part of the loan to which the 35 % risk weight is assigned does not                           exceed 80 % of the market value of the property in question or 80 % of the mortgage lending value of the property in question                           in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory                           or regulatory provisions.                  

3.Institutions may derogate from point (b) of paragraph 2 for exposures fully and completely secured by mortgages on residential                           property which is situated within the territory of a Member State, where the competent authority of that Member State has                           published evidence showing that a well-developed and long-established residential property market is present in that territory                           with loss rates which do not exceed the following limits:                  

(a)losses stemming from lending collateralised by residential property up to 80 % of the market value or 80 % of the mortgage                           lending value, unless otherwise decided under Article 124(2), do not exceed 0,3 % of the outstanding loans collateralised                           by residential property in any given year;                  

(b)overall losses stemming from lending collateralised by residential property do not exceed 0,5 % of the outstanding loans collateralised                           by residential property in any given year.                  

4.Where either of the limits referred to in paragraph 3 is not satisfied in a given year, the eligibility to use paragraph 3                           shall cease and the condition contained in point (b) of paragraph 2 shall apply until the conditions in paragraph 3 are satisfied                           in a subsequent year.                  

##### Article 126U.K.Exposures fully and completely secured by mortgages on commercial immovable property

1.Unless otherwise decided by the competent authorities in accordance with Article 124(2), exposures fully and completely secured                           by mortgages on commercial immovable property shall be treated as follows:                  

(a)exposures or any part of an exposure fully and completely secured by mortgages on offices or other commercial premises may                           be assigned a risk weight of 50 %;                  

(b)exposures related to property leasing transactions concerning offices or other commercial premises under which the institution                           is the lessor and the tenant has an option to purchase may be assigned a risk weight of 50 % provided that the exposure of                           the institution is fully and completely secured by its ownership of the property.                  

2.Institutions shall consider an exposure or any part of an exposure as fully and completely secured for the purposes of paragraph                           1 only if the following conditions are met:                  

(a)the value of the property shall not materially depend upon the credit quality of the borrower. Institutions may exclude situations                           where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination                           of the materiality of such dependence;                  

(b)the risk of the borrower shall not materially depend upon the performance of the underlying property or project, but on the                           underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility                           shall not materially depend on any cash flow generated by the underlying property serving as collateral;                  

(c)the requirements set out in Article 208 and the valuation rules set out in Article 229(1) are met;                  

(d)the 50 % risk weight unless otherwise provided under Article 124(2) shall be assigned to the part of the loan that does not                           exceed 50 % of the market value of the property or 60 % of the mortgage lending value unless otherwise provided under Article                           124(2) of the property in question in those Member States that have laid down rigorous criteria for the assessment of the                           mortgage lending value in statutory or regulatory provisions.                  

3.Institutions may derogate from point (b) of paragraph 2 for exposures fully and completely secured by mortgages on commercial                           immovable property which is situated within the territory of a Member State, where the competent authority of that Member                           State has published evidence showing that a well-developed and long-established commercial immovable property market is present                           in that territory with loss rates which do not exceed the following limits:                  

(a)losses stemming from lending collateralised by commercial immovable property up to 50 % of the market value or 60 % of the                           mortgage lending value, unless otherwise determined under Article 124(2), do not exceed 0,3 % of the outstanding loans collateralised                           by commercial immovable property;                  

(b)overall losses stemming from lending collateralised by commercial immovable property do not exceed 0,5 % of the outstanding                           loans collateralised by commercial immovable property.                  

4.Where either of the limits referred to in paragraph 3 is not satisfied in a given year, the eligibility to use paragraph 3                           shall cease and the condition contained in point (b) of paragraph 2 shall apply until the conditions in paragraph 3 are satisfied                           in a subsequent year.                  

##### Article 127U.K.Exposures in default

1.The unsecured part of any item where the obligor has defaulted in accordance with Article 178, or in the case of retail exposures,                           the unsecured part of any credit facility which has defaulted in accordance with Article 178 shall be assigned a risk weight                           of:                  

(a)150 %, where specific credit risk adjustments are less than 20 % of the unsecured part of the exposure value if these specific                           credit risk adjustments were not applied;                  

(b)100 %, where specific credit risk adjustments are no less than 20 % of the unsecured part of the exposure value if these specific                           credit risk adjustments were not applied.                  

2.For the purpose of determining the secured part of the past due item, eligible collateral and guarantees shall be those eligible                           for credit risk mitigation purposes under Chapter 4.                  

3.The exposure value remaining after specific credit risk adjustments of exposures fully and completely secured by mortgages                           on residential property in accordance with Article 125 shall be assigned a risk weight of 100 % if a default has occurred                           in accordance with Article 178.                  

4.The exposure value remaining after specific credit risk adjustments of exposures fully and completely secured by mortgages                           on commercial immovable property in accordance with Article 126 shall be assigned a risk weight of 100 % if a default has                           occurred in accordance with Article 178.                  

##### Article 128U.K.Items associated with particular high risk

1.Institutions shall assign a 150 % risk weight to exposures, including exposures in the form of shares or units in a CIU that                           are associated with particularly high risks, where appropriate.                  

2.Exposures with particularly high risks shall include any of the following exposures:                  

(a)investments in venture capital firms;                  

(b)investments in AIFs as defined in Article 4(1)(a) of Directive 2011/61/EU except where the mandate of the fund does not allow                           a leverage higher than that required under Article 51(3) of Directive 2009/65/EC;                  

(c)investments in private equity;                  

(d)speculative immovable property financing.                  

3.When assessing whether an exposure other than exposures referred to in paragraph 2 is associated with particularly high risks,                           institutions shall take into account the following risk characteristics:                  

(a)there is a high risk of loss as a result of a default of the obligor;                  

(b)it is impossible to assess adequately whether the exposure falls under point (a).                  

EBA shall issue guidelines specifying which types of exposures are associated with particularly high risk and under which                        circumstances.                   

Those guidelines shall be adopted in accordance with Article 16 of Regulation (EU) No 1093/2010.                   

##### Article 129U.K.Exposures in the form of covered bonds

1.To be eligible for the preferential treatment set out in paragraphs 4 and 5, bonds as referred to in Article 52(4) of Directive                           2009/65/EC (covered bonds) shall meet the requirements set out in paragraph 7 and shall be collateralised by any of the following                           eligible assets:                  

(a)exposures to or guaranteed by central governments, the ESCB central banks, public sector entities, regional governments or                           local authorities in the Union;                  

(b)exposures to or guaranteed by third country central governments, third-country central banks, multilateral development banks,                           international organisations that qualify for the credit quality step 1 as set out in this Chapter, and exposures to or guaranteed                           by third-country public sector entities, third-country regional governments or third-country local authorities that are risk                           weighted as exposures to institutions or central governments and central banks in accordance with Article 115(1) or (2), or                           Article 116(1), (2) or (4) respectively and that qualify for the credit quality step 1 as set out in this Chapter, and exposures                           within the meaning of this point that qualify as a minimum for the credit quality step 2 as set out in this Chapter, provided                           that they do not exceed 20 % of the nominal amount of outstanding covered bonds of the issuing institutions;                  

(c)exposures to institutions that qualify for the credit quality step 1 as set out in this Chapter. The total exposure of this                           kind shall not exceed 15 % of the nominal amount of outstanding covered bonds of the issuing institution. Exposures to institutions                           in the Union with a maturity not exceeding 100 days shall not be comprised by the step 1 requirement but those institutions                           shall as a minimum qualify for credit quality step 2 as set out in this Chapter;                  

(d)loans secured by:                  

residential property up to the lesser of the principal amount of the liens that are combined with any prior liens and 80 %                                 of the value of the pledged properties; or                            

senior units issued by French Fonds Communs de Titrisation or equivalent securitisation entities governed by the laws of a                                 Member State securitising residential property exposures. In the event of such senior units being used as collateral, the                                 special public supervision to protect bond holders as provided for in Article 52(4) of Directive 2009/65/EC shall ensure that                                 the assets underlying such units shall, at any time while they are included in the cover pool be at least 90 % composed of                                 residential mortgages that are combined with any prior liens up to the lesser of the principal amounts due under the units,                                 the principal amounts of the liens, and 80 % of the value of the pledged properties, that the units qualify for the credit                                 quality step 1 as set out in this Chapter and that such units do not exceed 10 % of the nominal amount of the outstanding                                 issue.                            

(e)residential loans fully guaranteed by an eligible protection provider referred to in Article 201 qualifying for the credit                           quality step 2 or above as set out in this Chapter, where the portion of each of the loans that is used to meet the requirement                           set out in this paragraph for collateralisation of the covered bond does not represent more than 80 % of the value of the                           corresponding residential property located in France, and where a loan-to-income ratio respects at most 33 % when the loan                           has been granted. There shall be no mortgage liens on the residential property when the loan is granted, and for the loans                           granted from 1 January 2014 the borrower shall be contractually committed not to grant such liens without the consent of the credit institution that                           granted the loan. The loan-to-income ratio represents the share of the gross income of the borrower that covers the reimbursement                           of the loan, including the interests. The protection provider shall be either a financial institution authorised and supervised                           by the competent authorities and subject to prudential requirements comparable to those applied to institutions in terms of                           robustness or an institution or an insurance undertaking. It shall establish a mutual guarantee fund or equivalent protection                           for insurance undertakings to absorb credit risk losses, whose calibration shall be periodically reviewed by the competent                           authorities. Both the credit institution and the protection provider shall carry out a creditworthiness assessment of the                           borrower;                  

(f)loans secured by:                  

commercial immovable property up to the lesser of the principal amount of the liens that are combined with any prior liens                                 and 60 % of the value of the pledged properties; or                            

senior units issued by French Fonds Communs de Titrisation or equivalent securitisation entities governed by the laws of a                                 Member State securitising commercial immovable property exposures. In the event of such senior units being used as collateral,                                 the special public supervision to protect bond holders as provided for in Article 52(4) of Directive 2009/65/EC shall ensure                                 that the assets underlying such units shall, at any time while they are included in the cover pool be at least 90 % composed                                 of commercial mortgages that are combined with any prior liens up to the lesser of the principal amounts due under the units,                                 the principal amounts of the liens, and 60 % of the value of the pledged properties, that the units qualify for the credit                                 quality step 1 as set out in this Chapter and that such units do not exceed 10 % of the nominal amount of the outstanding                                 issue.                            

Loans secured by commercial immovable property are eligible where the loan to value ratio of 60 % is exceeded up to a maximum                        level of 70 % if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding                        on the covered bond by at least 10 %, and the bondholders' claim meets the legal certainty requirements set out in Chapter                        4. The bondholders' claim shall take priority over all other claims on the collateral;                   

(g)loans secured by maritime liens on ships up to the difference between 60 % of the value of the pledged ship and the value                           of any prior maritime liens.                  

For the purposes of points (c), (d)(ii) and (f)(ii) of the first subparagraph, exposures caused by transmission and management                        of payments of the obligors of, or liquidation proceeds in respect of, loans secured by pledged properties of the senior units                        or debt securities shall not be comprised in calculating the limits referred to in those points.                   

The competent authorities may, after consulting EBA, partly waive the application of point (c) of the first subparagraph and                        allow credit quality step 2 for up to 10 % of the total exposure of the nominal amount of outstanding covered bonds of the                        issuing institution, provided that significant potential concentration problems in the Member States concerned can be documented                        due to the application of the credit quality step 1 requirement referred to in that point.                   

2.The situations referred to in points (a) to (f) of paragraph 1 shall also include collateral that is exclusively restricted                           by legislation to the protection of the bond-holders against losses.                  

3.Institutions shall for immovable property collateralising covered bonds meet the requirements set out in Article 208 and the                           valuation rules set out in Article 229(1).                  

4.Covered bonds for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance                           with Table 6a which corresponds to the credit assessment of the ECAI in accordance with Article 136.                  

###### Table 6a

5.Covered bonds for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight on the basis                           of the risk weight assigned to senior unsecured exposures to the institution which issues them. The following correspondence                           between risk weights shall apply:                  

(a)if the exposures to the institution are assigned a risk weight of 20 %, the covered bond shall be assigned a risk weight of                           10 %;                  

(b)if the exposures to the institution are assigned a risk weight of 50 %, the covered bond shall be assigned a risk weight of                           20 %;                  

(c)if the exposures to the institution are assigned a risk weight of 100 %, the covered bond shall be assigned a risk weight                           of 50 %;                  

(d)if the exposures to the institution are assigned a risk weight of 150 %, the covered bond shall be assigned a risk weight                           of 100 %.                  

6.Covered bonds issued before 31 December 2007 are not subject to the requirements of paragraphs 1 and 3. They are eligible for the preferential treatment under paragraphs                           4 and 5 until their maturity.                  

7.Exposures in the form of covered bonds are eligible for preferential treatment, provided that the institution investing in                           the covered bonds can demonstrate to the competent authorities that:                  

(a)it receives portfolio information at least on:                  

the value of the cover pool and outstanding covered bonds;                            

the geographical distribution and type of cover assets, loan size, interest rate and currency risks;                            

the maturity structure of cover assets and covered bonds; and                            

the percentage of loans more than 90 days past due;                            

(b)the issuer makes the information referred to in point (a) available to the institution at least semi-annually.                  

##### Article 130U.K.Items representing securitisation positions

Risk-weighted exposure amounts for securitisation positions shall be determined in accordance with Chapter 5.                   

##### Article 131U.K.Exposures to institutions and corporates with a short-term credit assessment

Exposures to institutions and exposures to corporates for which a short-term credit assessment by a nominated ECAI is available                        shall be assigned a risk weight in accordance with Table 7 which corresponds to the credit assessment of the ECAI in accordance                        with Article 136.                   

###### Table 7

##### Article 132U.K.Exposures in the form of units or shares in CIUs

1.Exposures in the form of units or shares in CIUs shall be assigned a risk weight of 100 %, unless the institution applies                           the credit risk assessment method under paragraph 2, or the look-through approach in paragraph 4 or the average risk weight                           approach under paragraph 5 when the conditions in paragraph 3 are met.                  

2.Exposures in the form of units or shares in CIUs for which a credit assessment by a nominated ECAI is available shall be assigned                           a risk weight in accordance with Table 8 which corresponds to the credit assessment of the ECAI in accordance with Article                           136.                  

###### Table 8

3.Institutions may determine the risk weight for a CIU in accordance with paragraphs 4 and 5, if the following eligibility criteria                           are met:                  

(a)the CIU is managed by a company that is subject to supervision in a Member State or, in the case of third country CIU, where                           the following conditions are met:                  

the CIU is managed by a company which is subject to supervision that is considered equivalent to that laid down in Union law;                            

cooperation between competent authorities is sufficiently ensured;                            

(b)the CIU's prospectus or equivalent document includes the following:                  

the categories of assets in which the CIU is authorised to invest;                            

if investment limits apply, the relative limits and the methodologies to calculate them;                            

(c)the business of the CIU is reported on at least an annual basis to enable an assessment to be made of the assets and liabilities,                           income and operations over the reporting period.                  

For the purposes of point (a), the Commission may adopt, by way of implementing acts, and subject to the examination procedure                        referred to in Article 464(2), a decision as to whether a third country applies supervisory and regulatory arrangements at                        least equivalent to those applied in the Union. In the absence of such a decision, until 1 January 2015, institutions may continue to apply the treatment set out in this paragraph to exposures in the form of units or shares of                        CIUs from third countries where the relevant competent authorities had approved the third country as eligible for that treatment                        before 1 January 2014.                   

4.Where the institution is aware of the underlying exposures of a CIU, it may look through to those underlying exposures in                           order to calculate an average risk weight for its exposures in the form of units or shares in the CIUs in accordance with                           the methods set out in this Chapter. Where an underlying exposure of the CIU is itself an exposure in the form of shares in                           another CIU which fulfils the criteria of paragraph 3, the institution may look through to the underlying exposures of that                           other CIU.                  

5.Where the institution is not aware of the underlying exposures of a CIU, it may calculate an average risk weight for its exposures                           in the form of a unit or share in the CIU in accordance with the methods set out in this Chapter subject to the assumption                           that the CIU first invests, to the maximum extent allowed under its mandate, in the exposure classes attracting the highest                           capital requirement, and then continues making investments in descending order until the maximum total investment limit is                           reached.                  

Institutions may rely on the following third parties to calculate and report, in accordance with the methods set out in paragraphs                        4 and 5, a risk weight for the CIU:                   

(a)the depository institution or the depository financial institution of the CIU provided that the CIU exclusively invests in                           securities and deposits all securities at that depository institution or the financial institution;                  

(b)for CIUs not covered by point (a), the CIU management company, provided that the CIU management company meets the criteria                           set out in paragraph 3(a).                  

The correctness of the calculation referred to in the first subparagraph shall be confirmed by an external auditor.                   

##### Article 133U.K.Equity exposures

1.The following exposures shall be considered equity exposures:                  

(a)non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuer;                  

(b)debt exposures and other securities, partnerships, derivatives, or other vehicles, the economic substance of which is similar                           to the exposures specified in point (a).                  

2.Equity exposures shall be assigned a risk weight of 100 %, unless they are required to be deducted in accordance with Part                           Two, assigned a 250 % risk weight in accordance with Article 48(4), assigned a 1 250 % risk weight in accordance with Article 89(3) or treated as high risk items in accordance with Article 128.                  

3.Investments in equity or regulatory capital instruments issued by institutions shall be classified as equity claims, unless                           deducted from own funds or attracting a 250 % risk weight under Article 48(4) or treated as high risk items in accordance                           with Article 128.                  

##### Article 134U.K.Other items

1.Tangible assets within the meaning of item 10 under the heading 'Assets' in Article 4 of Directive 86/635/EEC shall be assigned                           a risk weight of 100 %.                  

2.Prepayments and accrued income for which an institution is unable to determine the counterparty in accordance with Directive                           86/635/EEC, shall be assigned a risk weight of 100 %.                  

3.Cash items in the process of collection shall be assigned a 20 % risk weight. Cash in hand and equivalent cash items shall                           be assigned a 0 % risk weight.                  

4.Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities shall be assigned a 0                           % risk weight.                  

5.In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight shall be that assigned                           to the assets in question and not to the counterparties to the transactions.                  

6.Where an institution provides credit protection for a number of exposures under terms that the nth default among the exposures                           shall trigger payment and that this credit event shall terminate the contract, and where the product has an external credit                           assessment from an ECAI, the risk weights prescribed in Chapter 5 shall be assigned. If the product is not rated by an ECAI,                           the risk weights of the exposures included in the basket will be aggregated, excluding n-1 exposures, up to a maximum of 1 250 % and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk weighted asset                           amount. The n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those                           exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the                           exposures included in the aggregation.                  

7.The exposure value for leases shall be the discounted minimum lease payments. Minimum lease payments are the payments over                           the lease term that the lessee is or can be required to make and any bargain option the exercise of which is reasonably certain.                           A party other than the lessee may be required to make a payment related to the residual value of a leased property and that                           payment obligation fulfils the set of conditions in Article 201 regarding the eligibility of protection providers as well                           as the requirements for recognising other types of guarantees provided in Articles 213 to 215, that payment obligation may                           be taken into account as unfunded credit protection under Chapter 4. These exposures shall be assigned to the relevant exposure                           class in accordance with Article 112. When the exposure is a residual value of leased assets, the risk-weighted exposure amounts                           shall be calculated as follows: 1/t * 100 % * residual value, where t is the greater of 1 and the nearest number of whole                           years of the lease remaining.                  

#### Section 3U.K.Recognition and mapping of credit risk assessment

##### Sub-Section 1U.K.Recognition of ECAIs

###### Article 135U.K.Use of credit assessments by ECAIs

1.An external credit assessment may be used to determine the risk weight of an exposure under this Chapter only if it has been                           issued by an ECAI or has been endorsed by an ECAI in accordance with Regulation (EC) No 1060/2009.                  

2.EBA shall publish the list of ECAIs in accordance with Article 2(4) and Article 18(3) of Regulation (EC) No 1060/2009 on its                           website.                  

##### Sub-Section 2U.K.Mapping of ECAI's credit assessments

###### Article 136U.K.Mapping of ECAI's credit assessments

1.EBA, EIOPA and ESMA shall, through the Joint Committee, develop draft implementing technical standards to specify for all                           ECAIs, with which of the credit quality steps set out in Section 2 the relevant credit assessments of the ECAI correspond                           (‘mapping’). Those determinations shall be objective and consistent.                  

EBA, EIOPA and ESMA shall submit those draft implementing technical standards to the Commission by 1 July 2014 and shall submit revised draft implementing technical standards where necessary.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010, of Regulation (EU) No 1094/2010 and of Regulation (EU) No 1095/2010                        respectively.                   

2.When determining the mapping of credit assessments, EBA, EIOPA and ESMA shall comply with the following requirements:                  

(a)in order to differentiate between the relative degrees of risk expressed by each credit assessment, EBA, EIOPA and ESMA shall                           consider quantitative factors such as the long-term default rate associated with all items assigned the same credit assessment.                           For recently established ECAIs and for those that have compiled only a short record of default data, EBA, EIOPA and ESMA shall                           ask the ECAI what it believes to be the long-term default rate associated with all items assigned the same credit assessment;                  

(b)in order to differentiate between the relative degrees of risk expressed by each credit assessment, EBA, EIOPA and ESMA shall                           consider qualitative factors such as the pool of issuers that the ECAI covers, the range of credit assessments that the ECAI                           assigns, each credit assessment meaning and the ECAI's definition of default;                  

(c)EBA, EIOPA and ESMA shall compare default rates experienced for each credit assessment of a particular ECAI and compare them                           with a benchmark built on the basis of default rates experienced by other ECAIs on a population of issuers that present an                           equivalent level of credit risk;                  

(d)where the default rates experienced for the credit assessment of a particular ECAI are materially and systematically higher                           then the benchmark, EBA, EIOPA and ESMA shall assign a higher credit quality step in the credit quality assessment scale to                           the ECAI credit assessment;                  

(e)where EBA, EIOPA and ESMA have increased the associated risk weight for a specific credit assessment of a particular ECAI,                           and where default rates experienced for that ECAI's credit assessment are no longer materially and systematically higher than                           the benchmark, EBA, EIOPA and ESMA may restore the original credit quality step in the credit quality assessment scale for                           the ECAI credit assessment.                  

3.EBA, EIOPA and ESMA shall develop draft implementing technical standards to specify the quantitative factors referred to in                           point (a), the qualitative factors referred to in point (b) and the benchmark referred to in point (c) of paragraph 2.                  

EBA, EIOPA and ESMA shall submit those draft implementing technical standards to the Commission by 1 July 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010, of Regulation (EU) No 1094/2010 and of Regulation (EU) No 1095/2010                        respectively.                   

##### Sub-Section 3U.K.Use of credit assessments by Export Credit Agencies

###### Article 137U.K.Use of credit assessments by export credit agencies

1.For the purpose of Article 114, institutions may use credit assessments of an Export Credit Agency that the institution has                           nominated, if either of the following conditions is met:                  

(a)it is a consensus risk score from export credit agencies participating in the OECD ‘Arrangement on Guidelines for Officially Supported Export Credits’;                  

(b)the Export Credit Agency publishes its credit assessments, and the Export Credit Agency subscribes to the OECD agreed methodology,                           and the credit assessment is associated with one of the eight minimum export insurance premiums that the OECD agreed methodology                           establishes. An institution may revoke its nomination of an Export Credit Agency. An institution shall substantiate the revocation                           if there are concrete indications that the intention underlying the revocation is to reduce the capital adequacy requirements.                  

2.Exposures for which a credit assessment by an Export Credit Agency is recognised for risk weighting purposes shall be assigned                           a risk weight in accordance with Table 9.                  

###### Table 9

#### Section 4U.K.Use of the ECAI credit assessments for the determination of risk weights

##### Article 138U.K.General requirements

An institution may nominate one or more ECAIs to be used for the determination of risk weights to be assigned to assets and                        off-balance sheet items. An institution may revoke its nomination of an ECAI. An institution shall substantiate the revocation                        if there are concrete indications that the intention underlying the revocation is to reduce the capital adequacy requirements.                        Credit assessments shall not be used selectively. An institution shall use solicited credit assessments. However it may use                        unsolicited credit assessments if EBA has confirmed that unsolicited credit assessments of an ECAI do not differ in quality                        from solicited credit assessments of this ECAI. EBA shall refuse or revoke this confirmation in particular if the ECAI has                        used an unsolicited credit assessment to put pressure on the rated entity to place an order for a credit assessment or other                        services. In using credit assessment, institutions shall comply with the following requirements:                   

an institution which decides to use the credit assessments produced by an ECAI for a certain class of items shall use those                                 credit assessments consistently for all exposures belonging to that class;                            

an institution which decides to use the credit assessments produced by an ECAI shall use them in a continuous and consistent                                 way over time;                            

an institution shall only use ECAIs credit assessments that take into account all amounts both in principal and in interest                                 owed to it;                            

where only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment shall be used                                 to determine the risk weight for that item;                            

where two credit assessments are available from nominated ECAIs and the two correspond to different risk weights for a rated                                 item, the higher risk weight shall be assigned;                            

where more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating                                 the two lowest risk weights shall be referred to. If the two lowest risk weights are different, the higher risk weight shall                                 be assigned. If the two lowest risk weights are the same, that risk weight shall be assigned.                            

##### Article 139U.K.Issuer and issue credit assessment

1.Where a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure                           belongs, this credit assessment shall be used to determine the risk weight to be assigned to that item.                  

2.Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing                           programme or facility to which the item constituting the exposure does not belong or a general credit assessment exists for                           the issuer, then that credit assessment shall be used in either of the following cases:                  

(a)it produces a higher risk weight than would otherwise be the case and the exposure in question ranks pari passu or junior                           in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer, as relevant;                  

(b)it produces a lower risk weight and the exposure in question ranks pari passu or senior in all respects to the specific issuing                           programme or facility or to senior unsecured exposures of that issuer, as relevant.                  

In all other cases, the exposure shall be treated as unrated.                   

3.Paragraphs 1 and 2 are not to prevent the application of Article 129.                  

4.Credit assessments for issuers within a corporate group cannot be used as credit assessment of another issuer within the same                           corporate group.                  

##### Article 140U.K.Long-term and short-term credit assessments

1.Short-term credit assessments may only be used for short-term asset and off-balance sheet items constituting exposures to                           institutions and corporates.                  

2.Any short-term credit assessment shall only apply to the item the short-term credit assessment refers to, and it shall not                           be used to derive risk weights for any other item, except in the following cases:                  

(a)if a short-term rated facility is assigned a 150 % risk weight, then all unrated unsecured exposures on that obligor whether                           short-term or long-term shall also be assigned a 150 % risk weight;                  

(b)if a short-term rated facility is assigned a 50 % risk-weight, no unrated short-term exposure shall be assigned a risk weight                           lower than 100 %.                  

##### Article 141U.K.Domestic and foreign currency items

A credit assessment that refers to an item denominated in the obligor's domestic currency cannot be used to derive a risk                        weight for another exposure on that same obligor that is denominated in a foreign currency.                   

When an exposure arises through an institution's participation in a loan that has been extended by a multilateral development                        bank whose preferred creditor status is recognised in the market, the credit assessment on the obligors' domestic currency                        item may be used for risk weighting purposes.                   

### CHAPTER 3U.K.Internal Ratings Based Approach

#### Section 1U.K.Permission by competent authorities to use the IRB approach

##### Article 142U.K.Definitions

1.For the purposes of this Chapter, the following definitions shall apply:                  

‘rating system’ means all of the methods, processes, controls, data collection and IT systems that support the assessment of credit risk,                                 the assignment of exposures to rating grades or pools, and the quantification of default and loss estimates that have been                                 developed for a certain type of exposures;                            

‘type of exposures’ means a group of homogeneously managed exposures which are formed by a certain type of facilities and which may be limited                                 to a single entity or a single sub-set of entities within a group provided that the same type of exposures is managed differently                                 in other entities of the group;                            

‘business unit’ means any separate organisational or legal entities, business lines, geographical locations;                            

‘large financial sector entity’ means any financial sector entity which meets the following conditions:                            

its total assets, calculated on an individual or consolidated basis, are greater than or equal to a EUR 70 billion threshold,                                          using the most recent audited financial statement or consolidated financial statement in order to determine asset size; and                                     

it is, or one of its subsidiaries is, subject to prudential regulation in the Union or to the laws of a third country which                                          applies prudential supervisory and regulatory requirements at least equivalent to those applied in the Union;                                     

‘unregulated financial sector entity’ means an entity that is not a regulated financial sector entity but that performs, as its main business, one or more of the                                 activities listed in Annex I to Directive 2013/36/EU or in Annex I to Directive 2004/39/EC;                            

‘obligor grade’ means a risk category within the obligor rating scale of a rating system, to which obligors are assigned on the basis of                                 a specified and distinct set of rating criteria, from which estimates of probability of default (PD) are derived;                            

‘facility grade’ means a risk category within a rating system's facility scale, to which exposures are assigned on the basis of a specified                                 and distinct set of rating criteria, from which own estimates of LGD are derived;                            

‘servicer’ means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day basis.                            

2.For the purposes of point (4)(b) of paragraph 1 of this Article, the Commission may adopt, by way of implementing acts, and                           subject to the examination procedure referred to in Article 464(2), a decision as to whether a third country applies supervisory                           and regulatory arrangements at least equivalent to those applied in the Union. In the absence of such a decision, until 1 January 2015, institutions may continue to apply the treatment set out in this paragraph to a third country where the relevant competent                           authorities had approved the third country as eligible for this treatment before 1 January 2014.                  

##### Article 143U.K.Permission to use the IRB Approach

1.Where the conditions set out in this Chapter are met, the competent authority shall permit institutions to calculate their                           risk-weighted exposure amounts using the Internal Ratings Based Approach (hereinafter referred to as ‘IRB Approach’).                  

2.Prior permission to use the IRB Approach, including own estimates of LGD and conversion factors, shall be required for each                           exposure class and for each rating system and internal models approaches to equity exposures and for each approach to estimating                           LGDs and conversion factors used.                  

3.Institutions shall obtain the prior permission of the competent authorities for the following:                  

(a)material changes to the range of application of a rating system or an internal models approach to equity exposures that the                           institution has received permission to use;                  

(b)material changes to a rating system or an internal models approach to equity exposures that the institution has received permission                           to use.                  

The range of application of a rating system shall comprise all exposures of the relevant type of exposure for which that rating                        system was developed.                   

4.Institutions shall notify the competent authorities of all changes to rating systems and internal models approaches to equity                           exposures.                  

5.EBA shall develop draft regulatory technical standards to specify the conditions for assessing the materiality of the use                           of an existing rating system for other additional exposures not already covered by that rating system and changes to rating                           systems or internal models approaches to equity exposures under the IRB Approach.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to the first subparagraph in accordance                        with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 144U.K.Competent authorities' assessment of an application to use an IRB Approach

1.The competent authority shall grant permission pursuant to Article 143 for an institution to use the IRB Approach, including                           to use own estimates of LGD and conversion factors, only if the competent authority is satisfied that requirements laid down                           in this Chapter are met, in particular those laid down in Section 6, and that the systems of the institution for the management                           and rating of credit risk exposures are sound and implemented with integrity and, in particular, that the institution has                           demonstrated to the satisfaction of the competent authority that the following standards are met:                  

(a)the institution's rating systems provide for a meaningful assessment of obligor and transaction characteristics, a meaningful                           differentiation of risk and accurate and consistent quantitative estimates of risk;                  

(b)internal ratings and default and loss estimates used in the calculation of own funds requirements and associated systems and                           processes play an essential role in the risk management and decision-making process, and in the credit approval, internal                           capital allocation and corporate governance functions of the institution;                  

(c)the institution has a credit risk control unit responsible for its rating systems that is appropriately independent and free                           from undue influence;                  

(d)the institution collects and stores all relevant data to provide effective support to its credit risk measurement and management                           process;                  

(e)the institution documents its rating systems and the rationale for their design and validates its rating systems;                  

(f)the institution has validated each rating system and each internal models approach for equity exposures during an appropriate                           time period prior to the permission to use this rating system or internal models approach to equity exposures, has assessed                           during this time period whether the rating system or internal models approaches for equity exposures are suited to the range                           of application of the rating system or internal models approach for equity exposures, and has made necessary changes to these                           rating systems or internal models approaches for equity exposures following from its assessment;                  

(g)the institution has calculated under the IRB Approach the own funds requirements resulting from its risk parameters estimates                           and is able to submit the reporting as required by Article 99;                  

(h)the institution has assigned and continues with assigning each exposure in the range of application of a rating system to                           a rating grade or pool of this rating system; the institution has assigned and continues with assigning each exposure in the                           range of application of an approach for equity exposures to this internal models approach.                  

The requirements to use an IRB Approach, including own estimates of LGD and conversion factors, apply also where an institution                        has implemented a rating system, or model used within a rating system, that it has purchased from a third-party vendor.                   

2.EBA shall develop draft regulatory technical standards to specify the assessment methodology competent authorities shall follow                           in assessing the compliance of an institution with the requirements to use the IRB Approach.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 145U.K.Prior experience of using IRB approaches

1.An institution applying to use the IRB Approach shall have been using for the IRB exposure classes in question rating systems                           that were broadly in line with the requirements set out in Section 6 for internal risk measurement and management purposes                           for at least three years prior to its qualification to use the IRB Approach.                  

2.An institution applying for the use of own estimates of LGDs and conversion factors shall demonstrate to the satisfaction                           of the competent authorities that it has been estimating and employing own estimates of LGDs and conversion factors in a manner                           that is broadly consistent with the requirements for use of own estimates of those parameters set out in Section 6 for at                           least three years prior to qualification to use own estimates of LGDs and conversion factors.                  

3.Where the institution extends the use of the IRB Approach subsequent to its initial permission, the experience of the institution                           shall be sufficient to satisfy the requirements of paragraphs 1 and 2 in respect of the additional exposures covered. If the                           use of rating systems is extended to exposures that are significantly different from the scope of the existing coverage, such                           that the existing experience cannot be reasonably assumed to be sufficient to meet the requirements of these provisions in                           respect of the additional exposures, then the requirements of paragraphs 1 and 2 shall apply separately for the additional                           exposures.                  

##### Article 146U.K.Measures to be taken where the requirements of this Chapter cease to be met

Where an institution ceases to comply with the requirements laid down in this Chapter, it shall notify the competent authority                        and do one of the following:                   

present to the satisfaction of the competent authority a plan for a timely return to compliance and realise this plan within                                 a period agreed with the competent authority;                            

demonstrate to the satisfaction of the competent authorities that the effect of non-compliance is immaterial.                            

##### Article 147U.K.Methodology to assign exposures to exposure classes

1.The methodology used by the institution for assigning exposures to different exposure classes shall be appropriate and consistent                           over time.                  

2.Each exposure shall be assigned to one of the following exposure classes:                  

(a)exposures to central governments and central banks;                  

(b)exposures to institutions;                  

(c)exposures to corporates;                  

(d)retail exposures;                  

(e)equity exposures;                  

(f)items representing securitisation positions;                  

(g)other non credit-obligation assets.                  

3.The following exposures shall be assigned to the class laid down in point (a) of paragraph 2:                  

(a)exposures to regional governments, local authorities or public sector entities which are treated as exposures to central governments                           under Articles 115 and 116;                  

(b)exposures to multilateral development banks referred to in Article 117(2);                  

(c)exposures to International Organisations which attract a risk weight of 0 % under Article 118.                  

4.The following exposures shall be assigned to the class laid down in point (b) of paragraph 2:                  

(a)exposures to regional governments and local authorities which are not treated as exposures to central governments in accordance                           with Article 115(2) and (4);                  

(b)exposures to public sector entities which are not treated as exposures to central governments in accordance with Article 116(4);                  

(c)exposures to multilateral development banks which are not assigned a 0 % risk weight under Article 117; and                  

(d)exposures to financial institutions which are treated as exposures to institutions in accordance with Article 119(5).                  

5.To be eligible for the retail exposure class laid down in point (d) of paragraph 2, exposures shall meet the following criteria:                  

(a)they shall be one of the following:                  

exposures to one or more natural persons;                            

exposures to an SME, provided in that case that the total amount owed to the institution and parent undertakings and its subsidiaries,                                 including any past due exposure, by the obligor client or group of connected clients, but excluding exposures secured on residential                                 property collateral, shall not, to the knowledge of the institution, which shall have taken reasonable steps to confirm the                                 situation, exceed EUR 1 million;                            

(b)they are treated by the institution in its risk management consistently over time and in a similar manner;                  

(c)they are not managed just as individually as exposures in the corporate exposure class;                  

(d)they each represent one of a significant number of similarly managed exposures.                  

In addition to the exposures listed in the first subparagraph, the present value of retail minimum lease payments shall be                        included in the retail exposure class.                   

6.The following exposures shall be assigned to the equity exposure class laid down in point (e) of paragraph 2:                  

(a)non-debt exposures conveying a subordinated, residual claim on the assets or income of the issuer;                  

(b)debt exposures and other securities, partnerships, derivatives, or other vehicles, the economic substance of which is similar                           to the exposures specified in point (a).                  

7.Any credit obligation not assigned to the exposure classes laid down in points (a), (b), (d), (e) and (f) of paragraph 2 shall                           be assigned to the corporate exposure class referred to in point (c) of that paragraph.                  

8.Within the corporate exposure class laid down in point (c) of paragraph 2, institutions shall separately identify as specialised                           lending exposures, exposures which possess the following characteristics:                  

(a)the exposure is to an entity which was created specifically to finance or operate physical assets or is an economically comparable                           exposure;                  

(b)the contractual arrangements give the lender a substantial degree of control over the assets and the income that they generate;                  

(c)the primary source of repayment of the obligation is the income generated by the assets being financed, rather than the independent                           capacity of a broader commercial enterprise.                  

9.The residual value of leased properties shall be assigned to the exposure class laid down in point (g) of paragraph 2, except                           to the extent that residual value is already included in the lease exposure laid down in Article 166(4).                  

10.The exposure from providing protection under an nth-to-default basket credit derivative shall be assigned to the same class                           laid down in paragraph 2 to which the exposures in the basket would be assigned, except if the individual exposures in the                           basket would be assigned to various exposure classes in which case the exposure shall be assigned to the corporates exposure                           class laid down in point (c) of paragraph 2.                  

##### Article 148U.K.Conditions for implementing the IRB Approach across different classes of exposure and business units

1.Institutions and any parent undertaking and its subsidiaries shall implement the IRB Approach for all exposures, unless they                           have received the permission of the competent authorities to permanently use the Standardised Approach in accordance with                           Article 150.                  

Subject to the prior permission of the competent authorities, implementation may be carried out sequentially across the different                        exposure classes referred to in Article 147 within the same business unit, across different business units in the same group                        or for the use of own estimates of LGDs or conversion factors for the calculation of risk weights for exposures to corporates,                        institutions, and central governments and central banks.                   

In the case of the retail exposure class referred to in Article 147(5), implementation may be carried out sequentially across                        the categories of exposures to which the different correlations in Article 154 correspond.                   

2.Competent authorities shall determine the time period over which an institution and any parent undertaking and its subsidiaries                           shall be required to implement the IRB Approach for all exposures. This time period shall be one that competent authorities                           consider to be appropriate on the basis of the nature and scale of the activities of the institutions, or any parent undertaking                           and its subsidiaries, and the number and nature of rating systems to be implemented.                  

3.Institutions shall carry out implementation of the IRB Approach in accordance with conditions determined by the competent                           authorities. The competent authority shall design those conditions such that they ensure that the flexibility under paragraph                           1 is not used selectively for the purposes of achieving reduced own funds requirements in respect of those exposure classes                           or business units that are yet to be included in the IRB Approach or in the use of own estimates of LGDs and conversion factors.                  

4.Institutions that have begun to use the IRB Approach only after 1 January 2013 or that have until that date been required by the competent authorities to be able to calculate their capital requirements                           using the Standardised Approach shall retain their ability to calculate capital requirements using the Standardised Approach                           for all their exposures during the implementation period until the competent authorities notify them that they are satisfied                           that the implementation of the IRB Approach will be completed with reasonable certainty.                  

5.An institution that is permitted to use the IRB Approach for any exposure class shall use the IRB Approach for the equity                           exposure class laid down in point (e) of Article 147(2), except where that institution is permitted to apply the Standardised                           Approach for equity exposures pursuant to Article 150 and for the other non credit-obligation assets exposure class laid down                           in point (g) of Article 147(2).                  

6.EBA shall develop draft regulatory technical standards to specify the conditions according to which competent authorities                           shall determine the appropriate nature and timing of the sequential roll out of the IRB Approach across exposure classes referred                           to in paragraph 3.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 149U.K.Conditions to revert to the use of less sophisticated approaches

1.An institution that uses the IRB Approach for a particular exposure class or type of exposure shall not stop using that approach                           and use instead the Standardised Approach for the calculation of risk-weighted exposure amounts unless the following conditions                           are met:                  

(a)the institution has demonstrated to the satisfaction of the competent authority that the use of the Standardised Approach                           is not proposed in order to reduce the own funds requirement of the institution, is necessary on the basis of nature and complexity                           of the institution's total exposures of this type and would not have a material adverse impact on the solvency of the institution                           or its ability to manage risk effectively;                  

(b)the institution has received the prior permission of the competent authority.                  

2.Institutions which have obtained permission under Article 151(9) to use own estimates of LGDs and conversion factors, shall                           not revert to the use of LGD values and conversion factors referred to in Article 151(8) unless the following conditions are                           met:                  

(a)the institution has demonstrated to the satisfaction of the competent authority that the use of LGDs and conversion factors                           laid down in Article 151(8) for a certain exposure class or type of exposure is not proposed in order to reduce the own funds                           requirement of the institution, is necessary on the basis of nature and complexity of the institution's total exposures of                           this type and would not have a material adverse impact on the solvency of the institution or its ability to manage risk effectively;                  

(b)the institution has received the prior permission of the competent authority.                  

3.The application of paragraphs 1 and 2 is subject to the conditions for rolling out the IRB Approach determined by the competent                           authorities in accordance with Article 148 and the permission for permanent partial use referred to in Article 150.                  

##### Article 150U.K.Conditions for permanent partial use

1.Where institutions have received the prior permission of the competent authorities, institutions permitted to use the IRB                           Approach in the calculation of risk-weighted exposure amounts and expected loss amounts for one or more exposure classes may                           apply the Standardised Approach for the following exposures:                  

(a)the exposure class laid down in Article 147(2)(a), where the number of material counterparties is limited and it would be                           unduly burdensome for the institution to implement a rating system for these counterparties;                  

(b)the exposure class laid down in Article 147(2)(b), where the number of material counterparties is limited and it would be                           unduly burdensome for the institution to implement a rating system for these counterparties;                  

(c)exposures in non-significant business units as well as exposure classes or types of exposures that are immaterial in terms                           of size and perceived risk profile;                  

(d)exposures to central governments and central banks of the Member States and their regional governments, local authorities,                           administrative bodies and public sector entities provided that:                  

there is no difference in risk between the exposures to that central government and central bank and those other exposures                                 because of specific public arrangements; and                            

exposures to the central government and central bank are assigned a 0 % risk weight under Article 114(2) or (4) or Article                                 495(2);                            

(e)exposures of an institution to a counterparty which is its parent undertaking, its subsidiary or a subsidiary of its parent                           undertaking provided that the counterparty is an institution or a financial holding company, mixed financial holding company,                           financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements                           or an undertaking linked by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC;                  

(f)exposures between institutions which meet the requirements set out in Article 113(7);                  

(g)equity exposures to entities whose credit obligations are assigned a 0 % risk weight under Chapter 2 including those publicly                           sponsored entities where a 0 % risk weight can be applied;                  

(h)equity exposures incurred under legislative programmes to promote specified sectors of the economy that provide significant                           subsidies for the investment to the institution and involve some form of government oversight and restrictions on the equity                           investments where such exposures may in aggregate be excluded from the IRB Approach only up to a limit of 10 % of own funds;                  

(i)the exposures identified in Article 119(4) meeting the conditions specified therein;                  

(j)State and State-reinsured guarantees referred to in Article 215(2).                  

The competent authorities shall permit the application of Standardised Approach for equity exposures referred to in points                        (g) and (h) of the first subparagraph which have been permitted for that treatment in other Member States. EBA shall publish                        on its website and regularly update a list of the exposures referred to in those points to be treated according to the Standardised                        Approach.                   

2.For the purposes of paragraph 1, the equity exposure class of an institution shall be material if their aggregate value, excluding                           equity exposures incurred under legislative programmes as referred to in point (h) of paragraph 1, exceeds on average over                           the preceding year 10 % of the own funds of the institution. Where the number of those equity exposures is less than 10 individual                           holdings, that threshold shall be 5 % of the own funds of the institution.                  

3.EBA shall develop draft regulatory technical standards to determine the conditions of application of points (a), (b) and (c)                           of paragraph 1.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

4.EBA shall issue guidelines on the application of point (d) of paragraph 1 in 2018, recommending limits in terms of a percentage                           of total balance sheet and/or risk weighted assets to be calculated in accordance with the Standardised Approach.                  

Those guidelines shall be adopted in accordance with Article 16 of Regulation (EU) No 1093/2010.                   

#### Section 2U.K.Calculation of risk-weighted exposure amounts

##### Sub-Section 1U.K.Treatment by type of exposure class

###### Article 151U.K.Treatment by exposure class

1.The risk-weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in points                           (a) to (e) and (g) of 147(2) shall, unless deducted from own funds, be calculated in accordance with Sub-section 2 except                           where those exposures are deducted from Common Equity Tier 1 items, Additional Tier 1 items or Tier 2 items.                  

2.The risk-weighted exposure amounts for dilution risk for purchased receivables shall be calculated in accordance with Article                           157. Where an institution has full recourse to the seller of purchased receivables for default risk and for dilution risk,                           the provisions of this Article and Article 152 and Article 158(1) to (4) in relation to purchased receivables shall not apply                           and the exposure shall be treated as a collateralised exposure.                  

3.The calculation of risk-weighted exposure amounts for credit risk and dilution risk shall be based on the relevant parameters                           associated with the exposure in question. These shall include PD, LGD, maturity (hereinafter referred to as ‘M’) and exposure value of the exposure. PD and LGD may be considered separately or jointly, in accordance with Section 4.                  

4.Institutions shall calculate risk-weighted exposure amounts for credit risk for all exposures belonging to the exposure class                           ‘equity’ referred to in point (e) of Article 147(2) in accordance with Article 155. Institutions may use the approaches set out in                           Article 155(3) and (4) where they have received the prior permission of the competent authorities. Competent authorities shall                           grant permission for an institution to use the internal models approach set out in Article 155(4) provided that the institution                           meets the requirements set out in Sub-section 4 of Section 6.                  

5.The calculation of risk weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance                           with Article 153(5).                  

6.For exposures belonging to the exposure classes referred to in points (a) to (d) of Article 147(2), institutions shall provide                           their own estimates of PDs in accordance with Article 143 and Section 6.                  

7.For exposures belonging to the exposure class referred to in point (d) of Article 147(2), institutions shall provide own estimates                           of LGDs and conversion factors in accordance with Article 143 and Section 6.                  

8.For exposures belonging to the exposure classes referred to in points (a) to (c) of Article 147(2), institutions shall apply                           the LGD values set out in Article 161(1), and the conversion factors set out in Article 166(8)(a) to (d), unless it has been                           permitted to use its own estimates of LGDs and conversion factors for those exposure classes in accordance with paragraph                           9.                  

9.For all exposures belonging to the exposure classes referred to in points (a) to (c) of Article 147(2), the competent authority                           shall permit institutions to use own estimates of LGDs and conversion factors in accordance with Article 143 and Section 6.                  

10.The risk-weighted exposure amounts for securitised exposures and for exposures belonging to the exposure class referred to                           in point (f) of Article 147(2) shall be calculated in accordance with Chapter 5.                  

###### Article 152U.K.Treatment of exposures in the form of units or shares in CIUs

1.Where exposures in the form of units or shares in CIUs meet the criteria set out in Article 132(3) and the institution is                           aware of all or parts of the underlying exposures of the CIU, the institution shall look through to those underlying exposures                           in order to calculate risk-weighted exposure amounts and expected loss amounts in accordance with the methods set out in this                           Chapter.                  

Where an underlying exposure of the CIU is itself another exposure in the form of units or shares in another CIU, the first                        institution shall also look through to the underlying exposures of the other CIU.                   

2.Where the institution does not meet the conditions for using the methods set out in this Chapter for all or parts of the underlying                           exposures of the CIU, risk-weighted exposure amounts and expected loss amounts shall be calculated in accordance with the                           following approaches:                  

(a)for exposures belonging to the ‘equity’ exposure class referred to in Article 147(2)(e), institutions shall apply the simple risk-weight approach set out in Article                           155(2);                  

(b)for all other underlying exposures referred to in paragraph 1, institutions shall apply the Standardised Approach laid down                           in Chapter 2, subject to the following:                  

for exposures subject to a specific risk weight for unrated exposures or subject to the credit quality step yielding the highest                                 risk weight for a given exposure class, the risk weight shall be multiplied by a factor of two but shall not be higher than                                 1 250 %;                            

for all other exposures, the risk weight shall be multiplied by a factor of 1,1 and shall be subject to a minimum of 5 %.                            

Where, for the purposes of point (a), the institution is unable to differentiate between private equity, exchange-traded and                        other equity exposures, it shall treat the exposures concerned as other equity exposures. Where those exposures, taken together                        with the institution's direct exposures in that exposure class, are not material within the meaning of Article 150(2), Article                        150(1) may be applied subject to the permission of the competent authorities.                   

3.Where exposures in the form of units or shares in a CIU do not meet the criteria set out in Article 132(3), or where the institution                           is not aware of all of the underlying exposures of the CIU or of the underlying exposures of a unit or share in a CIU which                           is itself an underlying exposure of the CIU, the institution shall look through to those underlying exposures and calculate                           risk-weighted exposure amounts and expected loss amounts in accordance with the simple risk-weight approach set out in Article                           155(2).                  

Where the institution is unable to differentiate between private equity, exchange-traded and other equity exposures, it shall                        treat the exposures concerned as other equity exposures. It shall assign non equity exposures to the other equity class.                   

4.Alternatively to the method described in paragraph 3, institutions may calculate themselves or may rely on the following third                           parties to calculate and report the average risk-weighted exposure amounts based on the CIU's underlying exposures in accordance                           with the approaches referred to in points (a) and (b) of paragraph 2 for the following:                  

(a)the depository institution or financial institution of the CIU provided that the CIU exclusively invests in securities and                           deposits all securities at this depository institution or financial institution;                  

(b)for other CIUs, the CIU management company, provided that the CIU management company meets the criteria set out in Article                           132(3)(a).                  

The correctness of the calculation shall be confirmed by an external auditor.                   

5.EBA shall develop draft regulatory technical standards to specify the conditions according to which competent authorities                           may permit institutions to use the Standardised Approach referred to in Article 150(1) under point (b) of paragraph 2 of this                           Article.                  

EBA shall submit those draft regulatory technical standards to the Commission by 30 June 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Sub-Section 2U.K.Calculation of risk-weighted exposure amounts for credit risk

###### Article 153U.K.Risk-weighted exposure amounts for exposures to corporates, institutions and central governments and central banks

1.Subject to the application of the specific treatments laid down in paragraphs 2, 3 and 4, the risk-weighted exposure amounts                           for exposures to corporates, institutions and central governments and central banks shall be calculated according to the following                           formulae:                  

*Risk – weighted exposure amount = RW · exposure value*                   

where the risk weight RW is defined as                   

if PD = 0, RW shall be 0;                            

if PD = 1, i.e., for defaulted exposures:                            
                -  where institutions apply the LGD values set out in Article 161(1), RW shall be 0;                                   
                -  where institutions use own estimates of LGDs, RW shall be ;                                   

where the expected loss best estimate (hereinafter referred to as ‘ELBE’) shall be the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h);                            

if 0 < PD < 1                            

                            

where:                            

N(x)

=

the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable                                    with mean zero and variance of one is less than or equal to x);                               

G(Z)

=

denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that N(x)                                    = z)                               

R

=

denotes the coefficient of correlation, is defined as                               

                               

b

=

the maturity adjustment factor, which is defined as                               

.                               

2.For all exposures to large financial sector entities, the co-efficient of correlation of paragraph 1(iii) is multiplied by                           1,25. For all exposures to unregulated financial sector entities, the coefficients of correlation set out in paragraph 1(iii)                           and paragraph 4, as relevant, are multiplied by 1,25.                  

3.The risk-weighted exposure amount for each exposure which meets the requirements set out in Articles 202 and 217 may be adjusted                           in accordance with the following formula:                  

*Risk – weighted exposure amount = RW · exposure value* · (0.15 + 160 · *PDpp*)                   

where:                   

PD

=

PD of the protection provider.                      

RW shall be calculated using the relevant risk weight formula set out in point 1 for the exposure, the PD of the obligor and                        the LGD of a comparable direct exposure to the protection provider. The maturity factor (b) shall be calculated using the                        lower of the PD of the protection provider and the PD of the obligor.                   

4.For exposures to companies where the total annual sales for the consolidated group of which the firm is a part is less than                           EUR 50 million, institutions may use the following correlation formula in paragraph 1 (iii) for the calculation of risk weights                           for corporate exposures. In this formula S is expressed as total annual sales in millions of euro with EUR 5 million ≤ S ≤                           EUR 50 million. Reported sales of less than EUR 5 million shall be treated as if they were equivalent to EUR 5 million. For                           purchased receivables the total annual sales shall be the weighted average by individual exposures of the pool.                  

                   

Institutions shall substitute total assets of the consolidated group for total annual sales when total annual sales are not                        a meaningful indicator of firm size and total assets are a more meaningful indicator than total annual sales.                   

5.For specialised lending exposures in respect of which an institution is not able to estimate PDs or the institutions' PD estimates                           do not meet the requirements set out in Section 6, the institution shall assign risk weights to these exposures in accordance                           with Table 1, as follows:                  

###### Table 1

In assigning risk weights to specialised lending exposures institutions shall take into account the following factors: financial                        strength, political and legal environment, transaction and/or asset characteristics, strength of the sponsor and developer,                        including any public private partnership income stream, and security package.                   

6.For their purchased corporate receivables institutions shall comply with the requirements set out in Article 184. For purchased                           corporate receivables that comply in addition with the conditions set out in Article 154(5), and where it would be unduly                           burdensome for an institution to use the risk quantification standards for corporate exposures as set out in Section 6 for                           these receivables, the risk quantification standards for retail exposures as set out in Section 6 may be used.                  

7.For purchased corporate receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss                           protection for default losses, dilution losses, or both, may be treated as first-loss positions under the IRB securitisation                           framework.                  

8.Where an institution provides credit protection for a number of exposures under terms that the nth default among the exposures                           shall trigger payment and that this credit event shall terminate the contract, if the product has an external credit assessment                           from an ECAI the risk weights set out in Chapter 5 shall be applied. If the product is not rated by an ECAI, the risk weights                           of the exposures included in the basket will be aggregated, excluding n-1 exposures where the sum of the expected loss amount                           multiplied by 12,5 and the risk-weighted exposure amount shall not exceed the nominal amount of the protection provided by                           the credit derivative multiplied by 12,5. The n-1 exposures to be excluded from the aggregation shall be determined on the                           basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted                           exposure amount of any of the exposures included in the aggregation. A 1 250 % risk weight shall apply to positions in a basket for which an institution cannot determine the risk-weight under the IRB                           Approach.                  

9.EBA shall develop draft regulatory technical standards to specify how institutions shall take into account the factors referred                           to in the second subparagraph of paragraph 5 when assigning risk weights to specialised lending exposures.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 154U.K.Risk-weighted exposure amounts for retail exposures

1.The risk-weighted exposure amounts for retail exposures shall be calculated in accordance with the following formulae:                  

*Risk – weighted exposure amount = RW · exposure value*                   

where the risk weight RW is defined as follows:                   

if PD = 1, i.e., for defaulted exposures, RW shall be                            

;                            

where ELBE shall be the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h);                            

if 0 < PD < 1, i.e., for any possible value for PD other than under (i)                            

                            

where:                            

N(x)

=

the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable                                    with mean zero and variance of one is less than or equal to x);                               

G(Z)

=

the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that N(x) = z);                               

R

=

the coefficient of correlation defined as                               

                               

2.The risk-weighted exposure amount for each exposure to an SME as referred to in Article 147(5) which meets the requirements                           set out in Articles 202 and 217 may be calculated in accordance with Article 153(3).                  

3.For retail exposures secured by immovable property collateral a coefficient of correlation R of 0,15 shall replace the figure                           produced by the correlation formula in paragraph 1.                  

4.For qualifying revolving retail exposures in accordance with points (a) to (e), a coefficient of correlation R of 0,04 shall                           replace the figure produced by the correlation formula in paragraph 1.                  

Exposures shall qualify as qualifying revolving retail exposures if they meet the following conditions:                   

(a)the exposures are to individuals;                  

(b)the exposures are revolving, unsecured, and to the extent they are not drawn immediately and unconditionally, cancellable                           by the institution. In this context revolving exposures are defined as those where customers' outstanding balances are permitted                           to fluctuate based on their decisions to borrow and repay, up to a limit established by the institution. Undrawn commitments                           may be considered as unconditionally cancellable if the terms permit the institution to cancel them to the full extent allowable                           under consumer protection and related legislation;                  

(c)the maximum exposure to a single individual in the sub-portfolio is EUR 100 000 or less;                  

(d)the use of the correlation of this paragraph is limited to portfolios that have exhibited low volatility of loss rates, relative                           to their average level of loss rates, especially within the low PD bands;                  

(e)the treatment as a qualifying revolving retail exposure shall be consistent with the underlying risk characteristics of the                           sub-portfolio.                  

By way of derogation from point (b), the requirement to be unsecured does not apply in respect of collateralised credit facilities                        linked to a wage account. In this case amounts recovered from the collateral shall not be taken into account in the LGD estimate.                   

Competent authorities shall review the relative volatility of loss rates across the qualifying revolving retail sub-portfolios,                        as well the aggregate qualifying revolving retail portfolio, and shall share information on the typical characteristics of                        qualifying revolving retail loss rates across Member States.                   

5.To be eligible for the retail treatment, purchased receivables shall comply with the requirements set out in Article 184 and                           the following conditions:                  

(a)the institution has purchased the receivables from unrelated third party sellers, and its exposure to the obligor of the receivable                           does not include any exposures that are directly or indirectly originated by the institution itself;                  

(b)the purchased receivables shall be generated on an arm's-length basis between the seller and the obligor. As such, inter-company                           accounts receivables and receivables subject to contra-accounts between firms that buy and sell to each other are ineligible;                  

(c)the purchasing institution has a claim on all proceeds from the purchased receivables or a pro-rata interest in the proceeds;                           and                  

(d)the portfolio of purchased receivables is sufficiently diversified.                  

6.For purchased receivables, refundable purchase discounts, collateral or partial guarantees that provide first-loss protection                           for default losses, dilution losses, or both, may be treated as first-loss positions under the IRB securitisation framework.                  

7.For hybrid pools of purchased retail receivables where purchasing institutions cannot separate exposures secured by immovable                           property collateral and qualifying revolving retail exposures from other retail exposures, the retail risk weight function                           producing the highest capital requirements for those exposures shall apply.                  

###### Article 155U.K.Risk-weighted exposure amounts for equity exposures

1.Institutions shall determine their risk-weighted exposure amounts for equity exposures, excluding those deducted in accordance                           with Part Two or subject to a 250 % risk weight in accordance with Article 48, in accordance with the approaches set out in                           paragraphs 2, 3 and 4 of this Article. An institution may apply different approaches to different equity portfolios where                           the institution itself uses different approaches for internal risk management purposes. Where an institution uses different                           approaches, the choice of the PD/LGD approach or the internal models approach shall be made consistently, including over time                           and with the approach used for the internal risk management of the relevant equity exposure, and shall not be determined by                           regulatory arbitrage considerations.                  

Institutions may treat equity exposures to ancillary services undertakings in accordance with the treatment of other non credit-                        obligation assets.                   

2.Under the simple risk weight approach, the risk-weighted exposure amount shall be calculated in accordance with the formula:                  

*Risk – weighted exposure amount = RW * exposure value*,                   

where:                   

Risk weight (RW)

=

190 % for private equity exposures in sufficiently diversified portfolios.                      

Risk weight (RW)

=

290 % for exchange traded equity exposures.                      

Risk weight (RW)

=

370 % for all other equity exposures.                      

Short cash positions and derivative instruments held in the non-trading book are permitted to offset long positions in the                        same individual stocks provided that these instruments have been explicitly designated as hedges of specific equity exposures                        and that they provide a hedge for at least another year. Other short positions are to be treated as if they are long positions                        with the relevant risk weight assigned to the absolute value of each position. In the context of maturity mismatched positions,                        the method is that for corporate exposures as set out in Article 162(5).                   

Institutions may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out                        in Chapter 4.                   

3.Under the PD/LGD approach, risk-weighted exposure amounts shall be calculated according to the formulas in Article 153(1).                           If institutions do not have sufficient information to use the definition of default set out in Article 178, a scaling factor                           of 1,5 shall be assigned to the risk weights.                  

At the individual exposure level the sum of the expected loss amount multiplied by 12,5 and the risk-weighted exposure amount                        shall not exceed the exposure value multiplied by 12,5.                   

Institutions may recognise unfunded credit protection obtained on an equity exposure in accordance with the methods set out                        in Chapter 4. This shall be subject to an LGD of 90 % on the exposure to the provider of the hedge. For private equity exposures                        in sufficiently diversified portfolios an LGD of 65 % may be used. For these purposes M shall be five years.                   

4.Under the internal models approach, the risk-weighted exposure amount shall be the potential loss on the institution's equity                           exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of                           the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, multiplied                           by 12,5. The risk-weighted exposure amounts at the equity portfolio level shall not be less than the total of the sums of                           the following:                  

(a)the risk-weighted exposure amounts required under the PD/LGD Approach; and                  

(b)the corresponding expected loss amounts multiplied by 12,5.                  

The amounts referred to in point (a) and (b) shall be calculated on the basis of the PD values set out in Article 165(1) and                        the corresponding LGD values set out in Article 165(2).                   

Institutions may recognise unfunded credit protection obtained on an equity position.                   

###### Article 156U.K.Risk-weighted exposure amounts for other non credit-obligation assets

The risk-weighted exposure amounts for other non credit-obligation assets shall be calculated in accordance with the following                        formula:                   

*Risk* – *weighted exposure amount* = 100 % · *exposure value*,                   

except for:                   

cash in hand and equivalent cash items as well as gold bullion held in own vault or on an allocated basis to the extent backed                                 by bullion liabilities, in which case a 0 % risk-weight shall be assigned;                            

when the exposure is a residual value of leased assets in which case it shall be calculated as follows:                            

                            

where t is the greater of 1 and the nearest number of whole years of the lease remaining.                            

##### Sub-Section 3U.K.Calculation of risk-weighted exposure amounts for dilution risk of purchased receivables

###### Article 157U.K.Risk-weighted exposure amounts for dilution risk of purchased receivables

1.Institutions shall calculate the risk-weighted exposure amounts for dilution risk of purchased corporate and retail receivables                           in accordance with the formula set out in Article 153(1).                  

2.Institutions shall determine the input parameters PD and LGD in accordance with Section 4.                  

3.Institutions shall determine the exposure value in accordance with Section 5.                  

4.For the purposes of this Article, the value of M is 1 year.                  

5.The competent authorities shall exempt an institution from calculating and recognising risk-weighted exposure amounts for                           dilution risk of a type of exposures caused by purchased corporate or retail receivables where the institution has demonstrated                           to the satisfaction of the competent authority that dilution risk for that institution is immaterial for this type of exposures.                  

#### Section 3U.K.Expected loss amounts

##### Article 158U.K.Treatment by exposure type

1.The calculation of expected loss amounts shall be based on the same input figures of PD, LGD and the exposure value for each                           exposure as are used for the calculation of risk-weighted exposure amounts in accordance with Article 151.                  

2.The expected loss amounts for securitised exposures shall be calculated in accordance with Chapter 5.                  

3.The expected loss amount for exposures belonging to the ‘other non credit obligations assets’ exposure class referred to in point (g) of Article 147(2) shall be zero.                  

4.The expected loss amounts for exposures in the form of shares or units of a CIU referred to in Article 152 shall be calculated                           in accordance with the methods set out in this Article.                  

5.The expected loss (EL) and expected loss amounts for exposures to corporates, institutions, central governments and central                           banks and retail exposures shall be calculated in accordance with the following formulae:                  

*Expected loss (EL) = PD * LGD*                   

Expected loss amount

=

EL [multiplied by] exposure value.                      

For defaulted exposures (PD = 100 %) where institutions use own estimates of LGDs, EL shall be ELBE, the institution's best estimate of expected loss for the defaulted exposure in accordance with Article 181(1)(h).                   

For exposures subject to the treatment set out in Article 153(3), EL shall be 0 %.                   

6.The EL values for specialised lending exposures where institutions use the methods set out in Article 153(5) for assigning                           risk weights shall be assigned in accordance with Table 2.                  

###### Table 2

7.The expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with                           the simple risk weight approach shall be calculated in accordance with the following formula:                  

*Expected loss amount = EL · exposure value*                   

The EL values shall be the following:                   

Expected loss (EL)

=

0,8 % for private equity exposures in sufficiently diversified portfolios                      

Expected loss (EL)

=

0,8 % for exchange traded equity exposures                      

Expected loss (EL)

=

2,4 % for all other equity exposures.                      

8.The expected loss and expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in                           accordance with the PD/LGD approach shall be calculated in accordance with the following formula:                  

*Expected loss (EL) = PD · LGD*                   

*Expected loss amount = EL · exposure value*                   

9.The expected loss amounts for equity exposures where the risk-weighted exposure amounts are calculated in accordance with                           the internal models approach shall be zero.                  

10.The expected loss amounts for dilution risk of purchased receivables shall be calculated in accordance with the following                           formula:                  

*Expected loss (EL) = PD · LGD*                   

*Expected loss amount = EL · exposure value*                   

##### Article 159U.K.Treatment of expected loss amounts

Institutions shall subtract the expected loss amounts calculated in accordance with Article 158 (5), (6) and (10) from the                        general and specific credit risk adjustments and additional value adjustments in accordance with Articles 34 and 110 and other                        own funds reductions related to these exposures. Discounts on balance sheet exposures purchased when in default in accordance                        with Article 166(1) shall be treated in the same manner as specific credit risk adjustments. Specific credit risk adjustments                        on exposures in default shall not be used to cover expected loss amounts on other exposures. Expected loss amounts for securitised                        exposures and general and specific credit risk adjustments related to these exposures shall not be included in this calculation.                   

#### Section 4U.K.PD, LGD and maturity

##### Sub-Section 1U.K.Exposures to corporates, institutions and central governments and central banks

###### Article 160U.K.Probability of default (PD)

1.The PD of an exposure to a corporate or an institution shall be at least 0,03 %.                  

2.For purchased corporate receivables in respect of which an institution is not able to estimate PDs or an institution's PD                           estimates do not meet the requirements set out in Section 6, the PDs for these exposures shall be determined in accordance                           with the following methods:                  

(a)for senior claims on purchased corporate receivables PD shall be the institutions estimate of EL divided by LGD for these                           receivables;                  

(b)for subordinated claims on purchased corporate receivables PD shall be the institution's estimate of EL;                  

(c)an institution that has received the permission of the competent authority to use own LGD estimates for corporate exposures                           pursuant to Article 143 and that can decompose its EL estimates for purchased corporate receivables into PDs and LGDs in a                           manner that the competent authority considers to be reliable, may use the PD estimate that results from this decomposition.                  

3.The PD of obligors in default shall be 100 %.                  

4.Institutions may take into account unfunded credit protection in the PD in accordance with the provisions of Chapter 4. For                           dilution risk, in addition to the protection providers referred to in Article 201(1)(g) the seller of the purchased receivables                           is eligible if the following conditions are met:                  

(a)the corporate entity has a credit assessment by an ECAI which has been determined by EBA to be associated with credit quality                           step 3 or above under the rules for the risk weighting of exposures to corporates under Chapter 2;                  

(b)the corporate entity, in the case of institutions calculating risk-weighted exposure amounts and expected loss amounts under                           the IRB Approach, does not have a credit assessment by a recognised ECAI and is internally rated as having a PD equivalent                           to that associated with the credit assessments of ECAIs determined by EBA to be associated with credit quality step 3 or above                           under the rules for the risk weighting of exposures to corporates under Chapter 2.                  

5.Institutions using own LGD estimates may recognise unfunded credit protection by adjusting PDs subject to Article 161(3).                  

6.For dilution risk of purchased corporate receivables, PD shall be set equal to the EL estimate of the institution for dilution                           risk. An institution that has received permission from the competent authority pursuant to Article 143 to use own LGD estimates                           for corporate exposures that can decompose its EL estimates for dilution risk of purchased corporate receivables into PDs                           and LGDs in a manner that the competent authority considers to be reliable, may use the PD estimate that results from this                           decomposition. Institutions may recognise unfunded credit protection in the PD in accordance with the provisions of Chapter                           4. For dilution risk, in addition to the protection providers referred to in Article 201(1)(g), the seller of the purchased                           receivables is eligible provided that the conditions set out in paragraph 4 are met.                  

7.By way of derogation from Article 201(1)(g), the corporate entities that meet the conditions set out in paragraph 4 are eligible.                  

An institution that has received the permission of the competent authority pursuant to Article 143 to use own LGD estimates                        for dilution risk of purchased corporate receivables, may recognise unfunded credit protection by adjusting PDs subject to                        Article 161(3).                   

###### Article 161U.K.Loss Given Default (LGD)

1.Institutions shall use the following LGD values:                  

(a)senior exposures without eligible collateral: 45 %;                  

(b)subordinated exposures without eligible collateral: 75 %;                  

(c)institutions may recognise funded and unfunded credit protection in the LGD in accordance with Chapter 4;                  

(d)covered bonds eligible for the treatment set out in Article 129(4) or (5) may be assigned an LGD value of 11,25 %;                  

(e)for senior purchased corporate receivables exposures where an institution is not able to estimate PDs or the institution's                           PD estimates do not meet the requirements set out in Section 6: 45 %;                  

(f)for subordinated purchased corporate receivables exposures where an institution is not able to estimate PDs or the institution's                           PD estimates do not meet the requirements set out in Section 6: 100 %;                  

(g)for dilution risk of purchased corporate receivables: 75 %.                  

2.For dilution and default risk if an institution has received permission from the competent authority to use own LGD estimates                           for corporate exposures pursuant to Article 143 and it can decompose its EL estimates for purchased corporate receivables                           into PDs and LGDs in a manner the competent authority considers to be reliable, the LGD estimate for purchased corporate receivables                           may be used.                  

3.If an institution has received the permission of the competent authority to use own LGD estimates for exposures to corporates,                           institutions, central governments and central banks pursuant to Article 143, unfunded credit protection may be recognised                           by adjusting PD or LGD subject to requirements as specified in Section 6 and permission of the competent authorities. An institution                           shall not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk weight would be lower than that of                           a comparable, direct exposure to the guarantor.                  

4.For the purposes of the undertakings referred to in Article 153(3), the LGD of a comparable direct exposure to the protection                           provider shall either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor,                           depending upon whether in the event both the guarantor and obligor default during the life of the hedged transaction, available                           evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of                           the guarantor or obligor, respectively.                  

###### Article 162U.K.Maturity

1.Institutions that have not received permission to use own LGDs and own conversion factors for exposures to corporates, institutions                           or central governments and central banks shall assign to exposures arising from repurchase transactions or securities or commodities                           lending or borrowing transactions a maturity value (M) of 0,5 years and to all other exposures M of 2,5 years.                  

Alternatively, as part of the permission referred to in Article 143, the competent authorities shall decide on whether the                        institution shall use maturity (M) for each exposure as set out under paragraph 2.                   

2.Institutions that have received the permission of the competent authority to use own LGDs and own conversion factors for exposures                           to corporates, institutions or central governments and central banks pursuant to Article 143 shall calculate M for each of                           these exposures as set out in points (a) to (e) of this paragraph and subject to paragraphs 3 to 5 of this Article. M shall                           be no greater than five years except in the cases specified in Article 384(1) where M as specified there shall be used:                  

(a)for an instrument subject to a cash flow schedule, M shall be calculated in accordance with the following formula:                  

                   

where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the obligor in period t;                   

(b)for derivatives subject to a master netting agreement, M shall be the weighted average remaining maturity of the exposure,                           where M shall be at least 1 year, and the notional amount of each exposure shall be used for weighting the maturity;                  

(c)for exposures arising from fully or nearly-fully collateralised derivative instruments listed in Annex II and fully or nearly-fully                           collateralised margin lending transactions which are subject to a master netting agreement, M shall be the weighted average                           remaining maturity of the transactions where M shall be at least 10 days;                  

(d)for repurchase transactions or securities or commodities lending or borrowing transactions which are subject to a master netting                           agreement, M shall be the weighted average remaining maturity of the transactions where M shall be at least five days. The                           notional amount of each transaction shall be used for weighting the maturity;                  

(e)an institution that has received the permission of the competent authority pursuant to Article 143 to use own PD estimates                           for purchased corporate receivables, for drawn amounts M shall equal the purchased receivables exposure weighted average maturity,                           where M shall be at least 90 days. This same value of M shall also be used for undrawn amounts under a committed purchase                           facility provided that the facility contains effective covenants, early amortisation triggers, or other features that protect                           the purchasing institution against a significant deterioration in the quality of the future receivables it is required to                           purchase over the facility's term. Absent such effective protections, M for undrawn amounts shall be calculated as the sum                           of the longest-dated potential receivable under the purchase agreement and the remaining maturity of the purchase facility,                           where M shall be at least 90 days;                  

(f)for any instrument other than those referred to in this paragraph or when an institution is not in a position to calculate                           M as set out in point (a), M shall be the maximum remaining time (in years) that the obligor is permitted to take to fully                           discharge its contractual obligations, where M shall be at least one year;                  

(g)for institutions using the Internal Model Method set out in Section 6 of Chapter 6 to calculate the exposure values, M shall                           be calculated for exposures to which they apply this method and for which the maturity of the longest-dated contract contained                           in the netting set is greater than one year in accordance with the following formula:                  

                   

where:                   

=

a dummy variable whose value at future period tk is equal to 0 if tk > 1 year and to 1 if tk ≤ 1;                      

=

the expected exposure at the future period tk;                      

=

the effective expected exposure at the future period tk;                      

=

the risk-free discount factor for future time period tk;                      

;                   

(h)an institution that uses an internal model to calculate a one-sided credit valuation adjustment (CVA) may use, subject to                           the permission of the competent authorities, the effective credit duration estimated by the internal model as M.                  

Subject to paragraph 2, for netting sets in which all contracts have an original maturity of less than one year the formula                        in point (a) shall apply;                   

(i)for institutions using the Internal Model Method set out in Section 6 of Chapter 6, to calculate the exposure values and having                           an internal model permission for specific risk associated with traded debt positions in accordance with Part Three, Title                           IV, Chapter 5, M shall be set to 1 in the formula laid out in Article 153(1), provided that an institution can demonstrate                           to the competent authorities that its internal model for Specific risk associated with traded debt positions applied in Article                           383 contains effects of rating migrations;                  

(j)for the purposes of Article 153(3), M shall be the effective maturity of the credit protection but at least 1 year.                  

3.Where the documentation requires daily re-margining and daily revaluation and includes provisions that allow for the prompt                           liquidation or set off of collateral in the event of default or failure to remargin, M shall be at least one-day for:                  

(a)fully or nearly-fully collateralised derivative instruments listed in Annex II;                  

(b)fully or nearly-fully collateralised margin lending transactions;                  

(c)repurchase transactions, securities or commodities lending or borrowing transactions.                  

In addition, for qualifying short-term exposures which are not part of the institution's ongoing financing of the obligor,                        M shall be at least one-day. Qualifying short term exposures shall include the following:                   

(a)exposures to institutions arising from settlement of foreign exchange obligations;                  

(b)self-liquidating short-term trade finance transactions connected to the exchange of goods or services with a residual maturity                           of up to one year as referred to in point (80) of Article 4(1);                  

(c)exposures arising from settlement of securities purchases and sales within the usual delivery period or two business days;                  

(d)exposures arising from cash settlements by wire transfer and settlements of electronic payment transactions and prepaid cost,                           including overdrafts arising from failed transactions that do not exceed a short, fixed agreed number of business days.                  

4.For exposures to corporates situated in the Union and having consolidated sales and consolidated assets of less than EUR 500                           million, institutions may choose to consistently set M as set out in paragraph 1 instead of applying paragraph 2. Institutions                           may replace EUR 500 million total assets with EUR 1 000 million total assets for corporates which primarily own and let non-speculative residential property.                  

5.Maturity mismatches shall be treated as specified in Chapter 4.                  

##### Sub-Section 2U.K.Retail exposures

###### Article 163U.K.Probability of default (PD)

1.The PD of an exposure shall be at least 0,03 %.                  

2.The PD of obligors or, where an obligation approach is used, of exposures in default shall be 100 %.                  

3.For dilution risk of purchased receivables PD shall be set equal to EL estimates for dilution risk. If an institution can                           decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in a manner the competent authorities                           consider to be reliable, the PD estimate may be used.                  

4.Unfunded credit protection may be taken into account by adjusting PDs subject to Article 164(2). For dilution risk, in addition                           to the protection providers referred to in Article 201(1)(g), the seller of the purchased receivables is eligible if the conditions                           set out in Article 160(4) are met.                  

###### Article 164U.K.Loss Given Default (LGD)

1.Institutions shall provide own estimates of LGDs subject to requirements as specified in Section 6 and permission of the competent                           authorities granted in accordance with Article 143. For dilution risk of purchased receivables, an LGD value of 75 % shall                           be used. If an institution can decompose its EL estimates for dilution risk of purchased receivables into PDs and LGDs in                           a reliable manner, the institution may use its own LGD estimate.                  

2.Unfunded credit protection may be recognised as eligible by adjusting PD or LGD estimates subject to requirements as specified                           in Article 183(1), (2) and (3) and permission of the competent authorities either in support of an individual exposure or                           a pool of exposures. An institution shall not assign guaranteed exposures an adjusted PD or LGD such that the adjusted risk                           weight would be lower than that of a comparable, direct exposure to the guarantor.                  

3.For the purposes of Article 154(2), the LGD of a comparable direct exposure to the protection provider referred to in Article                           153(3) shall either be the LGD associated with an unhedged facility to the guarantor or the unhedged facility of the obligor,                           depending upon whether, in the event both the guarantor and obligor default during the life of the hedged transaction, available                           evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of                           the guarantor or obligor, respectively.                  

4.The exposure weighted average LGD for all retail exposures secured by residential property and not benefiting from guarantees                           from central governments shall not be lower than 10 %.                  

The exposure weighted average LGD for all retail exposures secured by commercial immovable property and not benefiting from                        guarantees from central governments shall not be lower than 15 %.                   

5.Based on the data collected under Article 101 and taking into account forward-looking immovable property market developments                           and any other relevant indicators, the competent authorities shall periodically, and at least annually, assess whether the                           minimum LGD values in paragraph 4 of this Article are appropriate for exposures secured by residential property or commercial                           immovable property located in their territory. Competent authorities may, where appropriate on the basis of financial stability                           considerations, set higher minimum values of exposure weighted average LGD for exposures secured by immovable property in                           their territory.                  

Competent authorities shall notify EBA of any changes to the minimum LGD values that they make in accordance with the first                        subparagraph and EBA shall publish these LGD values.                   

6.EBA shall develop draft regulatory technical standards to specify the conditions that competent authorities shall take into                           account when determining higher minimum LGD values.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

7.The institutions of one Member State shall apply the higher minimum LGD values that have been determined by the competent                           authorities of another Member State to exposures secured by immovable property located in that Member State.                  

##### Sub-Section 3U.K.Equity exposures subject to PD/LGD method

###### Article 165U.K.Equity exposures subject to the PD/LGD method

1.PDs shall be determined in accordance with the methods for corporate exposures.                  

The following minimum PDs shall apply:                   

(a)0,09 % for exchange traded equity exposures where the investment is part of a long-term customer relationship;                  

(b)0,09 % for non-exchange traded equity exposures where the returns on the investment are based on regular and periodic cash                           flows not derived from capital gains;                  

(c)0,40 % for exchange traded equity exposures including other short positions as set out in Article 155(2);                  

(d)1,25 % for all other equity exposures including other short positions as set out in Article 155(2).                  

2.Private equity exposures in sufficiently diversified portfolios may be assigned an LGD of 65 %. All other such exposures shall                           be assigned an LGD of 90 %.                  

3.M assigned to all exposures shall be five years.                  

#### Section 5U.K.Exposure value

##### Article 166U.K.Exposures to corporates, institutions, central governments and central banks and retail exposures

1.Unless noted otherwise, the exposure value of on-balance sheet exposures shall be the accounting value measured without taking                           into account any credit risk adjustments made.                  

This rule also applies to assets purchased at a price different than the amount owed.                   

For purchased assets, the difference between the amount owed and the accounting value remaining after specific credit risk                        adjustments have been applied that has been recorded on the balance-sheet of the institutions when purchasing the asset is                        denoted discount if the amount owed is larger, and premium if it is smaller.                   

2.Where institutions use master netting agreements in relation to repurchase transactions or securities or commodities lending                           or borrowing transactions, the exposure value shall be calculated in accordance with Chapter 4 or 6.                  

3.In order to calculate the exposure value for on-balance sheet netting of loans and deposits, institutions shall apply the                           methods set out in Chapter 4.                  

4.The exposure value for leases shall be the discounted minimum lease payments. Minimum lease payments shall comprise the payments                           over the lease term that the lessee is or can be required to make and any bargain option (i.e. option the exercise of which                           is reasonably certain). If a party other than the lessee may be required to make a payment related to the residual value of                           a leased asset and this payment obligation fulfils the set of conditions in Article 201 regarding the eligibility of protection                           providers as well as the requirements for recognising other types of guarantees provided in Article 213, the payment obligation                           may be taken into account as unfunded credit protection in accordance with Chapter 4.                  

5.In the case of any contract listed in Annex II, the exposure value shall be determined by the methods set out in Chapter 6                           and shall not take into account any credit risk adjustment made.                  

6.The exposure value for the calculation of risk-weighted exposure amounts of purchased receivables shall be the value determined                           in accordance with paragraph 1 minus the own funds requirements for dilution risk prior to credit risk mitigation.                  

7.Where an exposure takes the form of securities or commodities sold, posted or lent under repurchase transactions or securities                           or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, the exposure                           value shall be the value of the securities or commodities determined in accordance with Article 24. Where the Financial Collateral                           Comprehensive Method as set out under Article 223 is used, the exposure value shall be increased by the volatility adjustment                           appropriate to such securities or commodities, as set out therein. The exposure value of repurchase transactions, securities                           or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions may be determined                           either in accordance with Chapter 6 or Article 220(2).                  

8.The exposure value for the following items shall be calculated as the committed but undrawn amount multiplied by a conversion                           factor. Institutions shall use the following conversion factors in accordance with Article 151(8) for exposures to corporates,                           institutions, central governments and central banks:                  

(a)for credit lines that are unconditionally cancellable at any time by the institution without prior notice, or that effectively                           provide for automatic cancellation due to deterioration in a borrower's creditworthiness, a conversion factor of 0 % shall                           apply. To apply a conversion factor of 0 %, institutions shall actively monitor the financial condition of the obligor, and                           their internal control systems shall enable them to immediately detect deterioration in the credit quality of the obligor.                           Undrawn credit lines may be considered as unconditionally cancellable if the terms permit the institution to cancel them to                           the full extent allowable under consumer protection and related legislation;                  

(b)for short-term letters of credit arising from the movement of goods, a conversion factor of 20 % shall apply for both the                           issuing and confirming institutions;                  

(c)for undrawn purchase commitments for revolving purchased receivables that are able to be unconditionally cancelled or that                           effectively provide for automatic cancellation at any time by the institution without prior notice, a conversion factor of                           0 % shall apply. To apply a conversion factor of 0 %, institutions shall actively monitor the financial condition of the obligor,                           and their internal control systems shall enable them to immediately detect a deterioration in the credit quality of the obligor;                  

(d)for other credit lines, note issuance facilities (NIFs), and revolving underwriting facilities (RUFs), a conversion factor                           of 75 % shall apply.                  

Institutions which meet the requirements for the use of own estimates of conversion factors as specified in Section 6 may                        use their own estimates of conversion factors across different product types as mentioned in points (a) to (d), subject to                        permission of the competent authorities.                   

9.Where a commitment refers to the extension of another commitment, the lower of the two conversion factors associated with                           the individual commitment shall be used.                  

10.For all off-balance sheet items other than those mentioned in paragraphs 1 to 8, the exposure value shall be the following                           percentage of its value:                  

(a)100 % if it is a full risk item;                  

(b)50 % if it is a medium-risk item;                  

(c)20 % if it is a medium/low-risk item;                  

(d)0 % if it is a low-risk item.                  

For the purposes of this paragraph the off-balance sheet items shall be assigned to risk categories as indicated in Annex                        I.                   

##### Article 167U.K.Equity exposures

1.The exposure value of equity exposures shall be the accounting value remaining after specific credit risk adjustment have                           been applied.                  

2.The exposure value of off-balance sheet equity exposures shall be its nominal value after reducing its nominal value by specific                           credit risk adjustments for this exposure.                  

##### Article 168U.K.Other non credit-obligation assets

The exposure value of other non credit-obligation assets shall be the accounting value remaining after specific credit risk                        adjustment have been applied                   

#### Section 6U.K.Requirements for the IRB approach

##### Sub-Section 1U.K.Rating systems

###### Article 169U.K.General principles

1.Where an institution uses multiple rating systems, the rationale for assigning an obligor or a transaction to a rating system                           shall be documented and applied in a manner that appropriately reflects the level of risk.                  

2.Assignment criteria and processes shall be periodically reviewed to determine whether they remain appropriate for the current                           portfolio and external conditions.                  

3.Where an institution uses direct estimates of risk parameters for individual obligors or exposures these may be seen as estimates                           assigned to grades on a continuous rating scale.                  

###### Article 170U.K.Structure of rating systems

1.The structure of rating systems for exposures to corporates, institutions and central governments and central banks shall                           comply with the following requirements:                  

(a)a rating system shall take into account obligor and transaction risk characteristics;                  

(b)a rating system shall have an obligor rating scale which reflects exclusively quantification of the risk of obligor default.                           The obligor rating scale shall have a minimum of 7 grades for non-defaulted obligors and one for defaulted obligors;                  

(c)an institution shall document the relationship between obligor grades in terms of the level of default risk each grade implies                           and the criteria used to distinguish that level of default risk;                  

(d)institutions with portfolios concentrated in a particular market segment and range of default risk shall have enough obligor                           grades within that range to avoid undue concentrations of obligors in a particular grade. Significant concentrations within                           a single grade shall be supported by convincing empirical evidence that the obligor grade covers a reasonably narrow PD band                           and that the default risk posed by all obligors in the grade falls within that band;                  

(e)to be permitted by the competent authority to use own estimates of LGDs for own funds requirement calculation, a rating system                           shall incorporate a distinct facility rating scale which exclusively reflects LGD related transaction characteristics. The                           facility grade definition shall include both a description of how exposures are assigned to the grade and of the criteria                           used to distinguish the level of risk across grades;                  

(f)significant concentrations within a single facility grade shall be supported by convincing empirical evidence that the facility                           grade covers a reasonably narrow LGD band, respectively, and that the risk posed by all exposures in the grade falls within                           that band.                  

2.Institutions using the methods set out in Article 153(5) for assigning risk weights for specialised lending exposures are                           exempt from the requirement to have an obligor rating scale which reflects exclusively quantification of the risk of obligor                           default for these exposures. These institutions shall have for these exposures at least four grades for non-defaulted obligors                           and at least one grade for defaulted obligors.                  

3.The structure of rating systems for retail exposures shall comply with the following requirements:                  

(a)rating systems shall reflect both obligor and transaction risk, and shall capture all relevant obligor and transaction characteristics;                  

(b)the level of risk differentiation shall ensure that the number of exposures in a given grade or pool is sufficient to allow                           for meaningful quantification and validation of the loss characteristics at the grade or pool level. The distribution of exposures                           and obligors across grades or pools shall be such as to avoid excessive concentrations;                  

(c)the process of assigning exposures to grades or pools shall provide for a meaningful differentiation of risk, for a grouping                           of sufficiently homogenous exposures, and shall allow for accurate and consistent estimation of loss characteristics at grade                           or pool level. For purchased receivables the grouping shall reflect the seller's underwriting practices and the heterogeneity                           of its customers.                  

4.Institutions shall consider the following risk drivers when assigning exposures to grades or pools:                  

(a)obligor risk characteristics;                  

(b)transaction risk characteristics, including product or collateral types or both. Institutions shall explicitly address cases                           where several exposures benefit from the same collateral;                  

(c)delinquency, except where an institution demonstrates to the satisfaction of its competent authority that delinquency is not                           a material driver of risk for the exposure.                  

###### Article 171U.K.Assignment to grades or pools

1.An institution shall have specific definitions, processes and criteria for assigning exposures to grades or pools within a                           rating system that comply with the following requirements:                  

(a)the grade or pool definitions and criteria shall be sufficiently detailed to allow those charged with assigning ratings to                           consistently assign obligors or facilities posing similar risk to the same grade or pool. This consistency shall exist across                           lines of business, departments and geographic locations;                  

(b)the documentation of the rating process shall allow third parties to understand the assignments of exposures to grades or                           pools, to replicate grade and pool assignments and to evaluate the appropriateness of the assignments to a grade or a pool;                  

(c)the criteria shall also be consistent with the institution's internal lending standards and its policies for handling troubled                           obligors and facilities.                  

2.An institution shall take all relevant information into account in assigning obligors and facilities to grades or pools. Information                           shall be current and shall enable the institution to forecast the future performance of the exposure. The less information                           an institution has, the more conservative shall be its assignments of exposures to obligor and facility grades or pools. If                           an institution uses an external rating as a primary factor determining an internal rating assignment, the institution shall                           ensure that it considers other relevant information.                  

###### Article 172U.K.Assignment of exposures

1.For exposures to corporates, institutions and central governments and central banks, and for equity exposures where an institution                           uses the PD/LGD approach set out in Article 155(3), assignment of exposures shall be carried out in accordance with the following                           criteria:                  

(a)each obligor shall be assigned to an obligor grade as part of the credit approval process;                  

(b)for those exposures for which an institution has received the permission of the competent authority to use own estimates of                           LGDs and conversion factors pursuant to Article 143, each exposure shall also be assigned to a facility grade as part of the                           credit approval process;                  

(c)institutions using the methods set out in Article 153(5) for assigning risk weights for specialised lending exposures shall                           assign each of these exposures to a grade in accordance with Article 170(2);                  

(d)each separate legal entity to which the institution is exposed shall be separately rated. An institution shall have appropriate                           policies regarding the treatment of individual obligor clients and groups of connected clients;                  

(e)separate exposures to the same obligor shall be assigned to the same obligor grade, irrespective of any differences in the                           nature of each specific transaction. However, where separate exposures are allowed to result in multiple grades for the same                           obligor, the following shall apply:                  

country transfer risk, this being dependent on whether the exposures are denominated in local or foreign currency;                            

the treatment of associated guarantees to an exposure may be reflected in an adjusted assignment to an obligor grade;                            

consumer protection, bank secrecy or other legislation prohibit the exchange of client data.                            

2.For retail exposures, each exposure shall be assigned to a grade or a pool as part of the credit approval process.                  

3.For grade and pool assignments institutions shall document the situations in which human judgement may override the inputs                           or outputs of the assignment process and the personnel responsible for approving these overrides. Institutions shall document                           these overrides and note down the personnel responsible. Institutions shall analyse the performance of the exposures whose                           assignments have been overridden. This analysis shall include an assessment of the performance of exposures whose rating has                           been overridden by a particular person, accounting for all the responsible personnel.                  

###### Article 173U.K.Integrity of assignment process

1.For exposures to corporates, institutions and central governments and central banks, and for equity exposures where an institution                           uses the PD/LGD approach set out in Article 155(3), the assignment process shall meet the following requirements of integrity:                  

(a)Assignments and periodic reviews of assignments shall be completed or approved by an independent party that does not directly                           benefit from decisions to extend the credit;                  

(b)Institutions shall review assignments at least annually and adjust the assignment where the result of the review does not                           justify carrying forward the current assignment. High risk obligors and problem exposures shall be subject to more frequent                           review. Institutions shall undertake a new assignment if material information on the obligor or exposure becomes available;                  

(c)An institution shall have an effective process to obtain and update relevant information on obligor characteristics that affect                           PDs, and on transaction characteristics that affect LGDs or conversion factors.                  

2.For retail exposures, an institution shall at least annually review obligor and facility assignments and adjust the assignment                           where the result of the review does not justify carrying forward the current assignment, or review the loss characteristics                           and delinquency status of each identified risk pool, whichever applicable. An institution shall also at least annually review                           in a representative sample the status of individual exposures within each pool as a means of ensuring that exposures continue                           to be assigned to the correct pool, and adjust the assignment where the result of the review does not justify carrying forward                           the current assignment.                  

3.EBA shall develop draft regulatory technical standards for the methodologies of the competent authorities to assess the integrity                           of the assignment process and the regular and independent assessment of risks.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 174U.K.Use of models

If an institution uses statistical models and other mechanical methods to assign exposures to obligors or facilities grades                        or pools, the following requirements shall be met:                   

the model shall have good predictive power and capital requirements shall not be distorted as a result of its use. The input                                 variables shall form a reasonable and effective basis for the resulting predictions. The model shall not have material biases;                            

the institution shall have in place a process for vetting data inputs into the model, which includes an assessment of the                                 accuracy, completeness and appropriateness of the data;                            

the data used to build the model shall be representative of the population of the institution's actual obligors or exposures;                            

the institution shall have a regular cycle of model validation that includes monitoring of model performance and stability;                                 review of model specification; and testing of model outputs against outcomes;                            

the institution shall complement the statistical model by human judgement and human oversight to review model-based assignments                                 and to ensure that the models are used appropriately. Review procedures shall aim at finding and limiting errors associated                                 with model weaknesses. Human judgements shall take into account all relevant information not considered by the model. The                                 institution shall document how human judgement and model results are to be combined.                            

###### Article 175U.K.Documentation of rating systems

1.The institutions shall document the design and operational details of its rating systems. The documentation shall provide                           evidence of compliance with the requirements in this Section, and address topics including portfolio differentiation, rating                           criteria, responsibilities of parties that rate obligors and exposures, frequency of assignment reviews, and management oversight                           of the rating process.                  

2.The institution shall document the rationale for and analysis supporting its choice of rating criteria. An institution shall                           document all major changes in the risk rating process, and such documentation shall support identification of changes made                           to the risk rating process subsequent to the last review by the competent authorities. The organisation of rating assignment                           including the rating assignment process and the internal control structure shall also be documented.                  

3.The institutions shall document the specific definitions of default and loss used internally and ensure consistency with the                           definitions set out in this Regulation.                  

4.Where the institution employs statistical models in the rating process, the institution shall document their methodologies.                           This material shall:                  

(a)provide a detailed outline of the theory, assumptions and mathematical and empirical basis of the assignment of estimates                           to grades, individual obligors, exposures, or pools, and the data source(s) used to estimate the model;                  

(b)establish a rigorous statistical process including out-of-time and out-of-sample performance tests for validating the model;                  

(c)indicate any circumstances under which the model does not work effectively.                  

5.An institution shall demonstrate to the satisfaction of the competent authority that the requirements of this Article are                           met, where an institution has obtained a rating system, or model used within a rating system, from a third-party vendor and                           that vendor refuses or restricts the access of the institution to information pertaining to the methodology of that rating                           system or model, or underlying data used to develop that methodology or model, on the basis that such information is proprietary.                  

###### Article 176U.K.Data maintenance

1.Institutions shall collect and store data on aspects of their internal ratings as required under Part Eight.                  

2.For exposures to corporates, institutions and central governments and central banks, and for equity exposures where an institution                           uses the PD/LGD approach set out in Article 155(3), institutions shall collect and store:                  

(a)complete rating histories on obligors and recognised guarantors;                  

(b)the dates the ratings were assigned;                  

(c)the key data and methodology used to derive the rating;                  

(d)the person responsible for the rating assignment;                  

(e)the identity of obligors and exposures that defaulted;                  

(f)the date and circumstances of such defaults;                  

(g)data on the PDs and realised default rates associated with rating grades and ratings migration.                  

3.Institutions not using own estimates of LGDs and conversion factors shall collect and store data on comparisons of realised                           LGDs to the values as set out in Article 161(1) and realised conversion factors to the values as set out in Article 166(8).                  

4.Institutions using own estimates of LGDs and conversion factors shall collect and store:                  

(a)complete histories of data on the facility ratings and LGD and conversion factor estimates associated with each rating scale;                  

(b)the dates on which the ratings were assigned and the estimates were made;                  

(c)the key data and methodology used to derive the facility ratings and LGD and conversion factor estimates;                  

(d)the person who assigned the facility rating and the person who provided LGD and conversion factor estimates;                  

(e)data on the estimated and realised LGDs and conversion factors associated with each defaulted exposure;                  

(f)data on the LGD of the exposure before and after evaluation of the effects of a guarantee/or credit derivative, for those                           institutions that reflect the credit risk mitigating effects of guarantees or credit derivatives through LGD;                  

(g)data on the components of loss for each defaulted exposure.                  

5.For retail exposures, institutions shall collect and store:                  

(a)data used in the process of allocating exposures to grades or pools;                  

(b)data on the estimated PDs, LGDs and conversion factors associated with grades or pools of exposures;                  

(c)the identity of obligors and exposures that defaulted;                  

(d)for defaulted exposures, data on the grades or pools to which the exposure was assigned over the year prior to default and                           the realised outcomes on LGD and conversion factor;                  

(e)data on loss rates for qualifying revolving retail exposures.                  

###### Article 177U.K.Stress tests used in assessment of capital adequacy

1.An institution shall have in place sound stress testing processes for use in the assessment of its capital adequacy. Stress                           testing shall involve identifying possible events or future changes in economic conditions that could have unfavourable effects                           on an institution's credit exposures and assessment of the institution's ability to withstand such changes.                  

2.An institution shall regularly perform a credit risk stress test to assess the effect of certain specific conditions on its                           total capital requirements for credit risk. The test shall be one chosen by the institution, subject to supervisory review.                           The test to be employed shall be meaningful and consider the effects of severe, but plausible, recession scenarios. An institution                           shall assess migration in its ratings under the stress test scenarios. Stressed portfolios shall contain the vast majority                           of an institution's total exposure.                  

3.Institutions using the treatment set out in Article 153(3) shall consider as part of their stress testing framework the impact                           of a deterioration in the credit quality of protection providers, in particular the impact of protection providers falling                           outside the eligibility criteria.                  

##### Sub-Section 2U.K.Risk quantification

###### Article 178U.K.Default of an obligor

1.A default shall be considered to have occurred with regard to a particular obligor when either or both of the following have                           taken place:                  

(a)the institution considers that the obligor is unlikely to pay its credit obligations to the institution, the parent undertaking                           or any of its subsidiaries in full, without recourse by the institution to actions such as realising security;                  

(b)the obligor is past due more than 90 days on any material credit obligation to the institution, the parent undertaking or                           any of its subsidiaries. Competent authorities may replace the 90 days with 180 days for exposures secured by residential                           property or SME commercial immovable property in the retail exposure class, as well as exposures to public sector entities.                           The 180 days shall not apply for the purposes of Article 127.                  

In the case of retail exposures, institutions may apply the definition of default laid down in points (a) and (b) of the first                        subparagraph at the level of an individual credit facility rather than in relation to the total obligations of a borrower.                   

2.The following shall apply for the purposes of point (b) of paragraph 1:                  

(a)for overdrafts, days past due commence once an obligor has breached an advised limit, has been advised a limit smaller than                           current outstandings, or has drawn credit without authorisation and the underlying amount is material;                  

(b)for the purposes of point (a), an advised limit comprises any credit limit determined by the institution and about which the                           obligor has been informed by the institution;                  

(c)days past due for credit cards commence on the minimum payment due date;                  

(d)materiality of a credit obligation past due shall be assessed against a threshold, defined by the competent authorities. This                           threshold shall reflect a level of risk that the competent authority considers to be reasonable;                  

(e)institutions shall have documented policies in respect of the counting of days past due, in particular in respect of the re-ageing                           of the facilities and the granting of extensions, amendments or deferrals, renewals, and netting of existing accounts. These                           policies shall be applied consistently over time, and shall be in line with the internal risk management and decision processes                           of the institution.                  

3.For the purpose of point (a) of paragraph 1, elements to be taken as indications of unlikeliness to pay shall include the                           following:                  

(a)the institution puts the credit obligation on non-accrued status;                  

(b)the institution recognises a specific credit adjustment resulting from a significant perceived decline in credit quality subsequent                           to the institution taking on the exposure;                  

(c)the institution sells the credit obligation at a material credit-related economic loss;                  

(d)the institution consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished                           financial obligation caused by the material forgiveness, or postponement, of principal, interest or, where relevant fees.                           This includes, in the case of equity exposures assessed under a PD/LGD Approach, distressed restructuring of the equity itself;                  

(e)the institution has filed for the obligor's bankruptcy or a similar order in respect of an obligor's credit obligation to                           the institution, the parent undertaking or any of its subsidiaries;                  

(f)the obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of                           a credit obligation to the institution, the parent undertaking or any of its subsidiaries.                  

4.Institutions that use external data that is not itself consistent with the definition of default laid down in paragraph 1,                           shall make appropriate adjustments to achieve broad equivalence with the definition of default.                  

5.If the institution considers that a previously defaulted exposure is such that no trigger of default continues to apply, the                           institution shall rate the obligor or facility as they would for a non-defaulted exposure. Where the definition of default                           is subsequently triggered, another default would be deemed to have occurred.                  

6.EBA shall develop draft regulatory technical standards to specify the conditions according to which a competent authority                           shall set the threshold referred to in paragraph 2(d).                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

7.EBA shall issue guidelines on the application of this Article. Those guidelines shall be adopted in accordance with Article                           16 of Regulation (EU) No 1093/2010.                  

###### Article 179U.K.Overall requirements for estimation

1.In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements:                  

(a)an institution's own estimates of the risk parameters PD, LGD, conversion factor and EL shall incorporate all relevant data,                           information and methods. The estimates shall be derived using both historical experience and empirical evidence, and not based                           purely on judgemental considerations. The estimates shall be plausible and intuitive and shall be based on the material drivers                           of the respective risk parameters. The less data an institution has, the more conservative it shall be in its estimation;                  

(b)an institution shall be able to provide a breakdown of its loss experience in terms of default frequency, LGD, conversion                           factor, or loss where EL estimates are used, by the factors it sees as the drivers of the respective risk parameters. The                           institution's estimates shall be representative of long run experience;                  

(c)any changes in lending practice or the process for pursuing recoveries over the observation periods referred to in Article                           180(1)(h) and (2)(e), Article 181(1)(j) and (2), and Article 182(2) and (3) shall be taken into account. An institution's                           estimates shall reflect the implications of technical advances and new data and other information, as it becomes available.                           Institutions shall review their estimates when new information comes to light but at least on an annual basis;                  

(d)the population of exposures represented in the data used for estimation, the lending standards used when the data was generated                           and other relevant characteristics shall be comparable with those of the institution's exposures and standards. The economic                           or market conditions that underlie the data shall be relevant to current and foreseeable conditions. The number of exposures                           in the sample and the data period used for quantification shall be sufficient to provide the institution with confidence in                           the accuracy and robustness of its estimates;                  

(e)for purchased receivables the estimates shall reflect all relevant information available to the purchasing institution regarding                           the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing institution,                           or by external sources. The purchasing institution shall evaluate any data relied upon which is provided by the seller;                  

(f)an institution shall add to its estimates a margin of conservatism that is related to the expected range of estimation errors.                           Where methods and data are considered to be less satisfactory, the expected range of errors is larger, the margin of conservatism                           shall be larger.                  

Where institutions use different estimates for the calculation of risk weights and for internal purposes, it shall be documented                        and be reasonable. If institutions can demonstrate to their competent authorities that for data that have been collected prior                        to 1 January 2007 appropriate adjustments have been made to achieve broad equivalence with the definition of default laid down in Article 178                        or with loss, competent authorities may permit the institutions some flexibility in the application of the required standards                        for data.                   

2.Where an institution uses data that is pooled across institutions it shall meet the following requirements:                  

(a)the rating systems and criteria of other institutions in the pool are similar to its own;                  

(b)the pool is representative of the portfolio for which the pooled data is used;                  

(c)the pooled data is used consistently over time by the institution for its estimates;                  

(d)the institution shall remain responsible for the integrity of its rating systems;                  

(e)the institution shall maintain sufficient in-house understanding of its rating systems, including the ability to effectively                           monitor and audit the rating process.                  

###### Article 180U.K.Requirements specific to PD estimation

1.In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements                           specific to PD estimation to exposures to corporates, institutions and central governments and central banks and for equity                           exposures where an institution uses the PD/LGD approach set out in Article 155(3):                  

(a)institutions shall estimate PDs by obligor grade from long run averages of one-year default rates. PD estimates for obligors                           that are highly leveraged or for obligors whose assets are predominantly traded assets shall reflect the performance of the                           underlying assets based on periods of stressed volatilities;                  

(b)for purchased corporate receivables institutions may estimate the EL by obligor grade from long run averages of one-year realised                           default rates;                  

(c)if an institution derives long run average estimates of PDs and LGDs for purchased corporate receivables from an estimate                           of EL, and an appropriate estimate of PD or LGD, the process for estimating total losses shall meet the overall standards                           for estimation of PD and LGD set out in this part, and the outcome shall be consistent with the concept of LGD as set out                           in Article 181(1)(a);                  

(d)institutions shall use PD estimation techniques only with supporting analysis. Institutions shall recognise the importance                           of judgmental considerations in combining results of techniques and in making adjustments for limitations of techniques and                           information;                  

(e)to the extent that an institution uses data on internal default experience for the estimation of PDs, the estimates shall                           be reflective of underwriting standards and of any differences in the rating system that generated the data and the current                           rating system. Where underwriting standards or rating systems have changed, the institution shall add a greater margin of                           conservatism in its estimate of PD;                  

(f)to the extent that an institution associates or maps its internal grades to the scale used by an ECAI or similar organisations                           and then attributes the default rate observed for the external organisation's grades to the institution's grades, mappings                           shall be based on a comparison of internal rating criteria to the criteria used by the external organisation and on a comparison                           of the internal and external ratings of any common obligors. Biases or inconsistencies in the mapping approach or underlying                           data shall be avoided. The criteria of the external organisation underlying the data used for quantification shall be oriented                           to default risk only and not reflect transaction characteristics. The analysis undertaken by the institution shall include                           a comparison of the default definitions used, subject to the requirements in Article 178. The institution shall document the                           basis for the mapping;                  

(g)to the extent that an institution uses statistical default prediction models it is allowed to estimate PDs as the simple average                           of default-probability estimates for individual obligors in a given grade. The institution's use of default probability models                           for this purpose shall meet the standards specified in Article 174;                  

(h)irrespective of whether an institution is using external, internal, or pooled data sources, or a combination of the three,                           for its PD estimation, the length of the underlying historical observation period used shall be at least five years for at                           least one source. If the available observation period spans a longer period for any source, and this data is relevant, this                           longer period shall be used. This point also applies to the PD/LGD Approach to equity. Subject to the permission of competent                           authorities, institutions which have not received the permission of the competent authority pursuant to Article 143 to use                           own estimates of LGDs or conversion factors may use, when they implement the IRB Approach, relevant data covering a period                           of two years. The period to be covered shall increase by one year each year until relevant data cover a period of five years.                  

2.For retail exposures, the following requirements shall apply:                  

(a)institutions shall estimate PDs by obligor grade or pool from long run averages of one-year default rates;                  

(b)PD estimates may also be derived from an estimate of total losses and appropriate estimates of LGDs;                  

(c)institutions shall regard internal data for assigning exposures to grades or pools as the primary source of information for                           estimating loss characteristics. Institutions may use external data (including pooled data) or statistical models for quantification                           provided that the following strong links both exist:                  

between the institution's process of assigning exposures to grades or pools and the process used by the external data source;                                 and                            

between the institution's internal risk profile and the composition of the external data;                            

(d)if an institution derives long run average estimates of PD and LGD for retail exposures from an estimate of total losses and                           an appropriate estimate of PD or LGD, the process for estimating total losses shall meet the overall standards for estimation                           of PD and LGD set out in this part, and the outcome shall be consistent with the concept of LGD as set out in point (a) of                           Article 181(1);                  

(e)irrespective of whether an institution is using external, internal or pooled data sources or a combination of the three, for                           their estimation of loss characteristics, the length of the underlying historical observation period used shall be at least                           five years for at least one source. If the available observation spans a longer period for any source, and these data are                           relevant, this longer period shall be used. An institution need not give equal importance to historic data if more recent                           data is a better predictor of loss rates. Subject to the permission of the competent authorities, institutions may use, when                           they implement the IRB Approach, relevant data covering a period of two years. The period to be covered shall increase by                           one year each year until relevant data cover a period of five years;                  

(f)institutions shall identify and analyse expected changes of risk parameters over the life of credit exposures (seasoning effects).                  

For purchased retail receivables, institutions may use external and internal reference data. Institutions shall use all relevant                        data sources as points of comparison.                   

3.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the conditions according to which competent authorities may grant the permissions referred to in point (h) of paragraph 1                           and point (e) of paragraph 2;                  

(b)the methodologies according to which competent authorities shall assess the methodology of an institution for estimating PD                           pursuant to Article 143.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 181U.K.Requirements specific to own-LGD estimates

1.In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements                           specific to own-LGD estimates:                  

(a)institutions shall estimate LGDs by facility grade or pool on the basis of the average realised LGDs by facility grade or                           pool using all observed defaults within the data sources (default weighted average);                  

(b)institutions shall use LGD estimates that are appropriate for an economic downturn if those are more conservative than the                           long-run average. To the extent a rating system is expected to deliver realised LGDs at a constant level by grade or pool                           over time, institutions shall make adjustments to their estimates of risk parameters by grade or pool to limit the capital                           impact of an economic downturn;                  

(c)an institution shall consider the extent of any dependence between the risk of the obligor and that of the collateral or collateral                           provider. Cases where there is a significant degree of dependence shall be addressed in a conservative manner;                  

(d)currency mismatches between the underlying obligation and the collateral shall be treated conservatively in the institution's                           assessment of LGD;                  

(e)to the extent that LGD estimates take into account the existence of collateral, these estimates shall not solely be based                           on the collateral's estimated market value. LGD estimates shall take into account the effect of the potential inability of                           institutions to expeditiously gain control of their collateral and liquidate it;                  

(f)to the extent that LGD estimates take into account the existence of collateral, institutions shall establish internal requirements                           for collateral management, legal certainty and risk management that are generally consistent with those set out in Chapter                           4, Section 3;                  

(g)to the extent that an institution recognises collateral for determining the exposure value for counterparty credit risk in                           accordance with Chapter 6, Section 5 or 6, any amount expected to be recovered from the collateral shall not be taken into                           account in the LGD estimates;                  

(h)for the specific case of exposures already in default, the institution shall use the sum of its best estimate of expected                           loss for each exposure given current economic circumstances and exposure status and its estimate of the increase of loss rate                           caused by possible additional unexpected losses during the recovery period, i.e. between date of default and final liquidation                           of the exposure;                  

(i)to the extent that unpaid late fees have been capitalised in the institution's income statement, they shall be added to the                           institution's measure of exposure and loss;                  

(j)for exposures to corporates, institutions and central governments and central banks, estimates of LGD shall be based on data                           over a minimum of five years, increasing by one year each year after implementation until a minimum of seven years is reached,                           for at least one data source. If the available observation period spans a longer period for any source, and the data is relevant,                           this longer period shall be used.                  

2.For retail exposures, institutions may do the following:                  

(a)derive LGD estimates from realised losses and appropriate estimates of PDs;                  

(b)reflect future drawings either in their conversion factors or in their LGD estimates;                  

(c)For purchased retail receivables use external and internal reference data to estimate LGDs.                  

For retail exposures, estimates of LGD shall be based on data over a minimum of five years. An institution need not give equal                        importance to historic data if more recent data is a better predictor of loss rates. Subject to the permission of the competent                        authorities, institutions may use, when they implement the IRB Approach, relevant data covering a period of two years. The                        period to be covered shall increase by one year each year until relevant data cover a period of five years.                   

3.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the nature, severity and duration of an economic downturn referred to in paragraph 1;                  

(b)the conditions according to which a competent authority may permit an institution pursuant to paragraph 2 to use relevant                           data covering a period of two years when the institution implements the IRB Approach.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 182U.K.Requirements specific to own-conversion factor estimates

1.In quantifying the risk parameters to be associated with rating grades or pools, institutions shall apply the following requirements                           specific to own-conversion factor estimates:                  

(a)institutions shall estimate conversion factors by facility grade or pool on the basis of the average realised conversion factors                           by facility grade or pool using the default weighted average resulting from all observed defaults within the data sources;                  

(b)institutions shall use conversion factor estimates that are appropriate for an economic downturn if those are more conservative                           than the long-run average. To the extent a rating system is expected to deliver realised conversion factors at a constant                           level by grade or pool over time, institutions shall make adjustments to their estimates of risk parameters by grade or pool                           to limit the capital impact of an economic downturn;                  

(c)institutions' estimates of conversion factors shall reflect the possibility of additional drawings by the obligor up to and                           after the time a default event is triggered. The conversion factor estimate shall incorporate a larger margin of conservatism                           where a stronger positive correlation can reasonably be expected between the default frequency and the magnitude of conversion                           factor;                  

(d)in arriving at estimates of conversion factors institutions shall consider their specific policies and strategies adopted                           in respect of account monitoring and payment processing. Institutions shall also consider their ability and willingness to                           prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default                           events;                  

(e)institutions shall have adequate systems and procedures in place to monitor facility amounts, current outstandings against                           committed lines and changes in outstandings per obligor and per grade. The institution shall be able to monitor outstanding                           balances on a daily basis;                  

(f)if institutions use different estimates of conversion factors for the calculation of risk-weighted exposure amounts and internal                           purposes it shall be documented and be reasonable.                  

2.For exposures to corporates, institutions and central governments and central banks, estimates of conversion factors shall                           be based on data over a minimum of five years, increasing by one year each year after implementation until a minimum of seven                           years is reached, for at least one data source. If the available observation period spans a longer period for any source,                           and the data is relevant, this longer period shall be used.                  

3.For retail exposures, institutions may reflect future drawings either in their conversion factors or in their LGD estimates.                  

For retail exposures, estimates of conversion factors shall be based on data over a minimum of five years. By way of derogation                        from point (a) of paragraph 1, an institution need not give equal importance to historic data if more recent data is a better                        predictor of draw downs. Subject to the permission of competent authorities, institutions may use, when they implement the                        IRB Approach, relevant data covering a period of two years. The period to be covered shall increase by one year each year                        until relevant data cover a period of five years.                   

4.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the nature, severity and duration of an economic downturn referred to in paragraph 1;                  

(b)conditions according to which a competent authority may permit and institution to use relevant data covering a period of two                           years at the time an institution first implements the IRB Approach.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 183U.K.Requirements for assessing the effect of guarantees and credit derivatives for exposures to corporates, institutions and central                           governments and central banks where own estimates of LGD are used and for retail exposures

1.The following requirements shall apply in relation to eligible guarantors and guarantees:                  

(a)institutions shall have clearly specified criteria for the types of guarantors they recognise for the calculation of risk-weighted                           exposure amounts;                  

(b)for recognised guarantors the same rules as for obligors as set out in Articles 171, 172 and 173 shall apply;                  

(c)the guarantee shall be evidenced in writing, non-cancellable on the part of the guarantor, in force until the obligation is                           satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in                           a jurisdiction where the guarantor has assets to attach and enforce a judgement. Conditional guarantees prescribing conditions                           under which the guarantor may not be obliged to perform may be recognised subject to permission of the competent authorities.                           The assignment criteria shall adequately address any potential reduction in the risk mitigation effect.                  

2.An institution shall have clearly specified criteria for adjusting grades, pools or LGD estimates, and, in the case of retail                           and eligible purchased receivables, the process of allocating exposures to grades or pools, to reflect the impact of guarantees                           for the calculation of risk-weighted exposure amounts. These criteria shall comply with the requirements set out in Articles                           171, 172 and 173.                  

The criteria shall be plausible and intuitive. They shall address the guarantor's ability and willingness to perform under                        the guarantee, the likely timing of any payments from the guarantor, the degree to which the guarantor's ability to perform                        under the guarantee is correlated with the obligor's ability to repay, and the extent to which residual risk to the obligor                        remains.                   

3.The requirements for guarantees in this Article shall apply also for single-name credit derivatives. In relation to a mismatch                           between the underlying obligation and the reference obligation of the credit derivative or the obligation used for determining                           whether a credit event has occurred, the requirements set out under Article 216(2) shall apply. For retail exposures and eligible                           purchased receivables, this paragraph applies to the process of allocating exposures to grades or pools.                  

The criteria shall address the payout structure of the credit derivative and conservatively assess the impact this has on                        the level and timing of recoveries. The institution shall consider the extent to which other forms of residual risk remain.                   

4.The requirements set out in paragraphs 1 to 3 shall not apply for guarantees provided by institutions, central governments                           and central banks, and corporate entities which meet the requirements laid down in Article 201(1)(g) if the institution has                           received permission to apply the Standardised Approach for exposures to such entities pursuant to Articles 148 and 150. In                           this case the requirements of Chapter 4 shall apply.                  

5.For retail guarantees, the requirements set out in paragraphs 1, 2 and 3 shall also apply to the assignment of exposures to                           grades or pools, and the estimation of PD.                  

6.EBA shall develop draft regulatory technical standards to specify the conditions according to which competent authorities                           may permit conditional guarantees to be recognised.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 184U.K.Requirements for purchased receivables

1.In quantifying the risk parameters to be associated with rating grades or pools for purchased receivables, institutions shall                           ensure the conditions laid down in paragraphs 2 to 6 are met.                  

2.The structure of the facility shall ensure that under all foreseeable circumstances the institution has effective ownership                           and control of all cash remittances from the receivables. When the obligor makes payments directly to a seller or servicer,                           the institution shall verify regularly that payments are forwarded completely and within the contractually agreed terms. Institutions                           shall have procedures to ensure that ownership over the receivables and cash receipts is protected against bankruptcy stays                           or legal challenges that could materially delay the lender's ability to liquidate or assign the receivables or retain control                           over cash receipts.                  

3.The institution shall monitor both the quality of the purchased receivables and the financial condition of the seller and                           servicer. The following shall apply:                  

(a)the institution shall assess the correlation among the quality of the purchased receivables and the financial condition of                           both the seller and servicer, and have in place internal policies and procedures that provide adequate safeguards to protect                           against any contingencies, including the assignment of an internal risk rating for each seller and servicer;                  

(b)the institution shall have clear and effective policies and procedures for determining seller and servicer eligibility. The                           institution or its agent shall conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports                           from the seller or servicer, detect fraud or operational weaknesses, and verify the quality of the seller's credit policies                           and servicer's collection policies and procedures. The findings of these reviews shall be documented;                  

(c)the institution shall assess the characteristics of the purchased receivables pools, including over-advances; history of the                           seller's arrears, bad debts, and bad debt allowances; payment terms, and potential contra accounts;                  

(d)the institution shall have effective policies and procedures for monitoring on an aggregate basis single-obligor concentrations                           both within and across purchased receivables pools;                  

(e)the institution shall ensure that it receives from the servicer timely and sufficiently detailed reports of receivables ageings                           and dilutions to ensure compliance with the institution's eligibility criteria and advancing policies governing purchased                           receivables, and provide an effective means with which to monitor and confirm the seller's terms of sale and dilution.                  

4.The institution shall have systems and procedures for detecting deteriorations in the seller's financial condition and purchased                           receivables quality at an early stage, and for addressing emerging problems pro-actively. In particular, the institution shall                           have clear and effective policies, procedures, and information systems to monitor covenant violations, and clear and effective                           policies and procedures for initiating legal actions and dealing with problem purchased receivables.                  

5.The institution shall have clear and effective policies and procedures governing the control of purchased receivables, credit,                           and cash. In particular, written internal policies shall specify all material elements of the receivables purchase programme,                           including the advancing rates, eligible collateral, necessary documentation, concentration limits, and the way cash receipts                           are to be handled. These elements shall take appropriate account of all relevant and material factors, including the seller                           and servicer's financial condition, risk concentrations, and trends in the quality of the purchased receivables and the seller's                           customer base, and internal systems shall ensure that funds are advanced only against specified supporting collateral and                           documentation.                  

6.The institution shall have an effective internal process for assessing compliance with all internal policies and procedures.                           The process shall include regular audits of all critical phases of the institution's receivables purchase programme, verification                           of the separation of duties between firstly the assessment of the seller and servicer and the assessment of the obligor and                           secondly between the assessment of the seller and servicer and the field audit of the seller and servicer, and evaluations                           of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting automation                           systems.                  

##### Sub-Section 3U.K.Validation of internal estimates

###### Article 185U.K.Validation of internal estimates

Institutions shall validate their internal estimates subject to the following requirements:                   

institutions shall have robust systems in place to validate the accuracy and consistency of rating systems, processes, and                                 the estimation of all relevant risk parameters. The internal validation process shall enable the institution to assess the                                 performance of internal rating and risk estimation systems consistently and meaningfully;                            

institutions shall regularly compare realised default rates with estimated PDs for each grade and, where realised default                                 rates are outside the expected range for that grade, institutions shall specifically analyse the reasons for the deviation.                                 Institutions using own estimates of LGDs and conversion factors shall also perform analogous analysis for these estimates.                                 Such comparisons shall make use of historical data that cover as long a period as possible. The institution shall document                                 the methods and data used in such comparisons. This analysis and documentation shall be updated at least annually;                            

institutions shall also use other quantitative validation tools and comparisons with relevant external data sources. The analysis                                 shall be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period.                                 Institutions' internal assessments of the performance of their rating systems shall be based on as long a period as possible;                            

the methods and data used for quantitative validation shall be consistent through time. Changes in estimation and validation                                 methods and data (both data sources and periods covered) shall be documented;                            

institutions shall have sound internal standards for situations where deviations in realised PDs, LGDs, conversion factors                                 and total losses, where EL is used, from expectations, become significant enough to call the validity of the estimates into                                 question. These standards shall take account of business cycles and similar systematic variability in default experience.                                 Where realised values continue to be higher than expected values, institutions shall revise estimates upward to reflect their                                 default and loss experience;                            

##### Sub-Section 4U.K.Requirements for equity exposures under the internal models approach

###### Article 186U.K.Own funds requirement and risk quantification

For the purpose of calculating own funds requirements institutions shall meet the following standards:                   

the estimate of potential loss shall be robust to adverse market movements relevant to the long-term risk profile of the institution's                                 specific holdings. The data used to represent return distributions shall reflect the longest sample period for which data                                 is available and meaningful in representing the risk profile of the institution's specific equity exposures. The data used                                 shall be sufficient to provide conservative, statistically reliable and robust loss estimates that are not based purely on                                 subjective or judgmental considerations. The shock employed shall provide a conservative estimate of potential losses over                                 a relevant long-term market or business cycle. The institution shall combine empirical analysis of available data with adjustments                                 based on a variety of factors in order to attain model outputs that achieve appropriate realism and conservatism. In constructing                                 value at risk (VaR) models estimating potential quarterly losses, institutions may use quarterly data or convert shorter horizon                                 period data to a quarterly equivalent using an analytically appropriate method supported by empirical evidence and through                                 a well-developed and documented thought process and analysis. Such an approach shall be applied conservatively and consistently                                 over time. Where only limited relevant data is available the institution shall add appropriate margins of conservatism;                            

the models used shall capture adequately all of the material risks embodied in equity returns including both the general market                                 risk and specific risk exposure of the institution's equity portfolio. The internal models shall adequately explain historical                                 price variation, capture both the magnitude and changes in the composition of potential concentrations, and be robust to adverse                                 market environments. The population of risk exposures represented in the data used for estimation shall be closely matched                                 to or at least comparable with those of the institution's equity exposures;                            

the internal model shall be appropriate for the risk profile and complexity of an institution's equity portfolio. Where an                                 institution has material holdings with values that are highly non-linear in nature the internal models shall be designed to                                 capture appropriately the risks associated with such instruments;                            

mapping of individual positions to proxies, market indices, and risk factors shall be plausible, intuitive, and conceptually                                 sound;                            

institutions shall demonstrate through empirical analyses the appropriateness of risk factors, including their ability to                                 cover both general and specific risk;                            

the estimates of the return volatility of equity exposures shall incorporate relevant and available data, information, and                                 methods. Independently reviewed internal data or data from external sources including pooled data shall be used;                            

a rigorous and comprehensive stress-testing programme shall be in place.                            

###### Article 187U.K.Risk management process and controls

With regard to the development and use of internal models for own funds requirement purposes, institutions shall establish                        policies, procedures, and controls to ensure the integrity of the model and modelling process. These policies, procedures,                        and controls shall include the following:                   

full integration of the internal model into the overall management information systems of the institution and in the management                                 of the non-trading book equity portfolio. Internal models shall be fully integrated into the institution's risk management                                 infrastructure if they are particularly used in measuring and assessing equity portfolio performance including the risk-adjusted                                 performance, allocating economic capital to equity exposures and evaluating overall capital adequacy and the investment management                                 process;                            

established management systems, procedures, and control functions for ensuring the periodic and independent review of all                                 elements of the internal modelling process, including approval of model revisions, vetting of model inputs, and review of                                 model results, such as direct verification of risk computations. These reviews shall assess the accuracy, completeness, and                                 appropriateness of model inputs and results and focus on both finding and limiting potential errors associated with known                                 weaknesses and identifying unknown model weaknesses. Such reviews may be conducted by an internal independent unit, or by                                 an independent external third party;                            

adequate systems and procedures for monitoring investment limits and the risk exposures of equity exposures;                            

the units responsible for the design and application of the model shall be functionally independent from the units responsible                                 for managing individual investments;                            

parties responsible for any aspect of the modelling process shall be adequately qualified. Management shall allocate sufficient                                 skilled and competent resources to the modelling function.                            

###### Article 188U.K.Validation and documentation

Institutions shall have robust systems in place to validate the accuracy and consistency of their internal models and modelling                        processes. All material elements of the internal models and the modelling process and validation shall be documented.                   

The validation and documentation of institutions' internal models and modelling processes shall be subject to the following                        requirements:                   

institutions shall use the internal validation process to assess the performance of its internal models and processes in a                                 consistent and meaningful way;                            

the methods and data used for quantitative validation shall be consistent over time. Changes in estimation and validation                                 methods and changes to data sources and periods covered, shall be documented;                            

institutions shall regularly compare actual equity returns computed using realised and unrealised gains and losses with modelled                                 estimates. Such comparisons shall make use of historical data that cover as long a period as possible. The institution shall                                 document the methods and data used in such comparisons. This analysis and documentation shall be updated at least annually;                            

institutions shall make use of other quantitative validation tools and comparisons with external data sources. The analysis                                 shall be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period.                                 Institutions' internal assessments of the performance of their models shall be based on as long a period as possible;                            

institutions shall have sound internal standards for addressing situations where comparison of actual equity returns with                                 the models estimates calls the validity of the estimates or of the models as such into question. These standards shall take                                 account of business cycles and similar systematic variability in equity returns. All adjustments made to internal models in                                 response to model reviews shall be documented and consistent with the institution's model review standards;                            

the internal model and the modelling process shall be documented, including the responsibilities of parties involved in the                                 modelling, and the model approval and model review processes.                            

##### Sub-Section 5U.K.Internal governance and oversight

###### Article 189U.K.Corporate Governance

1.All material aspects of the rating and estimation processes shall be approved by the institution's management body or a designated                           committee thereof and senior management. These parties shall possess a general understanding of the rating systems of the                           institution and detailed comprehension of its associated management reports.                  

2.Senior management shall be subject to the following requirements:                  

(a)they shall provide notice to the management body or a designated committee thereof of material changes or exceptions from                           established policies that will materially impact the operations of the institution's rating systems;                  

(b)they shall have a good understanding of the rating systems designs and operations;                  

(c)they shall ensure, on an ongoing basis that the rating systems are operating properly.                  

Senior management shall be regularly informed by the credit risk control units about the performance of the rating process,                        areas needing improvement, and the status of efforts to improve previously identified deficiencies.                   

3.Internal ratings-based analysis of the institution's credit risk profile shall be an essential part of the management reporting                           to these parties. Reporting shall include at least risk profile by grade, migration across grades, estimation of the relevant                           parameters per grade, and comparison of realised default rates, and to the extent that own estimates are used of realised                           LGDs and realised conversion factors against expectations and stress-test results. Reporting frequencies shall depend on the                           significance and type of information and the level of the recipient.                  

###### Article 190U.K.Credit risk control

1.The credit risk control unit shall be independent from the personnel and management functions responsible for originating                           or renewing exposures and report directly to senior management. The unit shall be responsible for the design or selection,                           implementation, oversight and performance of the rating systems. It shall regularly produce and analyse reports on the output                           of the rating systems.                  

2.The areas of responsibility for the credit risk control unit or units shall include:                  

(a)testing and monitoring grades and pools;                  

(b)production and analysis of summary reports of the institution's rating systems;                  

(c)implementing procedures to verify that grade and pool definitions are consistently applied across departments and geographic                           areas;                  

(d)reviewing and documenting any changes to the rating process, including the reasons for the changes;                  

(e)reviewing the rating criteria to evaluate if they remain predictive of risk. Changes to the rating process, criteria or individual                           rating parameters shall be documented and retained;                  

(f)active participation in the design or selection, implementation and validation of models used in the rating process;                  

(g)oversight and supervision of models used in the rating process;                  

(h)ongoing review and alterations to models used in the rating process.                  

3.Institutions using pooled data in accordance with Article 179(2) may outsource the following tasks:                  

(a)production of information relevant to testing and monitoring grades and pools;                  

(b)production of summary reports of the institution's rating systems;                  

(c)production of information relevant to a review of the rating criteria to evaluate if they remain predictive of risk;                  

(d)documentation of changes to the rating process, criteria or individual rating parameters;                  

(e)production of information relevant to ongoing review and alterations to models used in the rating process.                  

4.Institutions making use of paragraph 3 shall ensure that the competent authorities have access to all relevant information                           from the third party that is necessary for examining compliance with the requirements and that the competent authorities may                           perform on-site examinations to the same extent as within the institution.                  

###### Article 191U.K.Internal Audit

Internal audit or another comparable independent auditing unit shall review at least annually the institution's rating systems                        and its operations, including the operations of the credit function and the estimation of PDs, LGDs, ELs and conversion factors.                        Areas of review shall include adherence to all applicable requirements.                   

### CHAPTER 4U.K.Credit risk mitigation

#### Section 1U.K.Definitions and general requirements

##### Article 192U.K.Definitions

For the purposes of this Chapter, the following definitions shall apply:                   

‘lending institution’ means the institution which has the exposure in question;                            

‘secured lending transaction’ means any transaction giving rise to an exposure secured by collateral which does not include a provision conferring upon                                 the institution the right to receive margin at least daily;                            

‘capital market-driven transaction’ means any transaction giving rise to an exposure secured by collateral which includes a provision conferring upon the institution                                 the right to receive margin at least daily;                            

‘underlying CIU’ means a CIU in the shares or units of which another CIU has invested.                            

##### Article 193U.K.Principles for recognising the effect of credit risk mitigation techniques

1.No exposure in respect of which an institution obtains credit risk mitigation shall produce a higher risk-weighted exposure                           amount or expected loss amount than an otherwise identical exposure in respect of which an institution has no credit risk                           mitigation.                  

2.Where the risk-weighted exposure amount already takes account of credit protection under Chapter 2 or Chapter 3, as applicable,                           institutions shall not take into account that credit protection in the calculations under this Chapter.                  

3.Where the provisions in Sections 2 and 3 are met, institutions may amend the calculation of risk-weighted exposure amounts                           under the Standardised Approach and the calculation of risk-weighted exposure amounts and expected loss amounts under the                           IRB Approach in accordance with the provisions of Sections 4, 5 and 6.                  

4.Institutions shall treat cash, securities or commodities purchased, borrowed or received under a repurchase transaction or                           securities or commodities lending or borrowing transaction as collateral.                  

5.Where an institution calculating risk-weighted exposure amounts under the Standardised Approach has more than one form of                           credit risk mitigation covering a single exposure it shall do both of the following:                  

(a)subdivide the exposure into parts covered by each type of credit risk mitigation tool;                  

(b)calculate the risk-weighted exposure amount for each part obtained in point (a) separately in accordance with the provisions                           of Chapter 2 and this Chapter.                  

6.When an institution calculating risk-weighted exposure amounts under the Standardised Approach covers a single exposure with                           credit protection provided by a single protection provider and that protection has differing maturities, it shall do both                           of the following:                  

(a)subdivide the exposure into parts covered by each credit risk mitigation tool;                  

(b)calculate the risk-weighted exposure amount for each part obtained in point (a) separately in accordance with the provisions                           of Chapter 2 and this Chapter.                  

##### Article 194U.K.Principles governing the eligibility of credit risk mitigation techniques

1.The technique used to provide the credit protection together with the actions and steps taken and procedures and policies                           implemented by the lending institution shall be such as to result in credit protection arrangements which are legally effective                           and enforceable in all relevant jurisdictions.                  

The lending institution shall provide, upon request of the competent authority, the most recent version of the independent,                        written and reasoned legal opinion or opinions that it used to establish whether its credit protection arrangement or arrangements                        meet the condition laid down in the first subparagraph.                   

2.The lending institution shall take all appropriate steps to ensure the effectiveness of the credit protection arrangement                           and to address the risks related to that arrangement.                  

3.Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where                           the assets relied upon for protection meet both of the following conditions:                  

(a)they are included in the list of eligible assets set out in Articles 197 to 200, as applicable;                  

(b)they are sufficiently liquid and their value over time sufficiently stable to provide appropriate certainty as to the credit                           protection achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition                           allowed.                  

4.Institutions may recognise funded credit protection in the calculation of the effect of credit risk mitigation only where                           the lending institution has the right to liquidate or retain, in a timely manner, the assets from which the protection derives                           in the event of the default, insolvency or bankruptcy — or other credit event set out in the transaction documentation — of                           the obligor and, where applicable, of the custodian holding the collateral. The degree of correlation between the value of                           the assets relied upon for protection and the credit quality of the obligor shall not be too high.                  

5.In the case of unfunded credit protection, a protection provider shall qualify as an eligible protection provider only where                           the protection provider is included in the list of eligible protection providers set out in Article 201 or 202, as applicable.                  

6.In the case of unfunded credit protection, a protection agreement shall qualify as an eligible protection agreement only where                           it meets both the following conditions:                  

(a)it is included in the list of eligible protection agreements set out in Articles 203 and 204(1);                  

(b)it is legally effective and enforceable in the relevant jurisdictions, to provide appropriate certainty as to the credit protection                           achieved having regard to the approach used to calculate risk-weighted exposure amounts and to the degree of recognition allowed;                  

(c)the protection provider meets the criteria laid down in paragraph 5.                  

7.Credit protection shall comply with the requirements set out in Section 3, as applicable.                  

8.An institution shall be able to demonstrate to competent authorities that it has adequate risk management processes to control                           those risks to which it may be exposed as a result of carrying out credit risk mitigation practices.                  

9.Notwithstanding the fact that credit risk mitigation has been taken into account for the purposes of calculating risk-weighted                           exposure amounts and, where applicable, expected loss amounts, institutions shall continue to undertake a full credit risk                           assessment of the underlying exposure and be in a position to demonstrate the fulfilment of this requirement to the competent                           authorities. In the case of repurchase transactions and securities lending or commodities lending or borrowing transactions                           the underlying exposure shall, for the purposes of this paragraph only, be deemed to be the net amount of the exposure.                  

10.EBA shall develop draft regulatory technical standards to specify what constitutes sufficiently liquid assets and when asset                           values can be considered as sufficiently stable for the purpose of paragraph 3.                  

EBA shall submit those draft regulatory technical standards to the Commission by 30 September 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Section 2U.K.Eligible forms of credit risk mitigation

##### Sub-Section 1U.K.Funded credit protection

###### Article 195U.K.On-balance sheet netting

An institution may use on-balance sheet netting of mutual claims between itself and its counterparty as an eligible form of                        credit risk mitigation.                   

Without prejudice to Article 196, eligibility is limited to reciprocal cash balances between the institution and the counterparty.                        Institutions may amend risk-weighted exposure amounts and, as relevant, expected loss amounts only for loans and deposits                        that they have received themselves and that are subject to an on-balance sheet netting agreement.                   

###### Article 196U.K.Master netting agreements covering repurchase transactions or securities or commodities lending or borrowing transactions                           or other capital market-driven transactions

Institutions adopting the Financial Collateral Comprehensive Method set out in Article 223 may take into account the effects                        of bilateral netting contracts covering repurchase transactions, securities or commodities lending or borrowing transactions,                        or other capital market-driven transactions with a counterparty. Without prejudice to Article 299, the collateral taken and                        securities or commodities borrowed within such agreements or transactions shall comply with the eligibility requirements for                        collateral set out in Articles 197 and 198.                   

###### Article 197U.K.Eligibility of collateral under all approaches and methods

1.Institutions may use the following items as eligible collateral under all approaches and methods:                  

(a)cash on deposit with, or cash assimilated instruments held by, the lending institution;                  

(b)debt securities issued by central governments or central banks, which securities have a credit assessment by an ECAI or export                           credit agency recognised as eligible for the purposes of Chapter 2 which has been determined by EBA to be associated with                           credit quality step 4 or above under the rules for the risk weighting of exposures to central governments and central banks                           under Chapter 2;                  

(c)debt securities issued by institutions, which securities have a credit assessment by an ECAI which has been determined by                           EBA to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures to institutions                           under Chapter 2;                  

(d)debt securities issued by other entities which securities have a credit assessment by an ECAI which has been determined by                           EBA to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures to corporates                           under Chapter 2;                  

(e)debt securities with a short-term credit assessment by an ECAI which has been determined by EBA to be associated with credit                           quality step 3 or above under the rules for the risk weighting of short term exposures under Chapter 2;                  

(f)equities or convertible bonds that are included in a main index;                  

(g)gold;                  

(h)securitisation positions that are not re-securitisation positions, which have an external credit assessment by an ECAI which                           has been determined by EBA to be associated with credit quality step 3 or above under the rules for the risk weighting of                           securitisation exposures under the approach specified in Chapter 5, Section 3, Sub-section 3.                  

2.For the purposes of point (b) of paragraph 1, ‘debt securities issued by central governments or central banks’ shall include all the following:                  

(a)debt securities issued by regional governments or local authorities, exposures to which are treated as exposures to the central                           government in whose jurisdiction they are established under Article 115(2);                  

(b)debt securities issued by public sector entities which are treated as exposures to central governments in accordance with                           Article 116(4);                  

(c)debt securities issued by multilateral development banks to which a 0 % risk weight is assigned under Article 117(2);                  

(d)debt securities issued by international organisations which are assigned a 0 % risk weight under Article 118.                  

3.For the purposes of point (c) of paragraph 1, ‘debt securities issued by institutions’ shall include all the following:                  

(a)debt securities issued by regional governments or local authorities other than those debt securities referred to in point                           (a) of paragraph 2;                  

(b)debt securities issued by public sector entities, exposures to which are treated in accordance with Article 116(1) and (2);                  

(c)debt securities issued by multilateral development banks other than those to which a 0 % risk weight is assigned under Article                           117(2).                  

4.An institution may use debt securities that are issued by other institutions and that do not have a credit assessment by an                           ECAI as eligible collateral where those debt securities fulfil all the following criteria:                  

(a)they are listed on a recognised exchange;                  

(b)they qualify as senior debt;                  

(c)all other rated issues by the issuing institution of the same seniority have a credit assessment by an ECAI which has been                           determined by EBA to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures                           to institutions or short term exposures under Chapter 2;                  

(d)the lending institution has no information to suggest that the issue would justify a credit assessment below that indicated                           in point (c);                  

(e)the market liquidity of the instrument is sufficient for these purposes.                  

5.Institutions may use units or shares in CIUs as eligible collateral where all the following conditions are satisfied:                  

(a)the units or shares have a daily public price quote;                  

(b)the CIUs are limited to investing in instruments that are eligible for recognition under paragraphs 1 and 4;                  

(c)the CIUs meet the conditions laid down in Article 132(3).                  

Where a CIU invests in shares or units of another CIU, conditions laid down in points (a) to (c) of the first subparagraph                        shall apply equally to any such underlying CIU.                   

The use by a CIU of derivative instruments to hedge permitted investments shall not prevent units or shares in that undertaking                        from being eligible as collateral.                   

6.For the purposes of paragraph 5, where a CIU (‘the original CIU’) or any of its underlying CIUs are not limited to investing in instruments that are eligible under paragraphs 1 and 4, institutions                           may use units or shares in that CIU as collateral to an amount equal to the value of the eligible assets held by that CIU                           under the assumption that that CIU or any of its underlying CIUs have invested in non-eligible assets to the maximum extent                           allowed under their respective mandates.                  

Where any underlying CIU has underlying CIUs of its own, institutions may use units or shares in the original CIU as eligible                        collateral provided that they apply the methodology laid down in the first subparagraph.                   

Where non-eligible assets can have a negative value due to liabilities or contingent liabilities resulting from ownership,                        institutions shall do both of the following:                   

(a)calculate the total value of the non-eligible assets;                  

(b)where the amount obtained under point (a) is negative, subtract the absolute value of that amount from the total value of                           the eligible assets.                  

7.With regard to points (b) to (e) of paragraph 1, where a security has two credit assessments by ECAIs, institutions shall                           apply the less favourable assessment. Where a security has more than two credit assessments by ECAIs, institutions shall apply                           the two most favourable assessments. Where the two most favourable credit assessments are different, institutions shall apply                           the less favourable of the two.                  

8.ESMA shall develop draft implementing technical standards to specify the following:                  

(a)the main indices referred to in point (f) of paragraph 1 of this Article, in point (a) of Article 198(1), in Article 224(1)                           and (4), and in point (e) of Article 299(2);                  

(b)the recognised exchanges referred to in point (a) of paragraph 4 of this Article, in point (a) of Article 198(1), in Article                           224(1) and (4), in point (e) of Article 299(2), in point (k) of Article 400(2), in point (e) of Article 416(3), in point (c)                           of Article 428(1), and in point 12 of Annex III in accordance with the conditions laid down in point (72) of Article 4(1).                  

ESMA shall submit those draft implementing technical standards to the Commission by 31 December 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1095/2010.                   

###### Article 198U.K.Additional eligibility of collateral under the Financial Collateral Comprehensive Method

1.In addition to the collateral established in Article 197, where an institution uses the Financial Collateral Comprehensive                           Method set out in Article 223, that institution may use the following items as eligible collateral:                  

(a)equities or convertible bonds not included in a main index but traded on a recognised exchange;                  

(b)units or shares in CIUs where both the following conditions are met:                  

the units or shares have a daily public price quote;                            

the CIU is limited to investing in instruments that are eligible for recognition under Article 197(1) and (4) and the items                                 mentioned in point (a) of this subparagraph.                            

In the case a CIU invests in units or shares of another CIU, conditions (a) and (b) of this paragraph equally apply to any                        such underlying CIU.                   

The use by a CIU of derivative instruments to hedge permitted investments shall not prevent units or shares in that undertaking                        from being eligible as collateral.                   

2.Where the CIU or any underlying CIU are not limited to investing in instruments that are eligible for recognition under Article                           197(1) and (4) and the items mentioned in point (a) of paragraph 1 of this Article, institutions may use units or shares in                           that CIU as collateral to an amount equal to the value of the eligible assets held by that CIU under the assumption that that                           CIU or any of its underlying CIUs have invested in non-eligible assets to the maximum extent allowed under their respective                           mandates.                  

Where non-eligible assets can have a negative value due to liabilities or contingent liabilities resulting from ownership,                        institutions shall do both of the following:                   

(a)calculate the total value of the non-eligible assets;                  

(b)where the amount obtained under point (a) is negative, subtract the absolute value of that amount from the total value of                           the eligible assets.                  

###### Article 199U.K.Additional eligibility for collateral under the IRB Approach

1.In addition to the collateral referred to in Articles 197 and 198, institutions that calculate risk-weighted exposure amounts                           and expected loss amounts under the IRB Approach may also use the following forms of collateral:                  

(a)immovable property collateral in accordance with paragraphs 2, 3 and 4;                  

(b)receivables in accordance with paragraph 5;                  

(c)other physical collateral in accordance with paragraphs 6 and 8;                  

(d)leasing in accordance with paragraph 7.                  

2.Unless otherwise specified under Article 124(2), institutions may use as eligible collateral residential property which is                           or will be occupied or let by the owner, or the beneficial owner in the case of personal investment companies, and commercial                           immovable property, including offices and other commercial premises, where both the following conditions are met:                  

(a)the value of the property does not materially depend upon the credit quality of the obligor. Institutions may exclude situations                           where purely macro-economic factors affect both the value of the property and the performance of the borrower from their determination                           of the materiality of such dependence;                  

(b)the risk of the borrower does not materially depend upon the performance of the underlying property or project, but on the                           underlying capacity of the borrower to repay the debt from other sources, and as a consequence the repayment of the facility                           does not materially depend on any cash flow generated by the underlying property serving as collateral.                  

3.Institutions may derogate from point (b) of paragraph 2 for exposures secured by residential property situated within the                           territory of a Member State, where the competent authority of that Member State has published evidence showing that a well-developed                           and long-established residential property market is present in that territory with loss rates that do not exceed any of the                           following limits:                  

(a)losses stemming from loans collateralised by residential property up to 80 % of the market value or 80 % of the mortgage-lending-value,                           unless otherwise provided under Article 124(2), do not exceed 0,3 % of the outstanding loans collateralised by residential                           property in any given year;                  

(b)overall losses stemming from loans collateralised by residential property do not exceed 0,5 % of the outstanding loans collateralised                           by residential property in any given year.                  

Where either of the conditions in points (a) and (b) of the first subparagraph is not met in a given year, institutions shall                        not use the treatment set out in that subparagraph until both conditions are satisfied in a subsequent year.                   

4.Institutions may derogate from point (b) of paragraph 2 for commercial immovable property situated within the territory of                           a Member State, where the competent authority of that Member State has published evidence showing that a well-developed and                           long-established commercial immovable property market is present in that territory with loss rates that do not exceed any                           of the following limits:                  

(a)losses stemming from loans collateralised by commercial immovable property up to 50 % of the market value or 60 % of the mortgage-lending-value                           do not exceed 0,3 % of the outstanding loans collateralised by commercial immovable property in any given year;                  

(b)overall losses stemming from loans collateralised by commercial immovable property do not exceed 0,5 % of the outstanding                           loans collateralised by commercial immovable property in any given year.                  

Where either of the conditions in points (a) and (b) of the first subparagraph is not met in a given year, institutions shall                        not use the treatment set out in that subparagraph until both conditions are satisfied in a subsequent year.                   

5.Institutions may use as eligible collateral amounts receivable linked to a commercial transaction or transactions with an                           original maturity of less than or equal to one year. Eligible receivables do not include those associated with securitisations,                           sub-participations or credit derivatives or amounts owed by affiliated parties.                  

6.Competent authorities shall permit an institution to use as eligible collateral physical collateral of a type other than those                           indicated in paragraphs 2, 3 and 4 where all the following conditions are met:                  

(a)there are liquid markets, evidenced by frequent transactions taking into account the asset type, for the disposal of the collateral                           in an expeditious and economically efficient manner. Institutions shall carry out the assessment of this condition periodically                           and where information indicates material changes in the market;                  

(b)there are well-established, publicly available market prices for the collateral. Institutions may consider market prices as                           well-established where they come from reliable sources of information such as public indices and reflect the price of the                           transactions under normal conditions. Institutions may consider market prices as publicly available, where these prices are                           disclosed, easily accessible, and obtainable regularly and without any undue administrative or financial burden;                  

(c)the institution analyses the market prices, time and costs required to realise the collateral and the realised proceeds from                           the collateral;                  

(d)the institution demonstrates that the realised proceeds from the collateral are not below 70 % of the collateral value in                           more than 10 % of all liquidations for a given type of collateral. Where there is material volatility in the market prices,                           the institution demonstrates to the satisfaction of the competent authorities that its valuation of the collateral is sufficiently                           conservative.                  

Institutions shall document the fulfilment of the conditions specified in points (a) to (d) of the first subparagraph and                        those specified in Article 210.                   

7.Subject to the provisions of Article 230(2), where the requirements set out in Article 211 are met, exposures arising from                           transactions whereby an institution leases property to a third party may be treated in the same manner as loans collateralised                           by the type of property leased.                  

8.EBA shall disclose a list of types of physical collateral for which institutions can assume that the conditions referred to                           in points (a) and (b) of paragraph 6 are met.                  

###### Article 200U.K.Other funded credit protection

Institutions may use the following other funded credit protection as eligible collateral:                   

cash on deposit with, or cash assimilated instruments held by, a third party institution in a non-custodial arrangement and                                 pledged to the lending institution;                            

life insurance policies pledged to the lending institution;                            

instruments issued by third party institutions which will be repurchased by that institution on request.                            

##### Sub-Section 2U.K.Unfunded credit protection

###### Article 201U.K.Eligibility of protection providers under all approaches

1.Institutions may use the following parties as eligible providers of unfunded credit protection:                  

(a)central governments and central banks;                  

(b)regional governments or local authorities;                  

(c)multilateral development banks;                  

(d)international organisations exposures to which a 0 % risk weight under Article 117 is assigned;                  

(e)public sector entities, claims on which are treated in accordance with Article 116;                  

(f)institutions, and financial institutions for which exposures to the financial institution are treated as exposures to institutions                           in accordance with Article 119(5);                  

(g)other corporate entities, including parent undertakings, subsidiaries and affiliated corporate entities of the institution,                           where either of the following conditions is met:                  

those other corporate entities have a credit assessment by an ECAI;                            

in the case of institutions calculating risk-weighted exposure amounts and expected loss amounts under the IRB Approach, those                                 other corporate entities do not have a credit assessment by a recognised ECAI and are internally rated by the institution;                            

(h)central counterparties.                  

2.Where institutions calculate risk-weighted exposure amounts and expected loss amounts under the IRB Approach, to be eligible                           as a provider of unfunded credit protection a guarantor shall be internally rated by the institution in accordance with the                           provisions of Section 6 of Chapter 3.                  

Competent authorities shall publish and maintain the list of those financial institutions that are eligible providers of unfunded                        credit protection under point (f) of paragraph 1, or the guiding criteria for identifying such eligible providers of unfunded                        credit protection, together with a description of the applicable prudential requirements, and share their list with other                        competent authorities in accordance with Article 117 of Directive 2013/36/EU.                   

###### Article 202U.K.Eligibility of protection providers under the IRB Approach which qualify for the treatment set out in Article 153(3)

An institution may use institutions, insurance and reinsurance undertakings and export credit agencies as eligible providers                        of unfunded credit protection which qualify for the treatment set out in Article 153(3) where they meet all the following                        conditions:                   

they have sufficient expertise in providing unfunded credit protection;                            

they are regulated in a manner equivalent to the rules laid down in this Regulation, or had, at the time the credit protection                                 was provided, a credit assessment by a recognised ECAI which had been determined by EBA to be associated with credit quality                                 step 3 or above in accordance with the rules for the risk weighting of exposures to corporates set out in Chapter 2;                            

they had, at the time the credit protection was provided, or for any period of time thereafter, an internal rating with a                                 PD equivalent to or lower than that associated with credit quality step 2 or above in accordance with the rules for the risk                                 weighting of exposures to corporates set out in Chapter 2;                            

they have an internal rating with a PD equivalent to or lower than that associated with credit quality step 3 or above in                                 accordance with the rules for the risk weighting of exposures to corporates set out in Chapter 2.                            

For the purpose of this Article, credit protection provided by export credit agencies shall not benefit from any explicit                        central government counter-guarantee.                   

###### Article 203U.K.Eligibility of guarantees as unfunded credit protection

Institutions may use guarantees as eligible unfunded credit protection.                   

##### Sub-Section 3U.K.Types of derivatives

###### Article 204U.K.Eligible types of credit derivatives

1.Institutions may use the following types of credit derivatives, and instruments that may be composed of such credit derivatives                           or that are economically effectively similar, as eligible credit protection:                  

(a)credit default swaps;                  

(b)total return swaps;                  

(c)credit linked notes to the extent of their cash funding.                  

Where an institution buys credit protection through a total return swap and records the net payments received on the swap                        as net income, but does not record the offsetting deterioration in the value of the asset that is protected either through                        reductions in fair value or by an addition to reserves, that credit protection does not qualify as eligible credit protection.                   

2.Where an institution conducts an internal hedge using a credit derivative, in order for the credit protection to qualify as                           eligible credit protection for the purposes of this Chapter, the credit risk transferred to the trading book shall be transferred                           out to a third party or parties.                  

Where an internal hedge has been conducted in accordance with the first subparagraph and the requirements in this Chapter                        have been met, institutions shall apply the rules set out in Sections 4 to 6 for the calculation of risk-weighted exposure                        amounts and expected loss amounts where they acquire unfunded credit protection.                   

#### Section 3U.K.Requirements

##### Sub-Section 1U.K.Funded credit protection

###### Article 205U.K.Requirements for on-balance sheet netting agreements other than master netting agreements referred to in Article 206

On-balance sheet netting agreements other than master netting agreements referred to in Article 206 shall qualify as an eligible                        form of credit risk mitigation where all the following conditions are met:                   

those agreements are legally effective and enforceable in all relevant jurisdictions, including in the event of the insolvency                                 or bankruptcy of a counterparty;                            

institutions are able to determine at any time the assets and liabilities that are subject to those agreements;                            

institutions monitor and control the risks associated with the termination of the credit protection on an ongoing basis;                            

institutions monitor and control the relevant exposures on a net basis and do so on an ongoing basis.                            

###### Article 206U.K.Requirements for master netting agreements covering repurchase transactions or securities or commodities lending or borrowing                           transactions or other capital market driven transactions

Master netting agreements covering repurchase transactions, securities or commodities lending or borrowing transactions or                        other capital market driven transactions shall qualify as an eligible form of credit risk mitigation where the collateral                        provided under those agreements meets all the requirements laid down in Article 207(2) to (4) and where all the following                        conditions are met:                   

they are legally effective and enforceable in all relevant jurisdictions, including in the event of the bankruptcy or insolvency                                 of the counterparty;                            

they give the non-defaulting party the right to terminate and close-out in a timely manner all transactions under the agreement                                 upon the event of default, including in the event of the bankruptcy or insolvency of the counterparty;                            

they provide for the netting of gains and losses on transactions closed out under an agreement so that a single net amount                                 is owed by one party to the other.                            

###### Article 207U.K.Requirements for financial collateral

1.Under all approaches and methods, financial collateral and gold shall qualify as eligible collateral where all the requirements                           laid down in paragraphs 2 to 4 are met.                  

2.The credit quality of the obligor and the value of the collateral shall not have a material positive correlation. Where the                           value of the collateral is reduced significantly, this shall not alone imply a significant deterioration of the credit quality                           of the obligor. Where the credit quality of the obligor becomes critical, this shall not alone imply a significant reduction                           in the value of the collateral.                  

Securities issued by the obligor, or any related group entity, shall not qualify as eligible collateral. This notwithstanding,                        the obligor's own issues of covered bonds falling within the terms of Article 129 qualify as eligible collateral when they                        are posted as collateral for a repurchase transaction, provided that they comply with the condition set out in the first subparagraph.                   

3.Institutions shall fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure,                           the enforceability of the collateral arrangements under the law applicable to their interest in the collateral.                  

Institutions shall have conducted sufficient legal review confirming the enforceability of the collateral arrangements in                        all relevant jurisdictions. They shall re-conduct such review as necessary to ensure continuing enforceability.                   

4.Institutions shall fulfil all the following operational requirements:                  

(a)they shall properly document the collateral arrangements and have in place clear and robust procedures for the timely liquidation                           of collateral;                  

(b)they shall use robust procedures and processes to control risks arising from the use of collateral, including risks of failed                           or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration                           risk arising from the use of collateral and the interaction with the institution's overall risk profile;                  

(c)they shall have in place documented policies and practices concerning the types and amounts of collateral accepted;                  

(d)they shall calculate the market value of the collateral, and revalue it accordingly, at least once every six months and whenever                           they have reason to believe that a significant decrease in the market value of the collateral has occurred;                  

(e)where the collateral is held by a third party, they shall take reasonable steps to ensure that the third party segregates                           the collateral from its own assets;                  

(f)they shall ensure that they devote sufficient resources to the orderly operation of margin agreements with OTC derivatives                           and securities-financing counterparties, as measured by the timeliness and accuracy of their outgoing margin calls and response                           time to incoming margin calls;                  

(g)they shall have in place collateral management policies to control, monitor and report the following:                  

the risks to which margin agreements expose them;                            

the concentration risk to particular types of collateral assets;                            

the reuse of collateral including the potential liquidity shortfalls resulting from the reuse of collateral received from                                 counterparties;                            

the surrender of rights on collateral posted to counterparties.                            

5.In addition to meeting all the requirements set out in paragraphs 2 to 4, for financial collateral to qualify as eligible                           collateral under the Financial Collateral Simple Method the residual maturity of the protection shall be at least as long                           as the residual maturity of the exposure.                  

###### Article 208U.K.Requirements for immovable property collateral

1.Immovable property shall qualify as eligible collateral only where all the requirements laid down in paragraphs 2 to 5 are                           met.                  

2.The following requirements on legal certainly shall be met:                  

(a)a mortgage or charge is enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement                           and shall be properly filed on a timely basis;                  

(b)all legal requirements for establishing the pledge have been fulfilled;                  

(c)the protection agreement and the legal process underpinning it enable the institution to realise the value of the protection                           within a reasonable timeframe.                  

3.The following requirements on monitoring of property values and on property valuation shall be met:                  

(a)institutions monitor the value of the property on a frequent basis and at a minimum once every year for commercial immovable                           property and once every three years for residential property. Institutions carry out more frequent monitoring where the market                           is subject to significant changes in conditions;                  

(b)the property valuation is reviewed when information available to institutions indicates that the value of the property may                           have declined materially relative to general market prices and that review is carried out by a valuer who possesses the necessary                           qualifications, ability and experience to execute a valuation and who is independent from the credit decision process. For                           loans exceeding EUR 3 million or 5 % of the own funds of an institution, the property valuation shall be reviewed by such                           valuer at least every three years.                  

Institutions may use statistical methods to monitor the value of the immovable property and to identify immovable property                        that needs revaluation.                   

4.Institutions shall clearly document the types of residential property and commercial immovable property they accept and their                           lending policies in this regard.                  

5.Institutions shall have in place procedures to monitor that the immovable property taken as credit protection is adequately                           insured against the risk of damage.                  

###### Article 209U.K.Requirements for receivables

1.Receivables shall qualify as eligible collateral where all the requirements laid down in paragraphs 2 and 3 are met.                  

2.The following requirements on legal certainty shall be met:                  

(a)the legal mechanism by which the collateral is provided to a lending institution shall be robust and effective and ensure                           that that institution has clear rights over the collateral including the right to the proceeds from the sale of the collateral;                  

(b)institutions shall take all steps necessary to fulfil local requirements in respect of the enforceability of security interest.                           Lending institutions shall have a first priority claim over the collateral although such claims may still be subject to the                           claims of preferential creditors provided for in legislative provisions;                  

(c)institutions shall have conducted sufficient legal review confirming the enforceability of the collateral arrangements in                           all relevant jurisdictions;                  

(d)institutions shall properly document their collateral arrangements and shall have in place clear and robust procedures for                           the timely collection of collateral;                  

(e)institutions shall have in place procedures that ensure that any legal conditions required for declaring the default of a                           borrower and timely collection of collateral are observed;                  

(f)in the event of a borrower's financial distress or default, institutions shall have legal authority to sell or assign the                           receivables to other parties without consent of the receivables obligors.                  

3.The following requirements on risk management shall be met:                  

(a)an institution shall have in place a sound process for determining the credit risk associated with the receivables. Such a                           process shall include analyses of a borrower's business and industry and the types of customers with whom that borrower does                           business. Where the institution relies on its borrowers to ascertain the credit risk of the customers, the institution shall                           review the borrowers' credit practices to ascertain their soundness and credibility;                  

(b)the difference between the amount of the exposure and the value of the receivables shall reflect all appropriate factors,                           including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential                           concentration risk within the institution's total exposures beyond that controlled by the institution's general methodology.                           Institutions shall maintain a continuous monitoring process appropriate to the receivables. They shall also review, on a regular                           basis, compliance with loan covenants, environmental restrictions, and other legal requirements;                  

(c)receivables pledged by a borrower shall be diversified and not be unduly correlated with that borrower. Where there is material                           positive correlation, institutions shall take into account the attendant risks in the setting of margins for the collateral                           pool as a whole;                  

(d)institutions shall not use receivables from affiliates of a borrower, including subsidiaries and employees, as eligible credit                           protection;                  

(e)institution shall have in place a documented process for collecting receivable payments in distressed situations. Institutions                           shall have in place the requisite facilities for collection even when they normally rely on their borrowers for collections.                  

###### Article 210U.K.Requirements for other physical collateral

Physical collateral other than immovable property collateral shall qualify as eligible collateral under the IRB Approach where                        all the following conditions are met:                   

the collateral arrangement under which the physical collateral is provided to an institution shall be legally effective and                                 enforceable in all relevant jurisdictions and shall enable that institution to realise the value of the collateral within                                 a reasonable timeframe;                            

with the sole exception of permissible first priority claims referred to in Article 209(2)(b), only first liens on, or charges                                 over, collateral shall qualify as eligible collateral and an institution shall have priority over all other lenders to the                                 realised proceeds of the collateral;                            

institutions shall monitor the value of the collateral on a frequent basis and at least once every year. Institutions shall                                 carry out more frequent monitoring where the market is subject to significant changes in conditions;                            

the loan agreement shall include detailed descriptions of the collateral as well as detailed specifications of the manner                                 and frequency of revaluation;                            

institutions shall clearly document in internal credit policies and procedures available for examination the types of physical                                 collateral they accept and the policies and practices they have in place in respect of the appropriate amount of each type                                 of collateral relative to the exposure amount;                            

institutions' credit policies with regard to the transaction structure shall address the following:                            

appropriate collateral requirements relative to the exposure amount;                                     

the ability to liquidate the collateral readily;                                     

the ability to establish objectively a price or market value;                                     

the frequency with which the value can readily be obtained, including a professional appraisal or valuation;                                     

the volatility or a proxy of the volatility of the value of the collateral.                                     

when conducting valuation and revaluation, institutions shall take fully into account any deterioration or obsolescence of                                 the collateral, paying particular attention to the effects of the passage of time on fashion- or date-sensitive collateral;                            

institutions shall have the right to physically inspect the collateral. They shall also have in place policies and procedures                                 addressing their exercise of the right to physical inspection;                            

the collateral taken as protection shall be adequately insured against the risk of damage and institutions shall have in place                                 procedures to monitor this.                            

###### Article 211U.K.Requirements for treating lease exposures as collateralised

Institutions shall treat exposures arising from leasing transactions as collateralised by the type of property leased, where                        all the following conditions are met:                   

the conditions set out in Article 208 or 210, as applicable, for the type of property leased to qualify as eligible collateral                                 are met;                            

the lessor has in place robust risk management with respect to the use to which the leased asset is put, its location, its                                 age and the planned duration of its use, including appropriate monitoring of the value of the security;                            

the lessor has legal ownership of the asset and is able to exercise its rights as owner in a timely fashion;                            

where this has not already been ascertained in calculating the LGD level, the difference between the value of the unamortised                                 amount and the market value of the security is not so large as to overstate the credit risk mitigation attributed to the leased                                 assets.                            

###### Article 212U.K.Requirements for other funded credit protection

1.Cash on deposit with, or cash assimilated instruments held by, a third party institution shall be eligible for the treatment                           set out in Article 232(1), where all the following conditions are met:                  

(a)the borrower's claim against the third party institution is openly pledged or assigned to the lending institution and such                           pledge or assignment is legally effective and enforceable in all relevant jurisdictions and is unconditional and irrevocable;                  

(b)the third party institution is notified of the pledge or assignment;                  

(c)as a result of the notification, the third party institution is able to make payments solely to the lending institution or                           to other parties only with the lending institution's prior consent.                  

2.Life insurance policies pledged to the lending institution shall qualify as eligible collateral where all the following conditions                           are met:                  

(a)the life insurance policy is openly pledged or assigned to the lending institution;                  

(b)the company providing the life insurance is notified of the pledge or assignment and, as a result of the notification, may                           not pay amounts payable under the contract without the prior consent of the lending institution;                  

(c)the lending institution has the right to cancel the policy and receive the surrender value in the event of the default of                           the borrower;                  

(d)the lending institution is informed of any non-payments under the policy by the policy-holder;                  

(e)the credit protection is provided for the maturity of the loan. Where this is not possible because the insurance relationship                           ends before the loan relationship expires, the institution shall ensure that the amount deriving from the insurance contract                           serves the institution as security until the end of the duration of the credit agreement;                  

(f)the pledge or assignment is legally effective and enforceable in all jurisdictions which are relevant at the time of the conclusion                           of the credit agreement;                  

(g)the surrender value is declared by the company providing the life insurance and is non-reducible;                  

(h)the surrender value is to be paid by the company providing the life insurance in a timely manner upon request;                  

(i)the surrender value shall not be requested without the prior consent of the institution;                  

(j)the company providing the life insurance is subject to Directive 2009/138/EC or is subject to supervision by a competent authority                           of a third country which applies supervisory and regulatory arrangements at least equivalent to those applied in the Union.                  

##### Sub-Section 2U.K.Unfunded credit protection and credit linked notes

###### Article 213U.K.Requirements common to guarantees and credit derivatives

1.Subject to Article 214(1), credit protection deriving from a guarantee or credit derivative shall qualify as eligible unfunded                           credit protection where all the following conditions are met:                  

(a)the credit protection is direct;                  

(b)the extent of the credit protection is clearly defined and incontrovertible;                  

(c)the credit protection contract does not contain any clause, the fulfilment of which is outside the direct control of the lender,                           that:                  

would allow the protection provider to cancel the protection unilaterally;                            

would increase the effective cost of protection as a result of a deterioration in the credit quality of the protected exposure;                            

could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original obligor                                 fails to make any payments due, or when the leasing contract has expired for the purposes of recognising guaranteed residual                                 value under Articles 134(7) and 166(4);                            

could allow the maturity of the credit protection to be reduced by the protection provider;                            

(d)the credit protection contract is legally effective and enforceable in all jurisdictions which are relevant at the time of                           the conclusion of the credit agreement.                  

2.An institution shall demonstrate to competent authorities that it has in place systems to manage potential concentration of                           risk arising from its use of guarantees and credit derivatives. An institution shall be able to demonstrate to the satisfaction                           of the competent authorities how its strategy in respect of its use of credit derivatives and guarantees interacts with its                           management of its overall risk profile.                  

3.An institution shall fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure,                           the enforceability of its unfunded credit protection under the law applicable to its interest in the credit protection.                  

An institution shall have conducted sufficient legal review confirming the enforceability of the unfunded credit protection                        in all relevant jurisdictions. It shall repeat such review as necessary to ensure continuing enforceability.                   

###### Article 214U.K.Sovereign and other public sector counter-guarantees

1.Institutions may treat the exposures referred to in paragraph 2 as protected by a guarantee provided by the entities listed                           in that paragraph, provided that all the following conditions are satisfied:                  

(a)the counter-guarantee covers all credit risk elements of the claim;                  

(b)both the original guarantee and the counter-guarantee meet the requirements for guarantees set out in Articles 213 and 215(1),                           except that the counter-guarantee need not be direct;                  

(c)the cover is robust and nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than                           effectively equivalent to that of a direct guarantee by the entity in question.                  

2.The treatment set out in paragraph 1 shall apply to exposures protected by a guarantee which is counter-guaranteed by any                           of the following entities:                  

(a)a central government or a central bank;                  

(b)a regional government or a local authority;                  

(c)a public sector entity, claims on which are treated as claims on the central government in accordance with Article 116(4);                  

(d)a multilateral development bank or an international organisation, to which a 0 % risk weight is assigned under or by virtue                           of Articles 117(2) and 118 respectively;                  

(e)a public sector entity, claims on which are treated in accordance with Article 116(1) and (2).                  

3.Institutions shall apply the treatment set out in paragraph 1 also to an exposure which is not counter-guaranteed by any entity                           listed in paragraph 2 where that exposure's counter-guarantee is in turn directly guaranteed by one of those entities and                           the conditions listed in paragraph 1 are satisfied.                  

###### Article 215U.K.Additional requirements for guarantees

1.Guarantees shall qualify as eligible unfunded credit protection where all the conditions in Article 213 and all the following                           conditions are met:                  

(a)on the qualifying default of or non-payment by the counterparty, the lending institution has the right to pursue, in a timely                           manner, the guarantor for any monies due under the claim in respect of which the protection is provided and the payment by                           the guarantor shall not be subject to the lending institution first having to pursue the obligor;                  

In the case of unfunded credit protection covering residential mortgage loans, the requirements in Article 213(1)(c)(iii)                        and in the first subparagraph of this point have only to be satisfied within 24 months;                   

(b)the guarantee is an explicitly documented obligation assumed by the guarantor;                  

(c)either of the following conditions is met:                  

the guarantee covers all types of payments the obligor is expected to make in respect of the claim;                            

where certain types of payment are excluded from the guarantee, the lending institution has adjusted the value of the guarantee                                 to reflect the limited coverage.                            

2.In the case of guarantees provided in the context of mutual guarantee schemes or provided by or counter-guaranteed by entities                           listed in Article 214(2), the requirements in point (a) of paragraph 1 of this Article shall be considered to be satisfied                           where either of the following conditions is met:                  

(a)the lending institution has the right to obtain in a timely manner a provisional payment by the guarantor that meets both                           the following conditions:                  

it represents a robust estimate of the amount of the loss, including losses resulting from the non-payment of interest and                                 other types of payment which the borrower is obliged to make, that the lending institution is likely to incur;                            

it is proportional to the coverage of the guarantee;                            

(b)the lending institution can demonstrate to the satisfaction of the competent authorities that the effects of the guarantee,                           which shall also cover losses resulting from the non-payment of interest and other types of payments which the borrower is                           obliged to make, justify such treatment.                  

###### Article 216U.K.Additional requirements for credit derivatives

1.Credit derivatives shall qualify as eligible unfunded credit protection where all the conditions in Article 213 and all the                           following conditions are met:                  

(a)the credit events specified in the credit derivative contract include:                  

the failure to pay the amounts due under the terms of the underlying obligation that are in effect at the time of such failure,                                 with a grace period that is equal to or shorter than the grace period in the underlying obligation;                            

the bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability                                 generally to pay its debts as they become due, and analogous events;                            

the restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results                                 in a credit loss event;                            

(b)where credit derivatives allow for cash settlement:                  

institutions have in place a robust valuation process in order to estimate loss reliably;                            

there is a clearly specified period for obtaining post-credit-event valuations of the underlying obligation;                            

(c)where the protection purchaser's right and ability to transfer the underlying obligation to the protection provider is required                           for settlement, the terms of the underlying obligation provide that any required consent to such transfer shall not be unreasonably                           withheld;                  

(d)the identity of the parties responsible for determining whether a credit event has occurred is clearly defined;                  

(e)the determination of the credit event is not the sole responsibility of the protection provider;                  

(f)the protection buyer has the right or ability to inform the protection provider of the occurrence of a credit event.                  

Where the credit events do not include restructuring of the underlying obligation as described in point (a)(iii), the credit                        protection may nonetheless be eligible subject to a reduction in the value as specified in Article 233(2);                   

2.A mismatch between the underlying obligation and the reference obligation under the credit derivative or between the underlying                           obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible only where                           both the following conditions are met:                  

(a)the reference obligation or the obligation used for the purpose of determining whether a credit event has occurred, as the                           case may be, ranks pari passu with or is junior to the underlying obligation;                  

(b)the underlying obligation and the reference obligation or the obligation used for the purpose of determining whether a credit                           event has occurred, as the case may be, share the same obligor and legally enforceable cross-default or cross-acceleration                           clauses are in place.                  

###### Article 217U.K.Requirements to qualify for the treatment set out in Article 153(3)

1.To be eligible for the treatment set out in Article 153(3), credit protection deriving from a guarantee or credit derivative                           shall meet the following conditions:                  

(a)the underlying obligation is to one of the following exposures:                  

a corporate exposure as referred to in Article 147, excluding insurance and reinsurance undertakings;                            

an exposure to a regional government, local authority or public sector entity which is not treated as an exposure to a central                                 government or a central bank in accordance with Article 147;                            

an exposure to an SME, classified as a retail exposure in accordance with Article 147(5);                            

(b)the underlying obligors are not members of the same group as the protection provider;                  

(c)the exposure is hedged by one of the following instruments:                  

single-name unfunded credit derivatives or single-name guarantees;                            

first-to-default basket products;                            

nth-to-default basket products;                            

(d)the credit protection meets the requirements set out in Articles 213, 215 and 216, as applicable;                  

(e)the risk weight that is associated with the exposure prior to the application of the treatment set out in Article 153(3),                           does not already factor in any aspect of the credit protection;                  

(f)an institution has the right and expectation to receive payment from the protection provider without having to take legal                           action in order to pursue the counterparty for payment. To the extent possible, the institution shall take steps to satisfy                           itself that the protection provider is willing to pay promptly should a credit event occur;                  

(g)the purchased credit protection absorbs all credit losses incurred on the hedged portion of an exposure that arise due to                           the occurrence of credit events outlined in the contract;                  

(h)where the payout structure of the credit protection provides for physical settlement, there is legal certainty with respect                           to the deliverability of a loan, bond, or contingent liability;                  

(i)where an institution intends to deliver an obligation other than the underlying exposure, it shall ensure that the deliverable                           obligation is sufficiently liquid so that the institution would have the ability to purchase it for delivery in accordance                           with the contract;                  

(j)the terms and conditions of credit protection arrangements are legally confirmed in writing by both the protection provider                           and the institution;                  

(k)institutions have in place a process to detect excessive correlation between the creditworthiness of a protection provider                           and the obligor of the underlying exposure due to their performance being dependent on common factors beyond the systematic                           risk factor;                  

(l)in the case of protection against dilution risk, the seller of purchased receivables is not a member of the same group as                           the protection provider.                  

2.For the purpose of point (c)(ii) of paragraph 1, institutions shall apply the treatment set out in Article 153(3) to the asset                           within the basket with the lowest risk-weighted exposure amount.                  

3.For the purpose of point (c)(iii) of paragraph 1, the protection obtained is only eligible for consideration under this framework                           where eligible (n-1)th default protection has also been obtained or where (n-1) of the assets within the basket has or have                           already defaulted. Where this is the case, institutions shall apply the treatment set out in Article 153(3) to the asset within                           the basket with the lowest risk-weighted exposure amount.                  

#### Section 4U.K.Calculating the effects of credit risk mitigation

##### Sub-Section 1U.K.Funded credit protection

###### Article 218U.K.Credit linked notes

Investments in credit linked notes issued by the lending institution may be treated as cash collateral for the purpose of                        calculating the effect of funded credit protection in accordance with this Sub-section, provided that the credit default swap                        embedded in the credit linked note qualifies as eligible unfunded credit protection. For the purpose of determining whether                        the credit default swap embedded in a credit linked note qualifies as eligible unfunded credit protection, the institution                        may consider the condition in point (c) of Article 194(6) to be met.                   

###### Article 219U.K.On-balance sheet netting

Loans to and deposits with the lending institution subject to on-balance sheet netting are to be treated by that institution                        as cash collateral for the purpose of calculating the effect of funded credit protection for those loans and deposits of the                        lending institution subject to on-balance sheet netting which are denominated in the same currency.                   

###### Article 220U.K.Using the Supervisory Volatility Adjustments Approach or the Own Estimates Volatility Adjustments Approach for master netting                           agreements

1.When institutions calculate the 'fully adjusted exposure value' (E*) for the exposures subject to an eligible master netting                           agreement covering repurchase transactions or securities or commodities lending or borrowing transactions or other capital                           market-driven transactions, they shall calculate the volatility adjustments that they need to apply either by using the Supervisory                           Volatility Adjustments Approach or the Own Estimates Volatility Adjustments Approach ('Own Estimates Approach') as set out                           in Articles 223 to 226 for the Financial Collateral Comprehensive Method.                  

The use of the Own Estimates Approach shall be subject to the same conditions and requirements as apply under the Financial                        Collateral Comprehensive Method.                   

2.For the purpose of calculating E*, institutions shall:                  

(a)calculate the net position in each group of securities or in each type of commodity by subtracting the amount in point (ii)                           from the amount in point (i):                  

the total value of a group of securities or of commodities of the same type lent, sold or provided under the master netting                                 agreement;                            

the total value of a group of securities or of commodities of the same type borrowed, purchased or received under the master                                 netting agreement;                            

(b)calculate the net position in each currency, other than the settlement currency of the master netting agreement, by subtracting                           the amount in point (ii) from the amount in point (i):                  

the sum of the total value of securities denominated in that currency lent, sold or provided under the master netting agreement                                 and the amount of cash in that currency lent or transferred under that agreement;                            

the sum of the total value of securities denominated in that currency borrowed, purchased or received under the master netting                                 agreement and the amount of cash in that currency borrowed or received under that agreement;                            

(c)apply the volatility adjustment appropriate to a given group of securities or to a cash position to the absolute value of                           the positive or negative net position in the securities in that group;                  

(d)apply the foreign exchange risk (fx) volatility adjustment to the net positive or negative position in each currency other                           than the settlement currency of the master netting agreement.                  

3.Institutions shall calculate E* in accordance with the following formula:                  

                   

where:                   

E

=

the exposure value for each separate exposure i under the agreement that would apply in the absence of the credit protection,                           where institutions calculate risk-weighted exposure amounts under the Standardised Approach or where they calculate the risk-weighted                           exposure amounts and expected loss amounts under the IRB Approach;                      

C

=

the value of securities in each group or commodities of the same type borrowed, purchased or received or the cash borrowed                           or received in respect of each exposure i;                      

=

the net position (positive or negative) in a given group of securities j;                      

=

the net position (positive or negative) in a given currency k other than the settlement currency of the agreement as calculated                           under point (b) of paragraph 2;                      

=

the volatility adjustment appropriate to a particular group of securities j;                      

=

the foreign exchange volatility adjustment for currency k.                      

4.For the purpose of calculating risk-weighted exposure amounts and expected loss amounts for repurchase transactions or securities                           or commodities lending or borrowing transactions or other capital market-driven transactions covered by master netting agreements,                           institutions shall use E* as calculated under paragraph 3 as the exposure value of the exposure to the counterparty arising                           from the transactions subject to the master netting agreement for the purposes of Article 113 under the Standardised Approach                           or Chapter 3 under the IRB Approach.                  

5.For the purposes of paragraphs 2 and 3, ‘group of securities’ means securities which are issued by the same entity, have the same issue date, the same maturity, are subject to the same                           terms and conditions, and are subject to the same liquidation periods as indicated in Articles 224 and 225, as applicable.                  

###### Article 221U.K.Using the internal models approach for master netting agreements

1.Subject to permission of competent authorities, institutions may, as an alternative to using the Supervisory Volatility Adjustments                           Approach or the Own Estimates Approach in calculating the fully adjusted exposure value (E*) resulting from the application                           of an eligible master netting agreement covering repurchase transactions, securities or commodities lending or borrowing transactions,                           or other capital market driven transactions other than derivative transactions, use an internal models approach which takes                           into account correlation effects between security positions subject to the master netting agreement as well as the liquidity                           of the instruments concerned.                  

2.Subject to the permission of the competent authorities, institutions may also use their internal models for margin lending                           transactions, where the transactions are covered under a bilateral master netting agreement that meets the requirements set                           out in Chapter 6, Section 7.                  

3.An institution may choose to use an internal models approach independently of the choice it has made between the Standardised                           Approach and the IRB Approach for the calculation of risk-weighted exposure amounts. However, where an institution seeks to                           use an internal models approach, it shall do so for all counterparties and securities, excluding immaterial portfolios where                           it may use the Supervisory Volatility Adjustments Approach or the Own Estimates Approach as laid down in Article 220.                  

Institutions that have received permission for an internal risk-measurement model under Title IV, Chapter 5 may use the internal                        models approach. Where an institution has not received such permission, it may still apply for permission to the competent                        authorities to use an internal models approach for the purposes of this Article.                   

4.Competent authorities shall permit an institution to use an internal models approach only where they are satisfied that the                           institution's system for managing the risks arising from the transactions covered by the master netting agreement is conceptually                           sound and implemented with integrity and where the following qualitative standards are met:                  

(a)the internal risk-measurement model used for calculating the potential price volatility for the transactions is closely integrated                           into the daily risk-management process of the institution and serves as the basis for reporting risk exposures to the senior                           management of the institution;                  

(b)the institution has a risk control unit that meets all the following requirements:                  

it is independent from business trading units and reports directly to senior management;                            

it is responsible for designing and implementing the institution's risk-management system;                            

it produces and analyses daily reports on the output of the risk-measurement model and on the appropriate measures to be taken                                 in terms of position limits;                            

(c)the daily reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce                           reductions of positions taken and of overall risk exposure;                  

(d)the institution has sufficient staff skilled in the use of sophisticated models in the risk control unit;                  

(e)the institution has established procedures for monitoring and ensuring compliance with a documented set of internal policies                           and controls concerning the overall operation of the risk-measurement system;                  

(f)the institution's models have a proven track record of reasonable accuracy in measuring risks demonstrated through the back-testing                           of its output using at least one year of data;                  

(g)the institution frequently conducts a rigorous programme of stress testing and the results of these tests are reviewed by                           senior management and reflected in the policies and limits it sets;                  

(h)the institution conducts, as part of its regular internal auditing process, an independent review of its risk-measurement                           system. This review shall include both the activities of the business trading units and of the independent risk-control unit;                  

(i)at least once a year, the institution conducts a review of its risk-management system;                  

(j)the internal model meets the requirements set out in Article 292(8) and (9) and in Article 294.                  

5.An institution's internal risk-measurement model shall capture a sufficient number of risk factors in order to capture all                           material price risks.                  

An institution may use empirical correlations within risk categories and across risk categories where its system for measuring                        correlations is sound and implemented with integrity.                   

6.Institutions using the internal models approach shall calculate E* in accordance with the following formula:                  

                   

where:                   

E

=

the exposure value for each separate exposure i under the agreement that would apply in the absence of the credit protection,                           where institutions calculate the risk-weighted exposure amounts under the Standardised Approach or where they calculate risk-weighted                           exposure amounts and expected loss amounts under the IRB Approach;                      

C

=

the value of the securities borrowed, purchased or received or the cash borrowed or received in respect of each such exposure                           i.                      

When calculating risk-weighted exposure amounts using internal models, institutions shall use the previous business day's                        model output.                   

7.The calculation of the potential change in value referred to in paragraph 6 shall be subject to all the following standards:                  

(a)it shall be carried out at least daily;                  

(b)it shall be based on a 99th percentile, one-tailed confidence interval;                  

(c)it shall be based on a 5-day equivalent liquidation period, except in the case of transactions other than securities repurchase                           transactions or securities lending or borrowing transactions where a 10-day equivalent liquidation period shall be used;                  

(d)it shall be based on an effective historical observation period of at least one year except where a shorter observation period                           is justified by a significant upsurge in price volatility;                  

(e)the data set used in the calculation shall be updated every three months.                  

Where an institution has a repurchase transaction, a securities or commodities lending or borrowing transaction and margin                        lending or similar transaction or netting set which meets the criteria set out in Article 285(2), (3) and (4), the minimum                        holding period shall be brought in line with the margin period of risk that would apply under those paragraphs, in combination                        with Article 285(5).                   

8.For the purpose of calculating risk-weighted exposure amounts and expected loss amounts for repurchase transactions or securities                           or commodities lending or borrowing transactions or other capital market-driven transactions covered by master netting agreements,                           institutions shall use E* as calculated under paragraph 6 as the exposure value of the exposure to the counterparty arising                           from the transactions subject to the master netting agreement for the purposes of Article 113 under the Standardised Approach                           or Chapter 3 under the IRB Approach.                  

9.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)what constitutes an immaterial portfolio for the purpose of paragraph 3;                  

(b)the criteria for determining whether an internal model is sound and implemented with integrity for the purpose of paragraphs                           4 and 5 and master netting agreements.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2015.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 222U.K.Financial Collateral Simple Method

1.Institutions may use the Financial Collateral Simple Method only where they calculate risk-weighted exposure amounts under                           the Standardised Approach. Institution shall not use both the Financial Collateral Simple Method and the Financial Collateral                           Comprehensive Method, except for the purposes of Articles 148(1) and 150(1). Institutions shall not use this exception selectively                           with the purpose of achieving reduced own funds requirements or with the purpose of conducting regulatory arbitrage.                  

2.Under the Financial Collateral Simple Method institutions shall assign to eligible financial collateral a value equal to its                           market value as determined in accordance with point (d) of Article 207(4).                  

3.Institutions shall assign to those portions of exposure values that are collateralised by the market value of eligible collateral                           the risk weight that they would assign under Chapter 2 where the lending institution had a direct exposure to the collateral                           instrument. For this purpose, the exposure value of an off-balance sheet item listed in Annex I shall be equal to 100 % of                           the item's value rather than the exposure value indicated in Article 111(1).                  

The risk weight of the collateralised portion shall be at least 20 % except as specified in paragraphs 4 to 6. Institutions                        shall apply to the remainder of the exposure value the risk weight that they would assign to an unsecured exposure to the                        counterparty under Chapter 2.                   

4.Institutions shall assign a risk weight of 0 % to the collateralised portion of the exposure arising from repurchase transaction                           and securities lending or borrowing transactions which fulfil the criteria in Article 227. Where the counterparty to the transaction                           is not a core market participant, institutions shall assign a risk weight of 10 %.                  

5.Institutions shall assign a risk weight of 0 %, to the extent of the collateralisation, to the exposure values determined                           under Chapter 6 for the derivative instruments listed in Annex II and subject to daily marking-to-market, collateralised by                           cash or cash assimilated instruments where there is no currency mismatch.                  

Institutions shall assign a risk weight of 10 %, to the extent of the collateralisation, to the exposure values of such transactions                        collateralised by debt securities issued by central governments or central banks which are assigned a 0 % risk weight under                        Chapter 2.                   

6.For transactions other than those referred to in paragraphs 4 and 5, institutions may assign a 0 % risk weight where the exposure                           and the collateral are denominated in the same currency, and either of the following conditions is met:                  

(a)the collateral is cash on deposit or a cash assimilated instrument;                  

(b)the collateral is in the form of debt securities issued by central governments or central banks eligible for a 0 % risk weight                           under Article 114, and its market value has been discounted by 20 %.                  

7.For the purpose of paragraphs 5 and 6 debt securities issued by central governments or central banks shall include:                  

(a)debt securities issued by regional governments or local authorities exposures to which are treated as exposures to the central                           government in whose jurisdiction they are established under Article 115;                  

(b)debt securities issued by multilateral development banks to which a 0 % risk weight is assigned under or by virtue of Article                           117(2);                  

(c)debt securities issued by international organisations which are assigned a 0 % risk weight under Article 118;                  

(d)debt securities issued by public sector entities which are treated as exposures to central governments in accordance with                           Article 116(4).                  

###### Article 223U.K.Financial Collateral Comprehensive Method

1.In order to take account of price volatility, institutions shall apply volatility adjustments to the market value of collateral,                           as set out in Articles 224 to 227, when valuing financial collateral for the purposes of the Financial Collateral Comprehensive                           Method.                  

Where collateral is denominated in a currency that differs from the currency in which the underlying exposure is denominated,                        institutions shall add an adjustment reflecting currency volatility to the volatility adjustment appropriate to the collateral                        as set out in Articles 224 to 227.                   

In the case of OTC derivatives transactions covered by netting agreements recognised by the competent authorities under Chapter                        6, institutions shall apply a volatility adjustment reflecting currency volatility when there is a mismatch between the collateral                        currency and the settlement currency. Even where multiple currencies are involved in the transactions covered by the netting                        agreement, institutions shall apply a single volatility adjustment.                   

2.Institutions shall calculate the volatility-adjusted value of the collateral (CVA) they need to take into account as follows:                  

                   

where:                   

C

=

the value of the collateral;                      

H

=

the volatility adjustment appropriate to the collateral, as calculated under Articles 224 and 227;                      

H

=

the volatility adjustment appropriate to currency mismatch, as calculated under Articles 224 and 227.                      

Institutions shall use the formula in this paragraph when calculating the volatility-adjusted value of the collateral for                        all transactions except for those transactions subject to recognised master netting agreements to which the provisions set                        out in Articles 220 and 221 apply.                   

3.Institutions shall calculate the volatility-adjusted value of the exposure (EVA) they need to take into account as follows:                  

                   

where:                   

E

=

the exposure value as would be determined under Chapter 2 or Chapter 3, as applicable, where the exposure was not collateralised;                      

H

=

the volatility adjustment appropriate to the exposure, as calculated under Articles 224 and 227.                      

In the case of OTC derivative transactions institutions shall calculate EVA as follows:                   

.                   

4.For the purpose of calculating E in paragraph 3, the following shall apply:                  

(a)for institutions calculating risk-weighted exposure amounts under the Standardised Approach, the exposure value of an off-balance                           sheet item listed in Annex I shall be 100 % of that item's value rather than the exposure value indicated in Article 111(1);                  

(b)for institutions calculating risk-weighted exposure amounts under the IRB Approach, they shall calculate the exposure value                           of the items listed in Article 166(8) to (10) by using a conversion factor of 100 % rather than the conversion factors or                           percentages indicated in those paragraphs.                  

5.Institutions shall calculate the fully adjusted value of the exposure (E*), taking into account both volatility and the risk-mitigating                           effects of collateral as follows:                  

                   

where:                   

E

=

the volatility adjusted value of the exposure as calculated in paragraph 3;                      

C

=

CVA further adjusted for any maturity mismatch in accordance with the provisions of Section 5;                      

6.Institutions may calculate volatility adjustments either by using the Supervisory Volatility Adjustments Approach referred                           to in Article 224 or the Own Estimates Approach referred to in Article 225.                  

An institution may choose to use the Supervisory Volatility Adjustments Approach or the Own Estimates Approach independently                        of the choice it has made between the Standardised Approach and the IRB Approach for the calculation of risk-weighted exposure                        amounts.                   

However, where an institution uses the Own Estimates Approach, it shall do so for the full range of instrument types, excluding                        immaterial portfolios where it may use the Supervisory Volatility Adjustments Approach.                   

7.Where the collateral consists of a number of eligible items, institutions shall calculate the volatility adjustment (H) as                           follows:                  

                   

where:                   

a

=

the proportion of the value of an eligible item *i* in the total value of collateral;                      

H

=

the volatility adjustment applicable to eligible item *i*.                      

###### Article 224U.K.Supervisory volatility adjustment under the Financial Collateral Comprehensive Method

1.The volatility adjustments to be applied by institutions under the Supervisory Volatility Adjustments Approach, assuming daily                           revaluation, shall be those set out in Tables 1 to 4 of this paragraph.                  

###### VOLATILITY ADJUSTMENTS

2.The calculation of volatility adjustments in accordance with paragraph 1 shall be subject to the following conditions:                  

(a)for secured lending transactions the liquidation period shall be 20 business days;                  

(b)for repurchase transactions, except insofar as such transactions involve the transfer of commodities or guaranteed rights                           relating to title to commodities, and securities lending or borrowing transactions the liquidation period shall be 5 business                           days;                  

(c)for other capital market driven transactions, the liquidation period shall be 10 business days.                  

Where an institution has a transaction or netting set which meets the criteria set out in Article 285(2), (3) and (4), the                        minimum holding period shall be brought in line with the margin period of risk that would apply under those paragraphs.                   

3.In Tables 1 to 4 of paragraph 1 and in paragraphs 4 to 6, the credit quality step with which a credit assessment of the debt                           security is associated is the credit quality step with which the credit assessment is determined by EBA to be associated under                           Chapter 2.                  

For the purpose of determining the credit quality step with which a credit assessment of the debt security is associated referred                        to in the first subparagraph, Article 197(7) also applies.                   

4.For non-eligible securities or for commodities lent or sold under repurchase transactions or securities or commodities lending                           or borrowing transactions, the volatility adjustment is the same as for non-main index equities listed on a recognised exchange.                  

5.For eligible units in CIUs the volatility adjustment is the weighted average volatility adjustments that would apply, having                           regard to the liquidation period of the transaction as specified in paragraph 2, to the assets in which the fund has invested.                  

Where the assets in which the fund has invested are not known to the institution, the volatility adjustment is the highest                        volatility adjustment that would apply to any of the assets in which the fund has the right to invest.                   

6.For unrated debt securities issued by institutions and satisfying the eligibility criteria in Article 197(4) the volatility                           adjustments is the same as for securities issued by institutions or corporates with an external credit assessment associated                           with credit quality step 2 or 3.                  

###### Article 225U.K.Own estimates of volatility adjustments under the Financial Collateral Comprehensive Method

1.The competent authorities shall permit institutions to use their own volatility estimates for calculating the volatility adjustments                           to be applied to collateral and exposures where those institutions comply with the requirements set out in paragraphs 2 and                           3. Institutions which have obtained permission to use their own volatility estimates shall not revert to the use of other                           methods except for demonstrated good cause and subject to the permission of the competent authorities.                  

For debt securities that have a credit assessment from an ECAI equivalent to investment grade or better, institutions may                        calculate a volatility estimate for each category of security.                   

For debt securities that have a credit assessment from an ECAI equivalent to below investment grade, and for other eligible                        collateral, institutions shall calculate the volatility adjustments for each individual item.                   

Institutions using the Own Estimates Approach shall estimate volatility of the collateral or foreign exchange mismatch without                        taking into account any correlations between the unsecured exposure, collateral or exchange rates.                   

In determining relevant categories, institutions shall take into account the type of issuer of the security, the external                        credit assessment of the securities, their residual maturity, and their modified duration. Volatility estimates shall be representative                        of the securities included in the category by the institution.                   

2.The calculation of the volatility adjustments shall be subject to all the following criteria:                  

(a)institutions shall base the calculation on a 99th percentile, one-tailed confidence interval;                  

(b)institutions shall base the calculation on the following liquidation periods:                  

20 business days for secured lending transactions;                            

5 business days for repurchase transactions, except insofar as such transactions involve the transfer of commodities or guaranteed                                 rights relating to title to commodities and securities lending or borrowing transactions;                            

10 business days for other capital market driven transactions;                            

(c)institutions may use volatility adjustment numbers calculated in accordance with shorter or longer liquidation periods, scaled                           up or down to the liquidation period set out in point (b) for the type of transaction in question, using the square root of                           time formula:                  

                   

where:                   

T

=

the relevant liquidation period;                      

H

=

the volatility adjustment based on the liquidation period TM;                      

H

=

the volatility adjustment based on the liquidation period TN.                      

(d)institutions shall take into account the illiquidity of lower-quality assets. They shall adjust the liquidation period upwards                           in cases where there is doubt concerning the liquidity of the collateral. They shall also identify where historical data may                           understate potential volatility. Such cases shall be dealt with by means of a stress scenario;                  

(e)the length of the historical observation period institutions use for calculating volatility adjustments shall be at least                           one year. For institutions that use a weighting scheme or other methods for the historical observation period, the length                           of the effective observation period shall be at least one year. The competent authorities may also require an institution                           to calculate its volatility adjustments using a shorter observation period where, in the competent authorities' judgement,                           this is justified by a significant upsurge in price volatility;                  

(f)institutions shall update their data sets and calculate volatility adjustments at least once every three months. They shall                           also reassess their data sets whenever market prices are subject to material changes.                  

3.The estimation of volatility adjustments shall meet all the following qualitative criteria:                  

(a)an institutions shall use the volatility estimates in the day-to-day risk management process including in relation to its                           internal exposure limits;                  

(b)where the liquidation period used by an institution in its day-to-day risk management process is longer than that set out                           in this Section for the type of transaction in question, that institution shall scale up its volatility adjustments in accordance                           with the square root of time formula set out in point (c) of paragraph 2;                  

(c)an institution shall have in place established procedures for monitoring and ensuring compliance with a documented set of                           policies and controls for the operation of its system for the estimation of volatility adjustments and for the integration                           of such estimations into its risk management process;                  

(d)an independent review of the institution's system for the estimation of volatility adjustments shall be carried out regularly                           within the institution's own internal auditing process. A review of the overall system for the estimation of volatility adjustments                           and for the integration of those adjustments into the institution's risk management process shall take place at least once                           a year. The subject of that review shall include at least the following:                  

the integration of estimated volatility adjustments into daily risk management;                            

the validation of any significant change in the process for the estimation of volatility adjustments;                            

the verification of the consistency, timeliness and reliability of data sources used to run the system for the estimation                                 of volatility adjustments, including the independence of such data sources;                            

the accuracy and appropriateness of the volatility assumptions.                            

###### Article 226U.K.Scaling up of volatility adjustment under the Financial Collateral Comprehensive Method

The volatility adjustments set out in Article 224 are the volatility adjustments an institution shall apply where there is                        daily revaluation. Similarly, where an institution uses its own estimates of the volatility adjustments in accordance with                        Article 225, it shall calculate them in the first instance on the basis of daily revaluation. Where the frequency of revaluation                        is less than daily, institutions shall apply larger volatility adjustments. Institutions shall calculate them by scaling up                        the daily revaluation volatility adjustments, using the following square-root-of-time formula:                   

                   

where:                   

H

=

the volatility adjustment to be applied;                      

H

=

the volatility adjustment where there is daily revaluation;                      

N

=

the actual number of business days between revaluations;                      

T

=

the liquidation period for the type of transaction in question.                      

###### Article 227U.K.Conditions for applying a 0 % volatility adjustment under the Financial Collateral Comprehensive Method

1.In relation to repurchase transactions and securities lending or borrowing transactions, where an institution uses the Supervisory                           Volatility Adjustments Approach under Article 224 or the Own Estimates Approach under Article 225 and where the conditions                           set out in points (a) to (h) of paragraph 2 are satisfied, institutions may, instead of applying the volatility adjustments                           calculated under Articles 224 to 226, apply a 0 % volatility adjustment. Institutions using the internal models approach set                           out in Article 221 shall not use the treatment set out in this Article.                  

2.Institutions may apply a 0 % volatility adjustment where all the following conditions are met:                  

(a)both the exposure and the collateral are cash or debt securities issued by central governments or central banks within the                           meaning of Article 197(1)(b) and eligible for a 0 % risk weight under Chapter 2;                  

(b)both the exposure and the collateral are denominated in the same currency;                  

(c)either the maturity of the transaction is no more than one day or both the exposure and the collateral are subject to daily                           marking-to-market or daily re-margining;                  

(d)the time between the last marking-to-market before a failure to re-margin by the counterparty and the liquidation of the collateral                           is no more than four business days;                  

(e)the transaction is settled in a settlement system proven for that type of transaction;                  

(f)the documentation covering the agreement or transaction is standard market documentation for repurchase transactions or securities                           lending or borrowing transactions in the securities concerned;                  

(g)the transaction is governed by documentation specifying that where the counterparty fails to satisfy an obligation to deliver                           cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable;                  

(h)the counterparty is considered a core market participant by the competent authorities.                  

3.The core market participants referred to in point (h) of paragraph 2 shall include the following entities:                  

(a)the entities mentioned in Article 197(1)(b) exposures to which are assigned a 0 % risk weight under Chapter 2;                  

(b)institutions;                  

(c)other financial undertakings within the meaning of points (25)(b) and (d) of Article 13 of Directive 2009/138/EC exposures                           to which are assigned a 20 % risk weight under the Standardised Approach or which, in the case of institutions calculating                           risk-weighted exposure amounts and expected loss amounts under the IRB Approach, do not have a credit assessment by a recognised                           ECAI and are internally rated by the institution;                  

(d)regulated CIUs that are subject to capital or leverage requirements;                  

(e)regulated pension funds;                  

(f)recognised clearing organisations.                  

###### Article 228U.K.Calculating risk-weighted exposure amounts and expected loss amounts under the Financial Collateral Comprehensive method

1.Under the Standardised Approach, institutions shall use E* as calculated under Article 223(5) as the exposure value for the                           purposes of Article 113. In the case of off-balance sheet items listed in Annex I, institutions shall use E* as the value                           to which the percentages indicated in Article 111(1) shall be applied to arrive at the exposure value.                  

2.Under the IRB Approach, institutions shall use the effective LGD (LGD*) as the LGD for the purposes of Chapter 3. Institutions                           shall calculate LGD* as follows:                  

                   

where:                   

LGD

=

the LGD that would apply to the exposure under Chapter 3 where the exposure was not collateralised;                      

E

=

the exposure value in accordance with Article 223(3);                      

E*

=

the fully adjusted exposure value in accordance with Article 223(5).                      

###### Article 229U.K.Valuation principles for other eligible collateral under the IRB Approach

1.For immovable property collateral, the collateral shall be valued by an independent valuer at or at less than the market value.                           An institution shall require the independent valuer to document the market value in a transparent and clear manner.                  

In those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory                        or regulatory provisions the immovable property may instead be valued by an independent valuer at or at less than the mortgage                        lending value. Institutions shall require the independent valuer not to take into account speculative elements in the assessment                        of the mortgage lending value and to document that value in a transparent and clear manner.                   

The value of the collateral shall be the market value or mortgage lending value reduced as appropriate to reflect the results                        of the monitoring required under Article 208(3) and to take account of any prior claims on the immovable property.                   

2.For receivables, the value of receivables shall be the amount receivable.                  

3.Institutions shall value physical collateral other than immovable property at its market value. For the purposes of this Article,                           the market value is the estimated amount for which the property would exchange on the date of valuation between a willing                           buyer and a willing seller in an arm's-length transaction.                  

###### Article 230U.K.Calculating risk-weighted exposure amounts and expected loss amounts for other eligible collateral under the IRB Approach

1.Institutions shall use LGD* calculated in accordance with this paragraph and paragraph 2 as the LGD for the purposes of Chapter                           3.                  

Where the ratio of the value of the collateral (C) to the exposure value (E) is below the required minimum collateralisation                        level of the exposure (C*) as laid down in Table 5, LGD* shall be the LGD laid down in Chapter 3 for uncollateralised exposures                        to the counterparty. For this purpose, institutions shall calculate the exposure value of the items listed in Article 166(8)                        to (10) by using a conversion factor or percentage of 100 % rather than the conversion factors or percentages indicated in                        those paragraphs.                   

Where the ratio of the value of the collateral to the exposure value exceeds a second, higher threshold level of C** as laid                        down in Table 5, LGD* shall be that prescribed in Table 5.                   

Where the required level of collateralisation C** is not achieved in respect of the exposure as a whole, institutions shall                        consider the exposure to be two exposures — one corresponding to the part in respect of which the required level of collateralisation                        C** is achieved and one corresponding to the remainder.                   

2.The applicable LGD* and required collateralisation levels for the secured parts of exposures are set out in Table 5 of this                           paragraph.                  

###### Table 5

Minimum LGD for secured parts of exposures

3.As an alternative to the treatment set out in paragraphs 1 and 2, and subject to Article 124(2), institutions may assign a                           50 % risk weight to the part of the exposure that is, within the limits set out in Article 125(2)(d) and Article 126(2)(d)                           respectively, fully collateralised by residential property or commercial immovable property situated within the territory                           of a Member State where all the conditions in Article 199(3) or (4) are met.                  

###### Article 231U.K.Calculating risk-weighted exposure amounts and expected loss amounts in the case of mixed pools of collateral

1.An institution shall calculate the value of LGD* that it shall use as the LGD for the purposes of Chapter 3 in accordance                           with paragraphs 2 and 3 where both the following conditions are met:                  

(a)the institution uses the IRB Approach to calculate risk-weighted exposure amounts and expected loss amounts;                  

(b)an exposure is collateralised by both financial collateral and other eligible collateral.                  

2.Institutions shall be required to subdivide the volatility-adjusted value of the exposure, obtained by applying the volatility                           adjustment as set out in Article 223(5) to the value of the exposure, into parts so as to obtain a part covered by eligible                           financial collateral, a part covered by receivables, a part covered by commercial immovable property collateral or residential                           property collateral, a part covered by other eligible collateral, and the unsecured part, as applicable.                  

3.Institutions shall calculate LGD* for each part of the exposure obtained in paragraph 2 separately in accordance with the                           relevant provisions of this Chapter.                  

###### Article 232U.K.Other funded credit protection

1.Where the conditions set out in Article 212(1) are met, a deposit with a third party institution may be treated as a guarantee                           by the third party institution.                  

2.Where the conditions set out in Article 212(2) are met, institutions shall subject the portion of the exposure collateralised                           by the current surrender value of life insurance policies pledged to the lending institution to the following treatment:                  

(a)where the exposure is subject to the Standardised Approach, it shall be risk-weighted by using the risk weights specified                           in paragraph 3;                  

(b)where the exposure is subject to the IRB Approach but not subject to the institution's own estimates of LGD, it shall be assigned                           an LGD of 40 %.                  

In the event of a currency mismatch, institutions shall reduce the current surrender value in accordance with Article 233(3),                        the value of the credit protection being the current surrender value of the life insurance policy.                   

3.For the purposes of point (a) of paragraph 2, institutions shall assign the following risk weights on the basis of the risk                           weight assigned to a senior unsecured exposure to the undertaking providing the life insurance:                  

(a)a risk weight of 20 %, where the senior unsecured exposure to the undertaking providing the life insurance is assigned a risk                           weight of 20 %;                  

(b)a risk weight of 35 %, where the senior unsecured exposure to the undertaking providing the life insurance is assigned a risk                           weight of 50 %;                  

(c)a risk weight of 70 %, where the senior unsecured exposure to the undertaking providing the life insurance is assigned a risk                           weight of 100 %;                  

(d)a risk weight of 150 %, where the senior unsecured exposure to the undertaking providing the life insurance is assigned a                           risk weight of 150 %.                  

4.Institutions may treat instruments repurchased on request that are eligible under Article 200(c) as a guarantee by the issuing                           institution. The value of the eligible credit protection shall be the following:                  

(a)where the instrument will be repurchased at its face value, the value of the protection shall be that amount;                  

(b)where the instrument will be repurchased at market price, the value of the protection shall be the value of the instrument                           valued in the same way as the debt securities that meet the conditions in Article 197(4).                  

##### Sub-Section 2U.K.Unfunded credit protection

###### Article 233U.K.Valuation

1.For the purpose of calculating the effects of unfunded credit protection in accordance with this Sub-section, the value of                           unfunded credit protection (G) shall be the amount that the protection provider has undertaken to pay in the event of the                           default or non-payment of the borrower or on the occurrence of other specified credit events.                  

2.In the case of credit derivatives which do not include as a credit event restructuring of the underlying obligation involving                           forgiveness or postponement of principal, interest or fees that result in a credit loss event the following shall apply:                  

(a)where the amount that the protection provider has undertaken to pay is not higher than the exposure value, institutions shall                           reduce the value of the credit protection calculated under paragraph 1 by 40 %;                  

(b)where the amount that the protection provider has undertaken to pay is higher than the exposure value, the value of the credit                           protection shall be no higher than 60 % of the exposure value.                  

3.Where unfunded credit protection is denominated in a currency different from that in which the exposure is denominated, institutions                           shall reduce the value of the credit protection by the application of a volatility adjustment as follows:                  

                   

where:                   

G*

=

the amount of credit protection adjusted for foreign exchange risk,                      

G

=

the nominal amount of the credit protection;                      

H

=

the volatility adjustment for any currency mismatch between the credit protection and the underlying obligation determined                           in accordance with paragraph 4.                      

Where there is no currency mismatch Hfx is equal to zero.                   

4.Institutions shall base the volatility adjustments for any currency mismatch on a 10 business day liquidation period, assuming                           daily revaluation, and may calculate them based on the Supervisory Volatility Adjustments Approach or the Own Estimates Approach                           as set out in Articles 224 and 225 respectively. Institutions shall scale up the volatility adjustments in accordance with                           Article 226.                  

###### Article 234U.K.Calculating risk-weighted exposure amounts and expected loss amounts in the event of partial protection and tranching

Where an institution transfers a part of the risk of a loan in one or more tranches, the rules set out in Chapter 5 shall                        apply. Institutions may consider materiality thresholds on payments below which no payment shall be made in the event of loss                        to be equivalent to retained first loss positions and to give rise to a tranched transfer of risk.                   

###### Article 235U.K.Calculating risk-weighted exposure amounts under the Standardised Approach

1.For the purposes of Article 113(3) institutions shall calculate the risk-weighted exposure amounts in accordance with the                           following formula:                  

                   

where:                   

E

=

the exposure value in accordance with Article 111; for this purpose, the exposure value of an off-balance sheet item listed                           in Annex I shall be 100 % of its value rather than the exposure value indicated in Article 111(1);                      

G

=

the amount of credit risk protection as calculated under Article 233(3) (G*) further adjusted for any maturity mismatch as                           laid down in Section 5;                      

r

=

the risk weight of exposures to the obligor as specified under Chapter 2;                      

g

=

the risk weight of exposures to the protection provider as specified under Chapter 2.                      

2.Where the protected amount (GA) is less than the exposure (E), institutions may apply the formula specified in paragraph 1 only where the protected and                           unprotected parts of the exposure are of equal seniority.                  

3.Institutions may extend the treatment set out in Article 114(4) and (7) to exposures or parts of exposures guaranteed by the                           central government or central bank, where the guarantee is denominated in the domestic currency of the borrower and the exposure                           is funded in that currency.                  

###### Article 236U.K.Calculating risk-weighted exposure amounts and expected loss amounts under the IRB Approach

1.For the covered portion of the exposure value (E), based on the adjusted value of the credit protection GA, the PD for the purposes of Section 4 of Chapter 3 may be the PD of the protection provider, or a PD between that of the                           borrower and that of the guarantor where a full substitution is deemed not to be warranted. In the case of subordinated exposures                           and non-subordinated unfunded protection, the LGD to be applied by institutions for the purposes of Section 4 of Chapter 3                           may be that associated with senior claims.                  

2.For any uncovered portion of the exposure value (E) the PD shall be that of the borrower and the LGD shall be that of the                           underlying exposure.                  

3.For the purposes of this Article, GA is the value of G* as calculated under Article 233(3) further adjusted for any maturity mismatch as laid down in Section                           5. E is the exposure value determined in accordance with Section 5 of Chapter 3. For this purpose, institutions shall calculate                           the exposure value of the items listed in Article 166(8) to (10) by using a conversion factor or percentage of 100 % rather                           than the conversion factors or percentages indicated in those paragraphs.                  

#### Section 5U.K.Maturity mismatches

##### Article 237U.K.Maturity mismatch

1.For the purpose of calculating risk-weighted exposure amounts, a maturity mismatch occurs when the residual maturity of the                           credit protection is less than that of the protected exposure. Where protection has a residual maturity of less than three                           months and the maturity of the protection is less than the maturity of the underlying exposure that protection does not qualify                           as eligible credit protection.                  

2.Where there is a maturity mismatch the credit protection shall not qualify as eligible where either of the following conditions                           is met:                  

(a)the original maturity of the protection is less than one year;                  

(b)the exposure is a short term exposure specified by the competent authorities as being subject to a one-day floor rather than                           a one-year floor in respect of the maturity value (M) under Article 162(3).                  

##### Article 238U.K.Maturity of credit protection

1.Subject to a maximum of five years, the effective maturity of the underlying shall be the longest possible remaining time                           before the obligor is scheduled to fulfil its obligations. Subject to paragraph 2, the maturity of the credit protection shall                           be the time to the earliest date at which the protection may terminate or be terminated.                  

2.Where there is an option to terminate the protection which is at the discretion of the protection seller, institutions shall                           take the maturity of the protection to be the time to the earliest date at which that option may be exercised. Where there                           is an option to terminate the protection which is at the discretion of the protection buyer and the terms of the arrangement                           at origination of the protection contain a positive incentive for the institution to call the transaction before contractual                           maturity, an institution shall take the maturity of the protection to be the time to the earliest date at which that option                           may be exercised; otherwise the institution may consider that such an option does not affect the maturity of the protection.                  

3.Where a credit derivative is not prevented from terminating prior to expiration of any grace period required for a default                           on the underlying obligation to occur as a result of a failure to pay institutions shall reduce the maturity of the protection                           by the length of the grace period.                  

##### Article 239U.K.Valuation of protection

1.For transactions subject to funded credit protection under the Financial Collateral Simple Method, where there is a mismatch                           between the maturity of the exposure and the maturity of the protection, the collateral does not qualify as eligible funded                           credit protection.                  

2.For transactions subject to funded credit protection under the Financial Collateral Comprehensive Method, institutions shall                           reflect the maturity of the credit protection and of the exposure in the adjusted value of the collateral in accordance with                           the following formula:                  

                   

where:                   

C

=

the volatility adjusted value of the collateral as specified in Article 223(2) or the amount of the exposure, whichever is                           lower;                      

t

=

the number of years remaining to the maturity date of the credit protection calculated in accordance with Article 238, or                           the value of T, whichever is lower;                      

T

=

the number of years remaining to the maturity date of the exposure calculated in accordance with Article 238, or five years,                           whichever is lower;                      

t*

=

0,25.                      

Institutions shall use CVAM as CVA further adjusted for maturity mismatch in the formula for the calculation of the fully adjusted value of the exposure (E*)                        set out in Article 223(5).                   

3.For transactions subject to unfunded credit protection, institutions shall reflect the maturity of the credit protection and                           of the exposure in the adjusted value of the credit protection in accordance with the following formula:                  

                   

where:                   

G

=

G* adjusted for any maturity mismatch;                      

G*

=

the amount of the protection adjusted for any currency mismatch;                      

t

=

is the number of years remaining to the maturity date of the credit protection calculated in accordance with Article 238,                           or the value of T, whichever is lower;                      

T

=

is the number of years remaining to the maturity date of the exposure calculated in accordance with Article 238, or five years,                           whichever is lower;                      

t*

=

0,25.                      

Institutions shall use GA as the value of the protection for the purposes of Articles 233 to 236.                   

#### Section 6U.K.Basket CRM techniques

##### Article 240U.K.First-to-default credit derivatives

Where an institution obtains credit protection for a number of exposures under terms that the first default among the exposures                        shall trigger payment and that this credit event shall terminate the contract, the institution may amend the calculation of                        the risk-weighted exposure amount and, as relevant, the expected loss amount of the exposure which would, in the absence of                        the credit protection, produce the lowest risk-weighted exposure amount in accordance with this Chapter:                   

for institutions using the Standardised Approach, the risk-weighted exposure amount shall be that calculated under the Standardised                                 Approach;                            

for institutions using the IRB Approach, the risk-weighted exposure amount shall be the sum of the risk-weighted exposure                                 amount calculated under the IRB Approach and 12,5 times the expected loss amount.                            

The treatment set out in this Article applies only where the exposure value is less than or equal to the value of the credit                        protection.                   

##### Article 241U.K.Nth-to-default credit derivatives

Where the nth default among the exposures triggers payment under the credit protection, the institution purchasing the protection                        may only recognise the protection for the calculation of risk-weighted exposure amounts and, as applicable, expected loss                        amounts where protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such                        cases, the institution may amend the calculation of the risk-weighted exposure amount and, as applicable, the expected loss                        amount of the exposure which would, in the absence of the credit protection, produce the n-th lowest risk-weighted exposure                        amount in accordance with this Chapter. Institutions shall calculate the nth lowest amount as specified in points (a) and                        (b) of Article 240.                   

The treatment set out in this Article applies only where the exposure value is less than or equal to the value of the credit                        protection.                   

All exposures in the basket shall meet the requirements laid down in Article 204(2) and Article 216(1)(d).                   

### CHAPTER 5U.K.Securitisation

#### Section 1U.K.Definitions

##### Article 242U.K.Definitions

For the purposes of this Chapter, the following definitions shall apply:                   

‘excess spread’ means finance charge collections and other fee income received in respect of the securitised exposures net of costs and expenses;                            

‘clean-up call option’ means a contractual option for the originator to repurchase or extinguish the securitisation positions before all of the                                 underlying exposures have been repaid, when the amount of outstanding exposures falls below a specified level;                            

‘liquidity facility’ means the securitisation position arising from a contractual agreement to provide funding to ensure timeliness of cash flows                                 to investors;                            

‘KIRB’ means 8 % of the risk-weighted exposure amounts that would be calculated under Chapter 3 in respect of the securitised exposures,                                 had they not been securitised, plus the amount of expected losses associated with those exposures calculated under that Chapter;                            

‘ratings based method’ means the method of calculating risk-weighted exposure amounts for securitisation positions in accordance with Article 261;                            

‘supervisory formula method’ means the method of calculating risk-weighted exposure amounts for securitisation positions in accordance with Article 262;                            

‘unrated position’ means a securitisation position which does not have an eligible credit assessment by an ECAI as referred to in Section 4;                            

‘rated position’ means a securitisation position which has an eligible credit assessment by an ECAI as referred to in Section 4;                            

‘asset-backed commercial paper programme’ or ‘ABCP programme’ means a programme of securitisations the securities issued by which predominantly take the form of commercial paper with                                 an original maturity of one year or less;                            

‘traditional securitisation’ means a securitisation involving the economic transfer of the exposures being securitised. This shall be accomplished by                                 the transfer of ownership of the securitised exposures from the originator institution to an SSPE or through sub-participation                                 by an SSPE. The securities issued do not represent payment obligations of the originator institution;                            

‘synthetic securitisation’ means a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures                                 being securitised remain exposures of the originator institution;                            

‘revolving exposure’ means an exposure whereby customers' outstanding balances are permitted to fluctuate based on their decisions to borrow and                                 repay, up to an agreed limit;                            

‘revolving securitisation’ means a securitisation where the securitisation structure itself revolves by exposures being added to or removed from the                                 pool of exposures irrespective of whether the exposures revolve or not;                            

‘early amortisation provision’ means a contractual clause in a securitisation of revolving exposures or a revolving securitisation which requires, on the                                 occurrence of defined events, investors' positions to be redeemed before the originally stated maturity of the securities                                 issued;                            

‘first loss tranche’ means the most subordinated tranche in a securitisation that is the first tranche to bear losses incurred on the securitised                                 exposures and thereby provides protection to the second loss and, where relevant, higher ranking tranches.                            

#### Section 2U.K.Recognition of significant risk transfer

##### Article 243U.K.Traditional securitisation

1.The originator institution of a traditional securitisation may exclude securitised exposures from the calculation of risk-weighted                           exposure amounts and expected loss amounts if either of the following conditions is fulfilled:                  

(a)significant credit risk associated with the securitised exposures is considered to have been transferred to third parties;                  

(b)the originator institution applies a 1 250 % risk weight to all securitisation positions it holds in this securitisation or deducts these securitisation positions from                           Common Equity Tier 1 items in accordance with Article 36(1)(k).                  

2.Significant credit risk shall be considered to have been transferred in the following cases:                  

(a)the risk-weighted exposure amounts of the mezzanine securitisation positions held by the originator institution in this securitisation                           do not exceed 50 % of the risk-weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation;                  

(b)where there are no mezzanine securitisation positions in a given securitisation and the originator can demonstrate that the                           exposure value of the securitisation positions that would be subject to deduction from Common Equity Tier 1 or a 1 250 % risk weight exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin, the                           originator institution does not hold more than 20 % of the exposure values of the securitisation positions that would be subject                           to deduction from Common Equity Tier 1 or a 1 250 % risk weight.                  

Where the possible reduction in risk-weighted exposure amounts, which the originator institution would achieve by this securitisation                        is not justified by a commensurate transfer of credit risk to third parties, competent authorities may decide on a case-by-case                        basis that significant credit risk shall not be considered to have been transferred to third parties.                   

3.For the purposes of paragraph 2, mezzanine securitisation positions mean securitisation positions to which a risk weight lower                           than 1 250 % applies and that are more junior than the most senior position in this securitisation and more junior than any securitisation                           position in this securitisation to which either of the following is assigned in accordance with Section 4:                  

(a)in the case of a securitisation position subject to Section 3, Sub-section 3 a credit quality step 1;                  

(b)in the case of a securitisation position subject to points Section 3, Sub-section 4 a credit quality step 1 or 2.                  

4.As an alternative to paragraphs 2 and 3, competent authorities shall grant permission to originator institutions to consider                           significant credit risk as having been transferred where the originator institution is able to demonstrate, in every case                           of a securitisation, that the reduction of own funds requirements which the originator achieves by the securitisation is justified                           by a commensurate transfer of credit risk to third parties.                  

Permission shall be granted only where the institution meets all of the following conditions:                   

(a)the institution has appropriately risk-sensitive policies and methodologies in place to assess the transfer of risk;                  

(b)the institution has also recognised the transfer of credit risk to third parties in each case for purposes of the institution's                           internal risk management and its internal capital allocation.                  

5.In addition to the requirements set out in paragraphs 1 to 4, as applicable, all the following conditions shall be met:                  

(a)the securitisation documentation reflects the economic substance of the transaction;                  

(b)the securitised exposures are put beyond the reach of the originator institution and its creditors, including in bankruptcy                           and receivership. This shall be supported by the opinion of qualified legal counsel;                  

(c)the securities issued do not represent payment obligations of the originator institution;                  

(d)the originator institution does not maintain effective or indirect control over the transferred exposures. An originator shall                           be considered to have maintained effective control over the transferred exposures if it has the right to repurchase from the                           transferee the previously transferred exposures in order to realise their benefits or if it is obligated to re-assume transferred                           risk. The originator institution's retention of servicing rights or obligations in respect of the exposures shall not of itself                           constitute indirect control of the exposures;                  

(e)the securitisation documentation meets all the following conditions:                  

it does not contain clauses that other than in the case of early amortisation provisions, require positions in the securitisation                                 to be improved by the originator institution including but not limited to altering the underlying credit exposures or increasing                                 the yield payable to investors in response to a deterioration in the credit quality of the securitised exposures;                            

it does not contain clauses that increase the yield payable to holders of positions in the securitisation in response to a                                 deterioration in the credit quality of the underlying pool;                            

it makes it clear, where applicable, that any purchase or repurchase of securitisation positions by the originator or sponsor                                 beyond its contractual obligations is exceptional and may only be made at arm's length;                            

(f)where there is a clean-up call option, that option shall also meet the following conditions:                  

it is exercisable at the discretion of the originator institution;                            

it may only be exercised when 10 % or less of the original value of the exposures securitised remains unamortised;                            

it is not structured to avoid allocating losses to credit enhancement positions or other positions held by investors and is                                 not otherwise structured to provide credit enhancement.                            

6.The competent authorities shall keep EBA informed about the specific cases, referred to in paragraph 2, where the possible                           reduction in risk-weighted exposure amounts is not justified by a commensurate transfer of credit risk to third parties, and                           the use institutions make of paragraph 4. EBA shall monitor the range of practices in this area and shall, in accordance with                           Article 16 of Regulation (EU) No 1093/2010, issue guidelines. EBA shall review Member States' implementation of those guidelines                           and provide advice to the Commission by 31 December 2017 on whether a binding technical standard is required.                  

##### Article 244U.K.Synthetic securitisation

1.An originator institution of a synthetic securitisation may calculate risk-weighted exposure amounts, and, as relevant, expected                           loss amounts, for the securitised exposures in accordance with Article 249, if either of the following is met:                  

(a)significant credit risk is considered to have been transferred to third parties either through funded or unfunded credit protection;                  

(b)the originator institution applies a 1 250 % risk weight to all securitisation positions it holds in this securitisation or deducts these securitisation positions from                           Common Equity Tier 1 items in accordance with Article 36(1)(k).                  

2.Significant credit risk shall be considered to have been transferred if either of the following conditions is met:                  

(a)the risk-weighted exposure amounts of the mezzanine securitisation positions which are held by the originator institution                           in this securitisation do not exceed 50 % of the risk-weighted exposure amounts of all mezzanine securitisation positions                           existing in this securitisation;                  

(b)where there are no mezzanine securitisation positions in a given securitisation and the originator can demonstrate that the                           exposure value of the securitisation positions that would be subject to deduction from Common Equity Tier 1 or a 1 250 % risk weight exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin, the                           originator institution does not hold more than 20 % of the exposure values of the securitisation positions that would be subject                           to deduction from Common Equity Tier 1 or a 1 250 % risk weight.                  

Where the possible reduction in risk-weighted exposure amounts, which the originator institution would achieve by this securitisation,                        is not justified by a commensurate transfer of credit risk to third parties, competent authority may decide on a case- by-case                        basis that significant credit risk shall not be considered to have been transferred to third parties.                   

3.For the purposes of paragraph 2, mezzanine securitisation positions means securitisation positions to which a risk weight                           lower than 1 250 % applies and that are more junior than the most senior position in this securitisation and more junior than any securitisation                           positions in this securitisation to which either of the following is assigned in accordance with Section 4:                  

(a)in the case of a securitisation position subject to Section 3, Sub-section 3 a credit quality step 1;                  

(b)in the case of a securitisation position subject to Section 3, Sub-section 4 a credit quality step 1 or 2.                  

4.As an alternative to paragraphs 2 and 3, competent authorities shall grant permission to originator institutions to consider                           significant credit risk as having been transferred where the originator institution is able to demonstrate, in every case                           of a securitisation, that the reduction of own funds requirements which the originator achieves by the securitisation is justified                           by a commensurate transfer of credit risk to third parties.                  

Permission shall be granted only where the institution meets all of the following conditions:                   

(a)the institution has appropriately risk-sensitive policies and methodologies in place to assess the transfer of risk;                  

(b)the institution has also recognised the transfer of credit risk to third parties in each case for the purposes of the institution's                           internal risk management and its internal capital allocation.                  

5.In addition to the requirements set out in paragraphs 1 to 4, as applicable, the transfer shall comply with the following                           conditions:                  

(a)the securitisation documentation reflects the economic substance of the transaction;                  

(b)the credit protection by which the credit risk is transferred complies with Article 247(2);                  

(c)the instruments used to transfer credit risk do not contain terms or conditions that:                  

impose significant materiality thresholds below which credit protection is deemed not to be triggered if a credit event occurs;                            

allow for the termination of the protection due to deterioration of the credit quality of the underlying exposures;                            

other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator                                 institution;                            

increase the institution's cost of credit protection or the yield payable to holders of positions in the securitisation in                                 response to a deterioration in the credit quality of the underlying pool;                            

(d)an opinion is obtained from qualified legal counsel confirming the enforceability of the credit protection in all relevant                           jurisdictions;                  

(e)the securitisation documentation shall make clear, where applicable, that any purchase or repurchase of securitisation positions                           by the originator or sponsor beyond its contractual obligations may only be made at arm's length;                  

(f)where there is a clean-up call option, that option meets all the following conditions:                  

it is exercisable at the discretion of the originator institution;                            

it may only be exercised when 10 % or less of the original value of the exposures securitised remains unamortised;                            

it is not structured to avoid allocating losses to credit enhancement positions or other positions held by investors and is                                 not otherwise structured to provide credit enhancement.                            

6.The competent authorities shall keep EBA informed about the specific cases, referred to in paragraph 2, where the possible                           reduction in risk-weighted exposure amounts is not justified by a commensurate transfer of credit risk to third parties, and                           the use institutions make of paragraph 4. EBA shall monitor the range of practices in this area and shall, in accordance with                           Article 16 of Regulation (EU) No 1093/2010, issue guidelines. EBA shall review Member States' implementation of those guidelines                           and provide advice to the Commission by 31 December 2017 on whether a binding technical standard is required.                  

#### Section 3U.K.Calculation of the risk-weighted exposure amounts

##### Sub-Section 1U.K.Principles

###### Article 245U.K.Calculation of risk-weighted exposure amounts

1.Where an originator institution has transferred significant credit risk associated with securitised exposures in accordance                           with Section 2, that institution may:                  

(a)in the case of a traditional securitisation, exclude from its calculation of risk-weighted exposure amounts, and, as relevant,                           expected loss amounts, the exposures which it has securitised;                  

(b)in the case of a synthetic securitisation, calculate risk-weighted exposure amounts, and, as relevant, expected loss amounts,                           in respect of the securitised exposures in accordance with Articles 249 and 250.                  

2.Where the originator institution has decided to apply paragraph 1, it shall calculate the risk-weighted exposure amounts prescribed                           in this Chapter for the positions that it may hold in the securitisation.                  

Where the originator institution has not transferred significant credit risk or has decided not to apply paragraph 1, it need                        not calculate risk-weighted exposure amounts for any positions it may have in the securitisation in question but shall continue                        including the securitised exposures in its calculation of risk-weighted exposure amounts as if they had not been securitised.                   

3.Where there is an exposure to different tranches in a securitisation, the exposure to each tranche shall be considered a separate                           securitisation position. The providers of credit protection to securitisation positions shall be considered to hold positions                           in the securitisation. Securitisation positions shall include exposures to a securitisation arising from interest rate or                           currency derivative contracts.                  

4.Unless a securitisation position is deducted from Common Equity Tier 1 items pursuant to Article 36(1)(k), the risk-weighted                           exposure amount shall be included in the institution's total of risk-weighted exposure amounts for the purposes of Article                           92(3).                  

5.The risk-weighted exposure amount of a securitisation position shall be calculated by applying to the exposure value of the                           position, calculated as set out in Article 246, the relevant total risk weight.                  

6.The total risk weight shall be determined as the sum of the risk weight set out in this Chapter and any additional risk weight                           in accordance with Article 407.                  

###### Article 246U.K.Exposure value

1.The exposure value shall be calculated as follows:                  

(a)where an institution calculates risk-weighted exposure amounts under Sub-section 3, the exposure value of an on-balance sheet                           securitisation position shall be its accounting value remaining after specific credit risk adjustments treated in accordance                           with Article 110 have been applied;                  

(b)where an institution calculates risk-weighted exposure amounts under Sub-section 4, the exposure value of an on-balance sheet                           securitisation position shall be the accounting value measured without taking into account any credit risk adjustments treated                           in accordance with Article 110 made;                  

(c)where an institution calculates risk-weighted exposure amounts under Sub-section 3, the exposure value of an off-balance sheet                           securitisation position shall be its nominal value, less any specific credit risk adjustment of that securitisation position,                           multiplied by a conversion factor as prescribed in this Chapter. The conversion factor shall be 100 % unless otherwise specified;                  

(d)where an institution calculates risk-weighted exposure amounts under Sub-section 4, the exposure value of an off-balance sheet                           securitisation position shall be its nominal value multiplied by a conversion factor as prescribed in this Chapter. The conversion                           factor shall be 100 % unless otherwise specified;                  

(e)The exposure value for the counterparty credit risk of a derivative instrument listed in Annex II, shall be determined in                           accordance with Chapter 6.                  

2.Where an institution has two or more overlapping positions in a securitisation, it shall, to the extent that they overlap                           include in its calculation of risk-weighted exposure amounts only the position or portion of a position producing the higher                           risk-weighted exposure amounts. The institution may also recognise such overlap between specific risk own funds requirements                           for positions in the trading book and own funds requirements for securitisation positions in the non-trading book, provided                           that the institution is able to calculate and compare the own funds requirements for the relevant positions. For the purpose                           of this paragraph, overlapping occurs when the positions, wholly or partially, represent an exposure to the same risk such                           that, to the extent of the overlap, there is a single exposure.                  

3.Where Article 268(c) applies to positions in the ABCP, the institution may, use the risk-weight assigned to a liquidity facility                           in order to calculate the risk-weighted exposure amount for the ABCP provided that 100 % of the ABCP issued by the programme                           is covered by this or other liquidity facilities and all of those liquidity facilities rank pari passu with the ABCP so that                           they form overlapping positions.                  

The institution shall notify to the competent authorities the use it makes of that treatment.                   

###### Article 247U.K.Recognition of credit risk mitigation for securitisation positions

1.An institution may recognise funded or unfunded credit protection obtained in respect of a securitisation position in accordance                           with Chapter 4 and subject to the requirements laid down in this Chapter and in Chapter 4.                  

Eligible funded credit protection is limited to financial collateral which is eligible for the calculation of risk-weighted                        exposure amounts under Chapter 2 as laid down under Chapter 4 and recognition is subject to compliance with the relevant requirements                        as laid down under Chapter 4.                   

2.Eligible unfunded credit protection and unfunded credit protection providers are limited to those which are eligible under                           Chapter 4 and recognition is subject to compliance with the relevant requirements laid down under Chapter 4.                  

3.By way of derogation from paragraph 2, the eligible providers of unfunded credit protection listed in points (a) to (h) of                           Article 201(1) except for qualifying central counterparties shall have a credit assessment by a recognised ECAI which has                           been determined to be associated with credit quality step 3 or above under Article 136 and shall have been associated with                           credit quality step 2 or above at the time the credit protection was first recognised. Institutions that have a permission                           to apply the IRB Approach to a direct exposure to the protection provider may assess eligibility in accordance with the first                           sentence based on the equivalence of the PD for the protection provider to the PD associated with the credit quality steps                           referred to in Article 136.                  

4.By way of derogation from paragraph 2, SSPEs are eligible protection providers where they own assets that qualify as eligible                           financial collateral and to which there are no rights or contingent rights preceding or ranking pari passu to the contingent                           rights of the institution receiving unfunded credit protection and all requirements for the recognition of financial collateral                           in Chapter 4 are fulfilled. In those cases, GA (the amount of the protection adjusted for any currency mismatch and maturity                           mismatch in accordance with the provisions of Chapter 4) shall be limited to the volatility adjusted market value of those                           assets and g (the risk weight of exposures to the protection provider as specified under the Standardised Approach) shall                           be determined as the weighted-average risk weight that would apply to those assets as financial collateral under the Standardised                           Approach.                  

###### Article 248U.K.Implicit support

1.A sponsor institution, or an originator institution which in respect of a securitisation has made use of Article 245(1) and                           (2) in the calculation of risk-weighted exposure amounts or has sold instruments from its trading book to the effect that                           it is no longer required to hold own funds for the risks of those instruments shall not, with a view to reducing potential                           or actual losses to investors, provide support to the securitisation beyond its contractual obligations. A transaction shall                           not be considered to provide support if it is executed at arm's length and taken into account in the assessment of significant                           risk transfer. Any such transaction shall be, regardless of whether it provides support, notified to the competent authorities                           and subject to the institution's credit review and approval process. The institution shall, when assessing whether the transaction                           is not structured to provide support, adequately consider at least all the following:                  

(a)the price of the repurchase;                  

(b)the institution's capital and liquidity position before and after repurchase;                  

(c)the performance of the securitised exposures;                  

(d)the performance of the securitisation positions;                  

(e)the impact of support on the losses expected to be incurred by the originator relative to investors.                  

2.EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines on what constitutes at arm's length                           and when a transaction is not structured to provide support.                  

3.If an originator institution or a sponsor institution fails to comply with paragraph 1 in respect of a securitisation this                           institution shall at a minimum hold own funds against all of the securitised exposures as if they had not been securitised.                  

##### Sub-Section 2U.K.Originator institutions' calculation of risk-weighted exposure amounts securitised in a synthetic securitisation

###### Article 249U.K.General treatment

In calculating risk-weighted exposure amounts for the securitised exposures, where the conditions in Article 244 are met,                        the originator institution of a synthetic securitisation shall, subject to Article 250, use the relevant calculation methodologies                        set out in this Section and not those set out in Chapter 2. For institutions calculating risk-weighted exposure amounts and                        expected loss amounts under Chapter 3, the expected loss amount in respect of such exposures shall be zero.                   

The requirements set out in the first subparagraph apply to the entire pool of exposures included in the securitisation. Subject                        to Article 250, the originator institution shall calculate risk-weighted exposure amounts in respect of all tranches in the                        securitisation in accordance with the provisions of this Section including those for which the institution recognises credit                        risk mitigation in accordance with Article 247, in which case the risk-weight to be applied to that position may be amended                        in accordance with Chapter 4, subject to the requirements laid down in this Chapter.                   

###### Article 250U.K.Treatment of maturity mismatches in synthetic securitisations

For the purposes of calculating risk-weighted exposure amounts in accordance with Article 249, any maturity mismatch between                        the credit protection which constitutes a tranche and by which the transfer of risk is achieved and the securitised exposures                        shall be taken into consideration as follows:                   

the maturity of the securitised exposures shall be taken to be the longest maturity of any of those exposures subject to a                                 maximum of five years. The maturity of the credit protection shall be determined in accordance with Chapter 4;                            

an originator institution shall ignore any maturity mismatch in calculating risk-weighted exposure amounts for tranches appearing                                 pursuant to this Section with a risk weighting of 1 250 %. For all other tranches, the maturity mismatch treatment set out in Chapter 4 shall be applied in accordance with the following                                 formula:                            

                            

where:                            

RW*

=

risk-weighted exposure amounts for the purposes of Article 92(3)(a);                               

RW

=

risk-weighted exposure amounts for exposures if they had not been securitised, calculated on a pro-rata basis;                               

RW

=

risk-weighted exposure amounts calculated under Article 249 if there was no maturity mismatch;                               

T

=

maturity of the underlying exposures expressed in years;                               

t

=

maturity of credit protection. expressed in years;                               

t*

=

0,25.                               

##### Sub-Section 3U.K.Calculation of risk-weighted exposure amounts under the Standardised Approach

###### Article 251U.K.Risk-weights

Subject to Article 252, the institution shall calculate the risk-weighted exposure amount of a rated securitisation or re-securitisation                        position by applying the relevant risk weight to the exposure value.                   

The relevant risk weight shall be the risk weight as laid down in Table 1, with which the credit assessment of the position                        is associated in accordance with Section 4.                   

###### Table 1

Subject to Articles 252 to 255, the risk-weighted exposure amount of an unrated securitisation position shall be calculated                        by applying a risk weight of 1 250 %.                   

###### Article 252U.K.Originator and sponsor institutions

For an originator institution or sponsor institution, the risk-weighted exposure amounts calculated in respect of its securitisation                        positions in any one securitisation may be limited to the risk-weighted exposure amounts which would currently be calculated                        for the securitised exposures had they not been securitised subject to the presumed application of a 150 % risk weight to                        the following:                   

all items currently in default;                            

all items associated with particularly high risk in accordance with Article 128 amongst the securitised exposures.                            

###### Article 253U.K.Treatment of unrated positions

1.For the purpose of calculating the risk-weighted exposure amount of an unrated securitisation position an institution may                           apply the weighted-average risk weight that would be applied to the securitised exposures under Chapter 2 by an institution                           holding the exposures, multiplied by the concentration ratio referred to in paragraph 2. For this purpose, the institution                           shall know the composition of the pool of securitised exposures securitised at all times.                  

2.The concentration ratio shall be equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal                           amounts of the tranches junior to or pari passu with the tranche in which the position is held including that tranche itself.                           The resulting risk weight shall not be higher than 1 250 % or lower than any risk weight applicable to a rated more senior tranche. Where the institution is unable to determine the                           risk weights that would be applied to the securitised exposures under Chapter 2, it shall apply a risk weight of 1 250 % to the position.                  

###### Article 254U.K.Treatment of securitisation positions in a second loss tranche or better in an ABCP programme

Subject to the availability of a more favourable treatment for unrated liquidity facilities under Article 255 an institution                        may apply to securitisation positions meeting the following conditions a risk weight that is the greater of 100 % or the highest                        of the risk weights that would be applied to any of the securitised exposures under Chapter 2 by an institution holding the                        exposures:                   

the securitisation position shall be in a tranche which is economically in a second loss position or better in the securitisation                                 and the first loss tranche shall provide meaningful credit enhancement to the second loss tranche;                            

the quality of the securitisation position shall be equivalent to credit quality step 3 under the Standardised Approach or                                 better;                            

the securitisation position shall be held by an institution which does not hold a position in the first loss tranche.                            

###### Article 255U.K.Treatment of unrated liquidity facilities

1.Institutions may apply a conversion factor of 50 % to the nominal amount of an unrated liquidity facility in order to determine                           its exposure value when the following conditions are met:                  

(a)the liquidity facility documentation shall clearly identify and limit the circumstances under which the facility may be drawn;                  

(b)it shall not be possible for the facility to be drawn so as to provide credit support by covering losses already incurred                           at the time of draw and in particular not so as to provide liquidity in respect of exposures in default at the time of draw                           or so as to acquire assets at more than fair value;                  

(c)the facility shall not be used to provide permanent or regular funding for the securitisation;                  

(d)repayment of draws on the facility shall not be subordinated to the claims of investors other than to claims arising in respect                           of interest rate or currency derivative contracts, fees or other such payments, nor be subject to waiver or deferral;                  

(e)it shall not be possible for the facility to be drawn after all applicable credit enhancements from which the liquidity facility                           would benefit are exhausted;                  

(f)the facility shall include a provision that results in an automatic reduction in the amount that can be drawn by the amount                           of exposures that are in default, where ‘default’ has the meaning given to it under Chapter 3, or where the pool of securitised exposures consists of rated instruments, that                           terminates the facility if the average quality of the pool falls below investment grade.                  

The risk weight to be applied shall be the highest risk weight that would be applied to any of the securitised exposures under                        Chapter 2 by an institution holding the exposures.                   

2.To determine the exposure value of cash advance facilities, a conversion factor of 0 % may be applied to the nominal amount                           of a liquidity facility that is unconditionally cancellable provided that the conditions set out in paragraph 1 are satisfied                           and that repayment of draws on the facility are senior to any other claims on the cash flows arising from the securitised                           exposures.                  

###### Article 256U.K.Additional own funds requirements for securitisations of revolving exposures with early amortisation provisions

1.Where there is a securitisation of revolving exposures subject to an early amortisation provision, the originator institution                           shall calculate an additional risk-weighted exposure amount in respect of the risk that the levels of credit risk to which                           it is exposed may increase following the operation of the early amortisation provision, in accordance with this Article.                  

2.The institution shall calculate a risk-weighted exposure amount in respect of the sum of the exposure values of the originator's                           interest and the investors' interest.                  

For securitisation structures where the securitised exposures comprise revolving and non-revolving exposures, an originator                        institution shall apply the treatment set out in paragraphs 3 to 6 to that portion of the underlying pool containing revolving                        exposures.                   

The exposure value of the originator's interest shall be the exposure value of that notional part of a pool of drawn amounts                        sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure determines                        the proportion of the cash flows generated by principal and interest collections and other associated amounts which are not                        available to make payments to those having securitisation positions in the securitisation. The originator's interest shall                        not be subordinate to the investors' interest. The exposure value of the investors' interest shall be the exposure value of                        the remaining notional part of the pool of drawn amounts.                   

The risk-weighted exposure amount in respect of the exposure value of the originator's interest shall be calculated as that                        for a pro rata exposure to the securitised exposures as if they had not been securitised.                   

3.Originators of the following types of securitisation are exempt from the calculation of an additional risk-weighted exposure                           amount in paragraph 1:                  

(a)securitisations of revolving exposures whereby investors remain fully exposed to all future draws by borrowers so that the                           risk on the underlying facilities does not return to the originator institution even after an early amortisation event has                           occurred;                  

(b)securitisations where any early amortisation provision is solely triggered by events not related to the performance of the                           securitised assets or the originator institution, such as material changes in tax laws or regulations.                  

4.For an originator institution subject to the calculation of an additional risk-weighted exposure amount in accordance with                           paragraph 1 the total of the risk-weighted exposure amounts in respect of its positions in the investors' interest and the                           risk-weighted exposure amounts calculated under paragraph 1 shall be no greater than the greater of:                  

(a)the risk-weighted exposure amounts calculated in respect of its positions in the investors' interest;                  

(b)the risk-weighted exposure amounts that would be calculated in respect of the securitised exposures by an institution holding                           the exposures as if they had not been securitised in an amount equal to the investors' interest.                  

Deduction of net gains, if any, arising from the capitalisation of future income required under Article 32(1), shall be treated                        outside the maximum amount indicated in the preceding subparagraph.                   

5.The risk-weighted exposure amount to be calculated in accordance with paragraph 1 shall be determined by multiplying the exposure                           value of the investors' interest by the product of the appropriate conversion factor as indicated in paragraphs 6 to 9 and                           the weighted average risk weight that would apply to the securitised exposures if the exposures had not been securitised.                  

An early amortisation provision shall be considered to be controlled where all of the following conditions are met:                   

(a)the originator institution has an appropriate own funds/liquidity plan in place to ensure that it has sufficient own funds                           and liquidity available in the event of an early amortisation;                  

(b)throughout the duration of the transaction there is pro-rata sharing between the originator's interest and the investor's                           interest of payments of interest and principal, expenses, losses and recoveries based on the balance of receivables outstanding                           at one or more reference points during each month;                  

(c)the amortisation period is considered sufficient for 90 % of the total debt (originator's and investors' interest) outstanding                           at the beginning of the early amortisation period to have been repaid or recognised as in default;                  

(d)the speed of repayment is no more rapid than would be achieved by straight-line amortisation over the period set out in point                           (c).                  

6.In the case of securitisations subject to an early amortisation provision of retail exposures which are uncommitted and unconditionally                           cancellable without prior notice, where the early amortisation is triggered by the excess spread level falling to a specified                           level, institutions shall compare the three-month average excess spread level with the excess spread levels at which excess                           spread is required to be trapped.                  

Where the securitisation does not require excess spread to be trapped, the trapping point is deemed to be 4,5 percentage points                        greater than the excess spread level at which an early amortisation is triggered.                   

The conversion factor to be applied shall be determined by the level of the actual three month average excess spread in accordance                        with Table 2.                   

###### Table 2

Where:                   

‘Level A’ refers to levels of excess spread less than 133,33 % of the trapping level of excess spread but not less than 100 % of that                                 trapping level;                            

‘Level B’ refers to levels of excess spread less than 100 % of the trapping level of excess spread but not less than 75 % of that trapping                                 level;                            

‘Level C’ refers to levels of excess spread less than 75 % of the trapping level of excess spread but not less than 50 % of that trapping                                 level;                            

‘Level D’ refers to levels of excess spread less than 50 % of the trapping level of excess spread but not less than 25 % of that trapping                                 level;                            

‘Level E’ refers to levels of excess spread less than 25 % of the trapping level of excess spread.                            

7.In the case of securitisations subject to an early amortization provision of retail exposures which are uncommitted and unconditionally                           cancellable without prior notice and where the early amortization is triggered by a quantitative value in respect of something                           other than the three months average excess spread, subject to permission by the competent authorities, institutions may apply                           a treatment which approximates closely to that prescribed in paragraph 6 for determining the conversion factor indicated.                           The competent authority shall grant permission, if the following conditions are met:                  

(a)that treatment is more appropriate because the institution can establish a quantitative measure equivalent, in relation to                           the quantitative value triggering early amortisation, to the trapping level of excess spread;                  

(b)that treatment leads to a measure of the risk that the credit risk to which the institution is exposed may increase following                           the operation of the early amortisation provision that is as prudent as that calculated in accordance with paragraph 6.                  

8.All other securitisations subject to a controlled early amortisation provision of revolving exposures shall be subject to                           a conversion factor of 90 %.                  

9.All other securitisations subject to a non-controlled early amortisation provision of revolving exposures shall be subject                           to a conversion factor of 100 %.                  

###### Article 257U.K.Credit risk mitigation for securitisation positions subject to the Standardised Approach

Where credit protection is obtained on a securitisation position, the calculation of risk-weighted exposure amounts may be                        amended in accordance with Chapter 4.                   

###### Article 258U.K.Reduction in risk-weighted exposure amounts

Where a securitisation position is assigned a 1 250 % risk weight, institutions may in accordance with Article 36(1)(k), as an alternative to including the position in their                        calculation of risk-weighted exposure amounts, deduct from Common Equity Tier 1 capital the exposure value of the position.                        For these purposes, the calculation of the exposure value may reflect eligible funded credit protection in a manner consistent                        with Article 257.                   

Where an originator institution makes use of this alternative, it may subtract 12,5 times the amount deducted in accordance                        with Article 36(1)(k) from the amount specified in Article 252 as the risk-weighted exposure amount which would currently                        be calculated for the securitised exposures had they not been securitised.                   

##### Sub-Section 4U.K.Calculation of risk-weighted exposure amounts under the IRB approach

###### Article 259U.K.Hierarchy of methods

1.Institutions shall use the methods in accordance with the following hierarchy:                  

(a)for a rated position or a position in respect of which an inferred rating may be used, the Ratings Based Method set out in                           Article 261 shall be used to calculate the risk-weighted exposure amount;                  

(b)for an unrated position the institution may use the Supervisory Formula Method set out in Article 262 where it can produce                           estimates of PD, and where applicable exposure value and LGD as inputs into the Supervisory Formula Method in accordance with                           the requirements for the estimation of those parameters under the Internal Ratings Based approach in accordance with Section                           3. An institution other than the originator institution may only use the Supervisory Formula Method subject to the prior permission                           of the competent authorities, which shall only be granted where the institution fulfils the condition provided in the first                           sentence of this point;                  

(c)as an alternative to point (b) and only for unrated positions in ABCP programmes, the institution may use the Internal Assessment                           Approach as set out in paragraph 4 if the competent authorities have permitted it to do so;                  

(d)in all other cases, a risk weight of 1 250 % shall be assigned to securitisation positions which are unrated;                  

(e)notwithstanding point (d), and subject to the prior permission by the competent authorities, an institution may calculate                           the risk weight for an unrated position in an ABCP programme in accordance with Article 253 or 254, if the unrated position                           is not in commercial paper and falls within the scope of application of an Internal Assessment Approach for which permission                           is being sought. The aggregated exposure values treated by this exception shall not be material and in any case less than                           10 % of the aggregate exposure values treated by the institution under the Internal Assessment Approach. The institution shall                           stop making use of this when the permission for the relevant Internal Assessment Approach has been refused.                  

2.For the purposes of using inferred ratings, an institution shall attribute to an unrated position an inferred credit assessment                           equivalent to the credit assessment of a rated reference position which is the most senior position which is in all respects                           subordinate to the unrated securitisation position in question and meets all of the following conditions:                  

(a)the reference positions shall be subordinate in all respects to the unrated securitisation position;                  

(b)the maturity of the reference positions shall be equal to or longer than that of the unrated position in question;                  

(c)on an ongoing basis, any inferred rating shall be updated to reflect any changes in the credit assessment of the reference                           positions.                  

3.The competent authorities shall grant institutions permission to use the ‘Internal Assessment Approach’ as set out in paragraph 4 where all of the following conditions are met:                  

(a)positions in the commercial paper issued from the ABCP programme shall be rated positions;                  

(b)the internal assessment of the credit quality of the position shall reflect the publicly available assessment methodology                           of one or more ECAIs, for the rating of securities backed by the exposures of the type securitised;                  

(c)the ECAIs, the methodology of which shall be reflected as required by point (b), shall include those ECAIs which have provided                           an external rating for the commercial paper issued from the ABCP programme. Quantitative elements, such as stress factors,                           used in assessing the position to a particular credit quality shall be at least as conservative as those used in the relevant                           assessment methodology of the ECAIs in question;                  

(d)in developing its internal assessment methodology the institution shall take into consideration relevant published ratings                           methodologies of the ECAIs that rate the commercial paper of the ABCP programme. This consideration shall be documented by                           the institution and updated regularly, as outlined in point (g);                  

(e)the institution's internal assessment methodology shall include rating grades. There shall be a correspondence between such                           rating grades and the credit assessments of ECAIs. This correspondence shall be explicitly documented;                  

(f)the internal assessment methodology shall be used in the institution's internal risk management processes, including its decision                           making, management information and internal capital allocation processes;                  

(g)internal or external auditors, an ECAI, or the institution's internal credit review or risk management function shall perform                           regular reviews of the internal assessment process and the quality of the internal assessments of the credit quality of the                           institution's exposures to an ABCP programme. If the institution's internal audit, credit review, or risk management functions                           perform the review, then these functions shall be independent of the ABCP programme business line, as well as the customer                           relationship;                  

(h)the institution shall track the performance of its internal ratings over time to evaluate the performance of its internal                           assessment methodology and shall make adjustments, as necessary, to that methodology when the performance of the exposures                           routinely diverges from that indicated by the internal ratings;                  

(i)the ABCP programme shall incorporate underwriting standards in the form of credit and investment guidelines. In deciding on                           an asset purchase, the ABCP programme administrator shall consider the type of asset being purchased, the type and monetary                           value of the exposures arising from the provision of liquidity facilities and credit enhancements, the loss distribution,                           and the legal and economic isolation of the transferred assets from the entity selling the assets. A credit analysis of the                           asset seller's risk profile shall be performed and shall include analysis of past and expected future financial performance,                           current market position, expected future competitiveness, leverage, cash flow, interest coverage and debt rating. In addition,                           a review of the seller's underwriting standards, servicing capabilities, and collection processes shall be performed;                  

(j)the ABCP programme's underwriting standards shall establish minimum asset eligibility criteria that, in particular:                  

exclude the purchase of assets that are significantly past due or defaulted;                            

limit excess concentration to individual obligor or geographic area;                            

limits the tenor of the assets to be purchased;                            

(k)the ABCP programme shall have collections policies and processes that take into account the operational capability and credit                           quality of the servicer. The ABCP programme shall mitigate risk relating to the performance of the seller and the servicer                           through various methods, such as triggers based on current credit quality that would preclude commingling of funds;                  

(l)the aggregated estimate of loss on an asset pool that the ABCP programme is considering purchasing shall take into account                           all sources of potential risk, such as credit and dilution risk. If the seller-provided credit enhancement is sized based                           only on credit-related losses, then a separate reserve shall be established for dilution risk, if dilution risk is material                           for the particular exposure pool. In addition, in sizing the required enhancement level, the program shall review several                           years of historical information, including losses, delinquencies, dilutions, and the turnover rate of the receivables;                  

(m)the ABCP programme shall incorporate structural features, such as wind-down triggers, into the purchase of exposures in order                           to mitigate potential credit deterioration of the underlying portfolio.                  

4.Under the Internal Assessment Approach, the unrated position shall be assigned by the institution to one of the rating grades                           laid down in point (e) of paragraph 3. The position shall be attributed a derived rating the same as the credit assessments                           corresponding to that rating grade as laid down in point (e) of paragraph 3. Where this derived rating is, at the inception                           of the securitisation, at the level of investment grade or better, it shall be considered the same as an eligible credit assessment                           by an ECAI for the purposes of calculating risk-weighted exposure amounts.                  

5.Institutions which have obtained permission to use the Internal Assessment Approach shall not revert to the use of other methods                           unless all of the following conditions are met:                  

(a)the institution has demonstrated to the satisfaction of the competent authority that the institution has good cause to do                           so;                  

(b)the institution has received the prior permission of the competent authority.                  

###### Article 260U.K.Maximum risk-weighted exposure amounts

An originator institution, a sponsor institution, or other institutions which can calculate KIRB may limit the risk-weighted exposure amounts calculated in respect of its positions in a securitisation to that which would                        produce a own funds requirement under Article 92(3) equal to the sum of 8 % of the risk-weighted exposure amounts which would                        be produced if the securitised assets had not been securitised and were on the balance sheet of the institution plus the expected                        loss amounts of those exposures.                   

###### Article 261U.K.Ratings Based Method

1.Under the Ratings Based Method, the institution shall calculate the risk-weighted exposure amount of a rated securitisation                           or re-securitisation position by applying the relevant risk weight to the exposure value and multiplying the result by 1,06.                  

The relevant risk weight shall be the risk weight as laid down in Table 4, with which the credit assessment of the position                        is associated in accordance with Section 4.                   

###### Table 4

The weightings in column C of Table 4 shall be applied where the securitisation position is not a re-securitisation position                        and where the effective number of exposures securitised is less than six.                   

For the remainder of the securitisation positions that are not re-securitisation positions, the weightings in column B shall                        be applied unless the position is in the most senior tranche of a securitisation, in which case the weightings in column A                        shall be applied.                   

For re-securitisation positions the weightings in column E shall be applied unless the re-securitisation position is in the                        most senior tranche of the re-securitisation and none of the underlying exposures are themselves re-securitisation exposures,                        in which case column D shall be applied.                   

When determining whether a tranche is the most senior, it is not required to take into consideration amounts due under interest                        rate or currency derivative contracts, fees due, or other similar payments.                   

In calculating the effective number of exposures securitised multiple exposures to one obligor shall be treated as one exposure.                        The effective number of exposures is calculated as:                   

                   

where EADi represents the sum of the exposure values of all exposures to the ith obligor. If the portfolio share associated with the largest exposure, C1, is available, the institution may compute N as 1/C1.                   

2.Credit risk mitigation on securitisation positions may be recognised in accordance with Article 264(1) and (4), subject to                           the conditions in Article 247.                  

###### Article 262U.K.Supervisory Formula Method

1.Under the Supervisory Formula Method, the risk weight for a securitisation position shall be calculated as follows subject                           to a floor of 20 % for re-securitisation positions and 7 % for all other securitisation positions:                  

                   

where:                   

where:                   

                   

                   

                   

                   

                   

                   

                   

                   

                   

τ

=

1000;                      

ω

=

20;                      

Beta [x; a, b]

=

the cumulative beta distribution with parameters a and b evaluated at x;                      

T

=

the thickness of the tranche in which the position is held, measured as the ratio of (a) the nominal amount of the tranche                           to (b) the sum of the nominal amounts of the exposures that have been securitised. For derivative instruments listed in Annex                           II, the sum of the current replacement cost and the potential future credit exposure calculated in accordance with Chapter                           6 shall be used in place of the nominal amount;                      

K

=

the ratio of (a) KIRB to (b) the sum of the exposure values of the exposures that have been securitised, and is expressed in decimal form;                      

L

=

the credit enhancement level, measured as the ratio of the nominal amount of all tranches subordinate to the tranche in which                           the position is held to the sum of the nominal amounts of the exposures that have been securitised. Capitalised future income                           shall not be included in the measured L. Amounts due by counterparties to derivative instruments listed in Annex II that represent                           tranches more junior than the tranche in question may be measured at their current replacement cost, without the potential                           future credit exposures, in calculating the enhancement level;                      

N

=

the effective number of exposures calculated in accordance with Article 261. In the case of re-securitisations, the institution                           shall look at the number of securitisation exposures in the pool and not the number of underlying exposures in the original                           pools from which the underlying securitisation exposures stem;                      

ELGD

=

the exposure-weighted average loss-given-default, calculated as follows:                      

                      

where:                      

LGD

=

the average LGD associated with all exposures to the ith obligor, where LGD is determined in accordance with Chapter 3. In                              the case of re-securitisation, an LGD of 100 % shall be applied to the securitised positions. When default and dilution risk                              for purchased receivables are treated in an aggregate manner within a securitisation, the LGDi input shall be constructed as a weighted average of the LGD for credit risk and the 75 % LGD for dilution risk. The weights                              shall be the stand-alone own funds charges for credit risk and dilution risk respectively.                         

2.Where the nominal amount of the largest securitised exposure, C1, is no more than 3 % of the sum of the nominal amount of the securitised exposures, then, for the purposes of the Supervisory                           Formula Method, the institution may set LGD= 50 % in the case of securitisations, which are not re-securitisations, and N                           equal to either of the following:                  

                   

                   

where:                   

C

=

the ratio of the sum of the nominal amounts of the largest ‘m’ exposures to the sum of the nominal amounts of the exposures securitised. The level of ‘m’ may be set by the institution.                      

For securitisations in which materially all securitised exposures are retail exposures, institutions may, subject to permission                        by the competent authority, use the Supervisory Formula Method using the simplifications h=0 and v=0, provided that the effective                        number of exposures is not low and that the exposures are not highly concentrated.                   

3.The competent authorities shall keep EBA informed about the use institutions make of paragraph 2. EBA shall monitor the range                           of practices in this area and shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines.                  

4.Credit risk mitigation on securitisation positions may be recognised in accordance with Article 264(2) to (4), subject to                           the conditions in Article 247.                  

###### Article 263U.K.Liquidity Facilities

1.For the purposes of determining the exposure value of an unrated securitisation position in the form of cash advance facilities,                           a conversion factor of 0 % may be applied to the nominal amount of a liquidity facility that meets the conditions set out                           in Article 255(2).                  

2.When it is not possible for the institution to calculate the risk-weighted exposure amounts for the securitised exposures                           as if they had not been securitised, an institution may, on an exceptional basis and subject to the permission of the competent                           authorities, temporarily apply the method set out in paragraph 3 for the calculation of risk-weighted exposure amounts for                           an unrated securitisation position in the form of liquidity facility that meets the conditions in Article 255(1). Institutions                           shall notify the use they make of the first sentence to the competent authorities, together with its reasons and the intended                           time period of use.                  

The calculation of risk-weighted exposure amounts shall, in general, be deemed not to be possible if an inferred rating, the                        Internal Assessment Approach and the Supervisory Formula Approach are not at the institution's disposal.                   

3.The highest risk weight that would be applied under Chapter 2 to any of the securitised exposures, had they not been securitised,                           may be applied to the securitisation position represented by a liquidity facility that meets the conditions in Article 255(1).                           To determine the exposure value of the position a conversion factor of 100 % shall be applied.                  

###### Article 264U.K.Credit risk mitigation for securitisation positions subject to the IRB Approach

1.Where risk-weighted exposure amounts are calculated using the Ratings Based Method, the exposure value or the risk-weight                           for a securitisation position in respect of which credit protection has been obtained may be amended in accordance with the                           provisions of Chapter 4 as they apply for the calculation of risk-weighted exposure amounts under Chapter 2.                  

2.In the case of full credit protection, where risk-weighted exposure amounts are calculated using the Supervisory Formula Method,                           the following requirements shall apply:                  

(a)the institution shall determine the ‘effective risk weight’ of the position. It shall do this by dividing the risk-weighted exposure amount of the position by the exposure value of                           the position and multiplying the result by 100;                  

(b)in the case of funded credit protection, the risk-weighted exposure amount of the securitisation position shall be calculated                           by multiplying the funded protection-adjusted exposure amount of the position (E*), as calculated under Chapter 4 for the                           calculation of risk-weighted exposure amounts under Chapter 2 taking the amount of the securitisation position to be E, by                           the effective risk weight;                  

(c)in the case of unfunded credit protection, the risk-weighted exposure amount of the securitisation position shall be calculated                           by multiplying the amount of the protection adjusted for any currency mismatch and maturity mismatch (GA) in accordance with                           the provisions of Chapter 4 by the risk weight of the protection provider; and adding this to the amount arrived at by multiplying                           the amount of the securitisation position minus GA by the effective risk weight.                  

3.In the case of partial protection, where risk-weighted exposure amounts are calculated using the Supervisory Formula Method,                           the following requirements shall apply:                  

(a)if the credit risk mitigation covers the first loss or losses on a proportional basis on the securitisation position, the                           institution may apply paragraph 2;                  

(b)in other cases, the institution shall treat the securitisation position as two or more positions with the uncovered portion                           being considered the position with the lower credit quality. For the purposes of calculating the risk-weighted exposure amount                           for this position, the provisions in Article 262 shall apply subject to the adjustment of T to e* in the case of funded credit                           protection and to T-g in the case of unfunded credit protection, where e* denotes the ratio of E* to the total notional amount                           of the underlying pool, where E* is the adjusted exposure amount of the securitisation position calculated in accordance with                           the provisions of Chapter 4 as they apply for the calculation of risk-weighted exposure amounts under Chapter 2 taking the                           amount of the securitisation position to be E; and g is the ratio of the nominal amount of credit protection, adjusted for                           any currency or maturity mismatch in accordance with the provisions of Chapter 4, to the sum of the exposure amounts of the                           securitised exposures. In the case of unfunded credit protection the risk weight of the protection provider shall be applied                           to that portion of the position not falling within the adjusted value of T.                  

4.Where, in the case of unfunded credit protection, competent authorities have granted the institution permission to calculate                           risk-weighted exposure amounts for comparable direct exposures to the protection provider in accordance with Chapter 3, the                           risk weight g of exposures to the protection provider in accordance with Article 235 shall be determined as specified in Chapter                           3.                  

###### Article 265U.K.Additional own funds requirements for securitisations of revolving exposures with early amortisation provisions

1.In addition to the risk-weighted exposure amounts calculated in respect of its securitisation positions, an originator institution                           shall calculate a risk-weighted exposure amount in accordance with the methodology set out in Article 256 when it sells revolving                           exposures into a securitisation that contains an early amortisation provision.                  

2.By way of derogation from Article 256, the exposure value of the originators interest shall be the sum of the following items:                  

(a)the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in                           relation to the amount of the total pool sold into the structure determines the proportion of the cash flows generated by                           principal and interest collections and other associated amounts which are not available to make payments to those having securitisation                           positions in the securitisation;                  

(b)the exposure value of that part of the pool of undrawn amounts of the credit lines, the drawn amounts of which have been sold                           into the securitisation, the proportion of which to the total amount of such undrawn amounts is the same as the proportion                           of the exposure value described in point (a) to the exposure value of the pool of drawn amounts sold into the securitisation.                  

The originator's interest shall not be subordinate to the investors' interest.                   

The exposure value of the Investors' interest shall be the exposure value of the notional part of the pool of drawn amounts                        not falling within point (a) plus the exposure value of that part of the pool of undrawn amounts of credit lines, the drawn                        amounts of which have been sold into the securitisation, not falling within point (b).                   

3.The risk-weighted exposure amount in respect of the exposure value of the originator's interest in accordance with point (a)                           of paragraph 2 shall be calculated as that for a pro-rata exposure to the securitised drawn amounts exposures as if they had                           not been securitised and a pro rata exposure to the undrawn amounts of the credit lines, the drawn amounts of which have been                           sold into the securitisation.                  

###### Article 266U.K.Reduction in risk-weighted exposure amounts

1.The risk-weighted exposure amount of a securitisation position to which a 1 250 % risk weight is assigned may be reduced by 12,5 times the amount of any specific credit risk adjustments treated in accordance                           with Article 110 made by the institution in respect of the securitised exposures. To the extent that specific credit adjustments                           are taken account of for this purpose they shall not be taken account of for the purposes of the calculation laid down in                           Article 159.                  

2.The risk-weighted exposure amount of a securitisation position may be reduced by 12,5 times the amount of any specific credit                           risk adjustments treated in accordance with Article 110 made by the institution in respect of the position.                  

3.As provided in Article 36(1)(k) in respect of a securitisation position in respect of which a 1 250 % risk weight applies, institutions may, as an alternative to including the position in their calculation of risk-weighted                           exposure amounts, deduct from own funds the exposure value of the position subject to the following:                  

(a)the exposure value of the position may be derived from the risk-weighted exposure amounts taking into account any reductions                           made in accordance with paragraphs 1 and 2;                  

(b)the calculation of the exposure value may reflect eligible funded protection in a manner consistent with the methodology prescribed                           in Articles 247 and 264;                  

(c)where the Supervisory Formula Method is used to calculate risk-weighted exposure amounts and L < KIRBR and [L+T] > KIRBR the position may be treated as two positions with L equal to KIRBR for the more senior of the positions.                  

4.Where an institution makes use of the option in paragraph 3 it may subtract 12,5 times the amount deducted in accordance with                           that paragraph from the amount specified in Article 260 as the amount to which the risk-weighted exposure amount in respect                           of its positions in a securitisation may be limited.                  

#### Section 4U.K.External credit assessments

##### Article 267U.K.Use of Credit Assessments by ECAIs

Institutions may use credit assessments to determine the risk weight of a securitisation position only where the credit assessment                        has been issued or has been endorsed by an ECAI in accordance with Regulation (EC) No 1060/2009.                   

##### Article 268U.K.Requirements to be met by the credit assessments of ECAIs

For the purposes of calculating risk-weighted exposure amounts in accordance with Section 3, institutions shall only use a                        credit assessment of an ECAI if the following conditions are met:                   

there shall be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which                                 the institution is entitled under the contract giving rise to the securitisation position in question;                            

loss and cash-flow analysis as well as sensitivity of ratings to changes in the underlying ratings assumptions, including                                 the performance of pool assets, shall be published by the ECAI as well as the credit assessments, procedures, methodologies,                                 assumptions, and the key elements underpinning the assessments in accordance with Regulation (EC) No 1060/2009. Information                                 that is made available only to a limited number of entities shall not be considered to have been published. The credit assessments                                 shall be included in the ECAI's transition matrix;                            

the credit assessment shall not be based or partly based on unfunded support provided by the institution itself. In such case,                                 the institution shall consider the relevant position for the purposes of calculating risk-weighted exposure amounts for this                                 position in accordance with Section 3 as if it were not rated.                            

The ECAI shall be committed to publish explanations how the performance of pool assets affects this credit assessment.                            

##### Article 269U.K.Use of credit assessments

1.An institution may nominate one or more ECAIs the credit assessments of which shall be used in the calculation of its risk-weighted                           exposure amounts under this Chapter (a ‘nominated ECAI’).                  

2.An institution shall use credit assessments consistently and not selectively in respect of its securitisation positions, in                           accordance with the following principles:                  

(a)an institution may not use an ECAI's credit assessments for its positions in some tranches and another ECAI's credit assessments                           for its positions in other tranches within the same securitisation that may or may not be rated by the first ECAI;                  

(b)where a position has two credit assessments by nominated ECAIs, the institution shall use the less favourable credit assessment;                  

(c)where a position has more than two credit assessments by nominated ECAIs, the two most favourable credit assessments shall                           be used. If the two most favourable assessments are different, the less favourable of the two shall be used;                  

(d)an institution shall not actively solicit the withdrawal of less favourable ratings.                  

3.Where credit protection eligible under Chapter 4 is provided directly to the SSPE, and that protection is reflected in the                           credit assessment of a position by a nominated ECAI, the risk weight associated with that credit assessment may be used. Where                           the protection is not eligible under Chapter 4, the credit assessment shall not be recognised. Where the credit protection                           is not provided to the SSPE but directly to a securitisation position, the credit assessment shall not be recognised.                  

##### Article 270U.K.Mapping

EBA shall develop draft implementing technical standards to determine, for all ECAIs, which of the credit quality steps set                        out in this Chapter are associated with the relevant credit assessments of an ECAI. Those determinations shall be objective                        and consistent, and carried out in accordance with the following principles:                   

EBA shall differentiate between the relative degrees of risk expressed by each assessment;                            

EBA shall consider quantitative factors, such as default and/or loss rates and the historical performance of credit assessments                                 of each ECAI across different asset classes;                            

EBA shall consider qualitative factors such as the range of transactions assessed by the ECAI, its methodology and the meaning                                 of its credit assessments, in particular whether based on expected loss or first euro loss, and to timely payment of interest                                 or to ultimate payment of interest;                            

EBA shall seek to ensure that securitisation positions to which the same risk weight is applied on the basis of the credit                                 assessments of ECAIs are subject to equivalent degrees of credit risk. EBA shall consider amending its determination as to                                 the credit quality step with which a particular credit assessment shall be associated, as appropriate.                            

EBA shall submit those draft implementing technical standards to the Commission by 1 July 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

### CHAPTER 6U.K.Counterparty credit risk

#### Section 1U.K.Definitions

##### Article 271U.K.Determination of the exposure value

1.An institution shall determine the exposure value of derivative instruments listed in Annex II in accordance with this Chapter.                  

2.An institution may determine the exposure value of repurchase transactions, securities or commodities lending or borrowing                           transactions, long settlement transactions and margin lending transactions in accordance with this Chapter instead of making                           use of Chapter 4.                  

##### Article 272U.K.Definitions

For the purposes of this Chapter and of Title VI of this Part, the following definitions shall apply:                   
          -  General terms                           (1)
‘counterparty credit risk’ or ‘CCR’ means the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash                                       flows;                                  
 
          -  Transaction types                           (2)
‘long settlement transactions’ means transactions where a counterparty undertakes to deliver a security, a commodity, or a foreign exchange amount against                                       cash, other financial instruments, or commodities, or vice versa, at a settlement or delivery date specified by contract that                                       is later than the market standard for this particular type of transaction or five business days after the date on which the                                       institution enters into the transaction, whichever is earlier;                                  
(3)
‘margin lending transactions’ means transactions in which an institution extends credit in connection with the purchase, sale, carrying or trading of securities.                                       Margin lending transactions do not include other loans that are secured by collateral in the form of securities;                                  
 
          -  Netting set, hedging sets, and related terms                           (4)
‘netting set’ means a group of transactions between an institution and a single counterparty that is subject to a legally enforceable bilateral                                       netting arrangement that is recognised under Section 7 and Chapter 4.                                  

Each transaction that is not subject to a legally enforceable bilateral netting arrangement which is recognised under Section                                       7 shall be treated as its own netting set for the purposes of this Chapter.                                  

Under the Internal Model Method set out in Section 6, all netting sets with a single counterparty may be treated as a single                                       netting set if negative simulated market values of the individual netting sets are set to 0 in the estimation of expected                                       exposure (hereinafter referred to as ‘EE’);                                  
(5)
‘risk position’ means a risk number that is assigned to a transaction under the Standardised Method set out in Section5 following a predetermined                                       algorithm;                                  
(6)
‘hedging set’ means a group of risk positions arising from the transactions within a single netting set, where only the balance of those                                       risk positions is used for determining the exposure value under the Standardised Method set out in Section 5;                                  
(7)
‘margin agreement’ means an agreement or provisions of an agreement under which one counterparty must supply collateral to a second counterparty                                       when an exposure of that second counterparty to the first counterparty exceeds a specified level;                                  
(8)
‘margin threshold’ means the largest amount of an exposure that remains outstanding before one party has the right to call for collateral;                                  
(9)
‘margin period of risk’ means the time period from the most recent exchange of collateral covering a netting set of transactions with a defaulting                                       counterparty until the transactions are closed out and the resulting market risk is re-hedged;                                  
(10)
‘effective maturity’ under the Internal Model Method for a netting set with maturity greater than one year means the ratio of the sum of expected                                       exposure over the life of the transactions in the netting set discounted at the risk-free rate of return, divided by the sum                                       of expected exposure over one year in the netting set discounted at the risk-free rate.                                  

This effective maturity may be adjusted to reflect rollover risk by replacing expected exposure with effective expected exposure                                       for forecasting horizons under one year;                                  
(11)
‘cross-product netting’ means the inclusion of transactions of different product categories within the same netting set pursuant to the cross-product                                       netting rules set out in this Chapter;                                  
(12)
‘Current Market Value’ (hereinafter referred to as ‘CMV’) for the purposes of Section 5 refers to the net market value of the portfolio of transactions within a netting set, where                                       both positive and negative market values are used in computing the CMV;                                  
 
          -  Distributions                           (13)
‘distribution of market values’ means the forecast of the probability distribution of net market values of transactions within a netting set for a future                                       date (the forecasting horizon), given the realised market value of those transactions at the date of the forecast;                                  
(14)
‘distribution of exposures’ means the forecast of the probability distribution of market values that is generated by setting forecast instances of negative                                       net market values equal to zero;                                  
(15)
‘risk-neutral distribution’ means a distribution of market values or exposures over a future time period where the distribution is calculated using market                                       implied values such as implied volatilities;                                  
(16)
‘actual distribution’ means a distribution of market values or exposures at a future time period where the distribution is calculated using historic                                       or realised values such as volatilities calculated using past price or rate changes;                                  
 
          -  Exposure measures and adjustments                           (17)
‘current exposure’ means the larger of zero and the market value of a transaction or portfolio of transactions within a netting set with a counterparty                                       that would be lost upon the default of the counterparty, assuming no recovery on the value of those transactions in insolvency                                       or liquidation;                                  
(18)
‘peak exposure’ means a high percentile of the distribution of exposures at particular future date before the maturity date of the longest                                       transaction in the netting set;                                  
(19)
‘expected exposure’ (hereinafter referred to as ‘EE’) means the average of the distribution of exposures at a particular future date before the longest maturity transaction in                                       the netting set matures;                                  
(20)
‘effective expected exposure at a specific date’ (hereinafter referred to as ‘Effective EE’) means the maximum expected exposure that occurs at that date or any prior date. Alternatively, it may be defined for a specific                                       date as the greater of the expected exposure at that date or the effective expected exposure at any prior date;                                  
(21)
‘expected positive exposure’ (hereinafter referred to as ‘EPE’) means the weighted average over time of expected exposures, where the weights are the proportion of the entire time period                                       that an individual expected exposure represents.                                  

When calculating the own funds requirement, institutions shall take the average over the first year or, if all the contracts                                       within the netting set mature within less than one year, over the time period until the contract with the longest maturity                                       in the netting set has matured;                                  
(22)
‘effective expected positive exposure’ (hereinafter referred to as ‘Effective EPE’) means the weighted average of effective expected exposure over the first year of a netting set or, if all the contracts                                       within the netting set mature within less than one year, over the time period of the longest maturity contract in the netting                                       set, where the weights are the proportion of the entire time period that an individual expected exposure represents;                                  
 
          -  CCR related risks                           (23)
‘rollover risk’ means the amount by which EPE is understated when future transactions with a counterparty are expected to be conducted on                                       an ongoing basis.                                  

The additional exposure generated by those future transactions is not included in calculation of EPE;                                  
(24)
‘counterparty’ for the purposes of Section 7 means any legal or natural person that enters into a netting agreement, and has the contractual                                       capacity to do so;                                  
(25)
‘contractual cross product netting agreement’ means a bilateral contractual agreement between an institution and a counterparty which creates a single legal obligation                                       (based on netting of covered transactions) covering all bilateral master agreements and transactions belonging to different                                       product categories that are included within the agreement;                                  

For the purposes of this definition, ‘different product categories’ means:                                  
(a)
repurchase transactions, securities and commodities lending and borrowing transactions;                                           
(b)
margin lending transactions;                                           
(c)
the contracts listed in Annex II;                                           
(26)
‘payment leg’ means the payment agreed in an OTC derivative transaction with a linear risk profile which stipulates the exchange of a financial                                       instrument for a payment.                                  

In the case of transactions that stipulate the exchange of payment against payment, those two payment legs shall consist of                                       the contractually agreed gross payments, including the notional amount of the transaction.                                  
 

#### Section 2U.K.Methods for calculating the exposure value

##### Article 273U.K.Methods for calculating the exposure value

1.Institutions shall determine the exposure value for the contracts listed in Annex II on the basis of one of the methods set                           out in Sections 3 to 6 in accordance with this Article.                  

An institution which is not eligible for the treatment set out in Article 94 shall not use the method set out in Section 4.                        To determine the exposure value for the contracts listed in point 3 of Annex II an institution shall not use the method set                        out in Section 4. Institutions may use in combination the methods set out in Sections 3 to 6 on a permanent basis within a                        group. A single institution shall not use in combination the methods set out in Sections 3 to 6 on a permanent basis but shall                        be permitted to use in combination methods set out in Sections 3 and 5 when one of the methods is used for the cases set out                        in Article 282(6).                   

2.Where permitted by the competent authorities in accordance with Article 283(1) and (2), an institution may determine the exposure                           value for the following items using the Internal Model Method set out in Section 6:                  

(a)the contracts listed in Annex II;                  

(b)repurchase transactions;                  

(c)securities or commodities lending or borrowing transactions;                  

(d)margin lending transactions;                  

(e)long settlement transactions.                  

3.When an institution purchases protection through a credit derivative against a non-trading book exposure or against a counterparty                           risk exposure, it may calculate its own funds requirement for the hedged exposure in accordance with either of the following:                  

(a)Articles 233 to 236;                  

(b)in accordance with Article 153(3), or Article 183, where permission has been granted in accordance with Article 143.                  

The exposure value for CCR for those credit derivatives shall be zero, unless an institution applies the approach in point                        (h)(ii) of Article 299(2).                   

4.Notwithstanding paragraph 3, an institution may choose consistently to include for the purposes of calculating own funds requirements                           for counterparty credit risk all credit derivatives not included in the trading book and purchased as protection against a                           non-trading book exposure or against a counterparty credit risk exposure where the credit protection is recognised under this                           Regulation.                  

5.Where credit default swaps sold by an institution are treated by an institution as credit protection provided by that institution                           and are subject to own funds requirement for credit risk of the underlying for the full notional amount, their exposure value                           for the purposes of CCR in the non-trading book shall be zero.                  

6.Under all methods set out in Sections 3 to 6, the exposure value for a given counterparty shall be equal to the sum of the                           exposure values calculated for each netting set with that counterparty.                  

For a given counterparty, the exposure value for a given netting set of OTC derivative instruments listed in Annex II calculated                        in accordance with this Chapter shall be the greater of zero and the difference between the sum of exposure values across                        all netting sets with the counterparty and the sum of CVA for that counterparty being recognised by the institution as an                        incurred write-down. The credit valuation adjustments shall be calculated without taking into account any offsetting debit                        value adjustment attributed to the own credit risk of the firm that has been already excluded from own funds under Article                        33(1)(c).                   

7.Institutions shall determine the exposure value for exposures arising from long settlement transactions by any of the methods                           set out in Sections 3 to 6, regardless of which method the institution has chosen for treating OTC derivatives and repurchase                           transactions, securities or commodities lending or borrowing transactions, and margin lending transactions. In calculating                           the own funds requirements for long settlement transactions, an institution that uses the approach set out in Chapter 3 may                           assign the risk weights under the approach set out in Chapter 2 on a permanent basis and irrespective of the materiality of                           such positions.                  

8.For the methods set out in Sections 3 and 4, the institution shall adopt a consistent methodology for determining the notional                           amount for different product types, and shall ensure that the notional amount to be taken into account provides an appropriate                           measure of the risk inherent in the contract. Where the contract provides for a multiplication of cash flows, the notional                           amount shall be adjusted by an institution to take into account the effects of the multiplication on the risk structure of                           that contract.                  

For the methods set out in Sections 3 to 6, institutions shall treat transactions where specific wrong way risk has been identified                        in accordance with Article 291(2), (4), (5) and (6) as appropriate.                   

#### Section 3U.K.Mark-to-Market Method

##### Article 274U.K.Mark-to-Market Method

1.In order to determine the current replacement cost of all contracts with positive values, institutions shall attach the current                           market values to the contracts.                  

2.In order to determine the potential future credit exposure, institutions shall multiply the notional amounts or underlying                           values, as applicable, by the percentages in Table 1 and in accordance with the following principles:                  

contracts which do not fall within one of the five categories indicated in Table 1 shall be treated as contracts concerning                                 commodities other than precious metals;                            

for contracts with multiple exchanges of principal, the percentages shall be multiplied by the number of remaining payments                                 still to be made in accordance with the contract;                            

for contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are                                 reset so that the market value of the contract is zero on those specified dates, the residual maturity shall be equal to the                                 time until the next reset date. In the case of interest-rate contracts that meet those criteria and have a remaining maturity                                 of over one year, the percentage shall be no lower than 0,5 %.                            

###### Table 1

3.For contracts relating to commodities other than gold, which are referred to in point 3 of Annex II, an institution may, as                           an alternative to applying the percentages in Table 1, apply the percentages in Table 2 provided that that institution follows                           the extended maturity ladder approach set out in Article 361 for those contracts.                  

###### Table 2

4.The sum of current replacement cost and potential future credit exposure is the exposure value.                  

#### Section 4U.K.Original Exposure Method

##### Article 275U.K.Original Exposure Method

1.The exposure value is the notional amount of each instrument multiplied by the percentages set out in Table 3.                  

###### Table 3

2.For calculating the exposure value of interest-rate contracts, an institution may choose to use either the original or residual                           maturity.                  

#### Section 5U.K.Standardised Method

##### Article 276U.K.Standardised Method

1.Institutions may use the Standardised Method (hereinafter referred to as ‘SM’) only for calculating the exposure value for OTC derivatives and long settlement transactions.                  

2.When applying the SM, institutions shall calculate the exposure value separately for each netting set, net of collateral,                           as follows:                  

                   

where:                   

CMV

=

current market value of the portfolio of transactions within the netting set with a counterparty gross of collateral, where:                      

                      

where:                      

CMV

=

the current market value of transaction *i*;                         

CMC

=

the current market value of the collateral assigned to the netting set, where:                      

                      

where:                      

CMC

=

the current market value of collateral l;                         

i

=

index designating transaction;                      

l

=

index designating collateral;                      

j

=

index designating hedging set category;                      

The hedging sets for this purpose correspond to risk factors for which risk positions of opposite sign can be offset to yield                        a net risk position on which the exposure measure is then based.                   

RPT

=

risk position from transaction i with respect to hedging set j;                      

RPC

=

risk position from collateral l with respect to hedging set j;                      

CCRM

=

CCR Multiplier set out in Table 5 with respect to hedging set j;                      

β

=

1,4.                      

3.For the purposes of the calculation under paragraph 2:                  

(a)eligible collateral received from a counterparty shall have a positive sign and collateral posted to a counterparty shall                           have a negative sign;                  

(b)only collateral that is eligible under Article 197, Article 198 and Article 299(2)(d) shall be used for the SM;                  

(c)an institution may disregard the interest rate risk from payment legs with a remaining maturity of less than one year;                  

(d)an institution may treat transactions that consist of two payment legs that are denominated in the same currency as a single                           aggregate transaction. The treatment for payment legs applies to the aggregate transaction.                  

##### Article 277U.K.Transactions with a linear risk profile

1.Institutions shall map transactions with a linear risk profile to risk positions in accordance with the following provisions:                  

(a)transactions with a linear risk profile with equities (including equity indices), gold, other precious metals or other commodities                           as the underlying shall be mapped to a risk position in the respective equity (or equity index) or commodity and an interest                           rate risk position for the payment leg;                  

(b)transactions with a linear risk profile with a debt instrument as the underlying instrument shall be mapped to an interest                           rate risk position for the debt instrument and another interest rate risk position for the payment leg;                  

(c)transactions with a linear risk profile that stipulate the exchange of payment against payment, including foreign exchange                           forwards, shall be mapped to an interest rate risk position for each of the payment legs.                  

Where, under a transaction mentioned in point (a), (b) or (c), a payment leg or the underlying debt instrument is denominated                        in foreign currency, that payment leg or underlying instrument shall also be mapped to a risk position in that currency.                   

2.For the purposes of paragraph 1, the size of a risk position from a transaction with linear risk profile shall be the effective                           notional value (market price multiplied by quantity) of the underlying financial instruments or commodities converted to the                           institution's domestic currency by multiplication with the relevant exchange rate, except for debt instruments.                  

3.For debt instruments and for payment legs, the size of the risk position shall be the effective notional value of the outstanding                           gross payments (including the notional amount) converted to the currency of the home Member State, multiplied by the modified                           duration of the debt instrument or payment leg, as the case may be.                  

4.The size of a risk position from a credit default swap shall be the notional value of the reference debt instrument multiplied                           by the remaining maturity of the credit default swap.                  

##### Article 278U.K.Transactions with a non-linear risk profile

1.Institutions shall determine the size of the risk positions for transactions with a non-linear risk profile in accordance                           with the following paragraphs.                  

2.The size of a risk position from an OTC derivative with a non-linear risk profile, including options and swaptions, of which                           the underlying is not a debt instrument or a payment leg shall be equal to the delta equivalent effective notional value of                           the financial instrument that underlies the transaction in accordance with Article 280(1).                  

3.The size of a risk position from an OTC derivative with a non-linear risk profile, including options and swaptions, of which                           the underlying is a debt instrument or a payment leg, shall be equal to the delta equivalent effective notional value of the                           financial instrument or payment leg multiplied by the modified duration of the debt instrument or payment leg, as the case                           may be.                  

##### Article 279U.K.Treatment of collateral

For the determination of risk positions, institutions shall treat collateral as follows:                   

collateral received from a counterparty shall be treated as an obligation to the counterparty under a derivative contract                                 (short position) that is due on the day the determination is made;                            

collateral posted with the counterparty shall be treated as a claim on the counterparty (long position) that is due on the                                 day the determination is made.                            

##### Article 280U.K.Calculation of risk positions

1.An institution shall determine the size and sign of a risk position as follows:                  

(a)for all instruments other than debt instruments:                  

as the effective notional value in the case of a transaction with a linear risk profile;                            

as the delta equivalent notional value, , in the case of a transaction with a non-linear risk profile,                            

where:                            

P

=

price of the underlying instrument, expressed in the reference currency;                               

V

=

value of the financial instrument (in the case of an option, the value is the option price);                               

p

=

price of the underlying instrument, expressed in the same currency as V;                               

(b)for debt instruments and the payment legs of all transactions:                  

as the effective notional value multiplied by the modified duration in the case of a transaction with a linear risk profile;                            

as the delta equivalent in notional value multiplied by the modified duration, , in the case of a transaction with a non-linear risk profile,                            

where:                            

V

=

value of the financial instrument (in the case of an option this is the option price);                               

r

=

interest rate level.                               

If V is denominated in a currency other than the reference currency, the derivative shall be converted into the reference                        currency by multiplication with the relevant exchange rate.                   

2.Institutions shall group the risk positions into hedging sets. The absolute value amount of the sum of the resulting risk                           positions shall be calculated for each hedging set. The net risk position shall be the result of that calculation and shall                           be calculated for the purposes of Article 276(2) as follows:                  

                   

##### Article 281U.K.Interest rate risk positions

1.In order to calculate interest rate risk position, institutions shall apply the following provisions.                  

2.For interest rate risk positions from the following:                  

money deposits received from the counterparty as collateral;                            

a payment legs;                            

underlying debt instruments,                            

to which in each case a capital charge of 1,60 % or less applies in accordance with Table 1 of Article 336, institutions shall                        assign those positions to one of the six hedging sets for each currency set out in Table 4.                   

###### Table 4

3.For interest rate risk positions from underlying debt instruments or payment legs for which the interest rate is linked to                           a reference interest rate that represents a general market interest level, the remaining maturity shall be the length of the                           time interval up to the next re-adjustment of the interest rate. In all other cases, it shall be the remaining life of the                           underlying debt instrument or, in the case of a payment leg, the remaining life of the transaction.                  

##### Article 282U.K.Hedging sets

1.Institutions shall establish hedging sets in accordance with paragraphs 2 to 5.                  

2.There shall be one hedging set for each issuer of a reference debt instrument that underlies a credit default swap.                  

N-th to default basket credit default swaps shall be treated as follows:                   

(a)the size of a risk position in a reference debt instrument in a basket underlying an n-th to default credit default swap shall                           be the effective notional value of the reference debt instrument, multiplied by the modified duration of the n-th to default                           derivative with respect to a change in the credit spread of the reference debt instrument;                  

(b)there shall be one hedging set for each reference debt instrument in a basket underlying a given ‘nth to default’ credit default swap. Risk positions from different n-th to default credit default swaps shall not be included in the same                           hedging set;                  

(c)the CCR multiplier applicable to each hedging set created for one of the reference debt instruments of an n-th to default                           derivative shall be as follows:                  

0,3 % for reference debt instruments that have a credit assessment from a recognised ECAI equivalent to credit quality step                                 1 to 3;                            

0,6 % for other debt instruments.                            

3.For interest rate risk positions from:                  

(a)money deposits that are posted with a counterparty as collateral when that counterparty does not have debt obligations of                           low specific risk outstanding;                  

(b)underlying debt instruments, to which according to Table 1 of Article 336 a capital charge of more than 1,60 % applies.                  

There shall be one hedging set for each issuer.                   

When a payment leg emulates such a debt instrument, there shall also be one hedging set for each issuer of the reference debt                        instrument.                   

An institution may assign risk positions that arise from debt instruments of a particular issuer, or from reference debt instruments                        of the same issuer that are emulated by payment legs, or that underlie a credit default swap, to the same hedging set.                   

4.Underlying financial instruments other than debt instruments shall be assigned to the same hedging sets only if they are identical                           or similar instruments. In all other cases they shall be assigned to separate hedging sets.                  

For the purposes of this paragraph institutions shall determine whether underlying instruments are similar in accordance with                        the following principles:                   

(a)for equities, the underlying is similar if it is issued by the same issuer. An equity index shall be treated as a separate                           issuer;                  

(b)for precious metals, the underlying is similar if it is the same metal. A precious metal index shall be treated as a separate                           precious metal;                  

(c)for electric power, the underlying is similar if the delivery rights and obligations refer to the same peak or off-peak load                           time interval within any 24-hour interval;                  

(d)for commodities, the underlying is similar if it is the same commodity. A commodity index shall be treated as a separate commodity.                  

5.The CCR multipliers (hereinafter referred to as ‘CCRM’) for the different hedging set categories are set out in the following table:                  

###### Table 5

Underlying instruments of OTC derivatives, as referred to in point 10 of Table 5, shall be assigned to separate individual                        hedging sets for each category of underlying instrument.                   

6.For transactions with a non-linear risk profile or for payment legs and transactions with debt instruments as underlying for                           which the institution cannot determine the delta or the modified duration, as the case may be, with an instrument model that                           the competent authority has approved for the purposes of determining the own funds requirements for market risk, the competent                           authority shall either determine the size of the risk positions and the applicable CCRMjs conservatively, or require the institution                           to use the method set out in Section 3. Netting shall not be recognised (that is, the exposure value shall be determined as                           if there were a netting set that comprises just an individual transaction).                  

7.An institution shall have internal procedures to verify that, prior to including a transaction in a hedging set, the transaction                           is covered by a legally enforceable netting contract that meets the requirements set out in Section 7.                  

8.An institution that makes use of collateral to mitigate its CCR shall have internal procedures to verify that, prior to recognising                           the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in Chapter 4.                  

#### Section 6U.K.Internal Model Method

##### Article 283U.K.Permission to use the Internal Model Method

1.Provided that the competent authorities are satisfied that the requirement in paragraph 2 have been met by an institution,                           they shall permit that institution to use the Internal Model Method (IMM) to calculate the exposure value for any of the following                           transactions:                  

(a)transactions in Article 273(2)(a);                  

(b)transactions in Article 273(2)(b), (c) and (d);                  

(c)transactions in Article 273(2)(a) to (d),                  

Where an institution is permitted to use the IMM to calculate exposure value for any of the transactions mentioned in points                        (a) to (c) of the first subparagraph, it may also use the IMM for the transactions in Article 273(2)(e).                   

Notwithstanding the third subparagraph of Article 273(1), an institution may choose not to apply this method to exposures                        that are immaterial in size and risk. In such case, an institution shall apply one of the methods set out in Sections 3 to                        5 to these exposures where the relevant requirements for each approach are met.                   

2.Competent authorities shall permit institutions to use IMM for the calculations referred to in paragraph 1 only if the institution                           has demonstrated that it complies with the requirements set out in this Section, and the competent authorities verified that                           the systems for the management of CCR maintained by the institution are sound and properly implemented.                  

3.The competent authorities may permit institutions for a limited period to implement the IMM sequentially across different                           transaction types. During this period of sequential implementation institutions may use the methods set out in Section 3 or                           Section 5 for transaction type for which they do not use the IMM.                  

4.For all OTC derivative transactions and for long settlement transactions for which an institution has not received permission                           under paragraph 1 to use the IMM, the institution shall use the methods set out in Section 3 or Section 5.                  

Those methods may be used in combination on a permanent basis within a group. Within an institution those methods may be used                        in combination only where one of the methods is used for the cases set out in Article 282(6)                   

5.An institution which is permitted in accordance with paragraph 1 to use the IMM shall not revert to the use of the methods                           set out in Section 3 or Section 5 unless it is permitted by the competent authority to do so. Competent authorities shall                           give such permission if the institution demonstrates good cause.                  

6.If an institution ceases to comply with the requirements laid down in this Section, it shall notify the competent authority                           and do one of the following:                  

(a)present to the competent authority a plan for a timely return to compliance;                  

(b)demonstrate to the satisfaction of the competent authority that the effect of non-compliance is immaterial.                  

##### Article 284U.K.Exposure value

1.Where an institution is permitted, in accordance with Article 283(1), to use the IMM to calculate the exposure value of some                           or all transactions mentioned in that paragraph, it shall measure the exposure value of those transactions at the level of                           the netting set.                  

The model used by the institution for that purpose shall:                   

(a)specify the forecasting distribution for changes in the market value of the netting set attributable to joint changes in relevant                           market variables, such as interest rates, foreign exchange rates;                  

(b)calculate the exposure value for the netting set at each of the future dates on the basis of the joint changes in the market                           variables.                  

2.In order for the model to capture the effects of margining, the model of the collateral value shall meet the quantitative,                           qualitative and data requirements for the IMM in accordance with this Section and the institution may include in its forecasting                           distributions for changes in the market value of the netting set only eligible financial collateral as referred to in Articles                           197 and 198 and points (c) and (d) of Article 299(2).                  

3.The own funds requirement for counterparty credit risk with respect to the CCR exposures to which an institution applies the                           IMM, shall be the higher of the following:                  

(a)the own funds requirement for those exposures calculated on the basis of Effective EPE using current market data;                  

(b)the own funds requirement for those exposures calculated on the basis of Effective EPE using a single consistent stress calibration                           for all CCR exposures to which they apply the IMM.                  

4.Except for counterparties identified as having Specific Wrong-Way risk that fall within the scope of Article 291(4) and (5),                           institutions shall calculate the exposure value as the product of alpha (α) times Effective EPE, as follows:                  

*Exposure value = α · Effective EPE*                   

where:                   

α

=

1.4, unless competent authorities require a higher α or permit institutions to use their own estimates in accordance with                           paragraph 9;                      

Effective EPE shall be calculated by estimating expected exposure (EEt) as the average exposure at future date t, where the                        average is taken across possible future values of relevant market risk factors.                   

The model shall estimate EE at a series of future dates t1, t2, t3, etc.                   

5.Effective EE shall be calculated recursively as:                  

                   

where:                   
          -  the current date is denoted as t0;                          
          -  Effective EEt0 equals current exposure.                          

6.Effective EPE is the average Effective EE during the first year of future exposure. If all contracts in the netting set mature                           within less than one year, EPE shall be the average of EE until all contracts in the netting set mature. Effective EPE shall                           be calculated as a weighted average of Effective EE:                  

                   

where the weights  allow for the case when future exposure is calculated at dates that are not equally spaced over time.                   

7.Institutions shall calculate EE or peak exposure measures on the basis of a distribution of exposures that accounts for the                           possible non-normality of the distribution of exposures.                  

8.An institution may use a measure of the distribution calculated by the IMM that is more conservative than α multiplied by                           Effective EPE as calculated in accordance with the equation in paragraph 4 for every counterparty.                  

9.Notwithstanding paragraph 4, competent authorities may permit institutions to use their own estimates of alpha, where:                  

(a)alpha shall equal the ratio of internal capital from a full simulation of CCR exposure across counterparties (numerator) and                           internal capital based on EPE (denominator);                  

(b)in the denominator, EPE shall be used as if it were a fixed outstanding amount.                  

When estimated in accordance with this paragraph, alpha shall be no lower than 1,2.                   

10.For the purposes of an estimate of alpha under paragraph 9, an institution shall ensure that the numerator and denominator                           are calculated in a manner consistent with the modelling methodology, parameter specifications and portfolio composition.                           The approach used to estimate α shall be based on the institution's internal capital approach, be well documented and be subject                           to independent validation. In addition, an institution shall review its estimates of alpha on at least a quarterly basis,                           and more frequently when the composition of the portfolio varies over time. An institution shall also assess the model risk.                  

11.An institution shall demonstrate to the satisfaction of the competent authorities that its internal estimates of alpha capture                           in the numerator material sources of dependency of distribution of market values of transactions or of portfolios of transactions                           across counterparties. Internal estimates of alpha shall take account of the granularity of portfolios.                  

12.In supervising the use of estimates under paragraph 9, competent authorities shall have regard to the significant variation                           in estimates of alpha that arises from the potential for mis-specification in the models used for the numerator, especially                           where convexity is present.                  

13.Where appropriate, volatilities and correlations of market risk factors used in the joint modelling of market and credit risk                           shall be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an economic                           downturn.                  

##### Article 285U.K.Exposure value for netting sets subject to a margin agreement

1.If the netting set is subject to a margin agreement and daily mark-to-market valuation, the institution shall calculate Effective                           EPE as set out in this paragraph. If the model captures the effects of margining when estimating EE, the institution may,                           subject to the permission of the competent authority, use the model's EE measure directly in the equation in Article 284(5).                           Competent authorities shall grant such permission only if they verify that the model properly captures the effects of margining                           when estimating EE. An institution that has not received such permission shall use one of the following Effective EPE measures:                  

(a)Effective EPE, calculated without taking into account any collateral held or posted by way of margin plus any collateral that                           has been posted to the counterparty independent of the daily valuation and margining process or current exposure;                  

(b)Effective EPE, calculated as the potential increase in exposure over the margin period of risk, plus the larger of:                  

the current exposure including all collateral currently held or posted, other than collateral called or in dispute;                            

the largest net exposure, including collateral under the margin agreement, that would not trigger a collateral call. This                                 amount shall reflect all applicable thresholds, minimum transfer amounts, independent amounts and initial margins under the                                 margin agreement.                            

For the purposes of point (b), institutions shall calculate the add-on as the expected positive change of the mark-to-market                        value of the transactions during the margin period of risk. Changes in the value of collateral shall be reflected using the                        Supervisory Volatility Adjustments Approach in accordance with Section 4 of Chapter 4 or the own estimates of volatility adjustments                        of the Financial Collateral Comprehensive Method, but no collateral payments shall be assumed during the margin period of                        risk. The margin period of risk is subject to the minimum periods set out in paragraphs 2 to 5.                   

2.For transactions subject to daily re-margining and mark-to-market valuation, the margin period of risk used for the purpose                           of modelling the exposure value with margin agreements shall not be less than:                  

(a)5 business days for netting sets consisting only of repurchase transactions, securities or commodities lending or borrowing                           transactions and margin lending transactions;                  

(b)10 business days for all other netting sets.                  

3.Points (a) and (b) of paragraph 2 shall be subject to the following exceptions:                  

(a)for all netting sets where the number of trades exceeds 5 000 at any point during a quarter, the margin period of risk for the following quarter shall not be less than 20 business days.                           This exception shall not apply to institutions' trade exposures;                  

(b)for netting sets containing one or more trades involving either illiquid collateral, or an OTC derivative that cannot be easily                           replaced, the margin period of risk shall not be less than 20 business days.                  

An institution shall determine whether collateral is illiquid or whether OTC derivatives cannot be easily replaced in the                        context of stressed market conditions, characterised by the absence of continuously active markets where a counterparty would,                        within two days or fewer, obtain multiple price quotations that would not move the market or represent a price reflecting                        a market discount (in the case of collateral) or premium (in the case of an OTC derivative).                   

An institution shall consider whether trades or securities it holds as collateral are concentrated in a particular counterparty                        and if that counterparty exited the market precipitously whether the institution would be able to replace those trades or                        securities.                   

4.If an institution has been involved in more than two margin call disputes on a particular netting set over the immediately                           preceding two quarters that have lasted longer than the applicable margin period of risk under paragraphs 2 and 3, the institution                           shall use a margin period of risk that is at least double the period specified in paragraphs 2 and 3 for that netting set                           for the subsequent two quarters.                  

5.For re-margining with a periodicity of N days, the margin period of risk shall be at least equal to the period specified in                           paragraphs 2 and 3, F, plus N days minus one day. That is:                  

*Margin Period of Risk* = *F + N* – 1                   

6.If the internal model includes the effect of margining on changes in the market value of the netting set, an institution shall                           model collateral, other than cash of the same currency as the exposure itself, jointly with the exposure in its exposure value                           calculations for OTC derivatives and securities-financing transactions.                  

7.If an institution is not able to model collateral jointly with the exposure, it shall not recognise in its exposure value                           calculations for OTC derivatives and securities-financing transactions the effect of collateral other than cash of the same                           currency as the exposure itself, unless it uses either volatility adjustments that meet the standards of the financial collateral                           comprehensive Method with own volatility adjustments estimates or the standard Supervisory Volatility Adjustments Approach                           in accordance with Chapter 4.                  

8.An institution using the IMM shall ignore in its models the effect of a reduction of the exposure value due to any clause                           in a collateral agreement that requires receipt of collateral when counterparty credit quality deteriorates.                  

##### Article 286U.K.Management of CCR — Policies, processes and systems

1.An institution shall establish and maintain a CCR management framework, consisting of:                  

(a)policies, processes and systems to ensure the identification, measurement, management, approval and internal reporting of                           CCR;                  

(b)procedures for ensuring that those policies, processes and systems are complied with.                  

Those policies, processes and systems shall be conceptually sound, implemented with integrity and documented. The documentation                        shall include an explanation of the empirical techniques used to measure CCR.                   

2.The CCR management framework required by paragraph 1 shall take account of market, liquidity, and legal and operational risks                           that are associated with CCR. In particular, the framework shall ensure that the institution complies with the following principles:                  

(a)it does not undertake business with a counterparty without assessing its creditworthiness;                  

(b)it takes due account of settlement and pre-settlement credit risk;                  

(c)it manages such risks as comprehensively as practicable at the counterparty level by aggregating CCR exposures with other                           credit exposures and at the firm-wide level.                  

3.An institution using the IMM shall ensure that its CCR management framework accounts to the satisfaction of the competent                           authority for the liquidity risks of all of the following:                  

(a)potential incoming margin calls in the context of exchanges of variation margin or other margin types, such as initial or                           independent margin, under adverse market shocks;                  

(b)potential incoming calls for the return of excess collateral posted by counterparties;                  

(c)calls resulting from a potential downgrade of its own external credit quality assessment.                  

An institution shall ensure that the nature and horizon of collateral re-use is consistent with its liquidity needs and does                        not jeopardise its ability to post or return collateral in a timely manner.                   

4.An institution's management body and senior management shall be actively involved in, and ensure that adequate resources are                           allocated to, the management of CCR. Senior management shall be aware of the limitations and assumptions of the model used                           and the impact those limitations and assumptions can have on the reliability of the output through a formal process. Senior                           management shall be also aware of the uncertainties of the market environment and operational issues and of how these are                           reflected in the model.                  

5.The daily reports prepared on an institution's exposures to CCR in accordance with Article 287(2)(b) shall be reviewed by                           a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual                           credit managers or traders and reductions in the institution's overall CCR exposure.                  

6.An institution's CCR management framework established in accordance with paragraph 1 shall be used in conjunction with internal                           credit and trading limits. Credit and trading limits shall be related to the institution's risk measurement model in a manner                           that is consistent over time and that is well understood by credit managers, traders and senior management. An institution                           shall have a formal process to report breaches of risk limits to the appropriate level of management.                  

7.An institution's measurement of CCR shall include measuring daily and intra-day use of credit lines. The institution shall                           measure current exposure gross and net of collateral. At portfolio and counterparty level, the institution shall calculate                           and monitor peak exposure or potential future exposure at the confidence interval chosen by the institution. The institution                           shall take account of large or concentrated positions, including by groups of related counterparties, by industry and by market.                  

8.An institution shall establish and maintain a routine and rigorous program of stress testing. The results of that stress testing                           shall be reviewed regularly and at least quarterly by senior management and shall be reflected in the CCR policies and limits                           set by the management body or senior management. Where stress tests reveal particular vulnerability to a given set of circumstances,                           the institution shall take prompt steps to manage those risks.                  

##### Article 287U.K.Organisation structures for CCR management

1.An institution using the IMM shall establish and maintain:                  

(a)a risk control unit that complies with paragraph 2;                  

(b)a collateral management unit that complies with paragraph 3.                  

2.The risk control unit shall be responsible for the design and implementation of its CCR management, including the initial                           and on-going validation of the model, and shall carry out the following functions and meet the following requirements:                  

(a)it shall be responsible for the design and implementation of the CCR management system of the institution;                  

(b)it shall produce daily reports on and analyse the output of the institution's risk measurement model. That analysis shall                           include an evaluation of the relationship between measures of CCR exposure values and trading limits;                  

(c)it shall control input data integrity and produce and analyse reports on the output of the institution's risk measurement                           model, including an evaluation of the relationship between measures of risk exposure and credit and trading limits;                  

(d)it shall be independent from units responsible for originating, renewing or trading exposures and free from undue influence;                  

(e)it shall be adequately staffed;                  

(f)it shall report directly to the senior management of the institution;                  

(g)its work shall be closely integrated into the day-to-day credit risk management process of the institution;                  

(h)its output shall be an integral part of the process of planning, monitoring and controlling the institution's credit and overall                           risk profile.                  

3.The collateral management unit shall carry out the following tasks and functions:                  

(a)calculating and making margin calls, managing margin call disputes and reporting levels of independent amounts, initial margins                           and variation margins accurately on a daily basis;                  

(b)controlling the integrity of the data used to make margin calls, and ensuring that it is consistent and reconciled regularly                           with all relevant sources of data within the institution;                  

(c)tracking the extent of re-use of collateral and any amendment of the rights of the institution to or in connection with the                           collateral that it posts;                  

(d)reporting to the appropriate level of management the types of collateral assets that are reused, and the terms of such reuse                           including instrument, credit quality and maturity;                  

(e)tracking concentration to individual types of collateral assets accepted by the institution;                  

(f)reporting collateral management information on a regular basis, but at least quarterly, to senior management, including information                           on the type of collateral received and posted, the size, aging and cause for margin call disputes. That internal reporting                           shall also reflect trends in these figures.                  

4.Senior management shall allocate sufficient resources to the collateral management unit required under paragraph 1(b) to ensure                           that its systems achieve an appropriate level of operational performance, as measured by the timeliness and accuracy of margin                           calls by the institution and the timeliness of the response of the institution to margin calls by its counterparties. Senior                           management shall ensure that the unit is adequately staffed to process calls and disputes in a timely manner even under severe                           market crisis, and to enable the institution to limit its number of large disputes caused by trade volumes.                  

##### Article 288U.K.Review of CCR management system

An institution shall regularly conduct an independent review of its CCR management system through its internal auditing process.                        That review shall include both the activities of the control and collateral management units required by Article 287 and shall                        specifically address, as a minimum:                   

the adequacy of the documentation of the CCR management system and process required by Article 286;                            

the organisation of the CCR control unit required by Article 287(1)(a);                            

the organisation of the collateral management unit required by Article 287(1)(b);                            

the integration of CCR measures into daily risk management;                            

the approval process for risk pricing models and valuation systems used by front and back-office personnel;                            

the validation of any significant change in the CCR measurement process;                            

the scope of CCR captured by the risk measurement model;                            

the integrity of the management information system;                            

the accuracy and completeness of CCR data;                            

the accurate reflection of legal terms in collateral and netting agreements into exposure value measurements;                            

the verification of the consistency, timeliness and reliability of data sources used to run models, including the independence                                 of such data sources;                            

the accuracy and appropriateness of volatility and correlation assumptions;                            

the accuracy of valuation and risk transformation calculations;                            

the verification of the model's accuracy through frequent back-testing as set out in points (b) to (e) of Article 293(1);                            

the compliance of the CCR control unit and collateral management unit with the relevant regulatory requirements.                            

##### Article 289U.K.Use test

1.Institutions shall ensure that the distribution of exposures generated by the model used to calculate Effective EPE is closely                           integrated into the day-to-day CCR management process of the institution, and that the output of the model is taken into account                           in the process of credit approval, CCR management, internal capital allocation and corporate governance.                  

2.The institution shall demonstrate to the satisfaction of the competent authorities that it has been using a model to calculate                           the distribution of exposures upon which the EPE calculation is based that meets, broadly, the requirements set out in this                           Section for at least one year prior to permission to use the IMM by the competent authorities in accordance with Article 283.                  

3.The model used to generate a distribution of exposures to CCR shall be part of the CCR management framework required by Article                           286. This framework shall include the measurement of usage of credit lines, aggregating CCR exposures with other credit exposures                           and internal capital allocation.                  

4.In addition to EPE, an institution shall measure and manage current exposures. Where appropriate, the institution shall measure                           current exposure gross and net of collateral. The use test is satisfied if an institution uses other CCR measures, such as                           peak exposure, based on the distribution of exposures generated by the same model to compute EPE.                  

5.An institution shall have the systems capability to estimate EE daily if necessary, unless it demonstrates to the satisfaction                           of its competent authorities that its exposures to CCR warrant less frequent calculation. The institution shall estimate EE                           along a time profile of forecasting horizons that adequately reflects the time structure of future cash flows and maturity                           of the contracts and in a manner that is consistent with the materiality and composition of the exposures.                  

6.Exposure shall be measured, monitored and controlled over the life of all contracts in the netting set and not only to the                           one-year horizon. The institution shall have procedures in place to identify and control the risks for counterparties where                           the exposure rises beyond the one-year horizon. The forecast increase in exposure shall be an input into the institution's                           internal capital model.                  

##### Article 290U.K.Stress testing

1.An institution shall have a comprehensive stress testing programme for CCR, including for use in assessment of own funds requirements                           for CCR, which complies with the requirements laid down in paragraphs 2 to 10.                  

2.It shall identify possible events or future changes in economic conditions that could have unfavourable effects on an institution's                           credit exposures and assess the institution's ability to withstand such changes.                  

3.The stress measures under the programme shall be compared against risk limits and considered by the institution as part of                           the process set out in Article 81 of Directive 2013/36/EU.                  

4.The programme shall comprehensively capture trades and aggregate exposures across all forms of counterparty credit risk at                           the level of specific counterparties in a sufficient time frame to conduct regular stress testing.                  

5.It shall provide for at least monthly exposure stress testing of principal market risk factors such as interest rates, FX,                           equities, credit spreads, and commodity prices for all counterparties of the institution, in order to identify, and enable                           the institution when necessary to reduce outsized concentrations in specific directional risks. Exposure stress testing -including                           single factor, multifactor and material non-directional risks- and joint stressing of exposure and creditworthiness shall                           be performed at the counterparty-specific, counterparty group and aggregate institution-wide CCR levels.                  

6.It shall apply at least quarterly multifactor stress testing scenarios and assess material non-directional risks including                           yield curve exposure and basis risks. Multiple-factor stress tests shall, at a minimum, address the following scenarios in                           which the following occurs:                  

(a)severe economic or market events have occurred;                  

(b)broad market liquidity has decreased significantly;                  

(c)a large financial intermediary is liquidating positions.                  

7.The severity of the shocks of the underlying risk factors shall be consistent with the purpose of the stress test. When evaluating                           solvency under stress, the shocks of the underlying risk factors shall be sufficiently severe to capture historical extreme                           market environments and extreme but plausible stressed market conditions. The stress tests shall evaluate the impact of such                           shocks on own funds, own funds requirements and earnings. For the purpose of day-to-day portfolio monitoring, hedging, and                           management of concentrations the testing programme shall also consider scenarios of lesser severity and higher probability.                  

8.The programme shall include provision, where appropriate, for reverse stress tests to identify extreme, but plausible, scenarios                           that could result in significant adverse outcomes. Reverse stress testing shall account for the impact of material non-linearity                           in the portfolio.                  

9.The results of the stress testing under the programme shall be reported regularly, at least on a quarterly basis, to senior                           management. The reports and analysis of the results shall cover the largest counterparty-level impacts across the portfolio,                           material concentrations within segments of the portfolio (within the same industry or region), and relevant portfolio and                           counterparty specific trends.                  

10.Senior management shall take a lead role in the integration of stress testing into the risk management framework and risk                           culture of the institution and ensure that the results are meaningful and used to manage CCR. The results of stress testing                           for significant exposures shall be assessed against guidelines that indicate the institution's risk appetite, and referred                           to senior management for discussion and action when excessive or concentrated risks are identified.                  

##### Article 291U.K.Wrong-Way Risk

1.For the purposes of this Article:                  

(a)‘General Wrong-Way risk’ arises when the likelihood of default by counterparties is positively correlated with general market risk factors;                  

(b)‘Specific Wrong-Way risk’ arises when future exposure to a specific counterparty is positively correlated with the counterparty's PD due to the nature                           of the transactions with the counterparty. An institution shall be considered to be exposed to Specific Wrong-Way risk if                           the future exposure to a specific counterparty is expected to be high when the counterparty's probability of a default is                           also high.                  

2.An institution shall give due consideration to exposures that give rise to a significant degree of Specific and General Wrong-Way                           risk.                  

3.In order to identify General Wrong-Way risk, an institution shall design stress testing and scenario analyses to stress risk                           factors that are adversely related to counterparty creditworthiness. Such testing shall address the possibility of severe                           shocks occurring when relationships between risk factors have changed. An institution shall monitor General Wrong Way risk                           by product, by region, by industry, or by other categories that are relevant to the business.                  

4.An institution shall maintain procedures to identify, monitor and control cases of Specific Wrong-Way risk for each legal                           entity, beginning at the inception of a transaction and continuing through the life of the transaction.                  

5.Institutions shall calculate the own funds requirements for CCR in relation to transactions where Specific Wrong-Way risk                           has been identified and where there exists a legal connection between the counterparty and the issuer of the underlying of                           the OTC derivative or the underlying of the transactions referred to in points (b), (c) and (d) of Article 273(2)), in accordance                           with the following principles:                  

(a)the instruments where Specific Wrong-Way risk exists shall not be included in the same netting set as other transactions with                           the counterparty, and shall each be treated as a separate netting set;                  

(b)within any such separate netting set, for single-name credit default swaps the exposure value equals the full expected loss                           in the value of the remaining fair value of the underlying instruments based on the assumption that the underlying issuer                           is in liquidation;                  

(c)LGD for an institution using the approach set out in Chapter 3 shall be 100 % for such swap transactions;                  

(d)for an institution using the approach set out in Chapter 2, the applicable risk weight shall be that of an unsecured transaction;                  

(e)for all other transactions referencing a single name in any such separate netting set, the calculation of the exposure value                           shall be consistent with the assumption of a jump-to-default of those underlying obligations where the issuer is legally connected                           with the counterparty. For transactions referencing a basket of names or index, the jump-to-default of the respective underlying                           obligations where the issuer is legally connected with the counterparty, shall be applied, if material;                  

(f)to the extent that this uses existing market risk calculations for own funds requirements for incremental default and migration                           risk as set out in Title IV, Chapter 5, Section 4 that already contain an LGD assumption, the LGD in the formula used shall                           be 100 %.                  

6.Institutions shall provide senior management and the appropriate committee of the management body with regular reports on                           both Specific and General Wrong-Way risks and the steps being taken to manage those risks.                  

##### Article 292U.K.Integrity of the modelling process

1.An institution shall ensure the integrity of modelling process as set out in Article 284 by adopting at least the following                           measures:                  

(a)the model shall reflect transaction terms and specifications in a timely, complete, and conservative fashion;                  

(b)those terms shall include at least contract notional amounts, maturity, reference assets, margining arrangements and netting                           arrangements;                  

(c)those terms and specifications shall be maintained in a database that is subject to formal and periodic audit;                  

(d)a process for recognising netting arrangements that requires legal staff to verify that netting under those arrangements is                           legally enforceable;                  

(e)the verification required under point (d) shall be entered into the database mentioned in point (c) by an independent unit;                  

(f)the transmission of transaction terms and specification data to the EPE model shall be subject to internal audit;                  

(g)there shall be processes for formal reconciliation between the model and source data systems to verify on an ongoing basis                           that transaction terms and specifications are being reflected in EPE correctly or at least conservatively.                  

2.Current market data shall be used to determine current exposures. An institution may calibrate its EPE model using either                           historic market data or market implied data to establish parameters of the underlying stochastic processes, such as drift,                           volatility and correlation. If an institution uses historical data, it shall use at least three years of such data. The data                           shall be updated at least quarterly, and more frequently if necessary to reflect market conditions.                  

To calculate the Effective EPE using a stress calibration, an institution shall calibrate Effective EPE using either three                        years of data that includes a period of stress to the credit default spreads of its counterparties or market implied data                        from such a period of stress.                   

The requirements in paragraphs 3, 4 and 5 shall be applied by the institution for that purpose.                   

3.An institution shall demonstrate to the satisfaction of the competent authority, at least quarterly, that the stress period                           used for the calculation under this paragraph coincides with a period of increased credit default swap or other credit (such                           as loan or corporate bond) spreads for a representative selection of its counterparties with traded credit spreads. In situations                           where the institution does not have adequate credit spread data for a counterparty, it shall map that counterparty to specific                           credit spread data based on region, internal rating and business types.                  

4.The EPE model for all counterparties shall use data, either historic or implied, that include the data from the stressed credit                           period and shall use such data in a manner consistent with the method used for the calibration of the EPE model to current                           data.                  

5.To evaluate the effectiveness of its stress calibration for EEPE, an institution shall create several benchmark portfolios                           that are vulnerable to the main risk factors to which the institution is exposed. The exposure to these benchmark portfolios                           shall be calculated using (a) a stress methodology, based on current market values and model parameters calibrated to stressed                           market conditions, and (b) the exposure generated during the stress period, but applying the method set out in this Section                           (end of stress period market value, volatilities, and correlations from the 3-year stress period).                  

The competent authorities shall require an institution to adjust the stress calibration if the exposures of those benchmark                        portfolios deviate substantially from each other.                   

6.An institution shall subject the model to a validation process that is clearly articulated in the institutions' policies and                           procedures. That validation process shall:                  

(a)specify the kind of testing needed to ensure model integrity and identify conditions under which the assumptions underlying                           the model are inappropriate and may therefore result in an understatement of EPE;                  

(b)include a review of the comprehensiveness of the model.                  

7.An institution shall monitor the relevant risks and have processes in place to adjust its estimation of Effective EPE when                           those risks become significant. In complying with this paragraph, the institution shall:                  

(a)identify and manage its exposures to Specific Wrong-Way risk arising as specified in Article 291(1)(b) and exposures to General                           Wrong-Way risk arising as specified in Article 291(1)(a);                  

(b)for exposures with a rising risk profile after one year, compare on a regular basis the estimate of a relevant measure of                           exposure over one year with the same exposure measure over the life of the exposure;                  

(c)for exposures with a residual maturity below one year, compare on a regular basis the replacement cost (current exposure)                           and the realised exposure profile, and store data that would allow such a comparison.                  

8.An institution shall have internal procedures to verify that, prior to including a transaction in a netting set, the transaction                           is covered by a legally enforceable netting contract that meets the requirements set out in Section 7.                  

9.An institution that uses collateral to mitigate its CCR shall have internal procedures to verify that, prior to recognising                           the effect of collateral in its calculations, the collateral meets the legal certainty standards set out in Chapter 4.                  

10.EBA shall monitor the range of practices in this area and shall, in accordance with Article 16 of Regulation (EU) No 1093/2010,                           issue guidelines on the application of this Article.                  

##### Article 293U.K.Requirements for the risk management system

1.An institution shall comply with the following requirements:                  

(a)it shall meet the qualitative requirements set out in Part Three, Title IV, Chapter 5;                  

(b)it shall conduct a regular programme of back-testing, comparing the risk measures generated by the model with realised risk                           measures, and hypothetical changes based on static positions with realised measures;                  

(c)it shall carry out an initial validation and an on-going periodic review of its CCR exposure model and the risk measures generated                           by it. The validation and review shall be independent of the model development;                  

(d)the management body and senior management shall be involved in the risk control process and shall ensure that adequate resources                           are devoted to credit and counterparty credit risk control. In this regard, the daily reports prepared by the independent                           risk control unit established in accordance Article 287(1)(a) shall be reviewed by a level of management with sufficient seniority                           and authority to enforce both reductions of positions taken by individual traders and reductions in the overall risk exposure                           of the institution;                  

(e)the internal risk measurement exposure model shall be integrated into the day-to-day risk management process of the institution;                  

(f)the risk measurement system shall be used in conjunction with internal trading and exposure limits. In this regard, exposure                           limits shall be related to the institution's risk measurement model in a manner that is consistent over time and that is well                           understood by traders, the credit function and senior management;                  

(g)an institution shall ensure that its risk management system is well documented. In particular, it shall maintain a documented                           set of internal policies, controls and procedures concerning the operation of the risk measurement system, and arrangements                           to ensure that those policies are complied with;                  

(h)an independent review of the risk measurement system shall be carried out regularly in the institution's own internal auditing                           process. This review shall include both the activities of the business trading units and of the independent risk control unit.                           A review of the overall risk management process shall take place at regular intervals (and no less than once a year) and shall                           specifically address, as a minimum, all items referred to in Article 288;                  

(i)the on-going validation of counterparty credit risk models, including back-testing, shall be reviewed periodically by a level                           of management with sufficient authority to decide the action that will be taken to address weaknesses in the models.                  

2.Competent authorities shall take into account the extent to which an institution meets the requirements of paragraph 1 when                           setting the level of alpha, as set out in Article 284(4). Only those institutions that comply fully with those requirements                           shall be eligible for application of the minimum multiplication factor.                  

3.An institution shall document the process for initial and on-going validation of its CCR exposure model and the calculation                           of the risk measures generated by the models to a level of detail that would enable a third party to recreate, respectively,                           the analysis and the risk measures. That documentation shall set out the frequency with which back testing analysis and any                           other on-going validation will be conducted, how the validation is conducted with respect to data flows and portfolios and                           the analyses that are used.                  

4.An institution shall define criteria with which to assess its CCR exposure models and the models that input into the calculation                           of exposure and maintain a written policy that describes the process by which unacceptable performance will be identified                           and remedied.                  

5.An institution shall define how representative counterparty portfolios are constructed for the purposes of validating an CCR                           exposure model and its risk measures.                  

6.The validation of CCR exposure models and their risk measures that produce forecast distributions shall consider more than                           a single statistic of the forecast distribution.                  

##### Article 294U.K.Validation requirements

1.As part of the initial and on-going validation of its CCR exposure model and its risk measures, an institution shall ensure                           that the following requirements are met:                  

(a)the institution shall carry out back-testing using historical data on movements in market risk factors prior to the permission                           by the competent authorities in accordance with Article 283(1). That back-testing shall consider a number of distinct prediction                           time horizons out to at least one year, over a range of various initialisation dates and covering a wide range of market conditions;                  

(b)the institution using the approach set out in Article 285(1)(b) shall regularly validate its model to test whether realised                           current exposures are consistent with prediction over all margin periods within one year. If some of the trades in the netting                           set have a maturity of less than one year, and the netting set has higher risk factor sensitivities without these trades,                           the validation shall take this into account;                  

(c)it shall back-test the performance of its CCR exposure model and the model's relevant risk measures as well as the market                           risk factor predictions. For collateralised trades, the prediction time horizons considered shall include those reflecting                           typical margin periods of risk applied in collateralised or margined trading;                  

(d)if the model validation indicates that Effective EPE is underestimated, the institution shall take the action necessary to                           address the inaccuracy of the model;                  

(e)it shall test the pricing models used to calculate CCR exposure for a given scenario of future shocks to market risk factors                           as part of the initial and on-going model validation process. Pricing models for options shall account for the nonlinearity                           of option value with respect to market risk factors;                  

(f)the CCR exposure model shall capture the transaction-specific information necessary to be able to aggregate exposures at the                           level of the netting set. An institution shall verify that transactions are assigned to the appropriate netting set within                           the model;                  

(g)the CCR exposure model shall include transaction-specific information to capture the effects of margining. It shall take into                           account both the current amount of margin and margin that would be passed between counterparties in the future. Such a model                           shall account for the nature of margin agreements that are unilateral or bilateral, the frequency of margin calls, the margin                           period of risk, the minimum threshold of un-margined exposure the institution is willing to accept, and the minimum transfer                           amount. Such a model shall either estimate the mark-to-market change in the value of collateral posted or apply the rules                           set out in Chapter 4;                  

(h)the model validation process shall include static, historical back-testing on representative counterparty portfolios. An institution                           shall conduct such back-testing on a number of representative counterparty portfolios that are actual or hypothetical at regular                           intervals. Those representative portfolios shall be chosen on the basis of their sensitivity to the material risk factors                           and combinations of risk factors to which the institution is exposed;                  

(i)an institution shall conduct back-testing that is designed to test the key assumptions of the CCR exposure model and the relevant                           risk measures, including the modelled relationship between tenors of the same risk factor, and the modelled relationships                           between risk factors;                  

(j)the performance of CCR exposure models and its risk measures shall be subject to appropriate back-testing practice. The back                           testing programme shall be capable of identifying poor performance in an EPE model's risk measures;                  

(k)an institution shall validate its CCR exposure models and all risk measures out to time horizons commensurate with the maturity                           of trades for which exposure is calculated using IMM in accordance to the Article 283;                  

(l)an institution shall regularly test the pricing models used to calculate counterparty exposure against appropriate independent                           benchmarks as part of the on-going model validation process;                  

(m)the on-going validation of an institution's CCR exposure model and the relevant risk measures shall include an assessment                           of the adequacy of the recent performance;                  

(n)the frequency with which the parameters of an CCR exposure model are updated shall be assessed by an institution as part of                           the initial and on-going validation process;                  

(o)the initial and on-going validation of CCR exposure models shall assess whether or not the counterparty level and netting                           set exposure calculations of exposure are appropriate.                  

2.A measure that is more conservative than the metric used to calculate regulatory exposure value for every counterparty may                           be used in place of alpha multiplied by Effective EPE with the prior permission of the competent authorities. The degree of                           relative conservatism will be assessed upon initial approval by the competent authorities and at the regular supervisory reviews                           of the EPE models. An institution shall validate the conservatism regularly. The on-going assessment of model performance                           shall cover all counterparties for which the models are used.                  

3.If back-testing indicates that a model is not sufficiently accurate, the competent authorities shall revoke its permission                           for the model, or impose appropriate measures to ensure that the model is improved promptly.                  

#### Section 7U.K.Contractual netting

##### Article 295U.K.Recognition of contractual netting as risk-reducing

Institutions may treat as risk reducing in accordance with Article 298 only the following types of contractual netting agreements                        where the netting agreement has been recognised by competent authorities in accordance with Article 296 and where the institution                        meets the requirements set out in Article 297:                   

bilateral contracts for novation between an institution and its counterparty under which mutual claims and obligations are                                 automatically amalgamated in such a way that the novation fixes one single net amount each time it applies so as to create                                 a single new contract that replaces all former contracts and all obligations between parties pursuant to those contracts and                                 is binding on the parties;                            

other bilateral agreements between an institution and its counterparty;                            

contractual cross-product netting agreements for institutions that have received the approval to use the method set out in                                 Section 6 for transactions falling under the scope of that method. Competent authorities shall report to EBA a list of the                                 contractual cross-product netting agreements approved.                            

Netting across transactions entered into by different legal entities of a group shall not be recognised for the purposes of                        calculating the own funds requirements.                   

##### Article 296U.K.Recognition of contractual netting agreements

1.Competent authorities shall recognise a contractual netting agreement only where the conditions in paragraph 2 and, where                           relevant, 3 are fulfilled.                  

2.The following conditions shall be fulfilled by all contractual netting agreements used by an institution for the purposes                           of determining exposure value in this Part:                  

(a)the institution has concluded a contractual netting agreement with its counterparty which creates a single legal obligation,                           covering all included transactions, such that, in the event of default by the counterparty it would be entitled to receive                           or obliged to pay only the net sum of the positive and negative mark-to-market values of included individual transactions;                  

(b)the institution has made available to the competent authorities written and reasoned legal opinions to the effect that, in                           the event of a legal challenge of the netting agreement, the institution's claims and obligations would not exceed those referred                           to in point (a). The legal opinion shall refer to the applicable law:                  

the jurisdiction in which the counterparty is incorporated;                            

if a branch of an undertaking is involved, which is located in a country other than that where the undertaking is incorporated,                                 the jurisdiction in which the branch is located;                            

the jurisdiction whose law governs the individual transactions included in the netting agreement;                            

the jurisdiction whose law governs any contract or agreement necessary to effect the contractual netting;                            

(c)credit risk to each counterparty is aggregated to arrive at a single legal exposure across transactions with each counterparty.                           This aggregation shall be factored into credit limit purposes and internal capital purposes;                  

(d)the contract shall not contain any clause which, in the event of default of a counterparty, permits a non-defaulting counterparty                           to make limited payments only, or no payments at all, to the estate of the defaulting party, even if the defaulting party                           is a net creditor (i.e. walk-away clause).                  

If any of the competent authorities are not satisfied that the contractual netting is legally valid and enforceable under                        the law of each of the jurisdictions referred to in point (b) the contractual netting agreement shall not be recognised as                        risk-reducing for either of the counterparties. Competent authorities shall inform each other accordingly.                   

3.The legal opinions referred to in point (b) may be drawn up by reference to types of contractual netting. The following additional                           conditions shall be fulfilled by contractual cross-product netting agreements:                  

(a)the net sum referred to in point (a) of paragraph 2 is the net sum of the positive and negative close out values of any included                           individual bilateral master agreement and of the positive and negative mark-to-market value of the individual transactions                           (the ‘cross-product net amount’);                  

(b)the legal opinions referred to in point (b) of paragraph 2 shall address the validity and enforceability of the entire contractual                           cross-product netting agreement under its terms and the impact of the netting arrangement on the material provisions of any                           included individual bilateral master agreement.                  

##### Article 297U.K.Obligations of institutions

1.An institution shall establish and maintain procedures to ensure that the legal validity and enforceability of its contractual                           netting is reviewed in the light of changes in the law of relevant jurisdictions referred to in Article 296(2)(b).                  

2.The institution shall maintain all required documentation relating to its contractual netting in its files.                  

3.The institution shall factor the effects of netting into its measurement of each counterparty's aggregate credit risk exposure                           and the institution shall manage its CCR on the basis of those effects of that measurement.                  

4.In the case of contractual cross-product netting agreements referred to in Article 295, the institution shall maintain procedures                           under Article 296(2)(c) to verify that any transaction which is to be included in a netting set is covered by a legal opinion                           referred to in Article 296(2)(b).                  

Taking into account the contractual cross-product netting agreement, the institution shall continue to comply with the requirements                        for the recognition of bilateral netting and the requirements of Chapter 4 for the recognition of credit risk mitigation,                        as applicable, with respect to each included individual bilateral master agreement and transaction.                   

##### Article 298U.K.Effects of recognition of netting as risk-reducing

1.The following treatment applies to contractual netting agreements:                  

(a)netting for the purposes of Sections 5 and 6 shall be recognised as set out in those Sections;                  

(b)in the case of contracts for novation, the single net amounts fixed by such contracts rather than the gross amounts involved,                           may be weighted.                  

In the application of Section 3, institutions may take the contract for novation into account when determining:                   

the current replacement cost referred to in Article 274(1);                            

the notional principal amounts or underlying values referred to in Article 274(2).                            

In the application of Section 4, in determining the notional amount referred to in Article 275(1) institutions may take into                        account the contract for novation for the purposes of calculating the notional principal amount In such cases, institutions                        shall apply the percentages of Table 3.                   

(c)In the case of other netting agreements, institutions shall apply Section 3 as follows:                  

the current replacement cost referred to in Article 274(1) for the contracts included in a netting agreement shall be obtained                                 by taking account of the actual hypothetical net replacement cost which results from the agreement; in the case where netting                                 leads to a net obligation for the institution calculating the net replacement cost, the current replacement cost is calculated                                 as ‘0’;                            

the figure for potential future credit exposure referred to in Article 274(2) for all contracts included in a netting agreement                                 shall be reduced in accordance with the following formula:                            

                            

where:                            

PCE

=

the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally                                    valid bilateral netting agreement;                               

PCE

=

the sum of the figures for potential future credit exposure for all contracts with a given counterparty which are included                                    in a legally valid bilateral netting agreement and are calculated by multiplying their notional principal amounts by the percentages                                    set out in Table 1;                               

NGR

=

the net-to-gross ratio calculated as the quotient of the net replacement cost for all contracts included in a legally valid                                    bilateral netting agreement with a given counterparty (numerator) and the gross replacement cost for all contracts included                                    in a legally valid bilateral netting agreement with that counterparty (denominator).                               

2.When carrying out the calculation of the potential future credit exposure in accordance with the formula set out in paragraph                           1, institutions may treat perfectly matching contracts included in the netting agreement as if they were a single contract                           with a notional principal equivalent to the net receipts.                  

In the application of Article 275(1) institutions may treat perfectly matching contracts included in the netting agreement                        as if they were a single contract with a notional principal equivalent to the net receipts, and the notional principal amounts                        shall be multiplied by the percentages given in Table 3.                   

For the purposes of this paragraph, perfectly matching contracts are forward foreign-exchange contracts or similar contracts                        in which a notional principal is equivalent to cash flows if the cash flows fall due on the same value date and fully in the                        same currency.                   

3.For all other contracts included in a netting agreement, the percentages applicable may be reduced as indicated in Table 6:                  

###### Table 6

4.In the case of interest-rate contracts, institutions may, subject to the consent of their competent authorities, choose either                           original or residual maturity.                  

#### Section 8U.K.Items in the trading book

##### Article 299U.K.Items in the trading book

1.For the purposes of the application of this Article, Annex II shall include a reference to derivative instruments for the                           transfer of credit risk as mentioned in point (8) of Section C of Annex I to Directive 2004/39/EC.                  

2.When calculating risk-weighted exposure amounts for counterparty risk of items in the trading book, institutions shall comply                           with the following principles:                  

(a)in the case of total return swap credit derivatives and credit default swap credit derivatives, to obtain a figure for potential                           future credit exposure under the method set out in Section 3, the nominal amount of the instrument shall be multiplied by                           the following percentages:                  

5 %, where the reference obligation is one that, if it gave rise to a direct exposure of the institution, would be a qualifying                                 item for the purposes of Part Three, Title IV, Chapter 2;                            

10 %, where the reference obligation is one that, if it gave rise to a direct exposure of the institution, would not be a                                 qualifying item for the purposes of Part Three, Title IV, Chapter 2.                            

In the case of an institution whose exposure arising from a credit default swap represents a long position in the underlying,                        the percentage for potential future credit exposure may be 0 %, unless the credit default swap is subject to close-out upon                        the insolvency of the entity whose exposure arising from the swap represents a short position in the underlying, even though                        the underlying has not defaulted.                   

Where the credit derivative provides protection in relation to ‘nth to default’ amongst a number of underlying obligations, an institution shall determine which of the percentage figures set out in the                        first subparagraph applies by reference to the obligation with the nth lowest credit quality which, if incurred by the institution,                        would be a qualifying item for the purposes of Part Three, Title IV, Chapter 2;                   

(b)institutions shall not use the Financial Collateral Simple Method set out in Article 222 for the recognition of the effects                           of financial collateral;                  

(c)in the case of repurchase transactions and securities or commodities lending or borrowing transactions booked in the trading                           book, institutions may recognise as eligible collateral all financial instruments and commodities that are eligible to be                           included in the trading book;                  

(d)for exposures arising from OTC derivative instruments booked in the trading book, institutions may recognise commodities that                           are eligible to be included in the trading book as eligible collateral;                  

(e)for the purposes of calculating volatility adjustments where such financial instruments or commodities which are not eligible                           under Chapter 4 are lent, sold or provided, or borrowed, purchased or received by way of collateral or otherwise under such                           a transaction, and an institution is using the Supervisory Volatility Adjustments Approach under Section 3 of Chapter 4, institutions                           shall treat such instruments and commodities in the same way as non-main index equities listed on a recognised exchange;                  

(f)where an institution is using the Own Estimates of Volatility adjustments Approach under Section 3 of Chapter 4 in respect                           of financial instruments or commodities which are not eligible under Chapter 4, it shall calculate volatility adjustments                           for each individual item. Where an institution has obtained the approval to use the internal models approach defined in Chapter                           4, it may also apply that approach in the trading book;                  

(g)in relation to the recognition of master netting agreements covering repurchase transactions, securities or commodities lending                           or borrowing transactions, or other capital market-driven transactions, institutions shall only recognise netting across positions                           in the trading book and the non-trading book when the netted transactions fulfil the following conditions:                  

all transactions are marked to market daily;                            

any items borrowed, purchased or received under the transactions may be recognised as eligible financial collateral under                                 Chapter 4 without the application of points (c) to (f) of this paragraph;                            

(h)where a credit derivative included in the trading book forms part of an internal hedge and the credit protection is recognised                           under this Regulation in accordance with Article 204, institutions shall apply one of the following approaches:                  

treat it as if there were no counterparty risk arising from the position in that credit derivative;                            

consistently include for the purpose of calculating the own funds requirements for counterparty credit risk all credit derivatives                                 in the trading book forming part of internal hedges or purchased as protection against a CCR exposure where the credit protection                                 is recognised as eligible under Chapter 4.                            

#### Section 9U.K.Own funds requirements for exposures to a central counterparty

##### Article 300U.K.Definitions

For the purposes of this Section, the following definitions shall apply:                   

‘bankruptcy remote’, in relation to client assets, means that effective arrangements exist which ensure that those assets will not be available                                 to the creditors of a CCP or of a clearing member in the event of the insolvency of that CCP or clearing member respectively,                                 or that the assets will not be available to the clearing member to cover losses it incurred following the default of a client                                 or clients other than those that provided those assets;                            

‘CCP-related transaction’ means a contract or a transaction listed in Article 301(1) between a client and a clearing member that is directly related                                 to a contract or a transaction listed in that paragraph between that clearing member and a CCP;                            

‘clearing member’ means a clearing member as defined in point (14) of Article 2 of Regulation (EU) No 648/2012;                            

‘client’ means a client as defined in point (15) of Article 2 of Regulation (EU) No 648/2012 or an undertaking that has established                                 indirect clearing arrangements with a clearing member in accordance with Article 4(3) of that Regulation.                            

##### Article 301U.K.Material scope

1.This Section applies to the following contracts and transactions for as long as they are outstanding with a CCP:                  

(a)the contracts listed in Annex II and credit derivatives;                  

(b)repurchase transactions;                  

(c)securities or commodities lending or borrowing transactions;                  

(d)long settlement transactions;                  

(e)margin lending transactions.                  

2.Institutions may choose whether to apply one of the following two treatments to the contracts and transactions outstanding                           with a QCCP listed in paragraph 1:                  

(a)the treatment for trade exposures and exposures from default fund contributions set out in Article 306, except for the treatment                           set out in paragraph 1(b) of that Article, and in Article 307, respectively;                  

(b)the treatment set out in Article 310.                  

3.Institutions shall apply the treatment set out in Article 306, except for the treatment set out in paragraph (1)(a) of that                           Article, and in Article 309, as applicable, to the contracts and transactions outstanding with a non-qualifying CCP listed                           in paragraph 1 of this Article.                  

##### Article 302U.K.Monitoring of exposures to CCPs

1.Institutions shall monitor all their exposures to CCPs and shall lay down procedures for the regular reporting of information                           on those exposures to senior management and appropriate committee or committees of the management body.                  

2.Institutions shall assess, through appropriate scenario analysis and stress testing, whether the level of own funds held against                           exposures to a CCP, including potential future credit exposures, exposures from default fund contributions and, where the                           institution is acting as a clearing member, exposures resulting from contractual arrangements as laid down in Article 304,                           adequately relates to the inherent risks of those exposures.                  

##### Article 303U.K.Treatment of clearing members' exposures to CCPs

Where an institution acts as a clearing member, either for its own purposes or as a financial intermediary between a client                        and a CCP, it shall calculate the own funds requirements for its exposures to a CCP in accordance with Article 301(2) and                        (3).                   

##### Article 304U.K.Treatment of clearing members' exposures to clients

1.Where an institution acts as a clearing member and, in that capacity, acts as a financial intermediary between a client and                           a CCP, it shall calculate the own funds requirements for its CCP-related transactions with the client in accordance with Sections                           1 to 8 of this Chapter and with Title VI of Part Three, as applicable.                  

2.Where an institution acting as a clearing member enters into a contractual arrangement with a client of another clearing member                           that facilitates, in accordance with Article 48(5) and (6), of Regulation (EU) No 648/2012, the transfer of positions and                           collateral referred to in Article 305(2)(b) of this Regulation for that client, and that contractual agreement gives rise                           to a contingent obligation for that institution, that institution may attribute an exposure value of zero to that contingent                           obligation.                  

3.An institution acting as a clearing member may apply a shorter margin period of risk when calculating the own funds requirement                           for its exposures to a client in accordance with the Internal Model Method. The margin period of risk applied by the institution                           shall not be less than five days.                  

4.An institution acting as a clearing member may multiply its EAD by a scalar when calculating the own funds requirement for                           its exposures to a client in accordance with the Mark-to-Market Method, the Standardised Method or the Original Exposure Method.                           The scalars that the institutions may apply are the following:                  

(a)0,71 for a margin period of risk of five days;                  

(b)0,77 for a margin period of risk of six days;                  

(c)0,84 for a margin period of risk of seven days;                  

(d)0,89 for a margin period of risk of eight days;                  

(e)0,95 for a margin period of risk of nine days;                  

(f)1 for a margin period of risk of ten days or more.                  

5.EBA shall develop draft regulatory technical standards to specify the margin periods of risk that institutions may use for                           the purposes of paragraphs 3 and 4.                  

When developing those draft regulatory technical standards, EBA shall apply the following principles:                   

(a)it shall define the margin period of risk for each of the types of contracts and transactions listed in Article 301(1);                  

(b)the margin periods of risk to be defined in point (a) shall reflect the close-out period of the contracts and transactions                           referred to in that point.                  

EBA shall submit those draft regulatory technical standards to the Commission by 30 June 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 305U.K.Treatment of clients' exposures

1.Where an institution is a client, it shall calculate the own funds requirements for its CCP-related transactions with its                           clearing member in accordance with Sections 1 to 8 of this Chapter and with Title VI of Part Three, as applicable.                  

2.Without prejudice to the approach specified in paragraph 1, where an institution is a client, it may calculate the own funds                           requirements for its trade exposures for CCP-related transactions with its clearing member in accordance with Article 306                           provided that all the following conditions are met:                  

(a)the positions and assets of that institution related to those transactions are distinguished and segregated, at the level                           of both the clearing member and the CCP, from the positions and assets of both the clearing member and the other clients of                           that clearing member and as a result of that distinction and segregation those positions and assets are bankruptcy remote                           in the event of the default or insolvency of the clearing member or one or more of its other clients;                  

(b)laws, regulations, rules and contractual arrangements applicable to or binding that institution or the CCP facilitate the                           transfer of the client's positions relating to those contracts and transactions and of the corresponding collateral to another                           clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing                           member. In such circumstance, the client's positions and the collateral shall be transferred at market value unless the client                           requests to close out the position at market value;                  

(c)the institution has available an independent, written and reasoned legal opinion that concludes that, in the event of legal                           challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of                           the insolvency of its clearing member or of any of its clearing member's clients under the laws of the jurisdiction of the                           institution, its clearing member and the CCP, the law governing the transactions and contracts the institution clears through                           the CCP, the law governing the collateral, and the law governing any contract or agreement necessary to meet the condition                           in point (b);                  

(d)the CCP is a QCCP.                  

3.Without prejudice to the conditions specified in paragraph 2, where an institution that is a client is not protected from                           losses in the case that the clearing member and another client of the clearing member jointly default, but all the other conditions                           set out in paragraph 2 are met, the client may calculate the own funds requirements for its trade exposures for CCP-related                           transactions with its clearing member in accordance with Article 306, subject to replacing the 2 % risk weight in paragraph                           1(a) of that Article with a 4 % risk weight.                  

4.Where an institution that is a client accesses the services of a CCP through indirect clearing arrangements, in accordance                           with Article 4(3) of Regulation (EU) No 648/2012, that institution may apply the treatment set out in paragraph 2 or 3 only                           where the conditions in each paragraph are met at every level of the chain of intermediaries.                  

##### Article 306U.K.Own funds requirements for trade exposures

1.An institution shall apply the following treatment to its trade exposures with CCPs:                  

(a)it shall apply a risk weight of 2 % to the exposure values of all its trade exposures with QCCPs;                  

(b)it shall apply the risk weight used for the Standardised Approach to credit risk as set out in Article 107(2)(b) to all its                           trade exposures with non-qualifying CCPs;                  

(c)where an institution is acting as a financial intermediary between a client and a CCP and the terms of the CCP-related transaction                           stipulate that the institution is not obligated to reimburse the client for any losses suffered due to changes in the value                           of that transaction in the event that the CCP defaults, the exposure value of the transaction with the CCP that corresponds                           to that CCP-related transaction is equal to zero.                  

2.Notwithstanding paragraph 1, where assets posted as collateral to a CCP or a clearing member are bankruptcy remote in the                           event that the CCP, the clearing member or one or more of the other clients of the clearing member becomes insolvent, an institution                           may attribute an exposure value of zero to the counterparty credit risk exposures for those assets.                  

3.An institution shall calculate exposure values of its trade exposures with a CCP in accordance with Sections 1 to 8 of this                           Chapter, as applicable.                  

4.An institution shall calculate the risk-weighted exposure amounts for its trade exposures with CCPs for the purposes of Article                           92(3) as the sum of the exposure values of its trade exposures with CCPs, calculated in accordance with paragraphs 2 and 3                           of this Article, multiplied by the risk weight determined in accordance with paragraph 1 of this Article.                  

##### Article 307U.K.Own funds requirements for pre-funded contributions to the default fund of a CCP

An institution acting as a clearing member shall apply the following treatment to its exposures arising from its contributions                        to the default fund of a CCP:                   

it shall calculate the own funds requirement for its pre-funded contributions to the default fund of a QCCP in accordance                                 with the approach set out in Article 308;                            

it shall calculate the own funds requirement for its pre-funded contributions to the default fund of a non-qualifying CCP                                 in accordance with the approach set out in Article 309.                            

##### Article 308U.K.Own funds requirements for pre-funded contributions to the default fund of a QCCP

1.The exposure value for an institution's pre-funded contribution to the default fund of a QCCP (DFi) shall be the amount paid                           in or the market value of the assets delivered by that institution reduced by any amount of that contribution that the QCCP                           has already used to absorb its losses following the default of one or more of its clearing members.                  

2.An institution shall calculate the own funds requirement (Ki) to cover the exposure arising from its pre-funded contribution (DFi) as follows:                  

                   

where:                   

β

=

the concentration factor communicated to the institution by the CCP;                      

N

=

the number of clearing members communicated to the institution by the CCP;                      

DF

=

the sum of pre-funded contributions of all clearing members of the CCP communicated to the institution by the CCP;                      

K

=

the sum of the own funds requirements of all clearing members of the CCP calculated in accordance with the applicable formula                           specified in paragraph 3 .                      

3.An institution shall calculate KCM as follows:                  

where KCCP ≤ DFCCP, the institution shall use the following formula:                            

;                            

where DFCCP < KCCP ≤DF*, the institution shall use the following formula:                            

;                            

where DF* < KCCP, the institution shall use the following formula:                            

                            

where:                   

DF

=

the pre-funded financial resources of the CCP communicated to the institution by the CCP;                      

K

=

the hypothetical capital of the CCP communicated to the institution by the CCP;                      

DF*

=

;                      

=

;                      

=

the average pre-funded contribution, , communicated to the institution by the CCP;                      

c

=

a capital factor equal to                       

c

=

a capital factor equal to 100 %;                      

μ

=

1,2.                      

4.An institution shall calculate the risk-weighted exposure amounts for exposures arising from an institution's pre-funded contribution                           for the purposes of Article 92(3) as the own funds requirement (Ki) determined in accordance with paragraph 2 multiplied by 12,5.                  

5.Where KCCP is equal to zero, institutions shall use the value for c1 of 0,16 % for the purpose of the calculation in paragraph 3.                  

##### Article 309U.K.Own funds requirements for pre-funded contributions to the default fund of a non-qualifying CCP and for unfunded contributions                           to a non-qualifying CCP

1.An institution shall apply the following formula to calculate the own funds requirement (Ki) for the exposures arising from its pre-funded contributions to the default fund of a non-qualifying CCP (DFi) and from unfunded contributions (UCi) to such CCP:                  

                   

where c2·and μ are defined as in Article 308(3).                   

2.For the purpose of paragraph 1, unfunded contributions means contributions that an institution acting as a clearing member                           has contractually committed to provide to a CCP after the CCP has depleted its default fund to cover the losses it incurred                           following the default of one or more of its clearing members.                  

3.An institution shall calculate the risk-weighted exposure amounts for exposures arising from an institution's pre-funded contribution                           for the purposes of Article 92(3) as the own funds requirement (Ki) determined in accordance with paragraph 1 multiplied by 12,5.                  

##### Article 310U.K.Alternative calculation of own funds requirement for exposures to a QCCP

An institution shall apply the following formula to calculate the own funds requirement (Ki) for the exposures arising from its trade exposures and the trade exposures of its clients (TEi) and pre-funded contributions (DFi) to the default fund of a QCCP:                   

                   

##### Article 311U.K.Own funds requirements for exposures to CCPs that cease to meet certain conditions

1.An institution shall apply the treatment set out in this Article where one or both of the following conditions have been met:                  

(a)the institution has received from a CCP a notification required by point (j)(ii) of Article 50b of Regulation (EU) No 648/2012                           that the CCP has stopped calculating KCCP;                  

(b)it has become known to the institution, following a public announcement or notification from the competent authority of a                           CCP used by the institution or from that CCP itself, that the CCP will no longer comply with the conditions for authorisation                           or recognition, as applicable.                  

2.Where only the condition in point (a) of paragraph 1 has been met, the competent authority of the institution shall verify                           the reasons why the CCP has stopped calculating KCCP.                  

Where the competent authority considers that the reasons referred to in the first subparagraph are valid, it may permit institutions                        in its Member State to apply the treatment set out in Article 310 to their trade exposures and default fund contributions                        to that CCP. Where it grants such permission, it shall disclose the reasons for its decision.                   

Where the competent authority considers that the reasons referred to in the first subparagraph are not valid, all institutions                        in its Member State, irrespective of the treatment they chose in accordance with Article 301(2), shall apply the treatment                        set out in points (a) to (d) of paragraph 3 of this Article.                   

3.Where the condition in point (b) of paragraph 1 has been met, irrespective of whether the condition in point (a) of that paragraph                           has been met or not, an institution shall, within three months of the circumstance set out in point (b) of that paragraph                           arising, or earlier where the competent authority of the institution requires it, do the following with respect to its exposures                           to that CCP:                  

(a)cease to apply the treatment it chose in accordance with Article 301(2);                  

(b)apply the treatment set out in point (b) of Article 306(1) to its trade exposures to that CCP;                  

(c)apply the treatment set out in Article 309 to its pre-funded contributions to the default fund of that CCP and to its unfunded                           contributions to that CCP;                  

(d)treat exposures other than those listed in points (b) and (c) to that CCP as exposures to a corporate in accordance with the                           Standardised Approach for credit risk as set out in Chapter 2.                  

## TITLE IIIU.K.OWN FUNDS REQUIREMENTS FOR OPERATIONAL RISK

### CHAPTER 1U.K.General principles governing the use of the different approaches

#### Article 312U.K.Permission and notification

1.To qualify for use of the Standardised Approach, institutions shall meet the criteria set out in Article 320, in addition                           to meeting the general risk management standards set out in Articles 74 and 85 of Directive 2013/36/EU. Institutions shall                           notify the competent authorities prior to using the Standardised Approach.                  

Competent authorities shall permit institutions to use an alternative relevant indicator for the business lines of retail                        banking and commercial banking where the conditions set out in Articles 319(2) and 320 are met.                   

2.Competent authorities shall permit institutions to use Advanced Measurement Approaches based on their own operational risk                           measurement systems, where all the qualitative and quantitative standards set out in Articles 321 and 322 respectively are                           met and where institutions meet the general risk management standards set out in Articles 74 and 85 of Directive 2013/36/EU                           and Section II, Chapter 3, Title VII of that Directive.                  

Institutions shall also apply for permission from their competent authorities where they want to implement material extensions                        and changes to those Advanced Measurement Approaches. Competent authorities shall grant the permission only where institutions                        would continue to meet the standards specified in the first subparagraph following those material extensions and changes.                   

3.Institutions shall notify the competent authorities of all changes to their Advanced Measurement Approaches models.                  

4.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the assessment methodology under which the competent authorities permit institutions to use Advanced Measurement Approaches;                  

(b)the conditions for assessing the materiality of extensions and changes to the Advanced Measurement Approaches;                  

(c)the modalities of the notification required in paragraph 3.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 313U.K.Reverting to the use of less sophisticated approaches

1.Institutions that use the Standardised Approach shall not revert to the use of the Basic Indicator Approach unless the conditions                           in paragraph 3 are met.                  

2.Institutions that use the Advanced Measurement Approaches shall not revert to the use of the Standardised Approach or the                           Basic Indicator Approach unless the conditions in paragraph 3 are met.                  

3.An institution may only revert to the use of a less sophisticated approach for operational risk where both the following conditions                           are met:                  

(a)the institution has demonstrated to the satisfaction of the competent authority that the use of a less sophisticated approach                           is not proposed in order to reduce the operational risk related own funds requirements of the institution, is necessary on                           the basis of nature and complexity of the institution and would not have a material adverse impact on the solvency of the                           institution or its ability to manage operational risk effectively;                  

(b)the institution has received the prior permission of the competent authority.                  

#### Article 314U.K.Combined use of different approaches

1.Institutions may use a combination of approaches provided that they obtain permission from the competent authorities. Competent                           authorities shall grant such permission where the requirements set out in paragraphs 2 to 4, as applicable, are met.                  

2.An institution may use an Advanced Measurement Approach in combination with either the Basic Indicator Approach or the Standardised                           Approach, where both of the following conditions are met:                  

(a)the combination of Approaches used by the institution captures all its operational risks and competent authorities are satisfied                           with the methodology used by the institution to cover different activities, geographical locations, legal structures or other                           relevant divisions determined on an internal basis;                  

(b)the criteria set out in Article 320 and the standards set out in Articles 321 and 322 are fulfilled for the part of activities                           covered by the Standardised Approach and the Advanced Measurement Approaches respectively.                  

3.For institutions that want to use an Advanced Measurement Approach in combination with either the Basic Indicator Approach                           or the Standardised Approach competent authorities shall impose the following additional conditions for granting permission:                  

(a)on the date of implementation of an Advanced Measurement Approach, a significant part of the institution's operational risks                           are captured by that Approach;                  

(b)the institution takes a commitment to apply the Advanced Measurement Approach across a material part of its operations within                           a time schedule that was submitted to and approved by its competent authorities.                  

4.An institution may request permission from a competent authority to use a combination of the Basic Indicator Approach and                           the Standardised Approach only in exceptional circumstances such as the recent acquisition of new business which may require                           a transitional period for the application of the Standardised Approach.                  

A competent authority shall grant such permission only where the institution has committed to apply the Standardised Approach                        within a time schedule that was submitted to and approved by the competent authority.                   

5.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the conditions that competent authorities shall use when assessing the methodology referred to in point (a) of paragraph 2;                  

(b)the conditions that the competent authorities shall use when deciding whether to impose the additional conditions referred                           to in paragraph 3.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2016.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### CHAPTER 2U.K.Basic Indicator Approach

#### Article 315U.K.Own funds requirement

1.Under the Basic Indicator Approach, the own funds requirement for operational risk is equal to 15 % of the average over three                           years of the relevant indicator as set out in Article 316.                  

Institutions shall calculate the average over three years of the relevant indicator on the basis of the last three twelve-monthly                        observations at the end of the financial year. When audited figures are not available, institutions may use business estimates.                   

2.Where an institution has been in operation for less than three years it may use forward-looking business estimates in calculating                           the relevant indicator, provided that it starts using historical data as soon as it is available.                  

3.Where an institution can prove to its competent authority that, due to a merger, an acquisition or a disposal of entities                           or activities, using a three year average to calculate the relevant indicator would lead to a biased estimation for the own                           funds requirement for operational risk, the competent authority may permit the institution to amend the calculation in a way                           that would take into account such events and shall duly inform EBA thereof. In such circumstances, the competent authority                           may, on its own initiative, also require an institution to amend the calculation.                  

4.Where for any given observation, the relevant indicator is negative or equal to zero, institutions shall not take into account                           this figure in the calculation of the average over three years. Institutions shall calculate the average over three years                           as the sum of positive figures divided by the number of positive figures.                  

#### Article 316U.K.Relevant indicator

1.For institutions applying accounting standards established by Directive 86/635/EEC, based on the accounting categories for                           the profit and loss account of institutions under Article 27 of that Directive, the relevant indicator is the sum of the elements                           listed in Table 1 of this paragraph. Institutions shall include each element in the sum with its positive or negative sign.                  

##### Table 1

(1Interest receivable and similar income                  

(2Interest payable and similar charges                  

(3Income from shares and other variable/fixed-yield securities                  

(4Commissions/fees receivable                  

(5Commissions/fees payable                  

(6Net profit or net loss on financial operations                  

(7Other operating income                  

Institutions shall adjust these elements to reflect the following qualifications:                   

(a)institutions shall calculate the relevant indicator before the deduction of any provisions and operating expenses. Institutions                           shall include in operating expenses fees paid for outsourcing services rendered by third parties which are not a parent or                           subsidiary of the institution or a subsidiary of a parent which is also the parent of the institution. Institutions may use                           expenditure on the outsourcing of services rendered by third parties to reduce the relevant indicator where the expenditure                           is incurred from an undertaking subject to rules under, or equivalent to, this Regulation;                  

(b)institutions shall not use the following elements in the calculation of the relevant indicator:                  

realised profits/losses from the sale of non-trading book items;                            

income from extraordinary or irregular items;                            

income derived from insurance.                            

(c)when revaluation of trading items is part of the profit and loss statement, institutions may include revaluation. When institutions                           apply Article 36(2) of Directive 86/635/EEC, they shall include revaluation booked in the profit and loss account.                  

2.When institutions apply accounting standards different from those established by Directive 86/635/EEC, they shall calculate                           the relevant indicator on the basis of data that best reflect the definition set out in this Article.                  

3.EBA shall develop draft regulatory technical standards to determine the methodology to calculate the relevant indicator referred                           to in paragraph 2.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2017.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### CHAPTER 3U.K.Standardised Approach

#### Article 317U.K.Own funds requirement

1.Under the Standardised Approach, institutions shall divide their activities into the business lines set out in Table 2 of                           paragraph 4 and in accordance with the principles set out in Article 318.                  

2.Institutions shall calculate the own funds requirement for operational risk as the average over three years of the sum of                           the annual own funds requirements across all business lines referred to in Table 2 of paragraph 4. The annual own funds requirement                           of each business line is equal to the product of the corresponding beta factor referred to in that Table and the part of the                           relevant indicator mapped to the respective business line.                  

3.In any given year, institutions may offset negative own funds requirements resulting from a negative part of the relevant                           indicator in any business line with positive own funds requirements in other business lines without limit. However, where                           the aggregate own funds requirement across all business lines within a given year is negative, institutions shall use the                           value zero as the input to the numerator for that year.                  

4.Institutions shall calculate the average over three years of the sum referred to in paragraph 2 on the basis of the last three                           twelve-monthly observations at the end of the financial year. When audited figures are not available, institutions may use                           business estimates.                  

Where an institution can prove to its competent authority that, due to a merger, an acquisition or a disposal of entities                        or activities, using a three year average to calculate the relevant indicator would lead to a biased estimation for the own                        funds requirement for operational risk, the competent authority may permit institutions to amend the calculation in a way                        that would take into account such events and shall duly inform EBA thereof. In such circumstances, the competent authority                        may, on its own initiative, also require an institution to amend the calculation.                   

Where an institution has been in operation for less than three years it may use forward-looking business estimates in calculating                        the relevant indicator, provided that it starts using historical data as soon as it is available.                   

##### Table 2

#### Article 318U.K.Principles for business line mapping

1.Institutions shall develop and document specific policies and criteria for mapping the relevant indicator for current business                           lines and activities into the standardised framework set out in Article 317. They shall review and adjust those policies and                           criteria as appropriate for new or changing business activities and risks.                  

2.Institutions shall apply the following principles for business line mapping:                  

(a)institutions shall map all activities into the business lines in a mutually exclusive and jointly exhaustive manner;                  

(b)institutions shall allocate any activity which cannot be readily mapped into the business line framework, but which represents                           an ancillary activity to an activity included in the framework, to the business line it supports. Where more than one business                           line is supported through the ancillary activity, institutions shall use an objective-mapping criterion;                  

(c)where an activity cannot be mapped into a particular business line then institutions shall use the business line yielding                           the highest percentage. The same business line equally applies to any ancillary activity associated with that activity;                  

(d)institutions may use internal pricing methods to allocate the relevant indicator between business lines. Costs generated in                           one business line which are imputable to a different business line may be reallocated to the business line to which they pertain;                  

(e)the mapping of activities into business lines for operational risk capital purposes shall be consistent with the categories                           institutions use for credit and market risks;                  

(f)senior management shall be responsible for the mapping policy under the control of the management body of the institution;                  

(g)institutions shall subject the mapping process to business lines to independent review.                  

3.EBA shall develop draft implementing technical standards to determine the conditions of application of the principles for                           business line mapping provided in this Article.                  

EBA shall submit those draft implementing technical standards to the Commission by 31 December 2017.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

#### Article 319U.K.Alternative Standardised Approach

1.Under the Alternative Standardised Approach, for the business lines ‘retail banking’ and ‘commercial banking’, institutions shall apply the following:                  

(a)the relevant indicator is a normalised income indicator equal to the nominal amount of loans and advances multiplied by 0,035;                  

(b)the loans and advances consist of the total drawn amounts in the corresponding credit portfolios. For the ‘commercial banking’ business line, institutions shall also include securities held in the non trading book in the nominal amount of loans and                           advances.                  

2.To be permitted to use the Alternative Standardised Approach, an institution shall meet all the following conditions:                  

(a)its retail or commercial banking activities shall account for at least 90 % of its income;                  

(b)a significant proportion of its retail or commercial banking activities shall comprise loans associated with a high PD;                  

(c)the Alternative Standardised Approach provides an appropriate basis for calculating its own funds requirement for operational                           risk.                  

#### Article 320U.K.Criteria for the Standardised Approach

The criteria referred to in the first subparagraph of Article 312(1) are the following:                   

an institution shall have in place a well-documented assessment and management system for operational risk with clear responsibilities                                 assigned for this system. It shall identify its exposures to operational risk and track relevant operational risk data, including                                 material loss data. This system shall be subject to regular independent review carried out by an internal or external party                                 possessing the necessary knowledge to carry out such review;                            

an institution's operational risk assessment system shall be closely integrated into the risk management processes of the                                 institution. Its output shall be an integral part of the process of monitoring and controlling the institution's operational                                 risk profile;                            

an institution shall implement a system of reporting to senior management that provides operational risk reports to relevant                                 functions within the institution. An institution shall have in place procedures for taking appropriate action according to                                 the information within the reports to management.                            

### CHAPTER 4U.K.Advanced measurement approaches

#### Article 321U.K.Qualitative standards

The qualitative standards referred to in Article 312(2) are the following:                   

an institution's internal operational risk measurement system shall be closely integrated into its day-to-day risk management                                 processes;                            

an institution shall have an independent risk management function for operational risk;                            

an institution shall have in place regular reporting of operational risk exposures and loss experience and shall have in place                                 procedures for taking appropriate corrective action;                            

an institution's risk management system shall be well documented. An institution shall have in place routines for ensuring                                 compliance and policies for the treatment of non-compliance;                            

an institution shall subject its operational risk management processes and measurement systems to regular reviews performed                                 by internal or external auditors;                            

an institution's internal validation processes shall operate in a sound and effective manner;                            

data flows and processes associated with an institution's risk measurement system shall be transparent and accessible.                            

#### Article 322U.K.Quantitative Standards

1.The quantitative standards referred to in Article 312(2) include the standards relating to process, to internal data, to external                           data, to scenario analysis, to business environment and to internal control factors laid down in paragraphs 2 to 6 respectively.                  

2.The standards relating to process are the following:                  

(a)an institution shall calculate its own funds requirement as comprising both expected loss and unexpected loss, unless expected                           loss is adequately captured in its internal business practices. The operational risk measure shall capture potentially severe                           tail events, achieving a soundness standard comparable to a 99,9 % confidence interval over a one year period;                  

(b)an institution's operational risk measurement system shall include the use of internal data, external data, scenario analysis                           and factors reflecting the business environment and internal control systems as set out in paragraphs 3 to 6. An institution                           shall have in place a well documented approach for weighting the use of these four elements in its overall operational risk                           measurement system;                  

(c)an institution's risk measurement system shall capture the major drivers of risk affecting the shape of the tail of the estimated                           distribution of losses;                  

(d)an institution may recognise correlations in operational risk losses across individual operational risk estimates only where                           its systems for measuring correlations are sound, implemented with integrity, and take into account the uncertainty surrounding                           any such correlation estimates, particularly in periods of stress. An institution shall validate its correlation assumptions                           using appropriate quantitative and qualitative techniques;                  

(e)an institution's risk measurement system shall be internally consistent and shall avoid the multiple counting of qualitative                           assessments or risk mitigation techniques recognised in other areas of this Regulation.                  

3.The standards relating to internal data are the following:                  

(a)an institution shall base its internally generated operational risk measures on a minimum historical observation period of                           five years. When an institution first moves to an Advanced Measurement Approach, it may use a three-year historical observation                           period;                  

(b)an institution shall be able to map their historical internal loss data into the business lines defined in Article 317 and                           into the event types defined in Article 324, and to provide these data to competent authorities upon request. In exceptional                           circumstances, an institution may allocate loss events which affect the entire institution to an additional business line                           ‘corporate items’. An institution shall have in place documented, objective criteria for allocating losses to the specified business lines                           and event types. An institution shall record the operational risk losses that are related to credit risk and that the institution                           has historically included in the internal credit risk databases in the operational risk databases and shall identify them                           separately. Such losses shall not be subject to the operational risk charge, provided that the institution is required to                           continue to treat them as credit risk for the purposes of calculating own funds requirements. An institution shall include                           operational risk losses that are related to market risks in the scope of the own funds requirement for operational risk;                  

(c)an institution's internal loss data shall be comprehensive in that it captures all material activities and exposures from                           all appropriate sub-systems and geographic locations. An institution shall be able to justify that any excluded activities                           or exposures, both individually and in combination, would not have a material impact on the overall risk estimates. An institution                           shall define appropriate minimum loss thresholds for internal loss data collection;                  

(d)aside from information on gross loss amounts, an institution shall collect information about the date of the loss event, any                           recoveries of gross loss amounts, as well as descriptive information about the drivers or causes of the loss event;                  

(e)an institution shall have in place specific criteria for assigning loss data arising from a loss event in a centralised function                           or an activity that spans more than one business line, as well as from related loss events over time;                  

(f)an institution shall have in place documented procedures for assessing the on-going relevance of historical loss data, including                           those situations in which judgement overrides, scaling, or other adjustments may be used, to what extent they may be used                           and who is authorised to make such decisions.                  

4.The qualifying standards relating to external data are the following:                  

(a)an institution's operational risk measurement system shall use relevant external data, especially when there is reason to                           believe that the institution is exposed to infrequent, yet potentially severe, losses. An institution shall have a systematic                           process for determining the situations for which external data shall be used and the methodologies used to incorporate the                           data in its measurement system;                  

(b)an institution shall regularly review the conditions and practices for external data and shall document them and subject them                           to periodic independent review.                  

5.An institution shall use scenario analysis of expert opinion in conjunction with external data to evaluate its exposure to                           high severity events. Over time, the institution shall validate and reassess such assessments through comparison to actual                           loss experience to ensure their reasonableness.                  

6.The qualifying standards relating to business environment and internal control factors are the following:                  

(a)an institution's firm-wide risk assessment methodology shall capture key business environment and internal control factors                           that can change the institutions operational risk profile;                  

(b)an institution shall justify the choice of each factor as a meaningful driver of risk, based on experience and involving the                           expert judgment of the affected business areas;                  

(c)an institution shall be able to justify to competent authorities the sensitivity of risk estimates to changes in the factors                           and the relative weighting of the various factors. In addition to capturing changes in risk due to improvements in risk controls,                           an institution's risk measurement framework shall also capture potential increases in risk due to greater complexity of activities                           or increased business volume;                  

(d)an institution shall document its risk measurement framework and shall subject it to independent review within the institution                           and by competent authorities. Over time, an institution shall validate and reassess the process and the outcomes through comparison                           to actual internal loss experience and relevant external data.                  

#### Article 323U.K.Impact of insurance and other risk transfer mechanisms

1.The competent authorities shall permit institutions to recognise the impact of insurance subject to the conditions set out                           in paragraphs 2 to 5 and other risk transfer mechanisms where the institution can demonstrate that a noticeable risk mitigating                           effect is achieved.                  

2.The insurance provider shall be authorised to provide insurance or re-insurance and shall have a minimum claims paying ability                           rating by an ECAI which has been determined by EBA to be associated with credit quality step 3 or above under the rules for                           the risk weighting of exposures to institutions under Title II, Chapter 2.                  

3.The insurance and the institutions' insurance framework shall meet all the following conditions:                  

(a)the insurance policy has an initial term of no less than one year. For policies with a residual term of less than one year,                           an institution shall make appropriate haircuts reflecting the declining residual term of the policy, up to a full 100 % haircut                           for policies with a residual term of 90 days or less;                  

(b)the insurance policy has a minimum notice period for cancellation of the contract of 90 days;                  

(c)the insurance policy has no exclusions or limitations triggered by supervisory actions or, in the case of a failed institution,                           that preclude the institution's receiver or liquidator from recovering the damages suffered or expenses incurred by the institution,                           except in respect of events occurring after the initiation of receivership or liquidation proceedings in respect of the institution.                           However, the insurance policy may exclude any fine, penalty, or punitive damages resulting from actions by the competent authorities;                  

(d)the risk mitigation calculations shall reflect the insurance coverage in a manner that is transparent in its relationship                           to, and consistent with, the actual likelihood and impact of loss used in the overall determination of operational risk capital;                  

(e)the insurance is provided by a third party entity. In the case of insurance through captives and affiliates, the exposure                           has to be laid off to an independent third party entity that meets the eligibility criteria set out in paragraph 2;                  

(f)the framework for recognising insurance is well reasoned and documented.                  

4.The methodology for recognising insurance shall capture all the following elements through discounts or haircuts in the amount                           of insurance recognition:                  

(a)the residual term of the insurance policy, where less than one year;                  

(b)the policy's cancellation terms, where less than one year;                  

(c)the uncertainty of payment as well as mismatches in coverage of insurance policies.                  

5.The reduction in own funds requirements from the recognition of insurances and other risk transfer mechanisms shall not exceed                           20 % of the own funds requirement for operational risk before the recognition of risk mitigation techniques.                  

#### Article 324U.K.Loss event type classification

The loss events types referred to in point (b) of Article 322(3) are the following:                   

##### Table 3

## TITLE IVU.K.OWN FUNDS REQUIREMENTS FOR MARKET RISK

### CHAPTER 1U.K.General provisions

#### Article 325U.K.Allowances for consolidated requirements

1.Subject to paragraph 2 and only for the purpose of calculating net positions and own funds requirements in accordance with                           this Title on a consolidated basis, institutions may use positions in one institution or undertaking to offset positions in                           another institution or undertaking.                  

2.Institutions may apply paragraph 1 only subject to the permission of the competent authorities, which shall be granted if                           all of the following conditions are met:                  

(a)there is a satisfactory allocation of own funds within the group;                  

(b)the regulatory, legal or contractual framework in which the institutions operate is such as to guarantee mutual financial                           support within the group.                  

3.Where there are undertakings located in third countries all of the following conditions shall be met in addition to those                           in paragraph 2:                  

(a)such undertakings have been authorised in a third country and either satisfy the definition of a credit institution or are                           recognised third-country investment firms;                  

(b)such undertakings comply, on an individual basis, with own funds requirements equivalent to those laid down in this Regulation;                  

(c)no regulations exist in the third countries in question which might significantly affect the transfer of funds within the                           group.                  

### CHAPTER 2U.K.Own funds requirements for position risk

#### Section 1U.K.General provisions and specific instruments

##### Article 326U.K.Own funds requirements for position risk

The institution's own funds requirement for position risk shall be the sum of the own funds requirements for the general and                        specific risk of its positions in debt and equity instruments. Securitisation positions in the trading book shall be treated                        as debt instruments.                   

##### Article 327U.K.Netting

1.The absolute value of the excess of an institution's long (short) positions over its short (long) positions in the same equity,                           debt and convertible issues and identical financial futures, options, warrants and covered warrants shall be its net position                           in each of those different instruments. In calculating the net position, positions in derivative instruments shall be treated                           as laid down in Articles 328 to 330. Institutions' holdings of their own debt instruments shall be disregarded in calculating                           specific risk capital requirements under Article 336.                  

2.No netting shall be allowed between a convertible and an offsetting position in the instrument underlying it, unless the competent                           authorities adopt an approach under which the likelihood of a particular convertible's being converted is taken into account                           or require an own funds requirement to cover any loss which conversion might entail. Such approaches or own funds requirements                           shall be notified to EBA. EBA shall monitor the range of practices in this area and shall, in accordance with Article 16 of                           Regulation (EU) No 1093/2010, issue guidelines.                  

3.All net positions, irrespective of their signs, shall be converted on a daily basis into the institution's reporting currency                           at the prevailing spot exchange rate before their aggregation.                  

##### Article 328U.K.Interest rate futures and forwards

1.Interest-rate futures, forward-rate agreements (FRAs) and forward commitments to buy or sell debt instruments shall be treated                           as combinations of long and short positions. Thus a long interest-rate futures position shall be treated as a combination                           of a borrowing maturing on the delivery date of the futures contract and a holding of an asset with maturity date equal to                           that of the instrument or notional position underlying the futures contract in question. Similarly a sold FRA will be treated                           as a long position with a maturity date equal to the settlement date plus the contract period, and a short position with maturity                           equal to the settlement date. Both the borrowing and the asset holding shall be included in the first category set out in                           Table 1 in Article 336 in order to calculate the own funds requirement for specific risk for interest-rate futures and FRAs.                           A forward commitment to buy a debt instrument shall be treated as a combination of a borrowing maturing on the delivery date                           and a long (spot) position in the debt instrument itself. The borrowing shall be included in the first category set out in                           Table 1 in Article 336 for purposes of specific risk, and the debt instrument under whichever column is appropriate for it                           in the same table.                  

2.For the purposes of this Article, ‘long position’ means a position in which an institution has fixed the interest rate it will receive at some time in the future, and ‘short position’ means a position in which it has fixed the interest rate it will pay at some time in the future.                  

##### Article 329U.K.Options and warrants

1.Options and warrants on interest rates, debt instruments, equities, equity indices, financial futures, swaps and foreign currencies                           shall be treated as if they were positions equal in value to the amount of the underlying instrument to which the option refers,                           multiplied by its delta for the purposes of this Chapter. The latter positions may be netted off against any offsetting positions                           in the identical underlying securities or derivatives. The delta used shall be that of the exchange concerned. For OTC-options, or where delta is not available from the exchange concerned, the institution may calculate delta itself using                           an appropriate model, subject to permission by the competent authorities. Permission shall be granted if the model appropriately                           estimates the rate of change of the option's or warrant's value with respect to small changes in the market price of the underlying.                  

2.Institutions shall adequately reflect other risks, apart from the delta risk, associated with options in the own funds requirements.                  

3.EBA shall develop draft regulatory technical standards defining a range of methods to reflect in the own funds requirements                           other risks, apart from delta risk, referred to in paragraph 2 in a manner proportionate to the scale and complexity of institutions'                           activities in options and warrants.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

4.Before the entry into force of the technical standards referred to in paragraph 3, competent authorities may continue to apply                           the existing national treatments, where the competent authorities have applied those treatments before 31 December 2013.                  

##### Article 330U.K.Swaps

Swaps shall be treated for interest-rate risk purposes on the same basis as on-balance-sheet instruments. Thus, an interest-rate                        swap under which an institution receives floating-rate interest and pays fixed-rate interest shall be treated as equivalent                        to a long position in a floating-rate instrument of maturity equivalent to the period until the next interest fixing and a                        short position in a fixed-rate instrument with the same maturity as the swap itself.                   

##### Article 331U.K.Interest rate risk on derivative instruments

1.Institutions which mark to market and manage the interest-rate risk on the derivative instruments covered in Articles 328                           to 330 on a discounted-cash-flow basis may, subject to permission by the competent authorities, use sensitivity models to                           calculate the positions referred to in those Articles and may use them for any bond which is amortised over its residual life                           rather than via one final repayment of principal. Permission shall be granted if these models generate positions which have                           the same sensitivity to interest-rate changes as the underlying cash flows. This sensitivity shall be assessed with reference                           to independent movements in sample rates across the yield curve, with at least one sensitivity point in each of the maturity                           bands set out in Table 2 in Article 339. The positions shall be included in the calculation of own funds requirements for                           general risk of debt instruments.                  

2.Institutions which do not use models under paragraph 1 may, treat as fully offsetting any positions in derivative instruments                           covered in Articles 328 to 330 which meet the following conditions at least:                  

(a)the positions are of the same value and denominated in the same currency;                  

(b)the reference rate (for floating-rate positions) or coupon (for fixed-rate positions) is closely matched;                  

(c)the next interest-fixing date or, for fixed coupon positions, residual maturity corresponds with the following limits:                  

less than one month hence: same day;                            

between one month and one year hence: within seven days;                            

over one year hence: within 30 days.                            

##### Article 332U.K.Credit Derivatives

1.When calculating the own funds requirement for general and specific risk of the party who assumes the credit risk (the ‘protection seller’), unless specified differently, the notional amount of the credit derivative contract shall be used. Notwithstanding the                           first sentence, the institution may elect to replace the notional value by the notional value plus the net market value change                           of the credit derivative since trade inception, a net downward change from the protection seller's perspective carrying a                           negative sign. For the purpose of calculating the specific risk charge, other than for total return swaps, the maturity of                           the credit derivative contract, rather than the maturity of the obligation, shall apply. Positions are determined as follows:                  

(a)a total return swap creates a long position in the general risk of the reference obligation and a short position in the general                           risk of a government bond with a maturity equivalent to the period until the next interest fixing and which is assigned a                           0 % risk weight under Title II, Chapter 2. It also creates a long position in the specific risk of the reference obligation;                  

(b)a credit default swap does not create a position for general risk. For the purposes of specific risk, the institution shall                           record a synthetic long position in an obligation of the reference entity, unless the derivative is rated externally and meets                           the conditions for a qualifying debt item, in which case a long position in the derivative is recorded. If premium or interest                           payments are due under the product, these cash flows shall be represented as notional positions in government bonds;                  

(c)a single name credit linked note creates a long position in the general risk of the note itself, as an interest rate product.                           For the purpose of specific risk, a synthetic long position is created in an obligation of the reference entity. An additional                           long position is created in the issuer of the note. Where the credit linked note has an external rating and meets the conditions                           for a qualifying debt item, a single long position with the specific risk of the note need only be recorded;                  

(d)in addition to a long position in the specific risk of the issuer of the note, a multiple name credit linked note providing                           proportional protection creates a position in each reference entity, with the total notional amount of the contract assigned                           across the positions according to the proportion of the total notional amount that each exposure to a reference entity represents.                           Where more than one obligation of a reference entity can be selected, the obligation with the highest risk weighting determines                           the specific risk;                  

(e)a first-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity.                           If the size of the maximum credit event payment is lower than the own funds requirement under the method in the first sentence                           of this point, the maximum payment amount may be taken as the own funds requirement for specific risk.                  

A -n-th-asset-to-default credit derivative creates a position for the notional amount in an obligation of each reference entity                        less the n-1 reference entities with the lowest specific risk own funds requirement. If the size of the maximum credit event                        payment is lower than the own funds requirement under the method in the first sentence of this point, this amount may be taken                        as the own funds requirement for specific risk.                   

Where an n-th-to-default credit derivative is externally rated, the protection seller shall calculate the specific risk own                        funds requirement using the rating of the derivative and apply the respective securitisation risk weights as applicable.                   

2.For the party who transfers credit risk (the protection buyer), the positions are determined as the mirror principle of the                           protection seller, with the exception of a credit linked note (which entails no short position in the issuer). When calculating                           the own funds requirement for the ‘protection buyer’, the notional amount of the credit derivative contract shall be used. Notwithstanding the first sentence, the institution                           may elect to replace the notional value by the notional value plus the net market value change of the credit derivative since                           trade inception, a net downward change from the protection seller's perspective carrying a negative sign. If at a given moment                           there is a call option in combination with a step-up, such moment is treated as the maturity of the protection.                  

3.Credit derivatives in accordance with Article 338(1) or (3) shall be included only in the determination of the specific risk                           own funds requirement in accordance with Article 338(4).                  

##### Article 333U.K.Securities sold under a repurchase agreement or lent

The transferor of securities or guaranteed rights relating to title to securities in a repurchase agreement and the lender                        of securities in a securities lending shall include these securities in the calculation of its own funds requirement under                        this Chapter provided that such securities are trading book positions.                   

#### Section 2U.K.Debt instruments

##### Article 334U.K.Net positions in debt instruments

Net positions shall be classified according to the currency in which they are denominated and shall calculate the own funds                        requirement for general and specific risk in each individual currency separately.                   

##### Sub-Section 1U.K.Specific risk

###### Article 335U.K.Cap on the own funds requirement for a net position

The institution may cap the own funds requirement for specific risk of a net position in a debt instrument at the maximum                        possible default-risk related loss. For a short position, that limit may be calculated as a change in value due to the instrument                        or, where relevant, the underlying names immediately becoming default risk-free.                   

###### Article 336U.K.Own funds requirement for non-securitisation debt instruments

1.The institution shall assign its net positions in the trading book in instruments that are not securitisation positions as                           calculated in accordance with Article 327 to the appropriate categories in Table 1 on the basis of their issuer or obligor,                           external or internal credit assessment, and residual maturity, and then multiply them by the weightings shown in that table.                           It shall sum its weighted positions resulting from the application of this Article regardless of whether they are long or                           short in order to calculate its own funds requirement against specific risk.                  

###### Table 1

2.For institutions which apply the IRB Approach to the exposure class of which the issuer of the debt instrument forms part,                           to qualify for a risk weight under the Standardised Approach for credit risk as referred to in paragraph 1, the issuer of                           the exposure shall have an internal rating with a PD equivalent to or lower than that associated with the appropriate credit                           quality step under the Standardised Approach.                  

3.Institutions may calculate the specific risk requirements for any bonds that qualify for a 10 % risk weight in accordance                           with the treatment set out in Article 129(4), (5) and (6) as half of the applicable specific risk own funds requirement for                           the second category in Table 1.                  

4.Other qualifying items are:                  

(a)long and short positions in assets for which a credit assessment by a nominated ECAI is not available and which meet all of                           the following conditions:                  

they are considered by the institution concerned to be sufficiently liquid;                            

their investment quality is, according to the institution's own discretion, at least equivalent to that of the assets referred                                 to under Table 1 second row;                            

they are listed on at least one regulated market in a Member State or on a stock exchange in a third country provided that                                 the exchange is recognised by the competent authorities of the relevant Member State;                            

(b)long and short positions in assets issued by institutions subject to the own funds requirements set out in this Regulation                           which are considered by the institution concerned to be sufficiently liquid and whose investment quality is, according to                           the institution's own discretion, at least equivalent to that of the assets referred to under Table 1 second row;                  

(c)securities issued by institutions that are deemed to be of equivalent, or higher, credit quality than those associated with                           credit quality step 2 under the Standardised Approach for credit risk of exposures to institutions and that are subject to                           supervisory and regulatory arrangements comparable to those under this Regulation and Directive 2013/36/EU.                  

Institutions that make use of point (a) or (b) shall have a documented methodology in place to assess whether assets meet                        the requirements in those points and shall notify this methodology to the competent authorities.                   

###### Article 337U.K.Own funds requirement for securitisation instruments

1.For instruments in the trading book that are securitisation positions, the institution shall weight with the following its                           net positions as calculated in accordance with Article 327(1):                  

(a)for securitisation positions that would be subject to the Standardised Approach for credit risk in the same institution's                           non-trading book, 8 % of the risk weight under the Standardised Approach as set out in Title II, Chapter 5, Section 3;                  

(b)for securitisation positions that would be subject to the Internal Ratings Based Approach in the same institution's non-trading                           book, 8 % of the risk weight under the Internal Ratings Based Approach as set out in Title II, Chapter 5, Section 3.                  

2.The Supervisory Formula Method set out in Article 262 may be used where the institution can produce estimates of PD, and where                           applicable exposure value and LGD as inputs into the Supervisory Formula Method in accordance with the requirements for the                           estimation of those parameters under the Internal Ratings Based Approach in accordance with Title II, Chapter 3.                  

An institution other than an originator institution that could apply it for the same securitisation position in its non-trading                        book may only use that method subject to permission by the competent authorities, which shall be granted where the institution                        fulfils the condition in the first subparagraph.                   

Estimates of PD and LGD as inputs to the Supervisory Formula Method may alternatively also be determined based on estimates                        that are derived from an IRC approach of an institution that has been granted permission to use an internal model for specific                        risk of debt instruments. The latter alternative may be used only subject to permission by the competent authorities, which                        shall be granted if those estimates meet the quantitative requirements for the Internal Ratings Based Approach set out in                        Title II, Chapter 3.                   

In accordance with Article 16 of Regulation (EU) No 1093/2010, EBA shall issue guidelines on the use of estimates of PD and                        LGD as inputs when those estimates are based on an IRC approach.                   

3.For securitisation positions that are subject to an additional risk weight in accordance with Article 407, 8 % of the total                           risk weight shall be applied.                  

Except for securitisation positions treated in accordance with Article 338(4), the institution shall sum its weighted positions                        resulting from the application of this Article (regardless of whether they are long or short) in order to calculate its own                        funds requirement against specific risk.                   

4.By way of derogation from the second subparagraph of paragraph 3, for a transitional period ending 31 December 2014, the institution shall sum separately its weighted net long positions and its weighted net short positions. The larger of                           those sums shall constitute the specific risk own funds requirement. The institution shall, however, quarterly report to the                           competent authority of the home Member State the total sum of its weighted net long and net short positions, broken down by                           types of underlying assets.                  

5.Where an originator institution of a traditional securitisation does not meet the conditions for significant risk transfer                           in Article 243, it shall include in the calculation of the own funds requirement under this Article the securitised exposures                           instead of its securitisation positions from this securitisation.                  

Where an originator institution of a synthetic securitisation does not meet the conditions for significant risk transfer in                        Article 244, it shall include in the calculation of the own funds requirement under this Article the securitised exposures                        from this securitisation, but not any credit protection obtained for the securitised portfolio.                   

###### Article 338U.K.Own funds requirement for the correlation trading portfolio

1.The correlation trading portfolio shall consist of securitisation positions and n-th-to-default credit derivatives that meet                           all of the following criteria:                  

(a)the positions are neither re-securitisation positions, nor options on a securitisation tranche, nor any other derivatives                           of securitisation exposures that do not provide a pro-rata share in the proceeds of a securitisation tranche;                  

(b)all reference instruments are either of the following:                  

single-name instruments, including single-name credit derivatives, for which a liquid two-way market exists;                            

commonly-traded indices based on those reference entities.                            

A two-way market is deemed to exist where there are independent bona fide offers to buy and sell so that a price reasonably                        related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day                        and settled at such price within a relatively short time conforming to trade custom.                   

2.Positions which reference any of the following shall not be part of the correlation trading portfolio:                  

(a)an underlying that is capable of being assigned to the exposure class ‘retail exposures’ or to the exposure class ‘exposures secured by mortgages on immovable property’ under the Standardised Approach for credit risk in an institution's non-trading book;                  

(b)a claim on a special purpose entity, collateralised, directly or indirectly, by a position that would itself not be eligible                           for inclusion in the correlation trading portfolio in accordance with paragraph 1 and this paragraph.                  

3.An institution may include in the correlation trading portfolio positions which are neither securitisation positions nor n-th-to-default                           credit derivatives but which hedge other positions of that portfolio, provided that a liquid two-way market as described in                           the last subparagraph of paragraph 1 exists for the instrument or its underlyings.                  

4.An institution shall determine the larger of the following amounts as the specific risk own funds requirement for the correlation                           trading portfolio:                  

(a)the total specific risk own funds requirement that would apply just to the net long positions of the correlation trading portfolio;                  

(b)the total specific risk own funds requirement that would apply just to the net short positions of the correlation trading                           portfolio.                  

##### Sub-Section 2U.K.General risk

###### Article 339U.K.Maturity-based calculation of general risk

1.In order to calculate own funds requirements against general risk all positions shall be weighted according to maturity as                           explained in paragraph 2 in order to compute the amount of own funds required against them. This requirement shall be reduced                           when a weighted position is held alongside an opposite weighted position within the same maturity band. A reduction in the                           requirement shall also be made when the opposite weighted positions fall into different maturity bands, with the size of this                           reduction depending both on whether the two positions fall into the same zone, or not, and on the particular zones they fall                           into.                  

2.The institution shall assign its net positions to the appropriate maturity bands in column 2 or 3, as appropriate, in Table                           2 in paragraph 4. It shall do so on the basis of residual maturity in the case of fixed-rate instruments and on the basis                           of the period until the interest rate is next set in the case of instruments on which the interest rate is variable before                           final maturity. It shall also distinguish between debt instruments with a coupon of 3 % or more and those with a coupon of                           less than 3 % and thus allocate them to column 2 or column 3 in Table 2. It shall then multiply each of them by the weighing                           for the maturity band in question in column 4 in Table 2.                  

3.The institution shall then work out the sum of the weighted long positions and the sum of the weighted short positions in                           each maturity band. The amount of the former which are matched by the latter in a given maturity band shall be the matched                           weighted position in that band, while the residual long or short position shall be the unmatched weighted position for the                           same band. The total of the matched weighted positions in all bands shall then be calculated.                  

4.The institution shall compute the totals of the unmatched weighted long positions for the bands included in each of the zones                           in Table 2 in order to derive the unmatched weighted long position for each zone. Similarly, the sum of the unmatched weighted                           short positions for each band in a particular zone shall be summed to compute the unmatched weighted short position for that                           zone. That part of the unmatched weighted long position for a given zone that is matched by the unmatched weighted short position                           for the same zone shall be the matched weighted position for that zone. That part of the unmatched weighted long or unmatched                           weighted short position for a zone that cannot be thus matched shall be the unmatched weighted position for that zone.                  

###### Table 2

5.The amount of the unmatched weighted long or short position in zone one which is matched by the unmatched weighted short or                           long position in zone two shall then be the matched weighted position between zones one and two. The same calculation shall                           then be undertaken with regard to that part of the unmatched weighted position in zone two which is left over and the unmatched                           weighted position in zone three in order to calculate the matched weighted position between zones two and three.                  

6.The institution may reverse the order in paragraph 5 so as to calculate the matched weighted position between zones two and                           three before calculating that position between zones one and two.                  

7.The remainder of the unmatched weighted position in zone one shall then be matched with what remains of that for zone three                           after the latter's matching with zone two in order to derive the matched weighted position between zones one and three.                  

8.Residual positions, following the three separate matching calculations in paragraphs 5, 6 and 7 shall be summed.                  

9.The institution's own funds requirement shall be calculated as the sum of:                  

(a)10 % of the sum of the matched weighted positions in all maturity bands;                  

(b)40 % of the matched weighted position in zone one;                  

(c)30 % of the matched weighted position in zone two;                  

(d)30 % of the matched weighted position in zone three;                  

(e)40 % of the matched weighted position between zones one and two and between zones two and three;                  

(f)150 % of the matched weighted position between zones one and three;                  

(g)100 % of the residual unmatched weighted positions.                  

###### Article 340U.K.Duration-based calculation of general risk

1.Institutions may use an approach for calculating the own funds requirement for the general risk on debt instruments which                           reflects duration, instead of the approach set out in Article 339, provided that the institution does so on a consistent basis.                  

2.Under the duration-based approach referred to in paragraph 1, the institution shall take the market value of each fixed-rate                           debt instrument and hence calculate its yield to maturity, which is implied discount rate for that instrument. In the case                           of floating-rate instruments, the institution shall take the market value of each instrument and hence calculate its yield                           on the assumption that the principal is due when the interest rate can next be changed.                  

3.The institution shall then calculate the modified duration of each debt instrument on the basis of the following formula:                  

                   

where:                   

D

=

duration calculated according to the following formula:                      

                      

where:                      

R

=

yield to maturity;                         

C

=

cash payment in time t;                         

M

=

total maturity.                         

Correction shall be made to the calculation of the modified duration for debt instruments which are subject to prepayment                        risk. EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines about how to apply such corrections.                   

4.The institution shall then allocate each debt instrument to the appropriate zone in Table 3. It shall do so on the basis of                           the modified duration of each instrument.                  

###### Table 3

5.The institution shall then calculate the duration-weighted position for each instrument by multiplying its market price by                           its modified duration and by the assumed interest-rate change for an instrument with that particular modified duration (see                           column 3 in Table 3).                  

6.The institution shall calculate its duration-weighted long and its duration-weighted short positions within each zone. The                           amount of the former which are matched by the latter within each zone shall be the matched duration-weighted position for                           that zone.                  

The institution shall then calculate the unmatched duration-weighted positions for each zone. It shall then follow the procedures                        laid down for unmatched weighted positions in Article 339(5) to (8).                   

7.The institution's own funds requirement shall then be calculated as the sum of the following:                  

(a)2 % of the matched duration-weighted position for each zone;                  

(b)40 % of the matched duration-weighted positions between zones one and two and between zones two and three;                  

(c)150 % of the matched duration-weighted position between zones one and three;                  

(d)100 % of the residual unmatched duration-weighted positions.                  

#### Section 3U.K.Equities

##### Article 341U.K.Net positions in equity instruments

1.The institution shall separately sum all its net long positions and all its net short positions in accordance with Article                           327. The sum of the absolute values of the two figures shall be its overall gross position.                  

2.The institution shall calculate, separately for each market, the difference between the sum of the net long and the net short                           positions. The sum of the absolute values of those differences shall be its overall net position.                  

3.EBA shall develop draft regulatory technical standards defining the term market referred to in paragraph 2.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 January 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 342U.K.Specific risk of equity instruments

The institution shall multiply its overall gross position by 8 % in order to calculate its own funds requirement against specific                        risk.                   

##### Article 343U.K.General risk of equity instruments

The own funds requirement against general risk shall be the institution's overall net position multiplied by 8 %.                   

##### Article 344U.K.Stock indices

1.EBA shall develop draft implementing technical standards listing the stock indices for which the treatments set out in the                           second sentence of paragraph 4 is available.                  

EBA shall submit those draft implementing technical standards to the Commission by 1 January 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

2.Before the entry into force of the technical standards referred to in paragraph 1, institutions may continue to apply the                           treatment set out in the second sentence of paragraph 4, where the competent authorities have applied that treatment before                           1 January 2014.                  

3.Stock-index futures, the delta-weighted equivalents of options in stock-index futures and stock indices collectively referred                           to hereafter as ‘stock-index futures’, may be broken down into positions in each of their constituent equities. These positions may be treated as underlying positions                           in the equities in question, and may, be netted against opposite positions in the underlying equities themselves. Institutions                           shall notify the competent authority of the use they make of that treatment.                  

4.Where a stock-index future is not broken down into its underlying positions, it shall be treated as if it were an individual                           equity. However, the specific risk on this individual equity can be ignored if the stock-index future in question is exchange                           traded and represents a relevant appropriately diversified index.                  

#### Section 4U.K.Underwriting

##### Article 345U.K.Reduction of net positions

1.In the case of the underwriting of debt and equity instruments, an institution may use the following procedure in calculating                           its own funds requirements. The institution shall first calculate the net positions by deducting the underwriting positions                           which are subscribed or sub-underwritten by third parties on the basis of formal agreements. The institution shall then reduce                           the net positions by the reduction factors in Table 4 and calculate its own funds requirements using the reduced underwriting                           positions.                  

###### Table 4

‘Working day zero’ shall be the working day on which the institution becomes unconditionally committed to accepting a known quantity of securities                        at an agreed price.                   

2.The institutions shall notify to the competent authorities the use they make of paragraph 1.                  

#### Section 5U.K.Specific risk own funds requirements for positions hedged by credit derivatives

##### Article 346U.K.Allowance for hedges by credit derivatives

1.An allowance shall be given for hedges provided by credit derivatives, in accordance with the principles set out in paragraphs                           2 to 6.                  

2.Institutions shall treat the position in the credit derivative as one ‘leg’ and the hedged position that has the same nominal, or, where applicable, notional amount, as the other ‘leg’.                  

3.Full allowance shall be given when the values of the two legs always move in the opposite direction and broadly to the same                           extent. This will be the case in the following situations:                  

(a)the two legs consist of completely identical instruments;                  

(b)a long cash position is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference                           obligation and the underlying exposure (i.e., the cash position). The maturity of the swap itself may be different from that                           of the underlying exposure.                  

In these situations, a specific risk own funds requirement shall not be applied to either side of the position.                   

4.An 80 % offset will be applied when the values of the two legs always move in the opposite direction and where there is an                           exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative,                           and the currency of the underlying exposure. In addition, key features of the credit derivative contract shall not cause the                           price movement of the credit derivative to materially deviate from the price movements of the cash position. To the extent                           that the transaction transfers risk, an 80 % specific risk offset will be applied to the side of the transaction with the                           higher own funds requirement, while the specific risk requirements on the other side shall be zero.                  

5.Partial allowance shall be given, absent the situations in paragraphs 3 and 4, in the following situations:                  

(a)the position falls under paragraph 3(b) but there is an asset mismatch between the reference obligation and the underlying                           exposure. However, the positions meet the following requirements:                  

the reference obligation ranks pari passu with or is junior to the underlying obligation;                            

the underlying obligation and reference obligation share the same obligor and have legally enforceable cross-default or cross-acceleration                                 clauses;                            

(b)the position falls under paragraph 3(a) or paragraph 4 but there is a currency or maturity mismatch between the credit protection                           and the underlying asset. Such currency mismatch shall be included in the own funds requirement for foreign exchange risk;                  

(c)the position falls under paragraph 4 but there is an asset mismatch between the cash position and the credit derivative. However,                           the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.                  

In order to give partial allowance, rather than adding the specific risk own funds requirements for each side of the transaction,                        only the higher of the two own funds requirements shall apply.                   

6.In all situations not falling under paragraphs 3 to 5, an own funds requirement for specific risk shall be calculated for                           both sides of the positions separately.                  

##### Article 347U.K.Allowance for hedges by first and nth-to default credit derivatives

In the case of first-to-default credit derivatives and nth-to-default credit derivatives, the following treatment applies                        for the allowance to be given in accordance with Article 346:                   

where an institution obtains credit protection for a number of reference entities underlying a credit derivative under the                                 terms that the first default among the assets shall trigger payment and that this credit event shall terminate the contract,                                 the institution may offset specific risk for the reference entity to which the lowest specific risk percentage charge among                                 the underlying reference entities applies in accordance with Table 1 in Article 336;                            

where the nth default among the exposures triggers payment under the credit protection, the protection buyer may only offset                                 specific risk if protection has also been obtained for defaults 1 to n-1 or when n-1 defaults have already occurred. In such                                 cases, the methodology set out in point (a) for first-to-default credit derivatives shall be followed appropriately amended                                 for nth-to-default products.                            

#### Section 6U.K.Own funds requirements for CIUs

##### Article 348U.K.Own funds requirements for CIUs

1.Without prejudice to other provisions in this Section, positions in CIUs shall be subject to an own funds requirement for                           position risk, comprising specific and general risk, of 32 %. Without prejudice to Article 353 taken together with the amended                           gold treatment set out in Article 352(4) and Article 367(2)(b) positions in CIUs shall be subject to an own funds requirement                           for position risk, comprising specific and general risk, and foreign-exchange risk of 40 %.                  

2.Unless noted otherwise in Article 350, no netting is permitted between the underlying investments of a CIU and other positions                           held by the institution.                  

##### Article 349U.K.General criteria for CIUs

CIUs shall be eligible for the approach set out in Article 350, where all the following conditions are met:                   

the CIU's prospectus or equivalent document shall include all of the following:                            

the categories of assets in which the CIU is authorised to invest;                                     

where investment limits apply, the relative limits and the methodologies to calculate them;                                     

where leverage is allowed, the maximum level of leverage;                                     

where concluding OTC financial derivatives transactions or repurchase transactions or securities borrowing or lending is allowed,                                          a policy to limit counterparty risk arising from these transactions;                                     

the business of the CIU shall be reported in half-yearly and annual reports to enable an assessment to be made of the assets                                 and liabilities, income and operations over the reporting period;                            

the shares or units of the CIU shall be redeemable in cash, out of the undertaking's assets, on a daily basis at the request                                 of the unit holder;                            

investments in the CIU shall be segregated from the assets of the CIU manager;                            

there shall be adequate risk assessment of the CIU, by the investing institution;                            

CIUs shall be managed by persons supervised in accordance with Directive 2009/65/EC or equivalent legislation.                            

##### Article 350U.K.Specific methods for CIUs

1.Where the institution is aware of the underlying investments of the CIU on a daily basis, the institution may look through                           to those underlying investments in order to calculate the own funds requirements for position risk, comprising specific and                           general risk. Under such an approach, positions in CIUs shall be treated as positions in the underlying investments of the                           CIU. Netting shall be permitted between positions in the underlying investments of the CIU and other positions held by the                           institution, provided that the institution holds a sufficient quantity of shares or units to allow for redemption/creation                           in exchange for the underlying investments.                  

2.Institutions may calculate the own funds requirements for position risk, comprising specific and general risk, for positions                           in CIUs by assuming positions representing those necessary to replicate the composition and performance of the externally                           generated index or fixed basket of equities or debt securities referred to in point (a), subject to the following conditions:                  

(a)the purpose of the CIU's mandate is to replicate the composition and performance of an externally generated index or fixed                           basket of equities or debt securities;                  

(b)a minimum correlation coefficient between daily returns on the CIU and the index or basket of equities or debt securities                           it tracks of 0,9 can be clearly established over a minimum period of six months.                  

3.Where the institution is not aware of the underlying investments of the CIU on a daily basis, the institution may calculate                           the own funds requirements for position risk, comprising specific and general risk, subject to the following conditions:                  

(a)it will be assumed that the CIU first invests to the maximum extent allowed under its mandate in the asset classes attracting                           the highest own funds requirement for specific and general risk separately, and then continues making investments in descending                           order until the maximum total investment limit is reached. The position in the CIU will be treated as a direct holding in                           the assumed position;                  

(b)institutions shall take account of the maximum indirect exposure that they could achieve by taking leveraged positions through                           the CIU when calculating their own funds requirement for specific and general risk separately, by proportionally increasing                           the position in the CIU up to the maximum exposure to the underlying investment items resulting from the mandate;                  

(c)if the own funds requirement for specific and general risk together in accordance with this paragraph exceed that set out                           in Article 348(1) the own funds requirement shall be capped at that level.                  

4.Institutions may rely on the following third parties to calculate and report own funds requirements for position risk for                           positions in CIUs falling under paragraphs 1 to 4, in accordance with the methods set out in this Chapter:                  

(a)the depository of the CIU provided that the CIU exclusively invests in securities and deposits all securities at this depository;                  

(b)for other CIUs, the CIU management company, provided that the CIU management company meets the criteria set out in Article                           132(3)(a).                  

The correctness of the calculation shall be confirmed by an external auditor.                   

### CHAPTER 3U.K.Own funds requirements for foreign-exchange risk

#### Article 351U.K.De minimis and weighting for foreign exchange risk

If the sum of an institution's overall net foreign-exchange position and its net gold position, calculated in accordance with                        the procedure set out in Article 352, including for any foreign exchange and gold positions for which own funds requirements                        are calculated using an internal model, exceeds 2 % of its total own funds, the institution shall calculate an own funds requirement                        for foreign exchange risk. The own funds requirement for foreign exchange risk shall be the sum of its overall net foreign-exchange                        position and its net gold position in the reporting currency, multiplied by 8 %.                   

#### Article 352U.K.Calculation of the overall net foreign exchange position

1.The institution's net open position in each currency (including the reporting currency) and in gold shall be calculated as                           the sum of the following elements (positive or negative):                  

(a)the net spot position (i.e. all asset items less all liability items, including accrued interest, in the currency in question                           or, for gold, the net spot position in gold);                  

(b)the net forward position, which are all amounts to be received less all amounts to be paid under forward exchange and gold                           transactions, including currency and gold futures and the principal on currency swaps not included in the spot position;                  

(c)irrevocable guarantees and similar instruments that are certain to be called and likely to be irrecoverable;                  

(d)the net delta, or delta-based, equivalent of the total book of foreign-currency and gold options;                  

(e)the market value of other options.                  

The delta used for purposes of point (d) shall be that of the exchange concerned. For OTC options, or where delta is not available                        from the exchange concerned, the institution may calculate delta itself using an appropriate model, subject to permission                        by the competent authorities. Permission shall be granted if the model appropriately estimates the rate of change of the option's                        or warrant's value with respect to small changes in the market price of the underlying.                   

The institution may include net future income/expenses not yet accrued but already fully hedged if it does so consistently.                   

The institution may break down net positions in composite currencies into the component currencies in accordance with the                        quotas in force.                   

2.Any positions which an institution has deliberately taken in order to hedge against the adverse effect of the exchange rate                           on its ratios in accordance with Article 92(1) may, subject to permission by the competent authorities, be excluded from the                           calculation of net open currency positions. Such positions shall be of a non-trading or structural nature and any variation                           of the terms of their exclusion, subject to separate permission by the competent authorities. The same treatment subject to                           the same conditions may be applied to positions which an institution has which relate to items that are already deducted in                           the calculation of own funds.                  

3.An institution may use the net present value when calculating the net open position in each currency and in gold provided                           that the institution applies this approach consistently.                  

4.Net short and long positions in each currency other than the reporting currency and the net long or short position in gold                           shall be converted at spot rates into the reporting currency. They shall then be summed separately to form the total of the                           net short positions and the total of the net long positions respectively. The higher of these two totals shall be the institution's                           overall net foreign-exchange position.                  

5.Institutions shall adequately reflect other risks associated with options, apart from the delta risk, in the own funds requirements.                  

6.EBA shall develop draft regulatory technical standards defining a range of methods to reflect in the own funds requirements                           other risks, apart from delta risk, in a manner proportionate to the scale and complexity of institutions' activities in options.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

Before the entry into force of the technical standards referred to in the first subparagraph, competent authorities may continue                        to apply the existing national treatments, where the competent authorities have applied those treatments before 31 December 2013.                   

#### Article 353U.K.Foreign exchange risk of CIUs

1.For the purposes of Article 352, in respect of CIUs the actual foreign exchange positions of the CIU shall be taken into account.                  

2.Institutions may rely on the following third parties' reporting of the foreign exchange positions in the CIU:                  

(a)the depository institution of the CIU provided that the CIU exclusively invests in securities and deposits all securities                           at this depository institution;                  

(b)for other CIUs, the CIU management company, provided that the CIU management company meets the criteria set out in point (a)                           of Article 132(3).                  

The correctness of the calculation shall be confirmed by an external auditor.                   

3.Where an institution is not aware of the foreign exchange positions in a CIU, it shall be assumed that the CIU is invested                           up to the maximum extent allowed under the CIU's mandate in foreign exchange and institutions shall, for trading book positions,                           take account of the maximum indirect exposure that they could achieve by taking leveraged positions through the CIU when calculating                           their own funds requirement for foreign exchange risk. This shall be done by proportionally increasing the position in the                           CIU up to the maximum exposure to the underlying investment items resulting from the investment mandate. The assumed position                           of the CIU in foreign exchange shall be treated as a separate currency according to the treatment of investments in gold,                           subject to the addition of the total long position to the total long open foreign exchange position and the total short position                           to the total short open foreign exchange position where the direction of the CIU's investment is available. There shall be                           no netting allowed between such positions prior to the calculation.                  

#### Article 354U.K.Closely correlated currencies

1.Institutions may provide lower own funds requirements against positions in relevant closely correlated currencies. A pair                           of currencies is deemed to be closely correlated only if the likelihood of a loss — calculated on the basis of daily exchange-rate                           data for the preceding three or five years — occurring on equal and opposite positions in such currencies over the following                           10 working days, which is 4 % or less of the value of the matched position in question (valued in terms of the reporting currency)                           has a probability of at least 99 %, when an observation period of three years is used, and 95 %, when an observation period                           of five years is used. The own-funds requirement on the matched position in two closely correlated currencies shall be 4 %                           multiplied by the value of the matched position.                  

2.In calculating the requirements of this Chapter, institutions may disregard positions in currencies, which are subject to                           a legally binding intergovernmental agreement to limit its variation relative to other currencies covered by the same agreement.                           Institutions shall calculate their matched positions in such currencies and subject them to an own funds requirement no lower                           than half of the maximum permissible variation laid down in the intergovernmental agreement in question in respect of the                           currencies concerned.                  

3.EBA shall develop draft implementing technical standards listing the currencies for which the treatment set out in paragraph                           1 is available.                  

EBA shall submit those draft implementing technical standards to the Commission by 1 January 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

4.The own funds requirement on the matched positions in currencies of Member States participating in the second stage of the                           economic and monetary union may be calculated as 1,6 % of the value of such matched positions.                  

5.Only the unmatched positions in currencies referred to in this Article shall be incorporated into the overall net open position                           in accordance with Article 352(4).                  

6.Where daily exchange-rate data for the preceding three or five years — occurring on equal and opposite positions in a pair                           of currencies over the following 10 working days show that these two currencies are perfectly positively correlated and the                           institution always can face a zero bid/ask spread on the respective trades, the institution can, upon explicit permission                           by its competent authority, apply an own funds requirement of 0 % until the end of 2017.                  

### CHAPTER 4U.K.Own funds requirements for commodities risk

#### Article 355U.K.Choice of method for commodities risk

Subject to Articles 356 to 358, institutions shall calculate the own funds requirement for commodities risk with one of the                        methods set out in Article 359, 360 or 361.                   

#### Article 356U.K.Ancillary commodities business

1.Institutions with ancillary agricultural commodities business may determine the own funds requirements for their physical                           commodity stock at the end of each year for the following year where all of the following conditions are met:                  

(a)at any time of the year it holds own funds for this risk which are not lower than the average own funds requirement for that                           risk estimated on a conservative basis for the coming year;                  

(b)it estimates on a conservative basis the expected volatility for the figure calculated under point (a);                  

(c)its average own funds requirement for this risk does not exceed 5 % of its own funds or EUR 1 million and, taking into account                           the volatility estimated in accordance with (b), the expected peak own funds requirements do not exceed 6,5 % of its own funds;                  

(d)the institution monitors on an ongoing basis whether the estimates carried out under points (a) and (b) still reflect the                           reality.                  

2.Institutions shall notify to the competent authorities the use they make of the option provided in paragraph 1.                  

#### Article 357U.K.Positions in commodities

1.Each position in commodities or commodity derivatives shall be expressed in terms of the standard unit of measurement. The                           spot price in each commodity shall be expressed in the reporting currency.                  

2.Positions in gold or gold derivatives shall be considered as being subject to foreign-exchange risk and treated in accordance                           with Chapter 3 or 5, as appropriate, for the purpose of calculating commodities risk.                  

3.For the purpose of Article 360(1), the excess of an institution's long positions over its short positions, or vice versa,                           in the same commodity and identical commodity futures, options and warrants shall be its net position in each commodity. Derivative                           instruments shall be treated, as laid down in Article 358, as positions in the underlying commodity.                  

4.For the purposes of calculating a position in a commodity, the following positions shall be treated as positions in the same                           commodity:                  

(a)positions in different sub-categories of commodities in cases where the sub-categories are deliverable against each other;                  

(b)positions in similar commodities if they are close substitutes and where a minimum correlation of 0,9 between price movements                           can be clearly established over a minimum period of one year.                  

#### Article 358U.K.Particular instruments

1.Commodity futures and forward commitments to buy or sell individual commodities shall be incorporated in the measurement system                           as notional amounts in terms of the standard unit of measurement and assigned a maturity with reference to expiry date.                  

2.Commodity swaps where one side of the transaction is a fixed price and the other the current market price shall be treated,                           as a series of positions equal to the notional amount of the contract, with, where relevant, one position corresponding with                           each payment on the swap and slotted into the maturity bands in Article 359(1). The positions shall be long positions if the                           institution is paying a fixed price and receiving a floating price and short positions if the institution is receiving a fixed                           price and paying a floating price. Commodity swaps where the sides of the transaction are in different commodities are to                           be reported in the relevant reporting ladder for the maturity ladder approach.                  

3.Options and warrants on commodities or on commodity derivatives shall be treated as if they were positions equal in value                           to the amount of the underlying to which the option refers, multiplied by its delta for the purposes of this Chapter. The                           latter positions may be netted off against any offsetting positions in the identical underlying commodity or commodity derivative.                           The delta used shall be that of the exchange concerned. For OTC options, or where delta is not available from the exchange                           concerned the institution may calculate delta itself using an appropriate model, subject to permission by the competent authorities.                           Permission shall be granted if the model appropriately estimates the rate of change of the option's or warrant's value with                           respect to small changes in the market price of the underlying.                  

Institutions shall adequately reflect other risks associated with options, apart from the delta risk, in the own funds requirements.                   

4.EBA shall develop draft regulatory technical standards defining a range of methods to reflect in the own funds requirements                           other risks, apart from delta risk, in a manner proportionate to the scale and complexity of institutions' activities in options.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

Before the entry into force of the technical standards referred to in the first subparagraph, competent authorities may continue                        to apply the existing national treatments, where the competent authorities have applied those treatments before 31 December 2013.                   

5.Where an institution is either of the following, it shall include the commodities concerned in the calculation of its own                           funds requirement for commodities risk:                  

(a)the transferor of commodities or guaranteed rights relating to title to commodities in a repurchase agreement;                  

(b)the lender of commodities in a commodities lending agreement.                  

#### Article 359U.K.Maturity ladder approach

1.The institution shall use a separate maturity ladder in line with Table 1 for each commodity. All positions in that commodity                           shall be assigned to the appropriate maturity bands. Physical stocks shall be assigned to the first maturity band between                           0 and up to and including 1 month.                  

##### Table 1

2.Positions in the same commodity may be offset and assigned to the appropriate maturity bands on a net basis for the following:                  

(a)positions in contracts maturing on the same date;                  

(b)positions in contracts maturing within 10 days of each other if the contracts are traded on markets which have daily delivery                           dates.                  

3.The institution shall then calculate the sum of the long positions and the sum of the short positions in each maturity band.                           The amount of the former which are matched by the latter in a given maturity band shall be the matched positions in that band,                           while the residual long or short position shall be the unmatched position for the same band.                  

4.That part of the unmatched long position for a given maturity band that is matched by the unmatched short position, or vice                           versa, for a maturity band further out shall be the matched position between two maturity bands. That part of the unmatched                           long or unmatched short position that cannot be thus matched shall be the unmatched position.                  

5.The institution's own funds requirement for each commodity shall be calculated on the basis of the relevant maturity ladder                           as the sum of the following:                  

(a)the sum of the matched long and short positions, multiplied by the appropriate spread rate as indicated in the second column                           of Table 1 for each maturity band and by the spot price for the commodity;                  

(b)the matched position between two maturity bands for each maturity band into which an unmatched position is carried forward,                           multiplied by 0,6 %, which is the carry rate and by the spot price for the commodity;                  

(c)the residual unmatched positions, multiplied by 15 % which is the outright rate and by the spot price for the commodity.                  

6.The institution's overall own funds requirement for commodities risk shall be calculated as the sum of the own funds requirements                           calculated for each commodity in accordance with paragraph 5.                  

#### Article 360U.K.Simplified approach

1.The institution's own funds requirement for each commodity shall be calculated as the sum of the following:                  

(a)15 % of the net position, long or short, multiplied by the spot price for the commodity;                  

(b)3 % of the gross position, long plus short, multiplied by the spot price for the commodity.                  

2.The institution's overall own funds requirement for commodities risk shall be calculated as the sum of the own funds requirements                           calculated for each commodity in accordance with paragraph 1.                  

#### Article 361U.K.Extended maturity ladder approach

Institutions may use the minimum spread, carry and outright rates set out in the following Table 2 instead of those indicated                        in Article 359 provided that the institutions:                   

undertake significant commodities business;                            

have an appropriately diversified commodities portfolio;                            

are not yet in a position to use internal models for the purpose of calculating the own funds requirement for commodities                                 risk.                            

##### Table 2

Institutions shall notify the use they make of this Article to their competent authorities together with evidence of their                        efforts to implement an internal model for the purpose of calculating the own funds requirement for commodities risk.                   

### CHAPTER 5U.K.Use of internal models to calculate own funds requirements

#### Section 1U.K.Permission and own funds requirements

##### Article 362U.K.Specific and general risks

Position risk on a traded debt instrument or equity instrument or derivative thereof may be divided into two components for                        purposes of this Chapter. The first shall be its specific risk component and shall encompass the risk of a price change in                        the instrument concerned due to factors related to its issuer or, in the case of a derivative, the issuer of the underlying                        instrument. The general risk component shall encompass the risk of a price change in the instrument due in the case of a traded                        debt instrument or debt derivative to a change in the level of interest rates or in the case of an equity or equity derivative                        to a broad equity-market movement unrelated to any specific attributes of individual securities.                   

##### Article 363U.K.Permission to use internal models

1.After having verified an institution's compliance with the requirements of Sections 2, 3 and 4 as relevant, competent authorities                           shall grant permission to institutions to calculate their own funds requirements for one or more of the following risk categories                           by using their internal models instead of or in combination with the methods in Chapters 2 to 4:                  

(a)general risk of equity instruments;                  

(b)specific risk of equity instruments;                  

(c)general risk of debt instruments;                  

(d)specific risk of debt instruments;                  

(e)foreign-exchange risk;                  

(f)commodities risk.                  

2.For risk categories for which the institution has not been granted the permission referred to in paragraph 1 to use its internal                           models, that institution shall continue to calculate own funds requirements in accordance with those Chapters 2, 3 and 4 as                           relevant. Permission by the competent authorities for the use of internal models shall be required for each risk category                           and shall be granted only if the internal model covers a significant share of the positions of a certain risk category.                  

3.Material changes to the use of internal models that the institution has received permission to use, the extension of the use                           of internal models that the institution has received permission to use, in particular to additional risk categories, and the                           initial calculation of stressed value-at-risk in accordance with Article 365(2) require a separate permission by the competent                           authority.                  

Institutions shall notify the competent authorities of all other extensions and changes to the use of those internal models                        that the institution has received permission to use.                   

4.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the conditions for assessing materiality of extensions and changes to the use of internal models;                  

(b)the assessment methodology under which competent authorities permit institutions to use internal models;                  

(c)the conditions under which the share of positions covered by the internal model within a risk category shall be considered                           significant as referred to in paragraph 2.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 364U.K.Own funds requirements when using internal models

1.Each institution using an internal model shall fulfil, in addition to own funds requirements calculated in accordance with                           Chapters 2, 3 and 4 for those risk categories for which permission to use an internal model has not been granted, an own funds                           requirement expressed as the sum of points (a) and (b):                  

(a)the higher of the following values:                  

its previous day's value-at-risk number calculated in accordance with Article 365(1) (VaRt-1);                            

an average of the daily value-at-risk numbers calculated in accordance with Article 365(1) on each of the preceding sixty                                 business days (VaRavg), multiplied by the multiplication factor (mc) in accordance with Article 366;                            

(b)the higher of the following values:                  

its latest available stressed-value-at-risk number calculated in accordance with Article 365(2) (sVaRt-1); and                            

an average of the stressed value-at-risk numbers calculated in the manner and frequency specified in Article 365(2) during                                 the preceding sixty business days (sVaRavg), multiplied by the multiplication factor (ms) in accordance with Article 366;                            

2.Institutions that use an internal model to calculate their own funds requirement for specific risk of debt instruments shall                           fulfil an additional own funds requirement expressed as the sum of the following points (a) and (b):                  

(a)the own funds requirement calculated in accordance with Article 337 and 338 for the specific risk of securitisation positions                           and nth to default credit derivatives in the trading book with the exception of those incorporated in an own funds requirement                           for the specific risk of the correlation trading portfolio in accordance with Section 5 and, where applicable, the own funds                           requirement for specific risk in accordance with Chapter 2, Section 6, for those positions in CIUs for which neither the conditions                           in Article 350(1) nor Article 350(2) are fulfilled;                  

(b)the higher of:                  

the most recent risk number for the incremental default and migration risk calculated in accordance with Section 3;                            

the average of this number over the preceding 12 weeks.                            

3.Institutions that have a correlation trading portfolio, which meets the requirements in Article 338(1) to (3), may fulfil                           an own funds requirement on the basis of Article 377 instead of Article 338(4), calculated as the higher of the following:                  

(a)the most recent risk number for the correlation trading portfolio calculated in accordance with Section 5;                  

(b)the average of this number over the preceding 12-weeks;                  

(c)8 % of the own funds requirement that would, at the time of calculation of the most recent risk number referred to in point                           (a), be calculated in accordance with Article 338(4) for all those positions incorporated into the internal model for the                           correlation trading portfolio.                  

#### Section 2U.K.General requirements

##### Article 365U.K.VaR and stressed VaR Calculation

1.The calculation of the value-at-risk number referred to in Article 364 shall be subject to the following requirements:                  

(a)daily calculation of the value-at-risk number;                  

(b)a 99th percentile, one-tailed confidence interval;                  

(c)a 10-day holding period;                  

(d)an effective historical observation period of at least one year except where a shorter observation period is justified by                           a significant upsurge in price volatility;                  

(e)at least monthly data set updates.                  

The institution may use value-at-risk numbers calculated according to shorter holding periods than 10 days scaled up to 10                        days by an appropriate methodology that is reviewed periodically.                   

2.In addition, the institution shall at least weekly calculate a ‘stressed value-at-risk’ of the current portfolio, in accordance with the requirements set out in the first paragraph, with value-at-risk model inputs                           calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the institution's                           portfolio. The choice of such historical data shall be subject to at least annual review by the institution, which shall notify                           the outcome to the competent authorities. EBA shall monitor the range of practices for calculating stressed value at risk                           and shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines on such practices.                  

##### Article 366U.K.Regulatory back testing and multiplication factors

1.The results of the calculations referred to in Article 365 shall be scaled up by the multiplication factors (mc) and (ms).                  

2.Each of the multiplication factors (mc) and (ms) shall be the sum of at least 3 and an addend between 0 and 1 in accordance with Table 1. That addend shall depend on the                           number of overshootings for the most recent 250 business days as evidenced by the institution's back-testing of the value-at-risk                           number as set out in Article 365(1).                  

###### Table 1

3.The institutions shall count daily overshootings on the basis of back-testing on hypothetical and actual changes in the portfolio's                           value. An overshooting is a one-day change in the portfolio's value that exceeds the related one-day value-at-risk number                           generated by the institution's model. For the purpose of determining the addend the number of overshootings shall be assessed                           at least quarterly and shall be equal to the higher of the number of overshootings under hypothetical and actual changes in                           the value of the portfolio.                  

Back-testing on hypothetical changes in the portfolio's value shall be based on a comparison between the portfolio's end-of-day                        value and, assuming unchanged positions, its value at the end of the subsequent day.                   

Back-testing on actual changes in the portfolio's value shall be based on a comparison between the portfolio's end-of-day                        value and its actual value at the end of the subsequent day excluding fees, commissions, and net interest income.                   

4.The competent authorities may in individual cases limit the addend to that resulting from overshootings under hypothetical                           changes, where the number of overshootings under actual changes does not result from deficiencies in the internal model.                  

5.In order to allow competent authorities to monitor the appropriateness of the multiplication factors on an ongoing basis,                           institutions shall notify promptly, and in any case no later than within five working days, the competent authorities of overshootings                           that result from their back-testing programme.                  

##### Article 367U.K.Requirements on risk measurement

1.Any internal model used to calculate capital requirements for position risk, foreign exchange risk, commodities risk and any                           internal model for correlation trading shall meet all of the following requirements:                  

(a)the model shall capture accurately all material price risks;                  

(b)the model shall capture a sufficient number of risk factors, depending on the level of activity of the institution in the                           respective markets. Where a risk factor is incorporated into the institution's pricing model but not into the risk-measurement                           model, the institution shall be able to justify such an omission to the satisfaction of the competent authority. The risk-                           measurement model shall capture nonlinearities for options and other products as well as correlation risk and basis risk.                           Where proxies for risk factors are used they shall show a good track record for the actual position held.                  

2.Any internal model used to calculate capital requirements for position risk, foreign exchange risk or commodities risk shall                           meet all of the following requirements:                  

(a)the model shall incorporate a set of risk factors corresponding to the interest rates in each currency in which the institution                           has interest rate sensitive on- or off-balance sheet positions. The institution shall model the yield curves using one of                           the generally accepted approaches. For material exposures to interest-rate risk in the major currencies and markets, the yield                           curve shall be divided into a minimum of six maturity segments, to capture the variations of volatility of rates along the                           yield curve. The model shall also capture the risk of less than perfectly correlated movements between different yield curves;                  

(b)the model shall incorporate risk factors corresponding to gold and to the individual foreign currencies in which the institution's                           positions are denominated. For CIUs the actual foreign exchange positions of the CIU shall be taken into account. Institutions                           may rely on third party reporting of the foreign exchange position of the CIU, where the correctness of that report is adequately                           ensured. If an institution is not aware of the foreign exchange positions of a CIU, this position shall be carved out and                           treated in accordance with Article 353(3);                  

(c)the model shall use a separate risk factor at least for each of the equity markets in which the institution holds significant                           positions;                  

(d)the model shall use a separate risk factor at least for each commodity in which the institution holds significant positions.                           The model shall also capture the risk of less than perfectly correlated movements between similar, but not identical, commodities                           and the exposure to changes in forward prices arising from maturity mismatches. It shall also take account of market characteristics,                           notably delivery dates and the scope provided to traders to close out positions;                  

(e)the institution's internal model shall conservatively assess the risk arising from less liquid positions and positions with                           limited price transparency under realistic market scenarios. In addition, the internal model shall meet minimum data standards.                           Proxies shall be appropriately conservative and shall be used only where available data is insufficient or is not reflective                           of the true volatility of a position or portfolio.                  

3.Institutions may, in any internal model used for purposes of this Chapter, use empirical correlations within risk categories                           and across risk categories only if the institution's approach for measuring correlations is sound and implemented with integrity.                  

##### Article 368U.K.Qualitative requirements

1.Any internal model used for purposes of this Chapter shall be conceptually sound and implemented with integrity and, in particular,                           all of the following qualitative requirements shall be met:                  

(a)any internal model used to calculate capital requirements for position risk, foreign exchange risk or commodities risk shall                           be closely integrated into the daily risk-management process of the institution and serve as the basis for reporting risk                           exposures to senior management;                  

(b)the institution shall have a risk control unit that is independent from business trading units and reports directly to senior                           management. The unit shall be responsible for designing and implementing any internal model used for purposes of this Chapter.                           The unit shall conduct the initial and on-going validation of any internal model used for purposes of this Chapter, being                           responsible for the overall risk management system. The unit shall produce and analyse daily reports on the output of any                           internal model used for calculating capital requirements for position risk, foreign exchange risk and commodities risk, and                           on the appropriate measures to be taken in terms of trading limits;                  

(c)the institution's management body and senior management shall be actively involved in the risk-control process and the daily                           reports produced by the risk-control unit are reviewed by a level of management with sufficient authority to enforce both                           reductions of positions taken by individual traders as well as in the institution's overall risk exposure;                  

(d)the institution shall have sufficient numbers of staff skilled in the use of sophisticated internal models, and including                           those used for purposes of this Chapter, in the trading, risk-control, audit and back-office areas;                  

(e)the institution shall have established procedures for monitoring and ensuring compliance with a documented set of internal                           policies and controls concerning the overall operation of its internal models, and including those used for purposes of this                           Chapter;                  

(f)any internal model used for purposes of this Chapter shall have a proven track record of reasonable accuracy in measuring                           risks;                  

(g)the institution shall frequently conduct a rigorous programme of stress testing, including reverse stress tests, which encompasses                           any internal model used for purposes of this Chapter and the results of these stress tests shall be reviewed by senior management                           and reflected in the policies and limits it sets. This process shall particularly address illiquidity of markets in stressed                           market conditions, concentration risk, one way markets, event and jump-to-default risks, non-linearity of products, deep out-of-the-money                           positions, positions subject to the gapping of prices and other risks that may not be captured appropriately in the internal                           models. The shocks applied shall reflect the nature of the portfolios and the time it could take to hedge out or manage risks                           under severe market conditions;                  

(h)the institution shall conduct, as part of its regular internal auditing process, an independent review of its internal models,                           and including those used for purposes of this Chapter.                  

2.The review referred to in point (h) of paragraph 1 shall include both the activities of the business trading units and of                           the independent risk-control unit. At least once a year, the institution shall conduct a review of its overall risk-management                           process. The review shall consider the following:                  

(a)the adequacy of the documentation of the risk-management system and process and the organisation of the risk-control unit;                  

(b)the integration of risk measures into daily risk management and the integrity of the management information system;                  

(c)the process the institution employs for approving risk-pricing models and valuation systems that are used by front and back-office                           personnel;                  

(d)the scope of risks captured by the risk-measurement model and the validation of any significant changes in the risk-measurement                           process;                  

(e)the accuracy and completeness of position data, the accuracy and appropriateness of volatility and correlation assumptions,                           and the accuracy of valuation and risk sensitivity calculations;                  

(f)the verification process the institution employs to evaluate the consistency, timeliness and reliability of data sources used                           to run internal models, including the independence of such data sources;                  

(g)the verification process the institution uses to evaluate back-testing that is conducted to assess the models' accuracy.                  

3.As techniques and best practices evolve, institutions shall apply those new techniques and practices in any internal model                           used for purposes of this Chapter.                  

##### Article 369U.K.Internal Validation

1.Institutions shall have processes in place to ensure that all their internal models used for purposes of this Chapter have                           been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually                           sound and adequately capture all material risks. The validation shall be conducted when the internal model is initially developed                           and when any significant changes are made to the internal model. The validation shall also be conducted on a periodic basis                           but especially where there have been any significant structural changes in the market or changes to the composition of the                           portfolio which might lead to the internal model no longer being adequate. As techniques and best practices for internal validation                           evolve, institutions shall apply these advances. Internal model validation shall not be limited to back-testing, but shall,                           at a minimum, also include the following:                  

(a)tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate or overestimate                           the risk;                  

(b)in addition to the regulatory back-testing programmes, institutions shall carry out their own internal model validation tests,                           including back-testing, in relation to the risks and structures of their portfolios;                  

(c)the use of hypothetical portfolios to ensure that the internal model is able to account for particular structural features                           that may arise, for example material basis risks and concentration risk.                  

2.The institution shall perform back-testing on both actual and hypothetical changes in the portfolio's value.                  

#### Section 3U.K.Requirements particular to specific risk modelling

##### Article 370U.K.Requirements for modelling specific risk

An internal model used for calculating own funds requirements for specific risk and an internal model for correlation trading                        shall meet the following additional requirements:                   

it explains the historical price variation in the portfolio;                            

it captures concentration in terms of magnitude and changes of composition of the portfolio;                            

it is robust to an adverse environment;                            

it is validated through back-testing aimed at assessing whether specific risk is being accurately captured. If the institution                                 performs such back-testing on the basis of relevant sub-portfolios, these shall be chosen in a consistent manner;                            

it captures name-related basis risk and shall in particular be sensitive to material idiosyncratic differences between similar                                 but not identical positions;                            

it captures event risk.                            

##### Article 371U.K.Exclusions from specific risk models

1.An institution may choose to exclude from the calculation of its specific risk own funds requirement using an internal model                           those positions for which it fulfils an own funds requirement for specific risk in accordance with Article 332(1)(e) or Article                           337 with exception of those positions that are subject to the approach set out in Article 377.                  

2.An institution may choose not to capture default and migration risks for traded debt instruments in its internal model where                           it is capturing those risks through the requirements set out in Section 4.                  

#### Section 4U.K.Internal model for incremental default and migration risk

##### Article 372U.K.Requirement to have an internal IRC model

An institution that uses an internal model for calculating own funds requirements for specific risk of traded debt instruments                        shall also have an internal incremental default and migration risk (IRC) model in place to capture the default and migration                        risks of its trading book positions that are incremental to the risks captured by the value-at-risk measure as specified in                        Article 365(1). The institution shall demonstrate that its internal model meets the following standards under the assumption                        of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging and                        optionality:                   

the internal model provides a meaningful differentiation of risk and accurate and consistent estimates of incremental default                                 and migration risk;                            

the internal model's estimates for potential losses play an essential role in the risk management of the institution;                            

the market and position data used for the internal model are up-to-date and subject to an appropriate quality assessment;                            

the requirements in Article 367(3), Article 368, Article 369(1) and points (b), (c), (e) and (f) of Article 370 are met.                            

EBA shall issue guidelines on the requirements in Articles 373 to 376.                   

##### Article 373U.K.Scope of the internal IRC model

The internal IRC model shall cover all positions subject to an own funds requirement for specific interest rate risk, including                        those subject to a 0 % specific risk capital charge under Article 336, but shall not cover securitisation positions and n-th-to-default                        credit derivatives.                   

The institution may, subject to permission by the competent authorities, choose to consistently include all listed equity                        positions and derivatives positions based on listed equities. The permission shall be granted if such inclusion is consistent                        with how the institution internally measures and manages risk.                   

##### Article 374U.K.Parameters of the internal IRC model

1.Institutions shall use the internal model to calculate a number which measures losses due to default and internal or external                           ratings migration at the 99,9 % confidence interval over a time horizon of one year. Institutions shall calculate this number                           at least weekly.                  

2.Correlation assumptions shall be supported by analysis of objective data in a conceptually sound framework. The internal model                           shall appropriately reflect issuer concentrations. Concentrations that can arise within and across product classes under stressed                           conditions shall also be reflected.                  

3.The internal IRC model shall reflect the impact of correlations between default and migration events. The impact of diversification                           between, on the one hand, default and migration events and, on the other hand, other risk factors shall not be reflected.                  

4.The internal model shall be based on the assumption of a constant level of risk over the one-year time horizon, implying that                           given individual trading book positions or sets of positions that have experienced default or migration over their liquidity                           horizon are re-balanced at the end of their liquidity horizon to attain the initial level of risk. Alternatively, an institution                           may choose to consistently use a one-year constant position assumption.                  

5.The liquidity horizons shall be set according to the time required to sell the position or to hedge all material relevant                           price risks in a stressed market, having particular regard to the size of the position. Liquidity horizons shall reflect actual                           practice and experience during periods of both systematic and idiosyncratic stresses. The liquidity horizon shall be measured                           under conservative assumptions and shall be sufficiently long that the act of selling or hedging, in itself, would not materially                           affect the price at which the selling or hedging would be executed.                  

6.The determination of the appropriate liquidity horizon for a position or set of positions is subject to a floor of three months.                  

7.The determination of the appropriate liquidity horizon for a position or set of positions shall take into account an institution's                           internal policies relating to valuation adjustments and the management of stale positions. When an institution determines                           liquidity horizons for sets of positions rather than for individual positions, the criteria for defining sets of positions                           shall be defined in a way that meaningfully reflects differences in liquidity. The liquidity horizons shall be greater for                           positions that are concentrated, reflecting the longer period needed to liquidate such positions. The liquidity horizon for                           a securitisation warehouse shall reflect the time to build, sell and securitise the assets, or to hedge the material risk                           factors, under stressed market conditions.                  

##### Article 375U.K.Recognition of hedges in the internal IRC model

1.Hedges may be incorporated into an institution's internal model to capture the incremental default and migration risks. Positions                           may be netted when long and short positions refer to the same financial instrument. Hedging or diversification effects associated                           with long and short positions involving different instruments or different securities of the same obligor, as well as long                           and short positions in different issuers, may only be recognised by explicitly modelling gross long and short positions in                           the different instruments. Institutions shall reflect the impact of material risks that could occur during the interval between                           the hedge's maturity and the liquidity horizon as well as the potential for significant basis risks in hedging strategies                           by product, seniority in the capital structure, internal or external rating, maturity, vintage and other differences in the                           instruments. An institution shall reflect a hedge only to the extent that it can be maintained even as the obligor approaches                           a credit or other event.                  

2.For positions that are hedged via dynamic hedging strategies, a rebalancing of the hedge within the liquidity horizon of the                           hedged position may be recognised provided that the institution:                  

(a)chooses to model rebalancing of the hedge consistently over the relevant set of trading book positions;                  

(b)demonstrates that the inclusion of rebalancing results in a better risk measurement;                  

(c)demonstrates that the markets for the instruments serving as hedges are liquid enough to allow for such rebalancing even during                           periods of stress. Any residual risks resulting from dynamic hedging strategies shall be reflected in the own funds requirement.                  

##### Article 376U.K.Particular requirements for the internal IRC model

1.The internal model to capture the incremental default and migration risks shall reflect the nonlinear impact of options, structured                           credit derivatives and other positions with material nonlinear behaviour with respect to price changes. The institution shall                           also have due regard to the amount of model risk inherent in the valuation and estimation of price risks associated with such                           products.                  

2.The internal model shall be based on data that are objective and up-to-date.                  

3.As part of the independent review and validation of their internal models used for purposes of this Chapter, inclusively for                           purposes of the risk measurement system, an institution shall in particular do all of the following:                  

(a)validate that its modelling approach for correlations and price changes is appropriate for its portfolio, including the choice                           and weights of its systematic risk factors;                  

(b)perform a variety of stress tests, including sensitivity analysis and scenario analysis, to assess the qualitative and quantitative                           reasonableness of the internal model, particularly with regard to the treatment of concentrations. Such tests shall not be                           limited to the range of events experienced historically;                  

(c)apply appropriate quantitative validation including relevant internal modelling benchmarks.                  

4.The internal model shall be consistent with the institution's internal risk management methodologies for identifying, measuring,                           and managing trading risks.                  

5.Institutions shall document their internal models so that its correlation and other modelling assumptions are transparent                           to the competent authorities.                  

6.The internal model shall conservatively assess the risk arising from less liquid positions and positions with limited price                           transparency under realistic market scenarios. In addition, the internal model shall meet minimum data standards. Proxies                           shall be appropriately conservative and may be used only where available data is insufficient or is not reflective of the                           true volatility of a position or portfolio.                  

#### Section 5U.K.Internal model for correlation trading

##### Article 377U.K.Requirements for an internal model for correlation trading

1.Competent authorities shall grant permission to use an internal model for the own funds requirement for the correlation trading                           portfolio instead of the own funds requirement in accordance with Article 338 to institutions that are allowed to use an internal                           model for specific risk of debt instruments and that meet the requirements in paragraphs 2 to 6 of this Article and in Article                           367(1) and (3), Article 368, Article 369(1) and points (a), (b), (c), (e) and (f) of Article 370.                  

2.Institutions shall use this internal model to calculate a number which adequately measures all price risks at the 99,9 % confidence                           interval over a time horizon of one year under the assumption of a constant level of risk, and adjusted where appropriate                           to reflect the impact of liquidity, concentrations, hedging and optionality. Institutions shall calculate this number at least                           weekly.                  

3.The following risks shall be adequately captured by the model referred to in paragraph 1:                  

(a)the cumulative risk arising from multiple defaults, including different ordering of defaults, in tranched products;                  

(b)credit spread risk, including the gamma and cross-gamma effects;                  

(c)volatility of implied correlations, including the cross effect between spreads and correlations;                  

(d)basis risk, including both of the following:                  

the basis between the spread of an index and those of its constituent single names;                            

the basis between the implied correlation of an index and that of bespoke portfolios;                            

(e)recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche prices;                  

(f)to the extent the comprehensive risk measure incorporates benefits from dynamic hedging, the risk of hedge slippage and the                           potential costs of rebalancing such hedges;                  

(g)any other material price risks of positions in the correlation trading portfolio.                  

4.An institution shall use sufficient market data within the model referred to in paragraph 1 in order to ensure that it fully                           captures the salient risks of those exposures in its internal approach in accordance with the requirements set out in this                           Article. It shall be able to demonstrate to the competent authority through back testing or other appropriate means that its                           model can appropriately explain the historical price variation of those products.                  

The institution shall have appropriate policies and procedures in place in order to separate the positions for which it holds                        permission to incorporate them in the own funds requirement in accordance with this Article from other positions for which                        it does not hold such permission.                   

5.With regard to the portfolio of all the positions incorporated in the model referred to in paragraph 1, the institution shall                           regularly apply a set of specific, predetermined stress scenarios. Such stress scenarios shall examine the effects of stress                           to default rates, recovery rates, credit spreads, basis risk, correlations and other relevant risk factors on the correlation                           trading portfolio. The institution shall apply stress scenarios at least weekly and report at least quarterly to the competent                           authorities the results, including comparisons with the institution's own funds requirement in accordance with this Article.                           Any instances where the stress test results materially exceed the own funds requirement for the correlation trading portfolio                           shall be reported to the competent authorities in a timely manner. EBA shall issue guidelines on the application of stress                           scenarios for the correlation trading portfolio.                  

6.The internal model shall conservatively assess the risk arising from less liquid positions and positions with limited price                           transparency under realistic market scenarios. In addition, the internal model shall meet minimum data standards. Proxies                           shall be appropriately conservative and may be used only where available data is insufficient or is not reflective of the                           true volatility of a position or portfolio.                  

## TITLE VU.K.OWN FUNDS REQUIREMENTS FOR SETTLEMENT RISK

### Article 378U.K.Settlement/delivery risk

In the case of transactions in which debt instruments, equities, foreign currencies and commodities excluding repurchase transactions                        and securities or commodities lending and securities or commodities borrowing are unsettled after their due delivery dates,                        an institution shall calculate the price difference to which it is exposed.                   

The price difference is calculated as the difference between the agreed settlement price for the debt instrument, equity,                        foreign currency or commodity in question and its current market value, where the difference could involve a loss for the                        credit institution.                   

The institution shall multiply that price difference by the appropriate factor in the right column of the following Table                        1 in order to calculate the institution's own funds requirement for settlement risk.                   

#### Table 1

### Article 379U.K.Free deliveries

1.An institution shall be required to hold own funds, as set out in Table 2, where the following occurs:                  

it has paid for securities, foreign currencies or commodities before receiving them or it has delivered securities, foreign                                 currencies or commodities before receiving payment for them;                            

in the case of cross-border transactions, one day or more has elapsed since it made that payment or delivery.                            

#### Table 2

Capital treatment for free deliveries

2.In applying a risk weight to free delivery exposures treated according to Column 3 of Table 2, an institution using the Internal                           Ratings Based approach set out in Part Three, Title II, Chapter 3 may assign PDs to counterparties, for which it has no other                           non-trading book exposure, on the basis of the counterparty's external rating. Institutions using own estimates of ‘LGDs’ may apply the LGD set out in Article 161(1) to free delivery exposures treated according to Column 3 of Table 2 provided                           that they apply it to all such exposures. Alternatively, an institution using the Internal Ratings Based approach set out                           in Part Three, Title II, Chapter 3 may apply the risk weights of the Standardised Approach, as set out in Part Three, Title                           II, Chapter 2 provided that it applies them to all such exposures or may apply a 100 % risk weight to all such exposures.                  

If the amount of positive exposure resulting from free delivery transactions is not material, institutions may apply a risk                        weight of 100 % to these exposures, except where a risk weight of 1 250 % in accordance with Column 4 of Table 2 in paragraph 1 is required.                   

3.As an alternative to applying a risk weight of 1 250 % to free delivery exposures according to Column 4 of Table 2 in paragraph 1, institutions may deduct the value transferred                           plus the current positive exposure of those exposures from Common Equity Tier 1 items in accordance with point (k) of Article                           36(1).                  

### Article 380U.K.Waiver

Where a system wide failure of a settlement system, a clearing system or a CCP occurs, competent authorities may waive the                        own funds requirements calculated as set out in Articles 378 and 379 until the situation is rectified. In this case, the failure                        of a counterparty to settle a trade shall not be deemed a default for purposes of credit risk.                   

## TITLE VIU.K.OWN FUNDS REQUIREMENTS FOR CREDIT VALUATION ADJUSTMENT RISK

### Article 381U.K.Meaning of credit valuation adjustment

For the purposes of this Title and Chapter 6 of Title II, ‘credit valuation adjustment’ or ‘CVA’ means an adjustment to the mid-market valuation of the portfolio of transactions with a counterparty. That adjustment reflects                        the current market value of the credit risk of the counterparty to the institution, but does not reflect the current market                        value of the credit risk of the institution to the counterparty.                   

### Article 382U.K.Scope

1.An institution shall calculate the own funds requirements for CVA risk in accordance with this Title for all OTC derivative                           instruments in respect of all of its business activities, other than credit derivatives recognised to reduce risk-weighted                           exposure amounts for credit risk.                  

2.An institution shall include securities financing transactions in the calculation of own funds required by paragraph 1 if                           the competent authority determines that the institution's CVA risk exposures arising from those transactions are material.                  

3.Transactions with a qualifying central counterparty and a client's transactions with a clearing member, when the clearing                           member is acting as an intermediary between the client and a qualifying central counterparty and the transactions give rise                           to a trade exposure of the clearing member to the qualifying central counterparty, are excluded from the own funds requirements                           for CVA risk.                  

4.The following transactions shall be excluded from the own funds requirements for CVA risk:                  

(a)transactions with non-financial counterparties as defined in point (9) of Article 2 of Regulation (EU) No 648/2012, or with                           non-financial counterparties established in a third country, where those transactions do not exceed the clearing threshold                           as specified in Article 10(3) and (4) of that Regulation;                  

(b)intragroup transactions as provided for in Article 3 of Regulation (EU) No 648/2012 unless Member States adopt national laws                           requiring the structural separation within a banking group, in which case competent authorities may require those intragroup                           transactions between the structurally separated institutions to be included in the own funds requirements;                  

(c)transactions with counterparties referred to in point (10) of Article 2 of Regulation (EU) No 648/2012 and subject to the                           transitional provisions set out in Article 89(1) of that Regulation until those transitional provisions cease to apply;                  

(d)transactions with counterparties referred to in Article 1(4) and (5) of Regulation (EU) No 648/2012 and transactions with                           counterparties for which Article 114(4) and Article 115(2) of this Regulation specifies a risk weight of 0 % for exposures                           to those counterparties.                  

The exemption from the CVA risk charge for those transactions referred to in point (c) of this paragraph) which are entered                        into during the transitional period laid down in Article 89(1) of Regulation (EU) No 648/2012 shall apply for the length of                        the contract of that transaction.                   

In regard to point (a), where an institution ceases to be exempt through crossing the exemption threshold or due to a change                        in the exemption threshold, outstanding contracts shall remain exempt until the date of their maturity.                   

5.EBA shall conduct a review by 1 January 2015 and every two years thereafter, in the light of international regulatory developments and including on potential methodologies                           on the calibration and thresholds for application of CVA risk charges to non-financial counterparties established in a third                           country.                  

EBA in cooperation with ESMA shall develop draft regulatory technical standards to specify the procedures for excluding transactions                        with non-financial counterparties established in a third country from the own funds requirement for CVA risk charge.                   

EBA shall submit those draft regulatory technical standards within six months of the date of the review referred to in the                        first subparagraph,                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the second subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 383U.K.Advanced method

1.An institution which has permission to use an internal model for the specific risk of debt instruments in accordance with                           point (d) of Article 363 (1) shall, for all transactions for which it has permission to use the IMM for determining the exposure                           value for the associated counterparty credit risk exposure in accordance with Article 283, determine the own funds requirements                           for CVA risk by modelling the impact of changes in the counterparties' credit spreads on the CVAs of all counterparties of                           those transactions, taking into account CVA hedges that are eligible in accordance with Article 386.                  

An institution shall use its internal model for determining the own funds requirements for the specific risk associated with                        traded debt positions and shall apply a 99 % confidence interval and a 10-day equivalent holding period. The internal model                        shall be used in such way that it simulates changes in the credit spreads of counterparties, but does not model the sensitivity                        of CVA to changes in other market factors, including changes in the value of the reference asset, commodity, currency or interest                        rate of a derivative.                   

The own funds requirements for CVA risk for each counterparty shall be calculated in accordance with the following formula:                   

                   

where:                   

t

=

the time of the i-th revaluation, starting from t0=0;                      

t

=

the longest contractual maturity across the netting sets with the counterparty;                      

s

=

is the credit spread of the counterparty at tenor ti, used to calculate the CVA of the counterparty. Where the credit default                           swap spread of the counterparty is available, an institution shall use that spread. Where such a credit default swap spread                           is not available, an institution shall use a proxy spread that is appropriate having regard to the rating, industry and region                           of the counterparty;                      

LGD

=

the LGD of the counterparty that shall be based on the spread of a market instrument of the counterparty if a counterparty                           instrument is available. Where a counterparty instrument is not available, it shall be based on the proxy spread that is appropriate                           having regard to the rating, industry and region of the counterparty.                      

The first factor within the sum represents an approximation of the market implied marginal probability of a default occurring                        between times ti-1 and ti;                   

EE

=

the expected exposure to the counterparty at revaluation time ti, where exposures of different netting sets for such counterparty                           are added, and where the longest maturity of each netting set is given by the longest contractual maturity inside the netting                           set; An institution shall apply the treatment set out in paragraph 3 in the case of margined trading, if the institution uses                           the EPE measure referred to in point (a) or (b) of Article 285(1) for margined trades;                      

D

=

the default risk-free discount factor at time ti, where D0 =1.                      

2.When calculating the own funds requirements for CVA risk for a counterparty, an institution shall base all inputs into its                           internal model for specific risk of debt instruments on the following formulae (whichever is appropriate):                  

(a)where the model is based on full repricing, the formula in paragraph 1 shall be used directly;                  

(b)where the model is based on credit spread sensitivities for specific tenors, an institution shall base each credit spread                           sensitivity ('Regulatory CS01') on the following formula:                  

                   

For the final time bucket i=T, the corresponding formula is                   

                   

(c)where the model uses credit spread sensitivities to parallel shifts in credit spreads, an institution shall use the following                           formula:                  

                   

(d)where the model uses second-order sensitivities to shifts in credit spreads (spread gamma), the gammas shall be calculated                           based on the formula in paragraph 1.                  

3.An institution using the EPE measure for collateralised OTC derivatives referred to in point (a) or (b) of Article 285(1)                           shall, when determining the own funds requirements for CVA risk in accordance with paragraph 1, do both of the following:                  

(a)assume a constant EE profile;                  

(b)set EE equal to the effective expected exposure as calculated under Article 285(1)(b) for a maturity equal to the greater                           of the following:                  

half of the longest maturity occurring in the netting set;                            

the notional weighted average maturity of all transactions inside the netting set.                            

4.An institution which is permitted by the competent authority in accordance with Article 283 to use IMM to calculate exposure                           values in relation to the majority of its business, but which uses the methods set out in Section 3, Section 4 or Section                           5 of Title II, Chapter 6 for smaller portfolios, and which has permission to use the market risk internal model for the specific                           risk of debt instruments in accordance with point (d) of Article 363(1) may, subject to permission from the competent authorities,                           calculate the own funds requirements for CVA risk in accordance with paragraph 1 for the non-IMM netting sets. Competent authorities                           shall grant this permission only if the institution uses the methods set out in Section 3, Section 4 or Section 5 of Title                           II, Chapter 6 for a limited number of smaller portfolios.                  

For the purposes of a calculation under the preceding subparagraph and where the IMM model does not produce an expected exposure                        profile, an institution shall do both of the following:                   

(a)assume a constant EE profile;                  

(b)set EE equal to the exposure value as computed under the methods set out in Section 3, Section 4 or Section 5 of Title II,                           Chapter 6, or IMM for a maturity equal to the greater of:                  

half of the longest maturity occurring in the netting set;                            

the notional weighted average maturity of all transactions inside the netting set.                            

5.An institution shall determine the own funds requirements for CVA risk in accordance with Article 364(1) and Articles 365                           and 367 as the sum of non-stressed and stressed value-at-risk, which shall be calculated as follows:                  

(a)for the non-stressed value-at-risk, current parameter calibrations for expected exposure as set out in the first subparagraph                           of Article 292(2), shall be used;                  

(b)for the stressed value-at-risk, future counterparty EE profiles using a stressed calibration as set out in the second subparagraph                           of Article 292(2) shall be used. The period of stress for the credit spread parameters shall be the most severe one-year stress                           period contained within the three-year stress period used for the exposure parameters;                  

(c)the three-times multiplication factor used in the calculation of own funds requirements based on a value-at-risk and a stressed                           value-at-risk in accordance with 364(1) will apply to these calculations. EBA shall monitor for consistency any supervisory                           discretion used to apply a higher multiplication factor than that three-times multiplication factor to the value-at-risk and                           stressed value-at-risk inputs to the CVA risk charge. Competent authorities applying a multiplication factor higher than three                           shall provide a written justification to EBA;                  

(d)the calculation shall be carried out on at least a monthly basis and the EE that is used shall be calculated on the same frequency.                           If lower than a daily frequency is used, for the purpose of the calculation specified in points (a)(ii) and (b)(ii) of Article                           364(1) institutions shall take the average over three months.                  

6.For exposures to a counterparty, for which the institution's approved internal model for the specific risk of debt instruments                           does not produce a proxy spread that is appropriate with respect to the criteria of rating, industry and region of the counterparty,                           the institution shall use the method set out in Article 384 to calculate the own funds requirement for CVA risk.                  

7.EBA shall develop draft regulatory technical standards to specify in greater detail:                  

(a)how a proxy spread is to be determined by the institution's approved internal model for the specific risk of debt instruments                           for the purposes of identifying si and LGDMKT referred to in paragraph 1;                  

(b)the number and size of portfolios that fulfil the criterion of a limited number of smaller portfolios referred to in paragraph                           4.                  

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 384U.K.Standardised method

1.An institution which does not calculate the own funds requirements for CVA risk for its counterparties in accordance with                           Article 383 shall calculate a portfolio own funds requirements for CVA risk for each counterparty in accordance with the following                           formula, taking into account CVA hedges that are eligible in accordance with Article 386:                  

                   

where:                   

h

=

the one-year risk horizon (in units of a year); h = 1;                      

w

=

the weight applicable to counterparty ‘i’.                      

Counterparty ‘i’ shall be mapped to one of the six weights wi based on an external credit assessment by a nominated ECAI, as set out in Table                           1. For a counterparty for which a credit assessment by a nominated ECAI is not available:                      

an institution using the approach in Title II, Chapter 3 shall map the internal rating of the counterparty to one of the external                                    credit assessment;                               

an institution using the approach in Title II, Chapter 2 shall assign wi=1,0 % to this counterparty. However, if an institution                                    uses Article 128 to risk weight counterparty credit risk exposures to this counterparty, wi=3,0 % shall be assigned;                               

=

the total counterparty credit risk exposure value of counterparty ‘i’ (summed across its netting sets) including the effect of collateral in accordance with the methods set out in Sections 3                           to 6 of Title II, Chapter 6 as applicable to the calculation of the own funds requirements for counterparty credit risk for                           that counterparty. An institution using one of the methods set out in Sections 3 and 4 of Title II, Chapter 6, may use as                           the fully adjusted exposure value in accordance with Article 223(5).                      

For an institution not using the method set out in Section 6 of Title II, Chapter 6, the exposure shall be discounted by applying                           the following factor:                      

                      

B

=

the notional of purchased single name credit default swap hedges (summed if more than one position) referencing counterparty                           ‘i’ and used to hedge CVA risk.                      

That notional amount shall be discounted by applying the following factor:                      

                      

B

=

is the full notional of one or more index credit default swap of purchased protection used to hedge CVA risk.                      

That notional amount shall be discounted by applying the following factor:                      

                      

w

=

is the weight applicable to index hedges.                      

An institution shall determine wind by calculating a weighted average of wi that are applicable to the individual constituents of the index;                      

M

=

the effective maturity of the transactions with counterparty i.                      

For an institution using the method set out in Section 6 of Title II, Chapter 6, Mi shall be calculated in accordance with Article 162(2)(g). However, for that purpose, Mi shall not be capped at five years but at the longest contractual remaining maturity in the netting set.                      

For an institution not using the method set out in Section 6 of Title II, Chapter 6, Mi is the average notional weighted maturity as referred to in point (b) of Article 162(2). However, for that purpose, Mi shall not be capped at five years but at the longest contractual remaining maturity in the netting set.                      

=

the maturity of the hedge instrument with notional Bi (the quantities Bi are to be summed if these are several positions);                      

M

=

the maturity of the index hedge.                      

In the case of more than one index hedge position, Mind is the notional-weighted maturity.                      

2.Where a counterparty is included in an index on which a credit default swap used for hedging counterparty credit risk is based,                           the institution may subtract the notional amount attributable to that counterparty in accordance with its reference entity                           weight from the index CDS notional amount and treat it as a single name hedge (Bi) of the individual counterparty with maturity based on the maturity of the index.                  

#### Table 1

### Article 385U.K.Alternative to using CVA methods to calculating own funds requirements

As an alternative to Article 384, for instruments referred to in Article 382 and subject to the prior consent of the competent                        authority, institutions using the Original Exposure Method as laid down in Article 275, may apply a multiplication factor                        of 10 to the resulting risk-weighted exposure amounts for counterparty credit risk for those exposures instead of calculating                        own funds requirements for CVA risk.                   

### Article 386U.K.Eligible hedges

1.Hedges shall be ‘eligible hedges’ for the purposes of the calculation of own funds requirements for CVA risk in accordance with Articles 383 and 384 only where                           they are used for the purpose of mitigating CVA risk and managed as such, and are one of the following:                  

(a)single-name credit default swaps or other equivalent hedging instruments referencing the counterparty directly;                  

(b)index credit default swaps, provided that the basis between any individual counterparty spread and the spreads of index credit                           default swap hedges is reflected, to the satisfaction of the competent authority, in the value-at-risk and the stressed value-at-risk.                  

The requirement in point (b) that the basis between any individual counterparty spread and the spreads of index credit default                        swap hedges is reflected in the value-at-risk and the stressed value-at-risk shall also apply to cases where a proxy is used                        for the spread of a counterparty.                   

For all counterparties for which a proxy is used, an institution shall use reasonable basis time series out of a representative                        group of similar names for which a spread is available.                   

If the basis between any individual counterparty spread and the spreads of index credit default swap hedges is not reflected                        to the satisfaction of the competent authority, then an institution shall reflect only 50 % of the notional amount of index                        hedges in the value-at-risk and the stressed value-at-risk.                   

Over-hedging of the exposures with single name credit default swaps under the method laid out in Article 383 is not allowed.                   

2.An institution shall not reflect other types of counterparty risk hedges in the calculation of the own funds requirements                           for CVA risk. In particular, tranched or nth-to-default credit default swaps and credit linked notes are not eligible hedges                           for the purposes the calculation of the own funds requirements for CVA risk.                  

3.Eligible hedges that are included in the calculation of the own funds requirements for CVA risk shall not be included in the                           calculation of the own funds requirements for specific risk as set out in Title IV or treated as credit risk mitigation other                           than for the counterparty credit risk of the same portfolio of transaction.                  

# PART FOURU.K.LARGE EXPOSURES

## Article 387U.K.Subject matter

Institutions shall monitor and control their large exposures in accordance with this Part.                   

## Article 388U.K.Negative Scope

This Part shall not apply to investment firms that fulfil the criteria set out in Article 95(1) or Article 96(1).                   

This Part shall not apply to a group on the basis of its consolidated situation, if that group only includes investment firms                        referred to in Article 95(1) or Article 96(1) and ancillary companies and where that group does not include credit institutions.                   

## Article 389U.K.Definition

For the purposes of this Part, ‘exposures’, means any asset or off-balance sheet item referred to in Part Three, Title II, Chapter 2, without applying the risk weights                        or degrees of risk.                   

## Article 390U.K.Calculation of the exposure value

1.Exposures arising from the items referred to in Annex II shall be calculated in accordance with one of the methods set out                           in Part Three, Title II, Chapter 6.                  

2.Institutions with a permission to use the Internal Model Method in accordance with Article 283 may use the Internal Model                           Method for calculating the exposure value for repurchase transactions, securities or commodities lending or borrowing transactions,                           margin lending transactions and long settlement transactions.                  

3.The institutions that calculate the own funds requirements for their trading-book business in accordance with Part Three,                           Title IV, Chapter 2, Article 299 and Part Three, Title V and, as appropriate, with Part Three, Title IV, Chapter 5, shall                           calculate the exposures to individual clients which arise on the trading book by adding together the following items:                  

(a)the positive excess of an institution's long positions over its short positions in all the financial instruments issued by                           the client in question, the net position in each of the different instruments being calculated in accordance with the methods                           laid down in Part Three, Title IV, Chapter 2;                  

(b)the net exposure, in the case of the underwriting of a debt or an equity instrument;                  

(c)the exposures due to the transactions, agreements and contracts referred to in Articles 299 and 378 to 380 with the client                           in question, such exposures being calculated in the manner laid down in those Articles, for the calculation of exposure values.                  

For the purposes of point (b), the net exposure is calculated by deducting those underwriting positions which are subscribed                        or sub-underwritten by third parties on the basis of a formal agreement reduced by the factors set out in Article 345.                   

For the purposes of point (b), institutions shall set up systems to monitor and control their underwriting exposures between                        the time of the initial commitment and the next business day in the light of the nature of the risks incurred in the markets                        in question.                   

For the purposes of point (c), Part Three, Title II, Chapter 3 shall be excluded from the reference in Article 299.                   

4.The overall exposures to individual clients or groups of connected clients shall be calculated by adding together the exposures                           of the trading book and those of the non-trading book.                  

5.The exposures to groups of connected clients shall be calculated by adding together the exposures to individual clients in                           a group.                  

6.Exposures shall not include any of the following:                  

(a)in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the two working                           days following payment;                  

(b)in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement                           during five working days following payment or delivery of the securities, whichever the earlier;                  

(c)in the case of the provision of money transmission including the execution of payment services, clearing and settlement in                           any currency and correspondent banking or financial instruments clearing, settlement and custody services to clients, delayed                           receipts in funding and other exposures arising from client activity which do not last longer than the following business                           day;                  

(d)in the case of the provision of money transmission including the execution of payment services, clearing and settlement in                           any currency and correspondent banking, intra-day exposures to institutions providing those services;                  

(e)exposures deducted from own funds in accordance with Articles 36, 56 and 66.                  

7.In order to determine the overall exposure to a client or a group of connected clients, in respect of clients to which the                           institution has exposures through transactions referred to in points (m) and (o) of Article 112 or through other transactions                           where there is an exposure to underlying assets, an institution shall assess its underlying exposures taking into account                           the economic substance of the structure of the transaction and the risks inherent in the structure of the transaction itself,                           in order to determine whether it constitutes an additional exposure.                  

8.EBA shall develop draft regulatory technical standards to specify the following:                  

(a)the conditions and methodologies used to determine the overall exposure to a client or a group of connected clients in respect                           of the types of exposures referred to in paragraph 7;                  

(b)the conditions under which the structure of the transaction referred to in paragraph 7 does not constitute an additional exposure.                  

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

## Article 391U.K.Definition of an institution for large exposures purposes

For the purposes of calculating the value of exposures in accordance with this Part the term ‘institution’ shall include a private or public undertaking, including its branches, which, were it established in the Union, would fulfil                        the definition of the term ‘institution’ and has been authorised in a third country that applies prudential supervisory and regulatory requirements at least equivalent                        to those applied in the Union.                   

## Article 392U.K.Definition of a large exposure

An institution's exposure to a client or group of connected clients shall be considered a large exposure where its value is                        equal to or exceeds 10 % of its eligible capital.                   

## Article 393U.K.Capacity to identify and manage large exposures

An institution shall have sound administrative and accounting procedures and adequate internal control mechanisms for the                        purposes of identifying, managing, monitoring, reporting and recording all large exposures and subsequent changes to them,                        in accordance with this Regulation.                   

## Article 394U.K.Reporting requirements

1.An institution shall report the following information about every large exposure to the competent authorities, including large                           exposures exempted from the application of Article 395(1):                  

(a)the identification of the client or the group of connected clients to which an institution has a large exposure;                  

(b)the exposure value before taking into account the effect of the credit risk mitigation, when applicable;                  

(c)where used, the type of funded or unfunded credit protection;                  

(d)the exposure value after taking into account the effect of the credit risk mitigation calculated for the purpose of Article                           395(1).                  

Where an institution is subject to Part Three, Title II, Chapter 3 its 20 largest exposures on a consolidated basis, excluding                        those exempted from the application of Article 395(1) shall be made available to the competent authorities.                   

2.An institution shall report the following information to the competent authorities, in addition to reporting the information                           referred to in paragraph 1, in relation to its 10 largest exposures on a consolidated basis to institutions as well as its                           10 largest exposures on a consolidated basis to unregulated financial sector entities, including large exposures exempted                           from the application of Article 395(1):                  

(a)the identification of the client or the group of connected clients to which an institution has a large exposure;                  

(b)the exposure value before taking into account the effect of the credit risk mitigation, when applicable;                  

(c)where used, the type of funded or unfunded credit protection;                  

(d)the exposure value after taking into account the effect of the credit risk mitigation calculated for the purpose of Article                           395(1);                  

(e)the expected run-off of the exposure expressed as the amount maturing within monthly maturity buckets up to one year, quarterly                           maturity buckets up to three years and annually thereafter.                  

3.Reporting shall be carried out at least twice a year.                  

4.EBA shall develop draft implementing technical standards to specify the following:                  

(a)the uniform formats for the reporting referred to in paragraph 3 which shall be proportionate to the nature, scale and complexity                           of institutions' activities and the instructions for using those formats;                  

(b)the frequencies and dates of the reporting referred to in paragraph 3;                  

(c)the IT solutions to be applied for the reporting referred to in paragraph 3.                  

EBA shall submit those draft implementing technical standards to the Commission by 1 January 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

## Article 395U.K.Limits to large exposures

1.An institution shall not incur an exposure, after taking into account the effect of the credit risk mitigation in accordance                           with Articles 399 to 403, to a client or group of connected clients the value of which exceeds 25 % of its eligible capital.                           Where that client is an institution or where a group of connected clients includes one or more institutions, that value shall                           not exceed 25 % of the institution's eligible capital or EUR 150 million, whichever the higher, provided that the sum of exposure                           values, after taking into account the effect of the credit risk mitigation in accordance with Articles 399 to 403, to all                           connected clients that are not institutions does not exceed 25 % of the institution's eligible capital.                  

Where the amount of EUR 150 million is higher than 25 % of the institution's eligible capital the value of the exposure, after                        taking into account the effect of credit risk mitigation in accordance with Articles 399 to 403 shall not exceed a reasonable                        limit in terms of the institution's eligible capital. That limit shall be determined by the institution in accordance with                        the policies and procedures referred to in Article 81 of Directive 2013/36/EU, to address and control concentration risk.                        This limit shall not exceed 100 % of the institution's eligible capital.                   

Competent authorities may set a lower limit than EUR 150 million and shall inform EBA and the Commission thereof.                   

2.EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, taking into account the effect of the credit risk                           mitigation in accordance with Articles 399 to 403 as well as the outcomes of developments in the area of shadow banking and                           large exposures at the Union and international levels, issue guidelines by 31 December 2014 to set appropriate aggregate limits to such exposures or tighter individual limits on exposures to shadow banking entities                           which carry out banking activities outside a regulated framework.                  

In developing those guidelines, EBA shall consider whether the introduction of additional limits would have a material detrimental                        impact on the risk profile of institutions established in the Union, on the provision of credit to the real economy or on                        the stability and orderly functioning of financial markets.                   

By 31 December 2015 the Commission shall assess the appropriateness and the impact of imposing limits on exposures to shadow banking entities                        which carry out banking activities outside a regulated framework, taking into account Union and international developments                        in the area of shadow banking and large exposures as well as credit risk mitigation in accordance with Articles 399 to 403.                        The Commission shall submit the report to the European Parliament and the Council, together, if appropriate, with a legislative                        proposal on exposure limits to shadow banking entities which carry out banking activities outside a regulated framework.                   

3.Subject to Article 396, an institution shall at all times comply with the relevant limit laid down in paragraph 1.                  

4.Assets constituting claims and other exposures onto recognised third-country investment firms may be subject to the same treatment                           as set out in paragraph 1.                  

5.The limits laid down in this Article may be exceeded for the exposures on the institution's trading book if the following                           conditions are met:                  

(a)the exposure on the non-trading book to the client or group of connected clients in question does not exceed the limit laid                           down in paragraph 1, this limit being calculated with reference to eligible capital, so that the excess arises entirely on                           the trading book;                  

(b)the institution meets an additional own funds requirement on the excess in respect of the limit laid down in paragraph 1 which                           is calculated in accordance with Articles 397 and 398;                  

(c)where 10 days or less have elapsed since the excess occurred, the trading-book exposure to the client or group of connected                           clients in question shall not exceed 500 % of the institution's eligible capital;                  

(d)any excesses that have persisted for more than 10 days do not, in aggregate, exceed 600 % of the institution's eligible capital.                  

In each case in which the limit has been exceeded, the institution shall report the amount of the excess and the name of the                        client concerned and, where applicable, the name of the group of connected clients concerned, without delay to the competent                        authorities.                   

6.For the purpose of this paragraph, structural measures mean measures adopted by a Member State and implemented by the relevant                           competent authorities of that Member State before the entry into force of a legal act explicitly harmonising such measures,                           that require credit institutions authorised in that Member State to reduce their exposures to different legal entities depending                           on their activities, irrespective of where those activities are located, with a view to protecting depositors and preserving                           financial stability.                  

Notwithstanding paragraph 1 of this Article and Article 400(1)(f), where Member States adopt national laws requiring structural                        measures to be taken within a banking group, competent authorities may require the institutions of the banking group which                        hold deposits that are covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC of the European Parliament                        and of the Council of 30 May 1994 on deposit-guarantee schemes (30)  or an equivalent deposit guarantee scheme in a third country to apply a large exposure limit below 25 % but not lower than                        15 % between 28 June 2013 and 30 June 2015, and than 10 % from 1 July 2015 on a sub-consolidated basis in accordance with Article 11(5) to intragroup exposures where these exposures consist of exposures                        to an entity that does not belong to the same subgroup as regards the structural measures.                   

For the purpose of this paragraph, the following conditions shall be met:                   

(a)all entities belonging to a same subgroup as regards the structural measures are considered as one client or group of connected                           clients;                  

(b)the competent authorities apply a uniform limit to the exposures referred to in the first subparagraph.                  

Applying this approach shall be without prejudice to effective supervision on a consolidated basis and shall not entail disproportionate                        adverse effects on the whole or parts of the financial system in other Member States or in the Union as a whole or form or                        create an obstacle to the functioning of the internal market.                   

7.Before adopting the specific structural measures as referred to in paragraph 6 relating to large exposures, the competent                           authorities shall notify the Council, the Commission, the competent authorities concerned and EBA at least two months prior                           to the publication of the decision to adopt the structural measures, and submit relevant quantitative or qualitative evidence                           of all of the following:                  

(a)the scope of the activities that are subject to the structural measures;                  

(b)an explanation as to why such draft measures are deemed to be suitable, effective and proportionate to protect depositors;                  

(c)an assessment of the likely positive or negative impact of the measures on the internal market based on information which                           is available to the Member State.                  

8.The power to adopt an implementing act to accept or reject the proposed national measures referred to in paragraph 7 is conferred                           on the Commission acting in accordance with the procedure referred to in Article 464(2).                  

Within one month of receiving the notification referred to in paragraph 7, EBA shall provide its opinion on the points mentioned                        in that paragraph to the Council, the Commission and the Member State concerned. Competent authorities concerned may also                        provide their opinions on the points mentioned in that paragraph to the Council, the Commission and the Member State concerned.                   

Taking utmost account of the opinions referred to in the second subparagraph and if there is robust and strong evidence that                        the measures have a negative impact on the internal market that outweighs the financial stability benefits, the Commission                        shall, within two months of receiving the notification, reject the proposed national measures. Otherwise, the Commission shall                        accept the proposed national measures for an initial period of 2 years and where appropriate the measures may be subject to                        amendment.                   

The Commission shall only reject the proposed national measures if it considers the proposed national measures entail disproportionate                        adverse effects on the whole or parts of the financial system in other Member States or in the Union as a whole, thus forming                        or creating an obstacle to the functioning of the internal market or to the free movement of capital in accordance with the                        provisions of the TFEU.                   

The assessment of the Commission shall take account of the opinion of EBA and shall take into account the evidence presented                        in accordance with paragraph 7.                   

Before the expiry of the measures, the competent authorities may propose new measures for the extension of the period of application                        for an additional period of 2 years each time. In this case, they shall notify the Commission, the Council, the competent                        authorities concerned and EBA. Approval of the new measures shall be subject to the process set out in this Article. This                        Article shall be without prejudice to Article 458.                   

## Article 396U.K.Compliance with large exposures requirements

1.If, in an exceptional case, exposures exceed the limit set out in Article 395(1), the institution shall report the value of                           the exposure without delay to the competent authorities which may, where the circumstances warrant it, allow the institution                           a limited period of time in which to comply with the limit.                  

Where the amount of EUR 150 million referred to in Article 395(1) is applicable, the competent authorities may allow on a                        case-by-case basis the 100 % limit in terms of the institution's eligible capital to be exceeded.                   

2.Where compliance by an institution on an individual or sub-consolidated basis with the obligations imposed in this Part is                           waived under Article 7(1), or the provisions of Article 9 are applied in the case of parent institutions in a Member State,                           measures shall be taken to ensure the satisfactory allocation of risks within the group.                  

## Article 397U.K.Calculating additional own funds requirements for large exposures in the trading book

1.The excess referred to in Article 395(5)(b) shall be calculated by selecting those components of the total trading exposure                           to the client or group of connected clients in question which attract the highest specific-risk requirements in Part Three,                           Title IV, Chapter 2 and/or requirements in Article 299 and Part Three, Title V, the sum of which equals the amount of the                           excess referred to in point (a) of Article 395(5).                  

2.Where the excess has not persisted for more than 10 days, the additional capital requirement shall be 200 % of the requirements                           referred to in paragraph 1, on these components.                  

3.As from 10 days after the excess has occurred, the components of the excess, selected in accordance with paragraph 1, shall                           be allocated to the appropriate line in Column 1 of Table 1 in ascending order of specific-risk requirements in Part Three,                           Title IV, Chapter 2 and/or requirements in Article 299 and Part Three, Title V. The additional own funds requirement shall                           be equal to the sum of the specific-risk requirements in Part Three, Title IV, Chapter 2 and/or the Article 299 and Part Three,                           Title V requirements on these components, multiplied by the corresponding factor in Column 2 of Table 1.                  

### Table 1

## Article 398U.K.Procedures to prevent institutions from avoiding the additional own funds requirement

Institutions shall not deliberately avoid the additional own funds requirements set out in Article 397 that they would otherwise                        incur, on exposures exceeding the limit laid down in Article 395(1) once those exposures have been maintained for more than                        10 days, by means of temporarily transferring the exposures in question to another company, whether within the same group                        or not, and/or by undertaking artificial transactions to close out the exposure during the 10-day period and create a new                        exposure.                   

Institutions shall maintain systems which ensure that any transfer which has the effect referred to in the first subparagraph                        is immediately reported to the competent authorities.                   

## Article 399U.K.Eligible credit mitigation techniques

1.For the purposes of Articles 400 to 403 the term ‘guarantee’ shall include credit derivatives recognised under Part Three, Title II, Chapter 4 other than credit linked notes.                  

2.Subject to paragraph 3 of this Article, where, under Articles 400 to 403 the recognition of funded or unfunded credit protection                           is permitted, this shall be subject to compliance with the eligibility requirements and other requirements set out in Part                           Three, Title II, Chapter 4.                  

3.Where an institution relies upon Article 401(2), the recognition of funded credit protection shall be subject to the relevant                           requirements under Part Three, Title II, Chapter 3. For the purposes of this Part, an institution shall not take into account                           the collateral referred to in Article 199(5) to (7), unless permitted under Article 402.                  

4.Institutions shall analyse, to the extent possible, their exposures to collateral issuers, providers of unfunded credit protection                           and underlying assets pursuant to Article 390(7) for possible concentrations and where appropriate take action and report                           any significant findings to their competent authority.                  

## Article 400U.K.Exemptions

1.The following exposures shall be exempted from the application of Article 395(1):                  

(a)asset items constituting claims on central governments, central banks or public sector entities which, unsecured, would be                           assigned a 0 % risk weight under Part Three, Title II, Chapter 2;                  

(b)asset items constituting claims on international organisations or multilateral development banks which, unsecured, would be                           assigned a 0 % risk weight under Part Three, Title II, Chapter 2;                  

(c)asset items constituting claims carrying the explicit guarantees of central governments, central banks, international organisations,                           multilateral development banks or public sector entities, where unsecured claims on the entity providing the guarantee would                           be assigned a 0 % risk weight under Part Three, Title II, Chapter 2;                  

(d)other exposures attributable to, or guaranteed by, central governments, central banks, international organisations, multilateral                           development banks or public sector entities, where unsecured claims on the entity to which the exposure is attributable or                           by which it is guaranteed would be assigned a 0 % risk weight under Part Three, Title II, Chapter 2;                  

(e)asset items constituting claims on regional governments or local authorities of Member States where those claims would be                           assigned a 0 % risk weight under Part Three, Title II, Chapter 2 and other exposures to or guaranteed by those regional governments                           or local authorities, claims on which would be assigned a 0 % risk weight under Part Three, Title II, Chapter 2;                  

(f)exposures to counterparties referred to in Article 113(6) or (7) if they would be assigned a 0 % risk weight under Part Three,                           Title II, Chapter 2. Exposures that do not meet those criteria, whether or not exempted from Article 395(1) shall be treated                           as exposures to a third party;                  

(g)asset items and other exposures secured by collateral in the form of cash deposits placed with the lending institution or                           with an institution which is the parent undertaking or a subsidiary of the lending institution;                  

(h)asset items and other exposures secured by collateral in the form of certificates of deposit issued by the lending institution                           or by an institution which is the parent undertaking or a subsidiary of the lending institution and lodged with either of                           them;                  

(i)exposures arising from undrawn credit facilities that are classified as low-risk off-balance sheet items in Annex I and provided                           that an agreement has been concluded with the client or group of connected clients under which the facility may be drawn only                           if it has been ascertained that it will not cause the limit applicable under Article 395(1) to be exceeded;                  

(j)trade exposures to central counterparties and default fund contributions to central counterparties;                  

(k)exposures to deposit guarantee schemes under Directive 94/19/EC arising from the funding of those schemes, if the member institutions                           of the scheme have a legal or contractual obligation to fund the scheme.                  

Cash received under a credit linked note issued by the institution and loans and deposits of a counterparty to or with the                        institution which are subject to an on-balance sheet netting agreement recognised under Part Three, Title II, Chapter 4 shall                        be deemed to fall under point (g).                   

2.Competent authorities may fully or partially exempt the following exposures:                  

(a)covered bonds falling within the terms of Article 129(1), (3) and (6);                  

(b)asset items constituting claims on regional governments or local authorities of Member States where those claims would be                           assigned a 20 % risk weight under Part Three, Title II, Chapter 2 and other exposures to or guaranteed by those regional governments                           or local authorities, claims on which would be assigned a 20 % risk weight under Part Three, Title II, Chapter 2;                  

(c)exposures, including participations or other kinds of holdings, incurred by an institution to its parent undertaking, to other                           subsidiaries of that parent undertaking or to its own subsidiaries, in so far as those undertakings are covered by the supervision                           on a consolidated basis to which the institution itself is subject, in accordance with this Regulation, Directive 2002/87/EC                           or with equivalent standards in force in a third country; exposures that do not meet these criteria, whether or not exempted                           from Article 395(1), shall be treated as exposures to a third party;                  

(d)asset items constituting claims on and other exposures, including participations or other kinds of holdings, to regional or                           central credit institutions with which the credit institution is associated in a network in accordance with legal or statutory                           provisions and which are responsible, under those provisions, for cash-clearing operations within the network;                  

(e)asset items constituting claims on and other exposures to credit institutions incurred by credit institutions, one of which                           operates on a non-competitive basis and provides or guarantees loans under legislative programmes or its statutes, to promote                           specified sectors of the economy under some form of government oversight and restrictions on the use of the loans, provided                           that the respective exposures arise from such loans that are passed on to the beneficiaries via credit institutions or from                           the guarantees of these loans;                  

(f)asset items constituting claims on and other exposures to institutions, provided that those exposures do not constitute such                           institutions' own funds, do not last longer than the following business day and are not denominated in a major trading currency;                  

(g)asset items constituting claims on central banks in the form of required minimum reserves held at those central banks which                           are denominated in their national currencies;                  

(h)asset items constituting claims on central governments in the form of statutory liquidity requirements held in government                           securities which are denominated and funded in their national currencies provided that, at the discretion of the competent                           authority, the credit assessment of those central governments assigned by a nominated ECAI is investment grade;                  

(i)50 % of medium/low risk off-balance sheet documentary credits and of medium/low risk off-balance sheet undrawn credit facilities                           referred to in Annex I and subject to the competent authorities' agreement, 80 % of guarantees other than loan guarantees                           which have a legal or regulatory basis and are given for their members by mutual guarantee schemes possessing the status of                           credit institutions;                  

(j)legally required guarantees used when a mortgage loan financed by issuing mortgage bonds is paid to the mortgage borrower                           before the final registration of the mortgage in the land register, provided that the guarantee is not used as reducing the                           risk in calculating the risk -weighted exposure amounts;                  

(k)assets items constituting claims on and other exposures to recognised exchanges.                  

3.Competent authorities may only make use of the exemption provided for in paragraph 2 where the following conditions are met:                  

(a)the specific nature of the exposure, the counterparty or the relationship between the institution and the counterparty eliminate                           or reduce the risk of the exposure; and                  

(b)any remaining concentration risk can be addressed by other equally effective means such as the arrangements, processes and                           mechanisms provided for in Article 81 of Directive 2013/36/EU.                  

Competent authorities shall inform EBA whether or not they intend to use any of the exemptions provided for in paragraph 2                        in accordance with points (a) and (b) of this paragraph and shall consult EBA on this choice.                   

## Article 401U.K.Calculating the effect of the use of credit risk mitigation techniques

1.For calculating the value of exposures for the purposes of Article 395(1) an institution may use the ‘fully adjusted exposure value’ as calculated under Part Three, Title II, Chapter 4 taking into account the credit risk mitigation, volatility adjustments,                           and any maturity mismatch (E*).                  

2.An institution permitted to use own estimates of LGDs and conversion factors for an exposure class under Part Three, Title                           II, Chapter 3 may, subject to a permission by the competent authorities recognise the effects of financial collateral in calculating                           the value of exposures for the purposes of Article 395(1).                  

Competent authorities shall grant the permission referred to in preceding subparagraph only if the institution can estimate                        the effects of financial collateral on their exposures separately from other LGD-relevant aspects.                   

The estimates produced by the institution shall be sufficiently suitable for reducing the exposure value for the purposes                        of compliance with the provisions of Article 395.                   

Where an institution is permitted to use its own estimates of the effects of financial collateral, it shall do so on a basis                        consistent with the approach adopted in the calculation of the own funds requirements in accordance with this Regulation.                   

Institutions permitted to use own estimates of LGDs and conversion factors for an exposure class under Part Three, Title II,                        Chapter 3, which do not calculate the value of their exposures using the method referred to in the first subparagraph of this                        paragraph, may use the Financial Collateral Comprehensive Method or the approach set out in Article 403(1)(b) for calculating                        the value of exposures.                   

3.An institution that makes use of the Financial Collateral Comprehensive Method or is permitted to use the method described                           in paragraph 2 of this Article in calculating the value of exposures for the purposes of Article 395(1) shall conduct periodic                           stress tests of their credit-risk concentrations, including in relation to the realisable value of any collateral taken.                  

These periodic stress tests referred to in the first subparagraph shall address risks arising from potential changes in market                        conditions that could adversely impact the institutions' adequacy of own funds and risks arising from the realisation of collateral                        in stressed situations.                   

The stress tests carried out shall be adequate and appropriate for the assessment of such risks.                   

In the event that the periodic stress test indicates a lower realisable value of collateral taken than would be permitted                        to be taken into account while making use of the Financial Collateral Comprehensive Method or the method described in paragraph                        2 as appropriate, the value of collateral permitted to be recognised in calculating the value of exposures for the purposes                        of Article 395(1) shall be reduced accordingly.                   

Institutions referred to in the first subparagraph shall include the following in their strategies to address concentration                        risk:                   

(a)policies and procedures to address risks arising from maturity mismatches between exposures and any credit protection on those                           exposures;                  

(b)policies and procedures in the event that a stress test indicates a lower realisable value of collateral than taken into account                           while making use of the Financial Collateral Comprehensive Method or the method described in paragraph 2;                  

(c)policies and procedures relating to concentration risk arising from the application of credit risk mitigation techniques,                           and in particular large indirect credit exposures, for example to a single issuer of securities taken as collateral.                  

## Article 402U.K.Exposures arising from mortgage lending

1.For the calculation of exposure values for the purposes of Article 395, an institution may reduce the value of an exposure                           or any part of an exposure fully secured by immovable property in accordance with Article 125(1) by the pledged amount of                           the market or mortgage lending value of the immovable property concerned but not more than 50 % of the market or 60 % of the                           mortgage lending value in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending                           value in statutory or regulatory provisions, if all of the following conditions are met:                  

(a)the competent authorities of the Member States have not set a higher risk weight than 35 % for exposures or parts of exposures                           secured by residential property in accordance with Article 124(2);                  

(b)the exposure or part of the exposure is fully secured by:                  

mortgages on residential property; or                            

a residential property in a leasing transaction under which the lessor retains full ownership of the residential property                                 and the lessee has not yet exercised his option to purchase;                            

(c)the requirements in Article 208 and Article 229(1) are met.                  

2.For the calculation of exposure values for the purposes of Article 395, an institution may reduce the value of an exposure                           or any part of an exposure fully secured by immovable property in accordance with Article 126(1) by the pledged amount of                           the market or mortgage lending value of the immovable property concerned but not more than 50 % of the market or 60 % of the                           mortgage lending value in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending                           value in statutory or regulatory provisions, if all of the following conditions are met:                  

(a)the competent authorities of the Member States have not set a higher risk weight than 50 % for exposures or parts of exposures                           secured by commercial immovable property in accordance with Article 124(2);                  

(b)the exposure is fully secured by:                  

mortgages on offices or other commercial premises; or                            

offices or other commercial premises and the exposures related to immovable property leasing transactions;                            

(c)the requirements in Article 126(2)(a), Article 208 and Article 229(1) are met;                  

(d)the commercial immovable property is fully constructed.                  

3.An institution may treat an exposure to a counterparty that results from a reverse repurchase agreement under which the institution                           has purchased from the counterparty non-accessory independent mortgage liens on immovable property of third parties as a number                           of individual exposures to each of those third parties, provided that all of the following conditions are met:                  

(a)the counterparty is an institution;                  

(b)the exposure is fully secured by liens on the immovable property of those third parties that have been purchased by the institution                           and the institution is able to exercise those liens;                  

(c)the institution has ensured that the requirements in Article 208 and Article 229(1) are met;                  

(d)the institution becomes beneficiary of the claims that the counterparty has against the third parties in the event of default,                           insolvency or liquidation of the counterparty;                  

(e)the institution reports to the competent authorities in accordance with Article 394 the total amount of exposures to each                           other institution that are treated in accordance with this paragraph.                  

For these purposes, the institution shall assume that it has an exposure to each of those third parties for the amount of                        the claim that the counterparty has on the third party instead of the corresponding amount of the exposure to the counterparty.                        The remainder of the exposure to the counter party, if any, shall continue to be treated as an exposure to the counter party.                   

## Article 403U.K.Substitution approach

1.Where an exposure to a client is guaranteed by a third party, or secured by collateral issued by a third party, an institution                           may:                  

(a)treat the portion of the exposure which is guaranteed as having been incurred to the guarantor rather than to the client provided                           that the unsecured exposure to the guarantor would be assigned an equal or lower risk weight than a risk weight of the unsecured                           exposure to the client under Part Three, Title II, Chapter 2;                  

(b)treat the portion of the exposure collateralised by the market value of recognised collateral as having been incurred to the                           third party rather than to the client, if the exposure is secured by collateral and provided that the collateralised portion                           of the exposure would be assigned an equal or lower risk weight than a risk weight of the unsecured exposure to the client                           under Part Three, Title II, Chapter 2.                  

The approach referred to in point (b) of the first subparagraph shall not be used by an institution where there is a mismatch                        between the maturity of the exposure and the maturity of the protection.                   

For the purpose of this Part, an institution may use both the Financial Collateral Comprehensive Method and the treatment                        set out in point (b) of the first subparagraph only where it is permitted to use both the Financial Collateral Comprehensive                        Method and the Financial Collateral Simple Method for the purposes of Article 92.                   

2.Where an institution applies point (a) of paragraph 1:                  

(a)where the guarantee is denominated in a currency different from that in which the exposure is denominated the amount of the                           exposure deemed to be covered shall be calculated in accordance with the provisions on the treatment of currency mismatch                           for unfunded credit protection set out in Part Three, Title II, Chapter 4;                  

(b)a mismatch between the maturity of the exposure and the maturity of the protection shall be treated in accordance with the                           provisions on the treatment of maturity mismatch set out in Part Three, Title II, Chapter 4;                  

(c)partial coverage may be recognised in accordance with the treatment set out in Part Three, Title II, Chapter 4.                  

# PART FIVEU.K.EXPOSURES TO TRANSFERRED CREDIT RISK

## TITLE IU.K.GENERAL PROVISIONS FOR THIS PART

### Article 404U.K.Scope of application

Titles II and III shall apply to new securitisations issued on or after 1 January 2011. Titles II and III shall, after 31 December 2014, apply to existing securitisations where new underlying exposures are added or substituted after that date.                   

## TITLE IIU.K.REQUIREMENTS FOR INVESTOR INSTITUTIONS

### Article 405U.K.Retained interest of the issuer

1.An institution, other than when acting as an originator, a sponsor or original lender, shall be exposed to the credit risk                           of a securitisation position in its trading book or non-trading book only if the originator, sponsor or original lender has                           explicitly disclosed to the institution that it will retain, on an ongoing basis, a material net economic interest which,                           in any event, shall not be less than 5 %.                  

Only any of the following qualifies as retention of a material net economic interest of not less than 5 %:                   

(a)retention of no less than 5 % of the nominal value of each of the tranches sold or transferred to the investors;                  

(b)in the case of securitisations of revolving exposures, retention of the originator's interest of no less than 5 % of the nominal                           value of the securitised exposures;                  

(c)retention of randomly selected exposures, equivalent to no less than 5 % of the nominal value of the securitised exposures,                           where such exposures would otherwise have been securitised in the securitisation, provided that the number of potentially                           securitised exposures is no less than 100 at origination;                  

(d)retention of the first loss tranche and, if necessary, other tranches having the same or a more severe risk profile than those                           transferred or sold to investors and not maturing any earlier than those transferred or sold to investors, so that the retention                           equals in total no less than 5 % of the nominal value of the securitised exposures;                  

(e)retention of a first loss exposure not less than 5 % of every securitised exposure in the securitisation.                  

Net economic interest is measured at the origination and shall be maintained on an ongoing basis. The net economic interest,                        including retained positions, interest or exposures, shall not be subject to any credit risk mitigation or any short positions                        or any other hedge and shall not be sold. The net economic interest shall be determined by the notional value for off-balance                        sheet items.                   

There shall be no multiple applications of the retention requirements for any given securitisation.                   

2.Where an EU parent credit institution, an EU financial holding company, an EU mixed financial holding company or one of its                           subsidiaries, as an originator or a sponsor, securitises exposures from several credit institutions, investment firms or other                           financial institutions which are included in the scope of supervision on a consolidated basis, the requirement referred to                           in paragraph 1 may be satisfied on the basis of the consolidated situation of the related EU parent credit institution, EU                           financial holding company, or EU mixed financial holding company.                  

The first subparagraph shall apply only where credit institutions, investment firms or financial institutions which created                        the securitised exposures have committed themselves to adhere to the requirements set out in Article 408 and deliver, in a                        timely manner, to the originator or sponsor and to the EU parent credit institution, EU financial holding company or EU mixed                        financial holding company the information needed to satisfy the requirements referred to in Article 409.                   

3.Paragraph 1 shall not apply where the securitised exposures are exposures on or fully, unconditionally and irrevocably guaranteed                           by the following entities:                  

(a)central governments or central banks;                  

(b)regional governments, local authorities and public sector entities of Member States;                  

(c)institutions to which a 50 % risk weight or less is assigned under Part Three, Title II, Chapter 2;                  

(d)multilateral development banks.                  

4.Paragraph 1 shall not apply to transactions based on a clear, transparent and accessible index, where the underlying reference                           entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities                           other than securitisation positions.                  

### Article 406U.K.Due diligence

1.Before becoming exposed to the risks of a securitisation, and as appropriate thereafter, institutions shall be able to demonstrate                           to the competent authorities for each of their individual securitisation positions, that they have a comprehensive and thorough                           understanding of and have implemented formal policies and procedures appropriate to their trading book and non-trading book                           and commensurate with the risk profile of their investments in securitised positions for analysing and recording:                  

(a)information disclosed under Article 405(1), by originators, sponsors or original lenders to specify the net economic interest                           that they maintain, on an ongoing basis, in the securitisation;                  

(b)the risk characteristics of the individual securitisation position;                  

(c)the risk characteristics of the exposures underlying the securitisation position;                  

(d)the reputation and loss experience in earlier securitisations of the originators or sponsors in the relevant exposure classes                           underlying the securitisation position;                  

(e)the statements and disclosures made by the originators or sponsors, or their agents or advisors, about their due diligence                           on the securitised exposures and, where applicable, on the quality of the collateral supporting the securitised exposures;                  

(f)where applicable, the methodologies and concepts on which the valuation of collateral supporting the securitised exposures                           is based and the policies adopted by the originator or sponsor to ensure the independence of the valuer;                  

(g)all the structural features of the securitisation that can materially impact the performance of the institution's securitisation                           position, such as the contractual waterfall and waterfall related triggers, credit enhancements, liquidity enhancements, market                           value triggers, and deal-specific definitions of default.                  

Institutions shall regularly perform their own stress tests appropriate to their securitisation positions. To this end, institutions                        may rely on financial models developed by an ECAI provided that institutions can demonstrate, when requested, that they took                        due care prior to investing to validate the relevant assumptions in and structuring of the models and to understand methodology,                        assumptions and results.                   

2.Institutions, other than when acting as originators or sponsors or original lenders, shall establish formal procedures appropriate                           to their trading book and non-trading book and commensurate with the risk profile of their investments in securitised positions                           to monitor on an ongoing basis and in a timely manner performance information on the exposures underlying their securitisation positions.                           Where relevant, this shall include the exposure type, the percentage of loans more than 30, 60 and 90 days past due, default                           rates, prepayment rates, loans in foreclosure, collateral type and occupancy, and frequency distribution of credit scores                           or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution                           of loan to value ratios with band widths that facilitate adequate sensitivity analysis. Where the underlying exposures are                           themselves securitisation positions, institutions shall have the information set out in this subparagraph not only on the                           underlying securitisation tranches, such as the issuer name and credit quality, but also on the characteristics and performance                           of the pools underlying those securitisation tranches.                  

Institutions shall also apply the same standards of analysis to participations or underwritings in securitisation issues purchased                        from third parties whether such participations or underwritings are to be held on their trading or non-trading book.                   

### Article 407U.K.Additional risk weight

Where an institution does not meet the requirements in Article 405, 406 or 409 in any material respect by reason of the negligence                        or omission of the institution, the competent authorities shall impose a proportionate additional risk weight of no less than                        250 % of the risk weight (capped at 1250 %) which shall apply to the relevant securitisation positions in the manner specified                        in Article 245(6) or Article 337(3) respectively. The additional risk weight shall progressively increase with each subsequent                        infringement of the due diligence provisions.                   

The competent authorities shall take into account the exemptions for certain securitisations provided in Article 405(3) by                        reducing the risk weight it would otherwise impose under this Article in respect of a securitisation to which Article 405(3)                        applies.                   

## TITLE IIIU.K.REQUIREMENTS FOR SPONSOR AND ORIGINATOR INSTITUTIONS

### Article 408U.K.Criteria for credit granting

Sponsor and originator institutions shall apply the same sound and well-defined criteria for credit-granting in accordance                        with the requirements of Article 79 of Directive 2013/36/EU to exposures to be securitised as they apply to exposures to be                        held in their own non-trading book. To this end the same processes for approving and, where relevant, amending, renewing and                        re-financing credits shall be applied by the originator and sponsor institutions.                   

Where the requirements referred to in the first subparagraph of this Article are not met, Article 245(1) shall not be applied                        by an originator institution and that originator institution shall not be allowed to exclude the securitised exposures from                        the calculation of its capital requirements under this Regulation.                   

### Article 409U.K.Disclosure to investors

Institutions acting as an originator, a sponsor or original lender shall disclose to investors the level of their commitment                        under Article 405 to maintain a net economic interest in the securitisation. Sponsor and originator institutions shall ensure                        that prospective investors have readily available access to all materially relevant data on the credit quality and performance                        of the individual underlying exposures, cash flows and collateral supporting a securitisation exposure as well as such information                        that is necessary to conduct comprehensive and well informed stress tests on the cash flows and collateral values supporting                        the underlying exposures. For that purpose, materially relevant data shall be determined as at the date of the securitisation                        and where appropriate due to the nature of the securitisation thereafter.                   

### Article 410U.K.Uniform condition of application

1.EBA shall report to the Commission annually on measures taken by the competent authorities in order to ensure the compliance                           with the requirements of Titles II and III by institutions.                  

2.EBA shall develop draft regulatory technical standards to specify in greater detail:                  

(a)the requirements in Articles 405 and 406 applying to institutions becoming exposed to the risk of a securitisation;                  

(b)the retention requirement, including the qualifying criteria for retaining a material net economic interest as referred to                           in Article 405 and the level of retention;                  

(c)the due diligence requirements in Article 406 for institutions becoming exposed to a securitisation position; and                  

(d)the requirements in Articles 408 and 409 applying to sponsor and originator institutions.                  

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU)No 1093/2010.                   

3.EBA shall develop draft implementing technical standards to facilitate the convergence of supervisory practices with regard                           to the implementation of Article 407, including the measures to be taken in the case of breach of the due diligence and risk                           management obligations.                  

EBA shall submit those draft implementing technical standards to the Commission by 1 January 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

# PART SIXU.K.LIQUIDITY

## TITLE IU.K.DEFINITIONS AND LIQUIDITY COVERAGE REQUIREMENT

### Article 411U.K.Definitions

For the purposes of this Part, the following definitions apply:                   

‘financial customer’ means a customer that performs one or more of the activities listed in Annex I to Directive 2013/36/EU as its main business,                                 or is one of the following:                            

a credit institution;                                     

an investment firm;                                     

an SSPE;                                     

a CIU;                                     

a non-open ended investment scheme;                                     

an insurance undertaking;                                     

a financial holding company or mixed-financial holding company.                                     

‘retail deposit’ means a liability to a natural person or to an SME, where the natural person or the SME would qualify for the retail exposure                                 class under the Standardised or IRB approaches for credit risk, or a liability to a company which is eligible for the treatment                                 set out in Article 153(4) and where the aggregate deposits by all such enterprises on a group basis do not exceed EUR 1 million.                            

### Article 412U.K.Liquidity coverage requirement

1.Institutions shall hold liquid assets, the sum of the values of which covers the liquidity outflows less the liquidity inflows                           under stressed conditions so as to ensure that institutions maintain levels of liquidity buffers which are adequate to face                           any possible imbalance between liquidity inflows and outflows under gravely stressed conditions over a period of thirty days.                           During times of stress, institutions may use their liquid assets to cover their net liquidity outflows.                  

2.Institutions shall not count double liquidity inflows and liquid assets.                  

3.Institutions may use the liquid assets referred to in paragraph 1 to meet their obligations under stressed circumstances as                           specified under Article 414.                  

4.The provisions set out in Title II shall apply exclusively for the purposes of specifying reporting obligations set out in                           Article 415.                  

5.Member States may maintain or introduce national provisions in the area of liquidity requirements before binding minimum standards                           for liquidity coverage requirements are specified and fully introduced in the Union in accordance with Article 460. Member                           States or competent authorities may require domestically authorised institutions, or a subset of those institutions, to maintain                           a higher liquidity coverage requirement up to 100 % until the binding minimum standard is fully introduced at a rate of 100                           % in accordance with Article 460.                  

### Article 413U.K.Stable Funding

1.Institutions shall ensure that long term obligations are adequately met with a diversity of stable funding instruments under                           both normal and stressed conditions.                  

2.The provisions set out in Title III shall apply exclusively for the purposes of specifying reporting obligations set out in                           Article 415.                  

3.Member States may maintain or introduce national provisions in the area of stable funding requirements before binding minimum                           standards for net stable funding requirements are specified and introduced in the Union in accordance with Article 510.                  

### Article 414U.K.Compliance with liquidity requirements

Where an institution does not meet, or expects not to meet the requirement set out in Article 412 or the general obligation                        set out in Article 413(1), including during times of stress, it shall immediately notify the competent authorities and shall                        submit without undue delay to the competent authorities a plan for the timely restoration of compliance with Article 412 or                        Article 413(1). Until compliance has been restored, the institution shall report the items referred to in Title II or Title III, as appropriate, daily by the                        end of each business day unless the competent authority authorises a lower reporting frequency and a longer reporting delay.                        Competent authorities shall only grant such authorisations based on the individual situation of an institution and taking                        into account the scale and complexity of the institution's activities. They shall monitor the implementation of the restoration                        plan and shall require a more speedy restoration if appropriate.                   

## TITLE IIU.K.LIQUIDITY REPORTING

### Article 415U.K.Reporting obligation and reporting format

1.Institutions shall report in a single currency, regardless of their actual denomination, to the competent authorities the                           items referred to in Titles II and III and their components, including the composition of their liquid assets in accordance                           with Article 416. Until the liquidity coverage requirement in Part Six is fully specified and implemented as a minimum standard                           in accordance with Article 460, institutions shall report the items set in Title II and Annex III. Institutions shall report                           the items in Title III. The reporting frequency shall not be less than monthly for items referred to in Title II and Annex                           III and not less than quarterly for items referred to in Title III.                  

The reporting formats shall include all the necessary information and shall allow EBA to assess whether secured lending and                        collateral swap transactions where liquid assets referred to in points (a), (b) and (c) of Article 416(1) have been obtained                        against collateral that does not qualify under points (a), (b) and (c) of Article 416(1) have been properly unwound.                   

2.An institution shall report separately to the competent authorities of the home Member State the items referred to in paragraph                           1 in the currency below when it has:                  

(a)aggregate liabilities in a currency different from the reporting currency under paragraph 1 amounting to or exceeding 5 %                           of the institution's or the single liquidity sub-group's total liabilities; or                  

(b)a significant branch in accordance with Article 51 of Directive 2013/36/EU in a host Member State using a currency different                           from the reporting currency under paragraph 1 of this Article.                  

3.EBA shall develop draft implementing technical standards to specify the following:                  

(a)uniform formats and IT solutions with associated instructions for frequencies and reference and remittance dates. The reporting                           formats and frequencies shall be proportionate to the nature, scale and complexity of the different activities of the institutions                           and shall comprise the reporting required in accordance with paragraphs 1 and 2;                  

(b)additional liquidity monitoring metrics required, to allow competent authorities to obtain a comprehensive view of the liquidity                           risk profile, proportionate to the nature, scale and complexity of an institution's activities.                  

EBA shall submit to the Commission those draft implementing technical standards for the items specified in point (a) by 28 July 2013 and for the items specified in point (b) by 1 January 2014.                   

Until the full introduction of binding liquidity requirements, competent authorities may continue to collect information through                        monitoring tools for the purpose of monitoring compliance with existing national liquidity standards.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

4.The competent authorities of the home Member State shall upon request provide in a timely manner and by electronic means the                           competent authorities and the central bank of the host Member States and EBA with the individual reporting in accordance with                           this Article.                  

5.Competent authorities that exercise supervision on a consolidated basis in accordance with Article 111 of Directive 2013/36/EU                           shall upon request provide in a timely manner and by electronic means the following authorities with all reporting submitted                           by the institution in accordance with the uniform reporting formats referred to in paragraph 3:                  

(a)the competent authorities and the national central bank of the host Member States in which there are significant branches                           in accordance with Article 51 of Directive 2013/36/EU of the parent institution or institutions controlled by the same parent                           financial holding company;                  

(b)the competent authorities that have authorised subsidiaries of the parent institution or institutions controlled by the same                           parent financial holding company and the central bank of the same Member State;                  

(c)EBA;                  

(d)ECB.                  

6.The competent authorities that have authorised an institution that is a subsidiary of a parent institution or parent financial                           holding company shall upon request provide in a timely manner and by electronic means the competent authorities that exercise                           supervision on a consolidated basis in accordance with Article 111 of Directive 2013/36/EU, the central bank of the Member                           State where the institution is authorised and EBA all reporting submitted by the institution in accordance with the uniform                           reporting formats referred to in paragraph 3.                  

### Article 416U.K.Reporting on liquid assets

1.Institutions shall report the following as liquid assets unless excluded by paragraph 2 and only if the liquid assets fulfil                           the conditions in paragraph 3:                  

(a)cash and exposures to central banks to the extent that these exposures can be withdrawn at any time in times of stress. As                           regards deposits held with central banks, the competent authority and the central bank shall aim at reaching a common understanding                           regarding the extent to which minimum reserves can be withdrawn in times of stress;                  

(b)other transferable assets that are of extremely high liquidity and credit quality;                  

(c)transferable assets representing claims on or guaranteed by:                  

the central government of a Member State, a region with fiscal autonomy to raise and collect taxes, or of a third country                                 in the domestic currency of the central or regional government, if the institution incurs a liquidity risk in that Member                                 State or third country that it covers by holding those liquid assets;                            

central banks and non-central government public sector entities in the domestic currency of the central bank and the public                                 sector entity;                            

the Bank for International Settlements, the International Monetary Fund, the Commission and multilateral development banks;                            

the European Financial Stability Facility and the European Stability Mechanism;                            

(d)transferable assets that are of high liquidity and credit quality;                  

(e)standby credit facilities granted by central banks within the scope of monetary policy to the extent that these facilities                           are not collateralised by liquid assets and excluding emergency liquidity assistance;                  

(f)if the credit institution belongs to a network in accordance with legal or statutory provisions, the legal or statutory minimum                           deposits with the central credit institution and other statutory or contractually available liquid funding from the central                           credit institution or institutions that are members of the network referred to in Article 113(7), or eligible for the waiver                           provided in Article 10, to the extent that this funding is not collateralised by liquid assets.                  

Pending specification of a uniform definition in accordance with Article 460 of high and extremely high liquidity and credit                        quality, institutions shall identify themselves in a given currency transferable assets that are respectively of high or extremely                        high liquidity and credit quality. Pending specification of a uniform definition, competent authorities may, taking into account                        the criteria listed in Article 509(3), (4) and (5) provide general guidance that institutions shall follow in identifying                        assets of high and extremely high liquidity and credit quality. In the absence of such guidance, institutions shall use transparent                        and objective criteria to this end, including some or all of the criteria listed in Article 509(3), (4) and (5).                   

2.The following shall not be considered liquid assets:                  

(a)assets that are issued by a credit institution unless they fulfil one of the following conditions:                  

they are bonds eligible for the treatment set out in Article 129(4) or (5) or asset backed instruments if demonstrated to                                 be of the highest credit quality as established by EBA pursuant to the criteria in Article 509 (3), (4) and (5);                            

they are bonds as referred to in Article 52(4) of Directive 2009/65/EC other than those referred to in point (i) of this point;                            

the credit institution has been set up by a Member State central or regional government and that government has an obligation                                 to protect the economic basis of the institution and maintain its viability throughout its lifetime; or the asset is explicitly                                 guaranteed by that government; or at least 90 % of the loans granted by the institution are directly or indirectly guaranteed                                 by that government and the asset is predominantly used to fund promotional loans granted on a non-competitive, not for profit                                 basis in order to promote that government's public policy objectives;                            

(b)assets that are provided as collateral to the institution under reverse repo and securities financing transactions and that                           are held by the institution only as a credit risk mitigant and that are not legally and contractually available for use by                           the institution;                  

(c)assets issued by any of the following:                  

an investment firm;                            

an insurance undertaking;                            

a financial holding company;                            

a mixed financial holding company;                            

any other entity that performs one or more of the activities listed in Annex I to Directive 2013/36/EU as its main business.                            

3.In accordance with paragraph 1, institutions shall report assets that fulfil the following conditions as liquid assets:                  

(a)they are unencumbered or stand available within collateral pools to be used for the obtaining of additional funding under                           committed but not yet funded credit lines available to the institution;                  

(b)they are not issued by the institution itself or its parent or subsidiary institutions or another subsidiary of its parent                           institutions or parent financial holding company;                  

(c)their price is generally agreed upon by markets participants and can easily be observed in the market, or their price can                           be determined by a formula that is easy to calculate based on publicly available inputs and does not depend on strong assumptions                           as is typically the case for structured or exotic products;                  

(d)they are eligible collateral for standard liquidity operations of a central bank in a Member State or if the liquid assets                           are held to meet liquidity outflows in the currency of a third country, of the central bank of that third country;                  

(e)they are listed on a recognised exchange or they are tradable on active outright sale or via a simple repurchase agreement                           on approved repurchase markets. These criteria shall be assessed separately for each market.                  

The conditions referred to in points (c), (d) and (e) of the first subparagraph shall not apply to the assets referred to                        in points (a), (e) and (f) of paragraph 1.                   

The condition referred to in point (d) of the first subparagraph shall not apply in the case of liquid assets held to meet                        liquidity outflows in a currency in which there is an extremely narrow definition of central bank eligibility. In the case                        of liquid assets denominated in currencies of third countries, this exception shall apply and only apply if the competent                        authorities of the third country apply the same or an equivalent exception.                   

4.Notwithstanding the provisions of paragraphs 1, 2 and 3, pending the specification of a binding liquidity requirement in accordance                           with Article 460 and in accordance with the second subparagraph of paragraph 1 of this Article, institutions shall report                           on:                  

(a)other non-central bank eligible but tradable assets such as equities and gold based on transparent and objective criteria,                           including some or all of the criteria listed in Article 509(3), (4) and (5);                  

(b)other central bank eligible and tradable assets such as asset backed instruments of the highest credit quality as established                           by EBA pursuant to the criteria in Article 509(3), (4) and (5);                  

(c)other central bank eligible but non-tradable assets such as credit claims as established by EBA pursuant to the criteria in                           Article 509(3), (4) and (5).                  

5.EBA shall develop draft implementing technical standards listing the currencies which meet the conditions referred to in the                           third subparagraph of paragraph 3.                  

EBA shall submit those draft implementing technical standards to the Commission by 31 March 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

Before the entry into force of the technical standards referred to in the third subparagraph, institutions may continue to                        apply the treatment set out in the second subparagraph of paragraph 3, where the competent authorities have applied that treatment                        before 1 January 2014.                   

6.Shares or units in CIUs may be treated as liquid assets up to an absolute amount of EUR 500 million in the portfolio of liquid                           assets of each institution provided that the requirements in Article 132(3) are met and that the CIU, apart from derivatives                           to mitigate interest rate or credit or currency risk, only invests in liquid assets as referred to in paragraph 1 of this                           Article.                  

The use or potential use by a CIU of derivative instruments to hedge risks of permitted investments shall not prevent that                        CIU from being eligible. Where the value of the shares or units of the CIU is not regularly marked to market by the third                        parties referred to in points (a) and (b) of Article 418(4) and the competent authority is not satisfied that an institution                        has developed robust methodologies and processes for such valuation as referred to in the first sentence of Article 418(4),                        shares or units in that CIU shall not be treated as liquid assets.                   

7.Where a liquid asset ceases to be eligible in the stock of liquid assets, an institution may nevertheless continue to consider                           it a liquid asset for an additional period of 30 calendar days. Where a liquid asset in a CIU ceases to be eligible for the                           treatment set out in paragraph 6, the shares or units in the CIU may nevertheless be considered a liquid asset for an additional                           period of 30 days provided that those assets do not exceed 10 % of the CIU's overall assets.                  

### Article 417U.K.Operational requirements for holdings of liquid assets

The institution shall only report as liquid assets those holdings of liquid assets that meet the following conditions:                   

they are appropriately diversified. Diversification is not required in terms of assets corresponding to points (a), (b) and                                 (c) of Article 416(1);                            

they are legally and practically readily available at any time during the next 30 days to be liquidated via outright sale                                 or via a simple repurchase agreement on approved repurchase markets in order to meet obligations coming due. Liquid assets                                 referred to in point (c) of Article 416(1) which are held in third countries where there are transfer restrictions or which                                 are denominated in non-convertible currencies shall be considered available only to the extent that they correspond to outflows                                 in the third country or currency in question, unless the institution can demonstrate to the competent authorities that it                                 has appropriately hedged the ensuing currency risk;                            

the liquid assets are controlled by a liquidity management function;                            

a portion of the liquid assets except those referred to in points (a), (c), (e) and (f) of Article 416(1) is periodically                                 and at least annually liquidated via outright sale or via simple repurchase agreements on an approved repurchase market for                                 the following purposes:                            

to test the access to the market for these assets;                                     

to test the effectiveness of its processes for the liquidation of assets;                                     

to test the usability of the assets;                                     

to minimise the risk of negative signalling during a period of stress;                                     

price risks associated with the assets may be hedged but the liquid assets are subject to appropriate internal arrangements                                 that ensure that they are readily available to the treasury when needed and especially that they are not used in other ongoing                                 operations, including:                            

hedging or other trading strategies;                                     

providing credit enhancements in structured transactions;                                     

covering operational costs.                                     

the denomination of the liquid assets is consistent with the distribution by currency of liquidity outflows after the deduction                                 of inflows.                            

### Article 418U.K.Valuation of liquid assets

1.The value of a liquid asset to be reported shall be its market value, subject to appropriate haircuts that reflect at least                           the duration, the credit and liquidity risk and typical repo haircuts in periods of general market stress. The haircuts shall                           not be less than 15 % for the assets referred to in point (d) of Article 416(1). If the institution hedges the price risk                           associated with an asset, it shall take into account the cash flow resulting from the potential close-out of the hedge.                  

2.Shares or units in CIUs as referred to in Article 416(6) shall be subject to haircuts, looking through to the underlying assets                           as follows:                  

(a)0 % for the assets referred to in point (a) of Article 416(1);                  

(b)5 % for the assets referred to in points (b) and (c) of Article 416(1);                  

(c)20 % for the assets referred to in point (d) of Article 416(1).                  

3.The look-through approach referred to in paragraph 2 shall be applied as follows:                  

(a)where the institution is aware of the underlying exposures of a CIU, it may look through to those underlying exposures in                           order to assign them to points (a) to (d) of Article 416(1);                  

(b)where the institution is not aware of the underlying exposures of a CIU, it shall be assumed that the CIU invests, to the                           maximum extent allowed under its mandate, in descending order in the asset types referred to in points (a) to (d) of Article                           416(1) until the maximum total investment limit is reached.                  

4.Institutions shall develop robust methodologies and processes to calculate and report the market value and haircuts for shares                           or units in CIUs. Only where they can demonstrate to the satisfaction of the competent authority that the materiality of the                           exposure does not justify the development of their own methodologies, institutions may rely on the following third parties                           to calculate and report the haircuts for shares or units in CIUs, in accordance with the methods set out in points (a) and                           (b) of paragraph 3:                  

(a)the depository institution of the CIU provided that the CIU exclusively invests in securities and deposits all securities                           at this depository institution;                  

(b)for other CIUs, the CIU management company, provided that the CIU management company meets the criteria set out in Article                           132(3)(a).                  

The correctness of the calculations by the depository institution or the CIU management company shall be confirmed by an external                        auditor.                   

### Article 419U.K.Currencies with constraints on the availability of liquid assets

1.EBA shall assess the availability for institutions of the liquid assets referred to in point (b) of Article 416(1) in the                           currencies that are relevant for institutions established in the Union.                  

2.Where the justified needs for liquid assets in light of the requirement in Article 412 are exceeding the availability of those                           liquid assets in a currency, one or more of the following derogations shall apply:                  

(a)by way of derogation from point (f) of Article 417, the denomination of the liquid assets may be inconsistent with the distribution                           by currency of liquidity outflows after the deduction of inflows;                  

(b)for currencies of a Member State or third countries, required liquid assets may be substituted by credit lines from the central                           bank of that Member State or third country, which are contractually irrevocably committed for the next 30 days and are fairly                           priced, independent of the amount currently drawn, provided that the competent authorities of that Member State or third country                           do the same and that Member State or third country has comparable reporting requirements in place.                  

3.The derogations applied in accordance with paragraph 2 shall be inversely proportional to the availability of the relevant                           assets. The justified needs of institutions shall be assessed taking into account their ability to reduce, by sound liquidity                           management, the need for those liquid assets and the holdings of those assets by other market participants.                  

4.EBA shall develop draft implementing technical standards listing the currencies which meet the conditions set out in this                           Article.                  

EBA shall submit those draft implementing technical standards to the Commission by 31 March 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

5.EBA shall develop draft regulatory technical standards to specify the derogations referred to in paragraph 2 including the                           conditions of their application.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 March 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 420U.K.Liquidity outflows

1.Pending the specification of a liquidity requirement in accordance with Article 460, liquidity outflows to be reported shall                           include:                  

(a)the current amount outstanding for retail deposits as set out in Article 421;                  

(b)the current amounts outstanding of other liabilities that come due, can be called for payout by the issuing institutions or                           by the provider of the funding or entail an implicit expectation of the provider of the funding that the institution would                           repay the liability during the next 30 days as set out in Article 422;                  

(c)the additional outflows referred to in Article 423;                  

(d)the maximum amount that can be drawn during the next 30 days from undrawn committed credit and liquidity facilities, as set                           out in Article 424;                  

(e)the additional outflows identified in the assessment in accordance with paragraph 2.                  

2.Institutions shall regularly assess the likelihood and potential volume of liquidity outflows during the next 30 days as far                           as products or services are concerned, which are not captured in Articles 422, 423 and 424 and which they offer or sponsor                           or which potential purchasers would consider to be associated with them, including but not limited to liquidity outflows resulting                           from any contractual arrangements such as other off-balance sheet and contingent funding obligations, including, but not limited                           to committed funding facilities, un-drawn loans and advances to wholesale counterparties, mortgages that have been agreed                           but not yet drawn down, credit cards, overdrafts, planned outflows related to renewal or extension of new retail or wholesale                           loans, planned derivative payables and trade finance off-balance sheet related products, as referred to in Article 429 and                           in Annex I. These outflows shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario.                  

For this assessment, institutions shall take particular account of material reputational damage that could result from not                        providing liquidity support to such products or services. Institutions shall report not less than annually to the competent                        authorities those products and services for which the likelihood and potential volume of the liquidity outflows referred to                        in the first subparagraph are material and the competent authorities shall determine the outflows to be assigned. The competent                        authorities may apply an outflow rate up to 5 % for trade finance off-balance sheet related products, as referred to in Article                        429 and Annex I.                   

The competent authorities shall at least annually report to EBA the types of products or services for which they have determined                        outflows on the basis of the reports from institutions. They shall in that report also explain the methodology applied to                        determine the outflows.                   

### Article 421U.K.Outflows on retail deposits

1.Institutions shall separately report the amount of retail deposits covered by a Deposit Guarantee Scheme in accordance with                           Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country, and multiply by at least 5 % where the deposit                           is either of the following:                  

(a)part of an established relationship making withdrawal highly unlikely;                  

(b)held in a transactional account, including accounts to which salaries are regularly credited.                  

2.Institutions shall multiply other retail deposits not referred to in paragraph 1 by at least 10 %.                  

3.Taking into account the behaviour of local depositors as advised by competent authorities, EBA shall issue guidelines by 1 January 2014 on the criteria to determine the conditions of application of paragraphs 1 and 2 in relation to the identification of retail                           deposits subject to different outflows and the definitions of those products for purposes of this Title. Those guidelines                           shall take account of the likelihood of these deposits to lead to outflows of liquidity during the next 30 days. These outflows                           shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario.                  

4.Notwithstanding paragraphs 1 and 2, institutions shall multiply retail deposits that they have taken in third countries by                           a higher percentage than provided for in those paragraphs if such percentage is provided by comparable third country reporting                           requirements.                  

5.Institutions may exclude from the calculation of outflows certain clearly circumscribed categories of retail deposits as long                           as in each and every instance the institution rigorously applies the following for the whole category of those deposits, unless                           in individually justified circumstances of hardship for the depositor:                  

(a)within 30 days, the depositor is not allowed to withdraw the deposit; or                  

(b)for early withdrawals within 30 days, the depositor has to pay a penalty that includes the loss of interest between the date                           of withdrawal and the contractual maturity date plus a material penalty that does not have to exceed the interest due for                           the time elapsed between the date of deposit and the date of withdrawal.                  

### Article 422U.K.Outflows on other liabilities

1.Institutions shall multiply liabilities resulting from the institution's own operating expenses by 0 %.                  

2.Institutions shall multiply liabilities resulting from secured lending and capital market-driven transactions as defined in                           point (3) of Article 192 by:                  

(a)0 % up to the value of the liquid assets in accordance with Article 418 if they are collateralised by assets that would qualify                           as liquid assets in accordance with Article 416;                  

(b)100 % over the value of the liquid assets in accordance with Article 418, if they are collateralized by assets that would                           qualify as liquid assets in accordance with Article 416;                  

(c)100 % if they are collateralized by assets that would not qualify as liquid assets in accordance with Article 416, with the                           exception of transactions covered by points (d) and (e) of this paragraph;                  

(d)25 % if they are collateralized by assets that would not qualify as liquid assets in accordance with Article 416 and the lender                           is the central government, a public sector entity of the Member State in which the credit institution has been authorised                           or has established a branch, or a multilateral development bank. Public sector entities that receive that treatment shall                           be limited to those that have a risk weight of 20 % or lower in accordance with Chapter 2, Title II of Part Three;                  

(e)0 % if the lender is a central bank.                  

3.Institutions shall multiply liabilities resulting from deposits that have to be maintained:                  

(a)by the depositor in order to obtain clearing, custody or cash management or other comparable services from the institution;                  

(b)in the context of common task sharing within an institutional protection scheme meeting the requirements of Article 113(7)                           or as a legal or statutory minimum deposit by another entity being a Member of the same institutional protection scheme;                  

(c)by the depositor in the context of an established operational relationship other than that mentioned in point (a);                  

(d)by the depositor to obtain cash clearing and central credit institution services and where the credit institution belongs                           to a network in accordance with legal or statutory provisions;                  

by 5 % in the case of point (a) to the extent to which they are covered by a Deposit Guarantee Scheme in accordance with Directive                        94/19/EC or an equivalent deposit guarantee scheme in a third country and by 25 % otherwise.                   

Deposits from credit institutions placed at central credit institutions that are considered as liquid assets in accordance                        with Article 416(1)(f) shall be multiplied by 100 % outflow rate.                   

4.Clearing, custody or cash management or other comparable services referred to in points (a) and (d) of paragraph 3 only covers                           such services to the extent that they are rendered in the context of an established relationship on which the depositor has                           substantial dependency. They shall not merely consist in correspondent banking or prime brokerage services and the institution                           shall have evidence that the client is unable to withdraw amounts legally due over a 30 day horizon without compromising its                           operational functioning.                  

Pending a uniform definition of an established operational relationship as referred to in point (c) of paragraph 3, institutions                        shall themselves establish the criteria to identify an established operational relationship for which they have evidence that                        the client is unable to withdraw amounts legally due over a 30-day horizon without compromising their operational functioning                        and shall report these criteria to the competent authorities. Competent authorities may, in the absence of a uniform definition,                        provide general guidance that institutions shall follow in identifying deposits maintained by the depositor in a context of                        an established operational relationship.                   

5.Institutions shall multiply liabilities resulting from deposits by clients that are not financial customers to the extent                           they do not fall under paragraphs 3 and 4 by 40 % and shall multiply the amount of these liabilities covered by a Deposit                           Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent Deposit Guarantee Scheme in a third country by 20                           %.                  

6.Institutions shall take outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II into account                           on a net basis across counterparties and shall multiply them by 100 % in the case of a net outflow. Net basis shall mean also                           net of collateral to be received that qualifies as liquid assets under Article 416.                  

7.Institutions shall separately report other liabilities that do not fall under paragraphs 1 to 5.                  

8.Competent authorities may grant the permission to apply a lower outflow percentage on a case-by-case basis, to the liabilities                           referred to in paragraph 7, when all of the following conditions are fulfilled:                  

(a)the depositor is:                  

a parent or subsidiary institution of the institution or another subsidiary of the same parent institution;                            

linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC;                            

an institution falling within the same institutional protection scheme meeting the requirements of Article 113(7);                            

the central institution or a member of a network compliant with Article 400 (2)(d);                            

(b)there are reasons to expect a lower outflow over the next 30 days even under a combined idiosyncratic and market-wide stress                           scenario;                  

(c)a corresponding symmetric or more conservative inflow is applied by the depositor by way of derogation from Article 425;                  

(d)the institution and the depositor are established in the same Member State.                  

9.Competent authorities may waive the conditions set out in point (d) of paragraph 8 where point (b) of Article 20(1) is applied.                           In that case additional objective criteria as set out in the delegated act referred to in Article 460 have to be met. Where                           such lower outflow is permitted to be applied, the competent authorities shall inform EBA about the result of the process                           referred to in point (b) of Article 20(1). The fulfilment of the conditions for such lower outflows shall be regularly reviewed                           by the competent authorities.                  

10.EBA shall develop draft regulatory technical standards to further specify the additional objective criteria referred to in                           paragraph 9.                  

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2015.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 423U.K.Additional outflows

1.Collateral other than assets referred to in Article 416(1)(a), (b) and (c), which is posted by the institution for contracts                           listed in Annex II and credit derivatives, shall be subject to an additional outflow of 20 %.                  

2.Institutions shall notify to the competent authorities all contracts entered into the contractual conditions of which lead,                           within 30 days following a material deterioration of the credit quality of the institution, to liquidity outflows or additional                           collateral needs. If the competent authorities consider such contracts material in relation to the potential liquidity outflows                           of the institution, they shall require the institution to add an additional outflow for those contracts corresponding to the                           additional collateral needs resulting from a material deterioration in the credit quality of the institution such as a downgrade                           in its external credit assessment by three notches. The institution shall regularly review the extent of this material deterioration                           in light of what is relevant under the contracts it has entered into and shall notify the result of its review to the competent                           authorities.                  

3.The institution shall add an additional outflow corresponding to collateral needs that would result from the impact of an                           adverse market scenario on the institution's derivatives transactions, financing transactions and other contracts if material.                  

EBA shall develop draft regulatory technical standards to determine the conditions of application in relation to the notion                        of materiality and methods for the measurement of this additional outflow.                   

EBA shall submit those draft regulatory technical standards to the Commission by 31 March 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the second subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

4.The institution shall add an additional outflow corresponding to the market value of securities or other assets sold short                           and to be delivered within the 30 days horizon unless the institution owns the securities to be delivered or has borrowed                           them at terms requiring their return only after the 30 day horizon and the securities do not form part of the institutions                           liquid assets.                  

5.The institution shall add an additional outflow corresponding to:                  

(a)the excess collateral the institution holds that can be contractually called at any time by the counterparty;                  

(b)collateral that is due to be returned to a counterparty;                  

(c)collateral that corresponds to assets that would qualify as liquid assets for the purposes of Article 416 that can be substituted                           for assets corresponding to assets that would not qualify as liquid assets for the purposes of Article 416 without the consent                           of the institution.                  

6.Deposits received as collateral shall not be considered liabilities for the purposes of Article 422 but will be subject to                           the provisions of this Article where applicable.                  

### Article 424U.K.Outflows from credit and liquidity facilities

1.Institutions shall report outflows from committed credit facilities and committed liquidity facilities, which shall be determined                           as a percentage of the maximum amount that can be drawn within the next 30 days. This maximum amount that can be drawn may                           be assessed net of any liquidity requirement that would be mandated under Article 420(2) for the trade finance off-balance                           sheet items and net of the value in accordance with Article 418 of collateral to be provided if the institution can reuse                           the collateral and if the collateral is held in the form of liquid assets in accordance with Article 416. The collateral to                           be provided shall not be assets issued by the counterparty of the facility or one of its affiliated entities. If the necessary                           information is available to the institution, the maximum amount that can be drawn for credit and liquidity facilities shall                           be determined as the maximum amount that could be drawn given the counterparty's own obligations or given the pre-defined                           contractual drawdown schedule coming due over the next 30 days.                  

2.The maximum amount that can be drawn of undrawn committed credit facilities and undrawn committed liquidity facilities within                           the next 30 days shall be multiplied by 5 % if they qualify for the retail exposure class under the Standardised or IRB approaches                           for credit risk.                  

3.The maximum amount that can be drawn of undrawn committed credit facilities and undrawn committed liquidity facilities within                           the next 30 days shall be multiplied by 10 % where they meet the following conditions:                  

(a)they do not qualify for the retail exposure class under the Standardised or IRB approaches for credit risk;                  

(b)they have been provided to clients that are not financial customers;                  

(c)they have not been provided for the purpose of replacing funding of the client in situations where he is unable to obtain                           its funding requirements in the financial markets.                  

4.The committed amount of a liquidity facility that has been provided to an SSPE for the purpose of enabling such an SSPE to                           purchase assets other than securities from clients that are not financial customers shall be multiplied by 10 % to the extent                           that it exceeds the amount of assets currently purchased from clients and where the maximum amount that can be drawn is contractually                           limited to the amount of assets currently purchased.                  

5.The institutions shall report the maximum amount that can be drawn of other undrawn committed credit facilities and undrawn                           committed liquidity facilities within the next 30 days. This applies in particular to the following:                  

(a)liquidity facilities that the institution has granted to SSPEs other than those referred to in point (b) of paragraph 3;                  

(b)arrangements under which the institution is required to buy or swap assets from an SSPE;                  

(c)facilities extended to credit institutions;                  

(d)facilities extended to financial institutions and investment firms.                  

6.By way of derogation from paragraph 5, institutions which have been set up and are sponsored by at least one Member State's                           central or regional government may apply the treatments set out in paragraphs 2 and 3 also to credit and liquidity facilities                           that are provided to institutions for the sole purpose of directly or indirectly funding promotional loans qualifying for                           the exposure classes referred to in those paragraphs. By way of derogation from point (g) of Article 425(2), where those promotional                           loans are extended via another institution as intermediary (pass through loans), a symmetric in and outflow may be applied                           by institutions. Those promotional loans shall be available only to persons who are not financial customers on a non-competitive,                           not for profit basis in order to promote public policy objectives of the Union and/or that Member State's central or regional                           government. It shall only be possible to draw on such facilities following the reasonably expected demand for a promotional                           loan and up to the amount of such demand linked to a subsequent reporting on the use of the funds disbursed.                  

### Article 425U.K.Inflows

1.Institutions shall report their liquidity inflows. Capped liquidity inflows shall be the liquidity inflows limited to 75 %                           of liquidity outflows. Institutions may exempt liquidity inflows from deposits placed with other institutions and qualifying                           for the treatments set out in Article 113(6) or (7) from this limit. Institutions may exempt liquidity inflows from monies                           due from borrowers and bond investors related to mortgage lending funded by bonds eligible for the treatment set out in Article                           129(4), (5) or (6) or by bonds as referred to in Article 52(4) of Directive 2009/65/EC from this limit. Institutions may exempt                           inflows from promotional loans that the institutions have passed through. Subject to the prior approval of the competent authority                           responsible for supervision on an individual basis, the institution may fully or partially exempt inflows where the provider                           is a parent or a subsidiary institution of the institution or another subsidiary of the same parent institution or linked                           to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC.                  

2.The liquidity inflows shall be measured over the next 30 days. They shall comprise only contractual inflows from exposures                           that are not past due and for which the institution has no reason to expect non-performance within the 30-day time horizon.                           Liquidity inflows shall be reported in full with the following inflows reported separately:                  

(a)monies due from customers that are not financial customers for the purposes of principal payment shall be reduced by 50 %                           of their value or by the contractual commitments to those customers to extend funding, whichever is higher. This does not                           apply to monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 that                           are collateralised by liquid assets in accordance with Article 416 as referred to in point (d) of this paragraph.                  

By way of derogation from the first subparagraph of this point, institutions that have received a commitment referred to in                        Article 424(6) in order for them to disburse a promotional loan to a final recipient may take an inflow into account up to                        the amount of the outflow they apply to the corresponding commitment to extend those promotional loans;                   

(b)monies due from trade financing transactions referred to in point (b) of the second subparagraph of Article 162(3) with a                           residual maturity of up to 30 days, shall be taken into account in full as inflows;                  

(c)assets with an undefined contractual end date shall be taken into account with a 20 % inflow provided that the contract allows                           the bank to withdraw and request payment within 30 days;                  

(d)monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 if they are                           collateralised by liquid assets as referred to in Article 416(1), shall not be taken into account up to the value net of haircuts                           of the liquid assets and shall be taken into account in full for the remaining monies due;                  

(e)monies due that the institution owing those monies treats in accordance with Article 422(3) and (4), shall be multiplied by                           a corresponding symmetrical inflow;                  

(f)monies due from positions in major index equity instruments provided that there is no double counting with liquid assets;                  

(g)any undrawn credit or liquidity facilities and any other commitments received shall not be taken into account.                  

3.Outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II shall be reflected on a net basis                           across counterparties and shall be multiplied by 100 % in the event of a net inflow. Net basis shall mean also net of collateral                           to be received that qualifies as liquid assets under Article 416.                  

4.By way of derogation from point (g) of paragraph 2, competent authorities may grant the permission to apply a higher inflow                           on a case by case basis for credit and liquidity facilities when all of the following conditions are fulfilled:                  

(a)there are reasons to expect a higher inflow even under a combined market and idiosyncratic stress of the provider;                  

(b)the counterparty is a parent or subsidiary institution of the institution or another subsidiary of the same parent institution                           or linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC or a member of                           the same institutional protection scheme referred to in Article 113(7) of this Regulation or the central institution or a                           member of a network that is subject to the waiver referred to in Article 10 of this Regulation;                  

(c)a corresponding symmetric or more conservative outflow is applied by the counterparty by way of derogation from Articles 422,                           423 and 424;                  

(d)the institution and the counterparty are established in the same Member State.                  

5.Competent authorities may waive the condition set out in point (d) of paragraph 4 where Article 20(1)(b) is applied. In that                           case additional objective criteria as set out in the delegated act referred to in Article 460 have to be met. Where such higher                           inflow is permitted to be applied, the competent authorities shall inform EBA about the result of the process referred to                           in Article 20(1)(b). Fulfilment of the conditions for such higher inflows shall be regularly reviewed by the competent authorities.                  

6.EBA shall develop draft regulatory technical standards to further specify the additional objective criteria referred to in                           paragraph 5.                  

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2015.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

7.Institutions shall not report inflows from any of the liquid assets reported in accordance with Article 416 other than payments                           due on the assets that are not reflected in the market value of the asset.                  

8.Institutions shall not report inflows from any new obligations entered into.                  

9.Institutions shall take liquidity inflows which are to be received in third countries where there are transfer restrictions                           or which are denominated in non-convertible currencies into account only to the extent that they correspond to outflows respectively                           in the third country or currency in question.                  

### Article 426U.K.Updating Future liquidity requirements

Following, the adoption by the Commission of a delegated act to specify the liquidity requirement in accordance with Article                        460, EBA may develop draft implementing technical standards to specify the conditions set out in Article 421(1), Article 422,                        with the exception of paragraphs 8, 9 and 10 of that Article, and Article 424 to take account of standards agreed internationally.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first paragraph in accordance                        with Article 15 of Regulation (EU) No 1093/2010.                   

## TITLE IIIU.K.REPORTING ON STABLE FUNDING

### Article 427U.K.Items providing stable funding

1.Institutions shall report to the competent authorities, in accordance with the reporting requirements set out in Article 415(1)                           and the uniform reporting formats referred to in Article 415(3), the following items and their components in order to allow                           an assessment of the availability of stable funding:                  

(a)the following own funds, after deductions have been applied, where appropriate:                  

tier 1 capital instruments;                            

tier 2 capital instruments;                            

other preferred shares and capital instruments in excess of Tier 2 allowable amount having an effective maturity of one year                                 or greater;                            

(b)the following liabilities not included in point (a):                  

retail deposits that qualify for the treatment set out in Article 421(1);                            

retail deposits that qualify for the treatment set out in Article 421(2);                            

deposits that qualify for the treatment set out in Article 422 (3) and (4);                            

of the deposits referred to in point (iii), those that are subject to a deposit guarantee scheme in accordance with Directive                                 94/19/EC or an equivalent deposit guarantee scheme in a third country deposit guarantees within the terms of Article 421(1);                            

of the deposits referred to in point (iii), those that fall under point (b) of Article 422(3);                            

of the deposits referred to in point (iii), those that fall under point (d) of Article 422(3);                            

amounts deposited not falling under point (i), (ii) or (iii) if they are not deposited by financial customers;                            

all funding obtained from financial customers;                            

separately for amounts falling under points (vii) and (viii) respectively, funding from secured lending and capital market-driven                                 transactions as defined in point (3) of Article 192:                            
                -  collateralised by assets that would qualify as liquid assets in accordance with Article 416;                                   
                -  collateralised by any other assets;                                   

liabilities resulting from securities issued qualifying for the treatment set out in Article 129(4) or (5) or as referred                                 to in Article 52(4) of Directive 2009/65/EC;                            

the following other liabilities resulting from securities issued that do not fall under point (a):                            
                -  liabilities resulting from securities issued with an effective maturity of one year or greater;                                   
                -  liabilities resulting from securities issued with an effective maturity of less than one year;                                   

any other liabilities.                            

2.Where applicable, all items shall be presented in the following five buckets according to the closest of their maturity date                           and the earliest date at which they can contractually be called:                  

(a)within three months;                  

(b)between three and six months;                  

(c)between six and nine months;                  

(d)between nine and 12 months;                  

(e)after 12 months.                  

### Article 428U.K.Items requiring stable funding

1.Unless deducted from own funds, the following items shall be reported to competent authorities separately in order to allow                           an assessment of the needs for stable funding:                  

(a)the assets that would qualify as liquid assets in accordance with Article 416, broken down by asset type;                  

(b)the following securities and money market instruments not included in point (a):                  

assets qualifying for credit step 1 under Article 122;                            

assets qualifying for credit step 2 under Article 122;                            

other assets;                            

(c)equity securities of non-financial entities listed on a major index in a recognised exchange;                  

(d)other equity securities;                  

(e)gold;                  

(f)other precious metals;                  

(g)non-renewable loans and receivables, and separately those non-renewable loans and receivables for which borrowers are:                  

natural persons other than commercial sole proprietors and partnerships;                            

SMEs that qualify for the retail exposure class under the Standardised or IRB approaches for credit risk or to a company which                                 is eligible for the treatment set out in Article 153(4) and where the aggregate deposit placed by that client or group of                                 connected clients is less than EUR 1 million;                            

sovereigns, central banks and public sector entities;                            

clients not referred to in points (i) and (ii) other than financial customers;                            

clients not referred to in points (i), (ii) and (iii) that are financial customers, and thereof separately those that are                                 credit institutions and other financial customers;                            

(h)non-renewable loans and receivables referred to in point (g), and thereof separately those that are:                  

collateralised by commercial immovable property (CRE);                            

collateralised by residential property (RRE);                            

match funded (pass-through) via bonds eligible for the treatment set out in Article 129(4) or (5) or via bonds as referred                                 to in Article 52(4) of Directive 2009/65/EC;                            

(i)derivatives receivables;                  

(j)any other assets;                  

(k)undrawn committed credit facilities that qualify as ‘medium risk’ or ‘medium/low risk’ under Annex I.                  

2.Where applicable, all items shall be presented in the five buckets described in Article 427(2).                  

# PART SEVENU.K.LEVERAGE

## Article 429U.K.Calculation of the leverage ratio

1.Institutions shall calculate their leverage ratio in accordance with the methodology set out in paragraphs 2 to 11.                  

2.The leverage ratio shall be calculated as an institution's capital measure divided by that institution's total exposure measure                           and shall be expressed as a percentage.                  

Institutions shall calculate the leverage ratio as the simple arithmetic mean of the monthly leverage ratios over a quarter.                   

3.For the purposes of paragraph 2, the capital measure shall be the Tier 1 capital.                  

4.The total exposure measure is the sum of the exposure values of all assets and off-balance sheet items not deducted when determining                           the capital measure referred to in paragraph 3.                  

Where institutions include a financial sector entity in which they hold a significant investment in accordance with Article                        43 in their consolidation according to the applicable accounting framework, but not in their prudential consolidation in accordance                        with Chapter 2 of Title II of Part One, they shall determine the exposure value for the significant investment not in accordance                        with point (a) of paragraph 5 of this Article but as the amount that is obtained by multiplying the amount defined in point                        (a) of this subparagraph with the factor defined in point (b) of this subparagraph:                   

(a)the sum of the exposure values of all exposures of the financial sector entity in which the significant investment is held;                  

(b)for all direct, indirect and synthetic holdings of the institution of the Common Equity Tier 1 instruments of the financial                           sector entity, the total amount of such items not deducted pursuant to Article 47 and point (b) of Article 48(1) divided by                           the total amount of such items.                  

5.Institutions shall determine the exposure value of assets in accordance with the following principles:                  

(a)the exposure values of assets excluding contracts listed in Annex II and credit derivatives, means exposure values in accordance                           with the first sentence of Article 111(1);                  

(b)physical or financial collateral, guarantees or credit risk mitigation purchased shall not be used to reduce exposure values                           of assets;                  

(c)loans shall not be netted with deposits.                  

6.Institutions shall determine the exposure value of contracts listed in Annex II and of credit derivatives including those                           that are off-balance sheet, in accordance with the method set out in Article 274.                  

In determining the exposure value of contracts listed in Annex II and of credit derivatives, institutions shall take into                        account the effects of contracts for novation and other netting agreements, except contractual cross-product netting agreements,                        in accordance with Article 295.                   

7.By way of derogation from paragraph 6, institutions may use the method set out in Article 275 to determine the exposure value                           of contracts listed in points 1 and 2 of Annex II only where they also use that method for determining the exposure value                           of those contracts for the purposes of meeting the own funds requirements set out in Article 92.                  

8.When determining the potential future credit exposure of credit derivatives, institutions shall apply the principles laid                           down in Article 299(2) to all their credit derivatives, not just those assigned to the trading book.                  

9.Institutions shall determine the exposure value of repurchase transactions, securities or commodities lending or borrowing                           transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet, in                           accordance with Article 220(1) to (3) and Article 222, and shall take into account the effects of master netting agreements,                           except contractual cross-product netting agreements, in accordance with Article 206.                  

10.Institutions shall determine the exposure value of off-balance sheet items, except the items referred to in paragraphs 6 and                           9 of this Article, in accordance with Article 111(1), subject to the following amendments to the conversion factors listed                           in that Article:                  

(a)the conversion factor to be applied to the nominal value for undrawn credit facilities, which may be cancelled unconditionally                           at any time without notice, referred to in points 4(a) and (b) of Annex I, is 10 %;                  

(b)the conversion factor for medium/low risk trade finance related off-balance sheet items referred to in point 3(a) of Annex                           I and to officially supported export credits related off-balance sheet items referred to in point 3(b)(i) of Annex I is 20                           %;                  

(c)the conversion factor for medium risk trade finance related off-balance sheet items referred to in points 2(a) and 2(b)(i)                           of Annex I and to officially supported export credits related off-balance sheet items referred to in point 2(b)(ii) of Annex                           I is 50 %;                  

(d)the conversion factor for all other off-balance sheet items listed in Annex I is 100 %.                  

11.Where national generally accepted accounting principles recognises fiduciary assets on balance sheet, in accordance with Article                           10 of Directive 86/635/EEC, those assets may be excluded from the leverage ratio total exposure measure provided that they                           meet the criteria for non-recognition set out in International Accounting Standard (IAS) 39, as applicable under Regulation                           (EC) No 1606/2002, and, where applicable, the criteria for non-consolidation set out in International Financial Reporting                           Standard (IFRS) 10, as applicable under Regulation (EC) No 1606/2002.                  

## Article 430U.K.Reporting requirement

1.Institutions shall submit to the competent authorities all necessary information on the leverage ratio and its components                           in accordance with Article 429. Competent authorities shall take into account this information when undertaking the supervisory                           review referred to in Article 97 of Directive 2013/36/EU.                  

Institutions shall also submit to the competent authorities the information required for the purposes of the preparation of                        the reports referred to in Article 511.                   

Competent authorities shall submit the information received from institutions to EBA upon its request to facilitate the review                        referred to in Article 511.                   

2.EBA shall develop draft implementing technical standards to determine the uniform reporting template, the instructions on                           how to use such template, the frequencies and dates of reporting and the IT solutions, for the purposes of the reporting requirement                           laid down in paragraph 1.                  

EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

# PART EIGHTU.K.DISCLOSURE BY INSTITUTIONS

## TITLE IU.K.GENERAL PRINCIPLES

### Article 431U.K.Scope of disclosure requirements

1.Institutions shall publicly disclose the information laid down in Title II, subject to the provisions laid down in Article                           432.                  

2.Permission granted by the competent authorities under Part Three for the instruments and methodologies referred to in Title                           III shall be subject to the public disclosure by institutions of the information laid down therein.                  

3.Institutions shall adopt a formal policy to comply with the disclosure requirements laid down in this Part, and have policies                           for assessing the appropriateness of their disclosures, including their verification and frequency. Institutions shall also                           have policies for assessing whether their disclosures convey their risk profile comprehensively to market participants.                  

Where those disclosures do not convey the risk profile comprehensively to market participants, institutions shall publicly                        disclose the information necessary in addition to that required in accordance with paragraph 1. However, they shall only be                        required to disclose information which is material and not proprietary or confidential in accordance with Article 432.                   

4.Institutions shall, if requested, explain their rating decisions to SMEs and other corporate applicants for loans, providing                           an explanation in writing when asked. The administrative costs of the explanation shall be proportionate to the size of the                           loan.                  

### Article 432U.K.Non-material, proprietary or confidential information

1.Institutions may omit one or more of the disclosures listed in Title II if the information provided by such disclosures is                           not regarded as material, except for the disclosures laid down in Article 435(2)(c), Article 437 and Article 450.                  

Information in disclosures shall be regarded as material if its omission or misstatement could change or influence the assessment                        or decision of a user relying on that information for the purpose of making economic decisions.                   

EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines by 31 December 2014 on how institutions have to apply materiality in relation to the disclosure requirements of Title II.                   

2.Institutions may also omit one or more items of information included in the disclosures listed in Titles II and III if those                           items include information which is regarded as proprietary or confidential in accordance with the second and third subparagraphs,                           except for the disclosures laid down in Articles 437 and 450.                  

Information shall be regarded as proprietary to an institution if disclosing it publicly would undermine its competitive position.                        It may include information on products or systems which, if shared with competitors, would render an institution's investments                        therein less valuable.                   

Information shall be regarded as confidential if there are obligations to customers or other counterparty relationships binding                        an institution to confidentiality.                   

EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines by 31 December 2014 on how institutions have to apply proprietary and confidentiality in relation to the disclosure requirements of Titles II                        and III.                   

3.In the exceptional cases referred to in paragraph 2, the institution concerned shall state in its disclosures the fact that                           the specific items of information are not disclosed, the reason for non-disclosure, and publish more general information about                           the subject matter of the disclosure requirement, except where these are to be classified as proprietary or confidential.                  

4.Paragraphs 1, 2 and 3 are without prejudice to the scope of liability for failure to disclose material information.                  

### Article 433U.K.Frequency of disclosure

Institutions shall publish the disclosures required by this Part at least on an annual basis.                   

Annual disclosures shall be published in conjunction with the date of publication of the financial statements.                   

Institutions shall assess the need to publish some or all disclosures more frequently than annually in the light of the relevant                        characteristics of their business such as scale of operations, range of activities, presence in different countries, involvement                        in different financial sectors, and participation in international financial markets and payment, settlement and clearing                        systems. That assessment shall pay particular attention to the possible need for more frequent disclosure of items of information                        laid down in Article 437, and points (c) to (f) of Article 438, and information on risk exposure and other items prone to                        rapid change.                   

EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines by 31 December 2014 on institutions assessing more frequent disclosures of Titles II and III.                   

### Article 434U.K.Means of disclosures

1.Institutions may determine the appropriate medium, location and means of verification to comply effectively with the disclosure                           requirements laid down in this Part. To the degree feasible, all disclosures shall be provided in one medium or location.                           If a similar piece of information is disclosed in two or more media, a reference to the synonymous information in the other                           media shall be included within each medium.                  

2.Equivalent disclosures made by institutions under accounting, listing or other requirements may be deemed to constitute compliance                           with this Part. If disclosures are not included in the financial statements, institutions shall unambiguously indicate in                           the financial statements where they can be found.                  

## TITLE IIU.K.TECHNICAL CRITERIA ON TRANSPARENCY AND DISCLOSURE

### Article 435U.K.Risk management objectives and policies

1.Institutions shall disclose their risk management objectives and policies for each separate category of risk, including the                           risks referred to under this Title. These disclosures shall include:                  

(a)the strategies and processes to manage those risks;                  

(b)the structure and organisation of the relevant risk management function including information on its authority and statute,                           or other appropriate arrangements;                  

(c)the scope and nature of risk reporting and measurement systems;                  

(d)the policies for hedging and mitigating risk, and the strategies and processes for monitoring the continuing effectiveness                           of hedges and mitigants;                  

(e)a declaration approved by the management body on the adequacy of risk management arrangements of the institution providing                           assurance that the risk management systems put in place are adequate with regard to the institution's profile and strategy;                  

(f)a concise risk statement approved by the management body succinctly describing the institution's overall risk profile associated                           with the business strategy. This statement shall include key ratios and figures providing external stakeholders with a comprehensive                           view of the institution's management of risk, including how the risk profile of the institution interacts with the risk tolerance                           set by the management body.                  

2.Institutions shall disclose the following information, including regular, at least annual updates, regarding governance arrangements:                  

(a)the number of directorships held by members of the management body;                  

(b)the recruitment policy for the selection of members of the management body and their actual knowledge, skills and expertise;                  

(c)the policy on diversity with regard to selection of members of the management body, its objectives and any relevant targets                           set out in that policy, and the extent to which these objectives and targets have been achieved;                  

(d)whether or not the institution has set up a separate risk committee and the number of times the risk committee has met;                  

(e)the description of the information flow on risk to the management body.                  

### Article 436U.K.Scope of application

Institutions shall disclose the following information regarding the scope of application of the requirements of this Regulation                        in accordance with Directive 2013/36/EU:                   

the name of the institution to which the requirements of this Regulation apply;                            

an outline of the differences in the basis of consolidation for accounting and prudential purposes, with a brief description                                 of the entities therein, explaining whether they are:                            

fully consolidated;                                     

proportionally consolidated;                                     

deducted from own funds;                                     

neither consolidated nor deducted;                                     

any current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities                                 among the parent undertaking and its subsidiaries;                            

the aggregate amount by which the actual own funds are less than required in all subsidiaries not included in the consolidation,                                 and the name or names of such subsidiaries;                            

if applicable, the circumstance of making use of the provisions laid down in Articles 7 and 9.                            

### Article 437U.K.Own funds

1.Institutions shall disclose the following information regarding their own funds:                  

(a)a full reconciliation of Common Equity Tier 1 items, Additional Tier 1 items, Tier 2 items and filters and deductions applied                           pursuant to Articles 32 to 35, 36, 56, 66 and 79 to own funds of the institution and the balance sheet in the audited financial                           statements of the institution;                  

(b)a description of the main features of the Common Equity Tier 1 and Additional Tier 1 instruments and Tier 2 instruments issued                           by the institution;                  

(c)the full terms and conditions of all Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments;                  

(d)separate disclosure of the nature and amounts of the following:                  

each prudential filter applied pursuant to Articles 32 to 35;                            

each deduction made pursuant to Articles 36, 56 and 66;                            

items not deducted in accordance with Articles 47, 48, 56, 66 and 79;                            

(e)a description of all restrictions applied to the calculation of own funds in accordance with this Regulation and the instruments,                           prudential filters and deductions to which those restrictions apply;                  

(f)where institutions disclose capital ratios calculated using elements of own funds determined on a basis other than that laid                           down in this Regulation, a comprehensive explanation of the basis on which those capital ratios are calculated.                  

2.EBA shall develop draft implementing technical standards to specify uniform templates for disclosure under points (a), (b),                           (d) and (e) of paragraph 1.                  

EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

### Article 438U.K.Capital requirements

Institutions shall disclose the following information regarding the compliance by the institution with the requirements laid                        down in Article 92 of this Regulation and in Article 73 of Directive 2013/36/EU:                   

a summary of the institution's approach to assessing the adequacy of its internal capital to support current and future activities;                            

upon demand from the relevant competent authority, the result of the institution's internal capital adequacy assessment process                                 including the composition of the additional own funds requirements based on the supervisory review process as referred to                                 in point (a) of Article 104(1) of Directive 2013/36/EU;                            

for institutions calculating the risk-weighted exposure amounts in accordance with Chapter 2 of Part Three, Title II, 8 %                                 of the risk-weighted exposure amounts for each of the exposure classes specified in Article 112;                            

for institutions calculating risk-weighted exposure amounts in accordance with Chapter 3 of Part Three, Title II, 8 % of the                                 risk-weighted exposure amounts for each of the exposure classes specified in Article 147. For the retail exposure class, this                                 requirement applies to each of the categories of exposures to which the different correlations in Article 154(1) to (4) correspond.                                 For the equity exposure class, this requirement applies to:                            

each of the approaches provided in Article 155;                                     

exchange traded exposures, private equity exposures in sufficiently diversified portfolios, and other exposures;                                     

exposures subject to supervisory transition regarding own funds requirements;                                     

exposures subject to grandfathering provisions regarding own funds requirements;                                     

own funds requirements calculated in accordance with points (b) and (c) of Article 92(3);                            

own funds requirements calculated in accordance with Part Three, Title III, Chapters 2, 3 and 4 and disclosed separately.                            

The institutions calculating the risk-weighted exposure amounts in accordance with Article 153(5) or Article 155(2) shall                        disclose the exposures assigned to each category in Table 1 of Article 153(5), or to each risk weight mentioned in Article                        155(2).                   

### Article 439U.K.Exposure to counterparty credit risk

Institutions shall disclose the following information regarding the institution's exposure to counterparty credit risk as                        referred to in Part Three, Title II, Chapter 6:                   

a discussion of the methodology used to assign internal capital and credit limits for counterparty credit exposures;                            

a discussion of policies for securing collateral and establishing credit reserves;                            

a discussion of policies with respect to Wrong-Way risk exposures;                            

a discussion of the impact of the amount of collateral the institution would have to provide given a downgrade in its credit                                 rating;                            

gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held and net derivatives                                 credit exposure. Net derivatives credit exposure is the credit exposure on derivatives transactions after considering both                                 the benefits from legally enforceable netting agreements and collateral arrangements;                            

measures for exposure value under the methods set out in Part Three, Title II, Chapter 6, Sections 3 to 6 whichever method                                 is applicable;                            

the notional value of credit derivative hedges, and the distribution of current credit exposure by types of credit exposure;                            

the notional amounts of credit derivative transactions, segregated between use for the institution's own credit portfolio,                                 as well as in its intermediation activities, including the distribution of the credit derivatives products used, broken down                                 further by protection bought and sold within each product group;                            

the estimate of α if the institution has received the permission of the competent authorities to estimate α.                            

### Article 440U.K.Capital buffers

1.An institution shall disclose the following information in relation to its compliance with the requirement for a countercyclical                           capital buffer referred to in Title VII, Chapter 4 of Directive 2013/36/EU:                  

(a)the geographical distribution of its credit exposures relevant for the calculation of its countercyclical capital buffer;                  

(b)the amount of its institution specific countercyclical capital buffer.                  

2.EBA shall develop draft regulatory technical standards specifying the disclosure requirements set out in paragraph 1.                  

EBA shall submit those draft regulatory technical standards to the Commission by 31 December 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 441U.K.Indicators of global systemic importance

1.Institutions identified as G-SIIs in accordance with Article 131 of Directive 2013/36/EU shall disclose, on an annual basis,                           the values of the indicators used for determining the score of the institutions in accordance with the identification methodology                           referred to in that Article.                  

2.EBA shall develop draft implementing technical standards to specify the uniform formats and date for the purposes of the disclosure                           referred to in paragraph 1. In developing those technical standards, EBA shall take into account international standards.                  

EBA shall submit those draft implementing technical standards to the Commission by 1 July 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

### Article 442U.K.Credit risk adjustments

Institutions shall disclose the following information regarding the institution's exposure to credit risk and dilution risk:                   

the definitions for accounting purposes of ‘past due’ and ‘impaired’;                            

a description of the approaches and methods adopted for determining specific and general credit risk adjustments;                            

the total amount of exposures after accounting offsets and without taking into account the effects of credit risk mitigation,                                 and the average amount of the exposures over the period broken down by different types of exposure classes;                            

the geographic distribution of the exposures, broken down in significant areas by material exposure classes, and further detailed                                 if appropriate;                            

the distribution of the exposures by industry or counterparty type, broken down by exposure classes, including specifying                                 exposure to SMEs, and further detailed if appropriate;                            

the residual maturity breakdown of all the exposures, broken down by exposure classes, and further detailed if appropriate;                            

by significant industry or counterparty type, the amount of:                            

impaired exposures and past due exposures, provided separately;                                     

specific and general credit risk adjustments;                                     

charges for specific and general credit risk adjustments during the reporting period;                                     

the amount of the impaired exposures and past due exposures, provided separately, broken down by significant geographical                                 areas including, if practical, the amounts of specific and general credit risk adjustments related to each geographical area;                            

the reconciliation of changes in the specific and general credit risk adjustments for impaired exposures, shown separately.                                 The information shall comprise:                            

a description of the type of specific and general credit risk adjustments;                                     

the opening balances;                                     

the amounts taken against the credit risk adjustments during the reporting period;                                     

the amounts set aside or reversed for estimated probable losses on exposures during the reporting period, any other adjustments                                          including those determined by exchange rate differences, business combinations, acquisitions and disposals of subsidiaries,                                          and transfers between credit risk adjustments;                                     

the closing balances.                                     

Specific credit risk adjustments and recoveries recorded directly to the income statement shall be disclosed separately.                   

### Article 443U.K.Unencumbered assets

EBA shall issue guidelines specifying the disclosure of unencumbered assets, taking into account Recommendation ESRB/2012/2                        of the European Systemic Risk Board of 20 December 2012 on funding of credit institutions (31)  and in particular Recommendation D — Market transparency on asset encumbrance, by 30 June 2014. Those guidelines shall be adopted in accordance with Article 16 of Regulation (EU) No 1093/2010.                   

EBA shall develop draft regulatory technical standards to specify disclosure of the balance sheet value per exposure class                        broken down by asset quality and the total amount of the balance sheet value that is unencumbered, taking into account Recommendation                        ESRB/2012/2 and conditional on EBA considering in its report that such additional disclosure offers reliable and meaningful                        information.                   

EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2016.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

### Article 444U.K.Use of ECAIs

For institutions calculating the risk-weighted exposure amounts in accordance with Part Three, Title II, Chapter 2, the following                        information shall be disclosed for each of the exposure classes specified in Article 112:                   

the names of the nominated ECAIs and ECAs and the reasons for any changes;                            

the exposure classes for which each ECAI or ECA is used;                            

a description of the process used to transfer the issuer and issue credit assessments onto items not included in the trading                                 book;                            

the association of the external rating of each nominated ECAI or ECA with the credit quality steps prescribed in Part Three,                                 Title II, Chapter 2, taking into account that this information needs not be disclosed if the institution complies with the                                 standard association published by EBA;                            

the exposure values and the exposure values after credit risk mitigation associated with each credit quality step prescribed                                 in Part Three, Title II, Chapter 2 as well as those deducted from own funds.                            

### Article 445U.K.Exposure to market risk

The institutions calculating their own funds requirements in accordance with points (b) and (c) of Article 92(3) shall disclose                        those requirements separately for each risk referred to in those provisions. In addition, the own funds requirement for specific                        interest rate risk of securitisation positions shall be disclosed separately.                   

### Article 446U.K.Operational risk

Institutions shall disclose the approaches for the assessment of own funds requirements for operational risk that the institution                        qualifies for; a description of the methodology set out in Article 312(2), if used by the institution, including a discussion                        of relevant internal and external factors considered in the institution's measurement approach, and in the case of partial                        use, the scope and coverage of the different methodologies used.                   

### Article 447U.K.Exposures in equities not included in the trading book

Institutions shall disclose the following information regarding the exposures in equities not included in the trading book:                   

the differentiation between exposures based on their objectives, including for capital gains relationship and strategic reasons,                                 and an overview of the accounting techniques and valuation methodologies used, including key assumptions and practices affecting                                 valuation and any significant changes in these practices;                            

the balance sheet value, the fair value and, for those exchange-traded, a comparison to the market price where it is materially                                 different from the fair value;                            

the types, nature and amounts of exchange-traded exposures, private equity exposures in sufficiently diversified portfolios,                                 and other exposures;                            

the cumulative realised gains or losses arising from sales and liquidations in the period; and                            

the total unrealised gains or losses, the total latent revaluation gains or losses, and any of these amounts included in Common                                 Equity Tier 1 capital.                            

### Article 448U.K.Exposure to interest rate risk on positions not included in the trading book

Institutions shall disclose the following information on their exposure to interest rate risk on positions not included in                        the trading book:                   

the nature of the interest rate risk and the key assumptions (including assumptions regarding loan prepayments and behaviour                                 of non-maturity deposits), and frequency of measurement of the interest rate risk;                            

the variation in earnings, economic value or other relevant measure used by the management for upward and downward rate shocks                                 according to management's method for measuring the interest rate risk, broken down by currency.                            

### Article 449U.K.Exposure to securitisation positions

Institutions calculating risk-weighted exposure amounts in accordance with Part Three, Title II, Chapter 5 or own funds requirements                        in accordance with Article 337 or 338 shall disclose the following information, where relevant, separately for their trading                        and non-trading book:                   

a description of the institution's objectives in relation to securitisation activity;                            

the nature of other risks including liquidity risk inherent in securitised assets;                            

the type of risks in terms of seniority of underlying securitisation positions and in terms of assets underlying those latter                                 securitisation positions assumed and retained with re-securitisation activity;                            

the different roles played by the institution in the securitisation process;                            

an indication of the extent of the institution's involvement in each of the roles referred to in point (d);                            

a description of the processes in place to monitor changes in the credit and market risk of securitisation exposures including,                                 how the behaviour of the underlying assets impacts securitisation exposures and a description of how those processes differ                                 for re-securitisation exposures;                            

a description of the institution's policy governing the use of hedging and unfunded protection to mitigate the risks of retained                                 securitisation and re-securitisation exposures, including identification of material hedge counterparties by relevant type                                 of risk exposure;                            

the approaches to calculating risk-weighted exposure amounts that the institution follows for its securitisation activities                                 including the types of securitisation exposures to which each approach applies;                            

the types of SSPE that the institution, as sponsor, uses to securitise third-party exposures including whether and in what                                 form and to what extent the institution has exposures to those SSPEs, separately for on- and off-balance sheet exposures,                                 as well as a list of the entities that the institution manages or advises and that invest in either the securitisation positions                                 that the institution has securitised or in SSPEs that the institution sponsors;                            

a summary of the institution's accounting policies for securitisation activities, including:                            

whether the transactions are treated as sales or financings;                                     

the recognition of gains on sales;                                     

the methods, key assumptions, inputs and changes from the previous period for valuing securitisation positions;                                     

the treatment of synthetic securitisations if not covered by other accounting policies;                                     

how assets awaiting securitisation are valued and whether they are recorded in the institution's non-trading book or the trading                                          book;                                     

policies for recognising liabilities on the balance sheet for arrangements that could require the institution to provide financial                                          support for securitised assets;                                     

the names of the ECAIs used for securitisations and the types of exposure for which each agency is used;                            

where applicable, a description of the Internal Assessment Approach as set out in Part Three, Title II, Chapter 5, Section                                 3, including the structure of the internal assessment process and relation between internal assessment and external ratings,                                 the use of internal assessment other than for Internal Assessment Approach capital purposes, the control mechanisms for the                                 internal assessment process including discussion of independence, accountability, and internal assessment process review,                                 the exposure types to which the internal assessment process is applied and the stress factors used for determining credit                                 enhancement levels, by exposure type;                            

an explanation of significant changes to any of the quantitative disclosures in points (n) to (q) since the last reporting                                 period;                            

separately for the trading and the non-trading book, the following information broken down by exposure type:                            

the total amount of outstanding exposures securitised by the institution, separately for traditional and synthetic securitisations                                          and securitisations for which the institution acts only as sponsor;                                     

the aggregate amount of on-balance sheet securitisation positions retained or purchased and off-balance sheet securitisation                                          exposures;                                     

the aggregate amount of assets awaiting securitisation;                                     

for securitised facilities subject to the early amortisation treatment, the aggregate drawn exposures attributed to the originator's                                          and investors' interests respectively, the aggregate capital requirements incurred by the institution against the originator's                                          interest and the aggregate capital requirements incurred by the institution against the investor's shares of drawn balances                                          and undrawn lines;                                     

the amount of securitisation positions that are deducted from own funds or risk-weighted at 1 250 %;                                     

a summary of the securitisation activity of the current period, including the amount of exposures securitised and recognised                                          gain or loss on sale;                                     

separately for the trading and the non-trading book, the following information:                            

the aggregate amount of securitisation positions retained or purchased and the associated capital requirements, broken down                                          between securitisation and re-securitisation exposures and further broken down into a meaningful number of risk-weight or                                          capital requirement bands, for each capital requirements approach used;                                     

the aggregate amount of re-securitisation exposures retained or purchased broken down according to the exposure before and                                          after hedging/insurance and the exposure to financial guarantors, broken down according to guarantor credit worthiness categories                                          or guarantor name;                                     

for the non-trading book and regarding exposures securitised by the institution, the amount of impaired/past due assets securitised                                 and the losses recognised by the institution during the current period, both broken down by exposure type;                            

for the trading book, the total outstanding exposures securitised by the institution and subject to a capital requirement                                 for market risk, broken down into traditional/synthetic and by exposure type;                            

where applicable, whether the institution has provided support within the terms of Article 248(1) and the impact on own funds.                            

### Article 450U.K.Remuneration policy

1.Institutions shall disclose at least the following information, regarding the remuneration policy and practices of the institution                           for those categories of staff whose professional activities have a material impact on its risk profile:                  

(a)information concerning the decision-making process used for determining the remuneration policy, as well as the number of                           meetings held by the main body overseeing remuneration during the financial year, including, if applicable, information about                           the composition and the mandate of a remuneration committee, the external consultant whose services have been used for the                           determination of the remuneration policy and the role of the relevant stakeholders;                  

(b)information on link between pay and performance;                  

(c)the most important design characteristics of the remuneration system, including information on the criteria used for performance                           measurement and risk adjustment, deferral policy and vesting criteria;                  

(d)the ratios between fixed and variable remuneration set in accordance with Article 94(1)(g) of Directive 2013/36/EU;                  

(e)information on the performance criteria on which the entitlement to shares, options or variable components of remuneration                           is based;                  

(f)the main parameters and rationale for any variable component scheme and any other non-cash benefits;                  

(g)aggregate quantitative information on remuneration, broken down by business area;                  

(h)aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have                           a material impact on the risk profile of the institution, indicating the following:                  

the amounts of remuneration for the financial year, split into fixed and variable remuneration, and the number of beneficiaries;                            

the amounts and forms of variable remuneration, split into cash, shares, share-linked instruments and other types;                            

the amounts of outstanding deferred remuneration, split into vested and unvested portions;                            

the amounts of deferred remuneration awarded during the financial year, paid out and reduced through performance adjustments;                            

new sign-on and severance payments made during the financial year, and the number of beneficiaries of such payments;                            

the amounts of severance payments awarded during the financial year, number of beneficiaries and highest such award to a single                                 person;                            

(i)the number of individuals being remunerated EUR 1 million or more per financial year, for remuneration between EUR 1 million                           and EUR 5 million broken down into pay bands of EUR 500 000 and for remuneration of EUR 5 million and above broken down into pay bands of EUR 1 million;                  

(j)upon demand from the Member State or competent authority, the total remuneration for each member of the management body or                           senior management.                  

2.For institutions that are significant in terms of their size, internal organisation and the nature, scope and the complexity                           of their activities, the quantitative information referred to in this Article shall also be made available to the public at                           the level of members of the management body of the institution.                  

Institutions shall comply with the requirements set out in this Article in a manner that is appropriate to their size, internal                        organisation and the nature, scope and complexity of their activities and without prejudice to Directive 95/46/EC.                   

### Article 451U.K.Leverage

1.Institutions shall disclose the following information regarding their leverage ratio calculated in accordance with Article                           429 and their management of the risk of excessive leverage:                  

(a)the leverage ratio and how the institution applies Article 499(2) and (3);                  

(b)a breakdown of the total exposure measure as well as a reconciliation of the total exposure measure with the relevant information                           disclosed in published financial statements;                  

(c)where applicable, the amount of derecognised fiduciary items in accordance with Article 429(11);                  

(d)a description of the processes used to manage the risk of excessive leverage;                  

(e)a description of the factors that had an impact on the leverage ratio during the period to which the disclosed leverage ratio                           refers.                  

2.EBA shall develop draft implementing technical standards to determine the uniform disclosure template for the disclosure referred                           to in paragraph 1 and the instructions on how to use such template.                  

EBA shall submit those draft implementing technical standards to the Commission by 30 June 2014.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

## TITLE IIIU.K.QUALIFYING REQUIREMENTS FOR THE USE OF PARTICULAR INSTRUMENTS OR METHODOLOGIES

### Article 452U.K.Use of the IRB Approach to credit risk

Institutions calculating the risk-weighted exposure amounts under the IRB Approach shall disclose the following information:                   

the competent authority's permission of the approach or approved transition;                            

an explanation and review of:                            

the structure of internal rating systems and relation between internal and external ratings;                                     

the use of internal estimates other than for calculating risk-weighted exposure amounts in accordance with Part Three, Title                                          II, Chapter 3;                                     

the process for managing and recognising credit risk mitigation;                                     

the control mechanisms for rating systems including a description of independence, accountability, and rating systems review;                                     

a description of the internal ratings process, provided separately for the following exposure classes:                            

central governments and central banks;                                     

institutions;                                     

corporate, including SMEs, specialised lending and purchased corporate receivables;                                     

retail, for each of the categories of exposures to which the different correlations in Article 154(1) to (4) correspond;                                     

equities;                                     

the exposure values for each of the exposure classes specified in Article 147. Exposures to central governments and central                                 banks, institutions and corporates where institutions use own estimates of LGDs or conversion factors for the calculation                                 of risk-weighted exposure amounts, shall be disclosed separately from exposures for which the institutions do not use such                                 estimates;                            

for each of the exposure classes central governments and central banks, institutions, corporates and equity, and across a                                 sufficient number of obligor grades (including default) to allow for a meaningful differentiation of credit risk, institutions                                 shall disclose:                            

the total exposures, including for the exposure classes central governments and central banks, institutions and corporates,                                          the sum of outstanding loans and exposure values for undrawn commitments; and for equities the outstanding amount;                                     

the exposure-weighted average risk weight;                                     

for the institutions using own estimates of conversion factors for the calculation of risk-weighted exposure amounts, the                                          amount of undrawn commitments and exposure-weighted average exposure values for each exposure class;                                     

For the retail exposure class and for each of the categories set out in point (c)(iv), either the disclosures outlined in                                 point (e) (if applicable, on a pooled basis), or an analysis of exposures (outstanding loans and exposure values for undrawn                                 commitments) against a sufficient number of EL grades to allow for a meaningful differentiation of credit risk (if applicable,                                 on a pooled basis);                            

the actual specific credit risk adjustments in the preceding period for each exposure class (for retail, for each of the categories                                 as set out in point (c)(iv)) and how they differ from past experience;                            

a description of the factors that impacted on the loss experience in the preceding period (for example, has the institution                                 experienced higher than average default rates, or higher than average LGDs and conversion factors);                            

the institution's estimates against actual outcomes over a longer period. At a minimum, this shall include information on                                 estimates of losses against actual losses in each exposure class (for retail, for each of the categories as set out in point                                 (c)(iv) over a period sufficient to allow for a meaningful assessment of the performance of the internal rating processes                                 for each exposure class (for retail for each of the categories as set out in point (c)(iv). Where appropriate, the institutions                                 shall further decompose this to provide analysis of PD and, for the institutions using own estimates of LGDs and/or conversion                                 factors, LGD and conversion factor outcomes against estimates provided in the quantitative risk assessment disclosures set                                 out in this Article;                            

for all exposure classes specified in Article 147 and for each category of exposure to which the different correlations in                                 Article 154 (1) to (4) correspond:                            

for the institutions using own LGD estimates for the calculation of risk-weighted exposure amounts, the exposure-weighted                                          average LGD and PD in percentage for each relevant geographical location of credit exposures;                                     

for the institutions that do not use own LGD estimates, the exposure-weighted average PD in percentage for each relevant geographical                                          location of credit exposures.                                     

For the purposes of point (c), the description shall include the types of exposure included in the exposure class, the definitions,                        methods and data for estimation and validation of PD and, if applicable, LGD and conversion factors, including assumptions                        employed in the derivation of these variables, and the descriptions of material deviations from the definition of default                        as set out in Article 178, including the broad segments affected by such deviations.                   

For the purposes of point (j), the relevant geographical location of credit exposures means exposures in the Member States                        in which the institution has been authorised and Member States or third countries in which institutions carry out activities                        through a branch or a subsidiary.                   

### Article 453U.K.Use of credit risk mitigation techniques

The institutions applying credit risk mitigation techniques shall disclose the following information:                   

the policies and processes for, and an indication of the extent to which the entity makes use of, on- and off-balance sheet                                 netting;                            

the policies and processes for collateral valuation and management;                            

a description of the main types of collateral taken by the institution;                            

the main types of guarantor and credit derivative counterparty and their creditworthiness;                            

information about market or credit risk concentrations within the credit mitigation taken;                            

for institutions calculating risk-weighted exposure amounts under the Standardised Approach or the IRB Approach, but not providing                                 own estimates of LGDs or conversion factors in respect of the exposure class, separately for each exposure class, the total                                 exposure value (after, where applicable, on- or off-balance sheet netting) that is covered — after the application of volatility                                 adjustments — by eligible financial collateral, and other eligible collateral;                            

for institutions calculating risk-weighted exposure amounts under the Standardised Approach or the IRB Approach, separately                                 for each exposure class, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by                                 guarantees or credit derivatives. For the equity exposure class, this requirement applies to each of the approaches provided                                 in Article 155.                            

### Article 454U.K.Use of the Advanced Measurement Approaches to operational risk

The institutions using the Advanced Measurement Approaches set out in Articles 321 to 324 for the calculation of their own                        funds requirements for operational risk shall disclose a description of the use of insurances and other risk transfer mechanisms                        for the purpose of mitigation of this risk.                   

### Article 455U.K.Use of Internal Market Risk Models

Institutions calculating their capital requirements in accordance with Article 363 shall disclose the following information:                   

for each sub-portfolio covered:                            

the characteristics of the models used;                                     

where applicable, for the internal models for incremental default and migration risk and for correlation trading, the methodologies                                          used and the risks measured through the use of an internal model including a description of the approach used by the institution                                          to determine liquidity horizons, the methodologies used to achieve a capital assessment that is consistent with the required                                          soundness standard and the approaches used in the validation of the model;                                     

a description of stress testing applied to the sub-portfolio;                                     

a description of the approaches used for back-testing and validating the accuracy and consistency of the internal models and                                          modelling processes;                                     

the scope of permission by the competent authority;                            

a description of the extent and methodologies for compliance with the requirements set out in Articles 104 and 105;                            

the highest, the lowest and the mean of the following:                            

the daily value-at-risk measures over the reporting period and as per the period end;                                     

the stressed value-at-risk measures over the reporting period and as per the period end;                                     

the risk numbers for incremental default and migration risk and for the specific risk of the correlation trading portfolio                                          over the reporting period and as per the period-end;                                     

the elements of the own funds requirement as specified in Article 364;                            

the weighted average liquidity horizon for each sub-portfolio covered by the internal models for incremental default and migration                                 risk and for correlation trading;                            

a comparison of the daily end-of-day value-at-risk measures to the one-day changes of the portfolio's value by the end of                                 the subsequent business day together with an analysis of any important overshooting during the reporting period.                            

# PART NINEU.K.DELEGATED AND IMPLEMENTING ACTS

## Article 456U.K.Delegated acts

1.The Commission shall be empowered to adopt delegated acts in accordance with Article 462, concerning the following matters:                  

(a)clarification of the definitions set out in Articles 4, 5, 142, 153, 192, 242, 272, 300, 381 and 411 to ensure uniform application                           of this Regulation;                  

(b)clarification of the definitions set out in Articles 4, 5, 142, 153, 192, 242, 272, 300, 381 and 411 in order to take account,                           in the application of this Regulation, of developments on financial markets;                  

(c)amendment of the list of exposure classes in Articles 112 and 147 in order to take account of developments on financial markets;                  

(d)the amount specified in point (c) of Article 123, Article 147(5)(a), Article 153(4) and Article 162(4), to take into account                           the effects of inflation;                  

(e)the list and classification of the off-balance sheet items in Annexes I and II, in order to take account of developments on                           financial markets;                  

(f)adjustment of the categories of investment firms in Article 95(1) and Article 96(1) to take account of developments on financial                           markets;                  

(g)clarification of the requirement laid down in Article 97 to ensure uniform application of this Regulation.                  

(h)amendment of the own funds requirements as set out in Articles 301 to 311 of this Regulation and Articles 50a to 50d of Regulation                           (EU) No 648/2012 to take account of developments or amendments of the international standards for exposures to a central counterparty;                  

(i)clarification of the terms referred to in the exemptions provided for in Article 400;                  

(j)amendment of the capital measure and the total exposure measure of the leverage ratio referred to in Article 429(2) in order                           to correct any shortcomings discovered on the basis of the reporting referred to in Article 430(1) before the leverage ratio                           has to be published by institutions as set out in Article 451(1)(a).                  

2.EBA shall monitor the own funds requirements for credit valuation adjustment risk and by 1 January 2015 submit a report to the Commission. In particular, the report shall assess:                  

(a)the treatment of CVA risk as a stand-alone charge versus an integrated component of the market risk framework;                  

(b)the scope of the CVA risk charge including the exemption in Article 482;                  

(c)eligible hedges;                  

(d)calculation of capital requirements of CVA risk.                  

On the basis of that report and where the findings are that such action is necessary the Commission shall also be empowered                        to adopt a delegated act in accordance with Article 462 to amend Article 381, Article 382(1) to (3) and Articles 383 to 386                        concerning those items.                   

## Article 457U.K.Technical adjustments and corrections

The Commission shall be empowered to adopt delegated acts in accordance with Article 462, to make technical adjustment and                        corrections of non-essential elements in the following provisions in order to take account of developments in new financial                        products or activities, to make adjustments taking into account developments after the adoption of this Regulation in other                        legislative acts of the Union on financial services and accounting including accounting standards based on Regulation (EC)                        No 1606/2002:                   

the own funds requirements for credit risk laid down in Articles 111 to 134, and in Articles 143 to 191;                            

the effects of credit risk mitigation in accordance with Articles 193 to 241;                            

the own funds requirements for securitisation laid down in Articles 243 to 266;                            

the own funds requirements for counterparty credit risks in accordance with Articles 272 to 311;                            

the own funds requirements for operational risk laid down in Articles 315 to 324;                            

the own funds requirements for market risk laid down in Articles 325 to 377;                            

the own funds requirements for settlement risk laid down in Articles 378 and 379;                            

the own funds requirements for credit valuation adjustment risk laid down in Articles 383, 384 and 386;                            

Part Two and Article 99 only as a result of developments in accounting standards or requirements which take account of Union                                 legislation.                            

## Article 458U.K.Macroprudential or systemic risk identified at the level of a Member State

1.Member States shall designate the authority in charge of the application of this Article. This authority shall be the competent                           authority or the designated authority.                  

2.Where the authority determined in accordance with paragraph 1 identifies changes in the intensity of macroprudential or systemic                           risk in the financial system with the potential to have serious negative consequences to the financial system and the real                           economy in a specific Member State and which that authority considers would better be addressed by means of stricter national                           measures, it shall notify the European Parliament, the Council, the Commission, the ESRB and EBA of that fact and submit relevant                           quantitative or qualitative evidence of all of the following:                  

(a)the changes in the intensity of macroprudential or systemic risk;                  

(b)the reasons why such changes could pose a threat to financial stability at national level;                  

(c)a justification of why Articles 124 and 164 of this Regulation and Articles 101, 103, 104, 105, 133, and 136 of Directive                           2013/36/EU cannot adequately address the macroprudential or systemic risk identified, taking into account the relative effectiveness                           of those measures;                  

(d)draft national measures for domestically authorised institutions, or a subset of those institutions, intended to mitigate                           the changes in the intensity of risk and concerning:                  

the level of own funds laid down in Article 92;                            

the requirements for large exposures laid down in Article 392 and Article 395 to 403;                            

the public disclosure requirements laid down in Articles 431 to 455;                            

the level of the capital conservation buffer laid down in Article 129 of Directive 2013/36/EU;                            

liquidity requirements laid down in Part Six;                            

risk weights for targeting asset bubbles in the residential property and commercial immovable property sector; or                            

intra financial sector exposures;                            

(e)an explanation as to why the draft measures are deemed by the authority determined in accordance with paragraph 1 to be suitable,                           effective and proportionate to address the situation; and                  

(f)an assessment of the likely positive or negative impact of the draft measures on the internal market based on information                           which is available to the Member State concerned.                  

3.When authorised to apply national measures in accordance with this Article, the authorities determined in accordance with                           paragraph 1 shall provide relevant competent authorities or designated authorities in other Member States with all relevant                           information.                  

4.The power to adopt an implementing act to reject the draft national measures referred to in point (d) of paragraph 2 is conferred                           on the Council, acting by qualified majority, on a proposal from the Commission.                  

Within one month of receiving the notification referred to in paragraph 2, the ESRB and EBA shall provide their opinions on                        the points mentioned in that paragraph to the Council, the Commission and the Member State concerned.                   

Taking utmost account of the opinions referred to in the second subparagraph and if there is robust, strong and detailed evidence                        that the measure will have a negative impact on the internal market that outweighs the financial stability benefits resulting                        in a reduction of the macroprudential or systemic risk identified, the Commission may, within one month, propose to the Council                        an implementing act to reject the draft national measures.                   

In the absence of a Commission proposal within that period of one month, the Member State concerned may immediately adopt                        the draft national measures for a period of up to two years or until the macroprudential or systemic risk ceases to exist                        if that occurs sooner.                   

The Council shall decide on the proposal by the Commission within one month after receipt of the proposal and state its reasons                        for rejecting or not rejecting the draft national measures.                   

The Council shall only reject the draft national measures if it considers that one or more of the following conditions are                        not complied with:                   

(a)the changes in the intensity of macroprudential or systemic risk are of such nature as to pose risk to financial stability                           at national level;                  

(b)Articles 124 and 164 of this Regulation and Articles 101, 103, 104, 105, 133, and 136 of Directive 2013/36/EU cannot adequately                           address the macroprudential or systemic risk identified, taking into account the relative effectiveness of those measures;                  

(c)the draft national measures are more suitable to address the identified macroprudential or systemic risk and do not entail                           disproportionate adverse effects on the whole or parts of the financial system in other Member States or in the Union as a                           whole, thus forming or creating an obstacle to the functioning of the internal market;                  

(d)the issue concerns only one Member State; and                  

(e)the risks have not already been addressed by other measures in this Regulation or in Directive 2013/36/EU.                  

The assessment of the Council shall take into account the opinion of the ESRB and EBA and shall be based on the evidence presented                        in accordance with paragraph 2 by the authority determined in accordance with paragraph 1.                   

In the absence of a Council implementing act to reject the draft national measures within one month after receipt of the proposal                        by the Commission, the Member State may adopt the measures and apply them for a period of up to two years or until the macroprudential                        or systemic risk ceases to exist if that occurs sooner.                   

5.Other Member States may recognise the measures set in accordance with this Article and apply them to domestically authorised                           branches located in the Member State authorised to apply the measures.                  

6.Where Member States recognise the measures set in accordance with this Article, they shall notify the Council, the Commission,                           EBA, the ESRB and the Member State authorised to apply the measures.                  

7.When deciding whether to recognise the measures set in accordance with this Article, the Member State shall take into consideration                           the criteria set in paragraph 4.                  

8.The Member State authorised to apply the measures may ask the ESRB to issue a recommendation as referred to in Article 16                           of Regulation (EU) No 1092/2010 to one or more Member States which do not recognise the measures.                  

9.Before the expiry of the authorisation issued in accordance with paragraph 4, the Member State shall, in consultation with                           the ESRB and EBA, review the situation and may adopt, in accordance with the procedure referred to in paragraph 4, a new decision                           for the extension of the period of application of national measures for one additional year each time. After the first extension,                           the Commission shall in consultation with the ESRB and EBA review the situation at least annually.                  

10.Notwithstanding the procedure as set out in paragraphs 3 to 9, Member States shall be allowed to increase the risk weights                           beyond those provided in this Regulation by up to 25 %, for those exposures identified in points (vi) and (vii) of paragraph                           2(d) of this Article and tighten the large exposure limit provided in Article 395 by up to 15 % for a period of up to two                           years or until the macroprudential or systemic risk ceases to exist if that occurs sooner, provided that the conditions and                           notification requirements in paragraph 2 of this Article are met.                  

## Article 459U.K.Prudential requirements

The Commission shall be empowered to adopt delegated acts in accordance with Article 462, to impose, for a period of one year,                        stricter prudential requirements for exposures where this is necessary to address changes in the intensity of microprudential                        and macroprudential risks which arise from market developments in the Union or outside the Union affecting all Member States,                        and where the instruments of this Regulation and Directive 2013/36/EU are not sufficient to address these risks, in particular                        upon the recommendation or opinion of the ESRB or EBA, concerning:                   

the level of own funds laid down in Article 92;                            

the requirements for large exposures laid down in Article 392 and Articles 395 to 403;                            

the public disclosure requirements laid down in Articles 431 to 455.                            

The Commission, assisted by the ESRB shall, at least on an annual basis, submit to the European Parliament and the Council,                        a report on market developments potentially requiring the use of this Article.                   

## Article 460U.K.Liquidity

1.The Commission shall be empowered to adopt a delegated act in accordance with Article 462 to specify in detail the general                           requirement set out in Article 412(1). The delegated act adopted in accordance with this paragraph shall be based on the items                           to be reported in accordance with Part Six, Title II and Annex III, shall specify under which circumstances competent authorities                           have to impose specific in- and outflow levels on credit institutions in order to capture specific risks to which they are                           exposed and shall respect the thresholds set out in paragraph 2.                  

2.The liquidity coverage requirement referred to in Article 412 shall be introduced in accordance with the following phasing-in:                  

(a)60 % of the liquidity coverage requirement in 2015;                  

(b)70 % as from 1 January 2016;                  

(c)80 % as from 1 January 2017;                  

(d)100 % as from 1 January 2018.                  

For this purpose the Commission shall take into account the reports referred to in Article 509(1), (2) and (3) and international                        standards developed by international fora as well as Union specificities.                   

The Commission shall adopt the delegated act referred to in paragraph 1 by 30 June 2014. It shall enter into force by 31 December 2014, but shall not apply before 1 January 2015.                   

## Article 461U.K.Review of the phasing-in of the liquidity coverage requirement

1.EBA shall, after consulting the ESRB, by 30 June 2016 report to the Commission on whether the phase-in of the liquidity coverage requirement as specified in Article 460(2) should                           be amended. Such analysis shall take due account of market and international regulatory developments as well as Union specificities.                  

EBA shall in its report assess in particular a deferred introduction of the 100 % minimum binding standard, until 1 January 2019. The report shall take into account the annual reports referred to in Article 509(1), relevant market data and the recommendations                        of all competent authorities.                   

2.Where necessary to address market and other developments, the Commission shall be empowered to adopt a delegated act in accordance                           with Article 462 to alter the phase-in specified in Article 460 and defer until 2019 the introduction of a 100 % binding minimum                           standard for the liquidity coverage requirement set out in Article 412(1) and to apply in 2018 a 90 % binding minimum standard                           for the liquidity coverage requirement.                  

For the purposes of assessing the necessity of deferral the Commission shall take into account the report and assessment referred                        to in paragraph 1.                   

A delegated act adopted in accordance with this Article shall not apply before 1 January 2018 and shall enter into force by 30 June 2017.                   

## Article 462U.K.Exercise of the delegation

1.The power to adopt delegated acts is conferred on the Commission subject to the conditions laid down in this Article.                  

2.The power to adopt delegated acts referred to in Articles 456 to 460 shall be conferred for an indeterminate period of time                           from 28 June 2013.                  

3.The delegation of power referred to in Articles 456 to 460 may be revoked at any time by the European Parliament or by the                           Council. A decision to revoke shall put an end to the delegation of the power specified in that decision. It shall take effect                           the day following the publication of the decision in the *Official Journal of the European Union* or at a later date specified therein. It shall not affect the validity of the delegated acts already in force.                  

4.As soon as it adopts a delegated act, the Commission shall notify it simultaneously to the European Parliament and to the                           Council.                  

5.A delegated act adopted pursuant to Articles 456 to 460 shall enter into force only if no objection has been expressed by                           the European Parliament or the Council within a period of three months of notification of that act to the European Parliament                           and the Council or if, before the expiry of that period, the European Parliament and the Council have both informed the Commission                           that they will not object. That period shall be extended by three months at the initiative of the European Parliament or of                           the Council.                  

## Article 463U.K.Objections to regulatory technical standards

Where the Commission adopts a regulatory technical standard pursuant to this Regulation which is the same as the draft regulatory                        technical standard submitted by EBA, the period during which the European Parliament and the Council may object to that regulatory                        technical standard shall be one month from the date of notification. At the initiative of the European Parliament or the Council                        that period shall be extended by one month. By way of derogation from the second subparagraph of Article 13(1) of Regulation                        (EU) No 1093/2010, the period during which the European Parliament or the Council may object to that regulatory technical                        standard may, where appropriate, be further extended by one month.                   

## Article 464U.K.European Banking Committee

1.The Commission shall be assisted by the European Banking Committee established by Commission Decision 2004/10/EC (32) . That committee shall be a committee within the meaning of Regulation (EU) No 182/2011.                  

2.Where reference is made to this paragraph, Article 5 of Regulation (EU) No 182/2011 shall apply.                  

# PART TENU.K.TRANSITIONAL PROVISIONS, REPORTS, REVIEWS AND AMENDMENTS

## TITLE IU.K.TRANSITIONAL PROVISIONS

### CHAPTER 1U.K.Own funds requirements, unrealised gains and losses measured at fair value and deductions

#### Section 1U.K.Own funds requirements

##### Article 465U.K.Own funds requirements

1.By way of derogation from points (a) and (b) of Article 92(1) the following own funds requirements shall apply during the                           period from 1 January 2014 to 31 December 2014:                  

(a)a Common Equity Tier 1 capital ratio of a level that falls within a range of 4 % to 4,5 %;                  

(b)a Tier 1 capital ratio of a level that falls within a range of 5,5 % to 6 %.                  

2.Competent authorities shall determine and publish the levels of the Common Equity Tier 1 and Tier 1 capital ratios in the                           ranges specified in paragraph 1 that institutions shall meet or exceed.                  

##### Article 466U.K.First time application of International Financial Reporting Standards

By way of derogation from Article 24(2), competent authorities shall grant institutions which are required to effect the valuation                        of assets and off-balance sheet items and the determination of own funds in accordance with the international accounting standards                        as applicable under Regulation (EC) No 1606/2002 for the first time a lead time of 24 months for the implementation of the                        necessary internal processes and technical requirements.                   

#### Section 2U.K.Unrealised gains and losses measured at fair value

##### Article 467U.K.Unrealised losses measured at fair value

1.By way of derogation from Article 35, during the period from 1 January 2014 to 31 December 2017 institutions shall include in the calculation of their Common Equity Tier 1 items only the applicable percentage of unrealised                           losses related to assets or liabilities measured at fair value, and reported on the balance sheet, excluding those referred                           to in Article 33 and all other unrealised losses reported as part of the profit and loss account.                  

2.The applicable percentage for the purposes of paragraph 1 shall fall within following ranges:                  

(a)20 % to 100 % during the period from 1 January 2014 to 31 December 2014;                  

(b)40 % to 100 % during the period from 1 January 2015 to 31 December 2015;                  

(c)60 % to 100 % during the period from 1 January 2016 to 31 December 2016; and                  

(d)80 % to 100 % for the period from 1 January 2017 to 31 December 2017.                  

By way of derogation from paragraph 1, the competent authorities may, in cases where such treatment was applied before 1 January 2014, allow institutions not to include in any element of own funds unrealised gains or losses on exposures to central governments                        classified in the ‘Available for Sale’ category of EU-endorsed IAS 39.                   

The treatment set out in the second subparagraph shall be applied until the Commission has adopted a regulation on the basis                        of Regulation (EC) No 1606/2002 endorsing the International Financial Reporting Standard replacing IAS 39.                   

3.Competent authorities shall determine and publish the applicable percentage in the ranges specified in points (a) to (d) of                           paragraph 2;                  

##### Article 468U.K.Unrealised gains measured at fair value

1.By way of derogation from Article 35, during the period from 1 January 2014 to 31 December 2017, institutions shall remove from their Common Equity Tier 1 items the applicable percentage of unrealised gains related to                           assets or liabilities measured at fair value and reported on the balance sheet, excluding those referred to in Article 33                           and all other unrealised gains with the exception of those related to investment properties reported as part of the profit                           and loss account. The resulting residual amount shall not be removed from Common Equity Tier 1 items.                  

2.For the purposes of paragraph 1, the applicable percentage shall be 100 % during the period from 1 January 2014 to 31 December 2014, and shall, after that date, fall within the following ranges:                  

(a)60 % to 100 % during the period from 1 January 2015 to 31 December 2015;                  

(b)40 % to 100 % during the period from 1 January 2016 to 31 December 2016;                  

(c)20 % to 100 % for the period from 1 January 2017 to 31 December 2017.                  

From 1 January 2015, where under Article 467 a competent authority requires institutions to include in the calculation of Common Equity Tier                        1 capital 100 % of their unrealised losses measured at fair value, that competent authority may also permit institutions to                        include in that calculation 100 % of their unrealised gains at fair value.                   

From 1 January 2015, where under Article 467 a competent authority requires institutions to include a percentage of unrealised losses measured                        at fair value in the calculation of Common Equity Tier 1 capital, that competent authority shall not set an applicable percentage                        of unrealised gains under paragraph 2 of this Article which results in a percentage of unrealised gains that is included in                        the calculation of Common Equity Tier 1 capital that exceeds the applicable percentage of unrealised losses set in accordance                        with Article 467.                   

3.Competent authorities shall determine and publish the applicable percentage of unrealised gains in the ranges specified in                           points (a) to (c) of paragraph 2 that is removed from Common Equity Tier 1 capital.                  

4.By way of derogation from Article 33(1)(c), during the period from 1 January 2013 to 31 December 2017, institutions shall not include in their own funds the applicable percentage, as specified in Article 478, of the fair value                           gains and losses from derivative liabilities arising from changes in the own credit standing of the institution. The percentage                           applied to fair value losses arising from changes in the own credit standing of the institution shall not exceed the percentage                           applied to fair value gains arising from changes in the own credit standing of the institution.                  

#### Section 3U.K.Deductions

##### Sub-Section 1U.K.Deductions from Common Equity Tier 1 items

###### Article 469U.K.Deductions from Common Equity Tier 1 items

1.By way of derogation from Article 36(1), during the period from 1 January 2014 to 31 December 2017, the following shall apply:                  

(a)institutions shall deduct from Common Equity Tier 1 items the applicable percentage specified in Article 478 of the amounts                           required to be deducted pursuant to points (a) to (h) of Article 36(1), excluding deferred tax assets that rely on future                           profitability and arise from temporary differences;                  

(b)institutions shall apply the relevant provisions laid down in Article 472 to the residual amounts of items required to be                           deducted pursuant to points (a) to (h) of Article 36(1), excluding deferred tax assets that rely on future profitability and                           arise from temporary differences;                  

(c)institutions shall deduct from Common Equity Tier 1 items the applicable percentage specified in Article 478 of the total                           amount required to be deducted pursuant to points (c) and (i) of Article 36(1) after applying Article 470;                  

(d)institutions shall apply the requirements laid down in Article 472(5) or (11), as applicable, to the total residual amount                           of items required to be deducted pursuant to points (c) and (i) of Article 36(1) after applying Article 470.                  

2.Institutions shall determine the portion of the total residual amount referred to in point (d) of paragraph 1, that is subject                           to Article 472(5), by dividing the amount specified in point (a) of this paragraph by the amount specified in point (b) of                           this paragraph:                  

(a)the amount of deferred tax assets that are dependent on future profitability and arise from temporary differences referred                           to in point (a) of Article 470(2);                  

(b)the sum of the amounts referred to in points (a) and (b) of Article 470(2).                  

3.Institutions shall determine the portion of the total residual amount referred to point (d) of paragraph 1 that is subject                           to Article 472(11) by dividing the amount specified in point (a) of this paragraph by the amount specified in point (b) of                           this paragraph:                  

(a)the amount of direct and indirect holdings of the Common Equity Tier 1 instruments referred to in point (b) of Article 470(2);                  

(b)the sum of the amounts referred to in points (a) and (b) of Article 470(2).                  

###### Article 470U.K.Exemption from deduction from Common Equity Tier 1 items

1.For the purposes of this Article, relevant Common Equity Tier 1 items shall comprise the Common Equity Tier 1 items of the                           institution calculated after applying the provisions of Articles 32 to 35 and making the deductions pursuant to points (a)                           to (h), (k)(ii) to (v) and (l) of Article 36(1), excluding deferred tax assets that rely on future profitability and arise                           from temporary differences.                  

2.By way of derogation from Article 48(1), during the period from 1 January 2014 to 31 December 2017, institutions shall not deduct the items listed in points (a) and (b) of this paragraph which in aggregate are equal to or                           less than 15 % of relevant Common Equity Tier 1 items of the institution:                  

(a)deferred tax assets that are dependent on future profitability and arise from temporary differences and in aggregate are equal                           to or less than 10 % of relevant Common Equity Tier 1 items;                  

(b)where an institution has a significant investment in a financial sector entity, the direct, indirect and synthetic holdings                           by the institution of the Common Equity Tier 1 instruments of that entity that in aggregate are equal to or less than 10 %                           of relevant Common Equity Tier 1 items.                  

3.By way of derogation from Article 48(4), the items exempt from deduction pursuant to paragraph 2 of this Article shall be                           risk weighted at 250 %. The items referred to in point (b) of paragraph 2 of this Article shall be subject to the requirements                           of Title IV of Part Three, as applicable.                  

###### Article 471U.K.Exemption from Deduction of Equity Holdings in Insurance Companies from Common Equity Tier 1 Items

1.By way of derogation from Article 49(1), during the period from 1 January 2014 to 31 December 2022, competent authorities may permit institutions to not deduct equity holdings in insurance undertakings, reinsurance undertakings                           and insurance holding companies where the following conditions are met:                  

(a)the conditions laid down in points (a), (c) and (e) of Article 49(1);                  

(b)the competent authorities are satisfied with the level of risk control and financial analysis procedures specifically adopted                           by the institution in order to supervise the investment in the undertaking or holding company;                  

(c)the equity holdings of the institution in the insurance undertaking, reinsurance undertaking or insurance holding company                           do not exceed 15 % of the Common Equity Tier 1 instruments issued by that insurance entity as at 31 December 2012 and during the period from 1 January 2013 to 31 December 2022;                  

(d)the amount of the equity holding which is not deducted does not exceed the amount held in the Common Equity Tier 1 instruments                           in the insurance undertaking, reinsurance undertaking or insurance holding company as at 31 December 2012.                  

2.The equity holdings which are not deducted pursuant to paragraph 1 shall qualify as exposures and be risk weighted at 370                           %.                  

###### Article 472U.K.Items not deducted from Common Equity Tier 1

1.By way of derogation from point (c) of Article 33(1) and points (a) to (i) of Article 36(1), during the period from 1 January 2014 to 31 December 2017, institutions shall apply this Article to the residual amounts of items referred to in Article 468(4) and in points (b) and                           (d) of Article 469(1), as applicable.                  

2.The residual amount of the valuation adjustments to derivative liabilities arising from an institution's own credit risk shall                           not be deducted.                  

3.Institutions shall apply the following to the residual amount of losses of the current financial year referred to in point                           (a) of Article 36(1):                  

(a)losses that are material are deducted from Tier 1 items;                  

(b)losses that are not material are not deducted.                  

4.Institutions shall deduct the residual amount of the intangible assets referred to in point (b) of Article 36(1) from Tier                           1 items.                  

5.The residual amount of the deferred tax assets referred to in point (c) of Article 36(1) shall not be deducted and shall be                           subject to a risk weight of 0 %.                  

6.The residual amount of the items referred to in point (d) of Article 36(1) shall be deducted half from Tier 1 items and half                           from Tier 2 items.                  

7.The residual amount of the assets of a defined benefit pension fund referred to in point (e) of Article 36(1) shall not be                           deducted from any element of own funds and shall be included in Common Equity Tier 1 items to the extent that amount would                           have been recognised as original own funds in accordance with the national transposition measures for points (a) to (ca) of                           Article 57 of Directive 2006/48/EC.                  

8.Institutions shall apply the following to the residual amount of holdings of own Common Equity Tier 1 instruments referred                           to in point (f) of Article 36(1):                  

(a)the amount of direct holdings is deducted from Tier 1 items;                  

(b)the amount of indirect and synthetic holdings, including own Common Equity Tier 1 instruments that an institution could be                           obliged to purchase by virtue of an existing or contingent contractual obligation, is not deducted and is subject to a risk                           weight in accordance with Chapter 2 or 3 of Title II of Part Three and to the requirements laid down in Title IV of Part Three,                           as applicable.                  

9.Institutions shall apply the following to the residual amount of holdings of Common Equity Tier 1 instruments of a financial                           sector entity where the institution has reciprocal cross holdings with that entity referred to in point (g) of Article 36(1):                  

(a)where an institution does not have a significant investment in that financial sector entity, the amount of its holding of                           the Common Equity Tier 1 instruments of that entity is treated as falling under point (h) of Article 36(1);                  

(b)where an institution has a significant investment in that financial sector entity, the amount of its holdings of Common Equity                           Tier 1 instruments of that entity is treated as falling under point (i) of Article 36(1).                  

10.Institutions shall apply the following to the residual amounts of items referred to in point (h) of Article 36(1):                  

(a)the amounts required to be deducted that relate to direct holdings are deducted half from Tier 1 items and half from Tier                           2 items;                  

(b)the amounts that relate to indirect and synthetic holdings are not deducted and are subject to a risk weights in accordance                           with Chapter 2 or 3 of Title II of Part Three and to the requirements laid down in Title IV of Part Three, as applicable.                  

11.Institutions shall apply the following to the residual amounts of the items referred to in point (i) of Article 36(1):                  

(a)the amounts required to be deducted that relate to direct holdings are deducted half from Tier 1 items and half from Tier                           2 items;                  

(b)the amounts that relate to indirect and synthetic holdings are not deducted and are subject to risk weights in accordance                           with Chapter 2 or 3 of Title II of Part Three and to the requirements laid down in Title IV of Part Three, as applicable.                  

###### Article 473U.K.Introduction of amendments to IAS 19

1.By way of derogation from Article 481 during the period from 1 January 2014 until 31 December 2018, competent authorities may permit institutions that prepare their accounts in conformity with the international accounting                           standards adopted in accordance with the procedure laid down in Article 6(2) of Regulation (EC) No 1606/2002 to add to their                           Common Equity Tier 1 capital the applicable amount in accordance with paragraph 2 or 3 of this Article, as applicable, multiplied                           by the factor applied in accordance with paragraph 4.                  

2.The applicable amount shall be calculated by deducting from the sum derived in accordance with point (a) the sum derived in                           accordance with point (b):                  

(a)institutions shall determine the values of the assets of their defined benefit pension funds or plans, as applicable, in accordance                           with Regulation (EC) No 1126/2008 (33)  as amended by Regulation (EU) No 1205/2011 (34) . Institutions shall then deduct from the values of these assets the values of the obligations under the same funds or plans                           determined according to the same accounting rules;                  

(b)institutions shall determine the values of the assets of their defined pension funds or plans, as applicable, in accordance                           with the rules set out in Regulation (EC) No 1126/2008. Institutions shall then deduct from the values of those assets, the                           values of the obligations under the same funds or plans determined in accordance with the same accounting rules.                  

3.The amount determined in accordance with paragraph 2 shall be limited to the amount not required to be deducted from own funds,                           prior to 1 January 2014, under national transposition measures of Directive 2006/48/EC, insofar as those national transposition measures would be                           eligible for the treatment set out in Article 481 of this Regulation in the Member State concerned.                  

4.The following factors apply:                  

(a)1 in the period from 1 January 2014 to 31 December 2014;                  

(b)0,8 in the period from 1 January 2015 to 31 December 2015;                  

(c)0,6 in the period from 1 January 2016 to 31 December 2016;                  

(d)0,4 in the period from 1 January 2017 to 31 December 2017;                  

(e)0,2 in the period from 1 January 2018 to 31 December 2018.                  

5.Institutions shall disclose the values of assets and liabilities in accordance with paragraph 2 in their published financial                           statements.                  

##### Sub-Section 2U.K.Deductions from Additional Tier 1 items

###### Article 474U.K.Deductions from Additional Tier 1 items

By way of derogation from Article 56, during the period from 1 January 2014 to 31 December 2017, the following shall apply:                   

institutions shall deduct from Additional Tier 1 items the applicable percentage specified in Article 478 of the amounts required                                 to be deducted pursuant to Article 56;                            

institutions shall apply the requirements laid down in Article 475 to the residual amounts of the items required to be deducted                                 pursuant to Article 56.                            

###### Article 475U.K.Items not deducted from Additional Tier 1 items

1.By way of derogation from Article 56, during the period from 1 January 2014 to 31 December 2017, the requirements laid down in this Article shall apply to the residual amounts referred to in point (b) of Article 474.                  

2.Institutions shall apply the following to the residual amount of the items referred to in point (a) of Article 56:                  

(a)direct holdings of own Additional Tier 1 instruments are deducted at book value from Tier 1 items;                  

(b)indirect and synthetic holdings of own Additional Tier 1 instruments, including own Additional Tier 1 instruments that an                           institution could be obliged to purchase by virtue of an existing or contingent contractual obligation, are not deducted and                           are risk weighted in accordance with Chapter 2 or 3 of Title II of Part Three and subject to the requirements of Title IV                           of Part Three, as applicable.                  

3.Institutions shall apply the following to the residual amount of the items referred to in point (b) of Article 56:                  

(a)where an institution does not have a significant investment in a financial sector entity with which it has reciprocal cross                           holdings, the amount of its direct, indirect and synthetic holdings of those Additional Tier 1 instruments of that entity                           is treated as falling within point (c) of Article 56;                  

(b)where the institution has a significant investment in a financial sector entity with which it has reciprocal cross holdings,                           the amount of its direct, indirect and synthetic holdings of those Additional Tier 1 instruments of that entity is treated                           as falling within point (d) of Article 56.                  

4.Institutions shall apply the following to the residual amount of the items referred to in points (c) and (d) of Article 56:                  

(a)the amount relating to direct holdings required to be deducted in accordance with points (c) and (d) of Article 56 are deducted                           half from Tier 1 items and half from Tier 2 items;                  

(b)the amount relating to indirect and synthetic holdings required to be deducted in accordance with points (c) and (d) of Article                           56 shall not be deducted and shall be subject to a risk weight in accordance with Chapter 2 or 3 of Title II of Part Three                           and to the requirements of Title IV of Part Three, as applicable.                  

##### Sub-Section 3U.K.Deductions from Tier 2 items

###### Article 476U.K.Deductions from Tier 2 items

By way of derogation from Article 66, during the period from 1 January 2014 to 31 December 2017, the following shall apply:                   

institutions shall deduct from Tier 2 items the applicable percentage specified in Article 478 of the amounts required to                                 be deducted pursuant to Article 66;                            

institutions shall apply the requirements laid down in Article 477 to the residual amounts required to be deducted pursuant                                 to Article 66.                            

###### Article 477U.K.Deductions from Tier 2 items

1.By way of derogation from Article 66, during the period from 1 January 2014 to 31 December 2017, the requirements laid down in this Article shall apply to the residual amounts referred to in point (b) of Article 476.                  

2.Institutions shall apply the following to the residual amount of items referred to in point (a) of Article 66:                  

(a)direct holdings of own Tier 2 instruments are deducted at book value from Tier 2 items;                  

(b)indirect and synthetic holdings of own Tier 2 instruments, including own Tier 2 instruments that an institution could be obliged                           to purchase by virtue of an existing or contingent contractual obligation are not deducted and are risk weighted in accordance                           with Chapter 2 or 3 of Title II of Part Three and subject to the requirements of Title IV of Part Three, as applicable.                  

3.Institutions shall apply the following to the residual amount of the items referred to in point (b) of Article 66:                  

(a)where an institution does not have a significant investment in a financial sector entity with which it has reciprocal cross                           holdings, the amount of its direct, indirect and synthetic holdings of the Tier 2 instruments of that entity is treated as                           falling within point (c) of Article 66;                  

(b)where the institution has a significant investment in a financial sector entity with which it has reciprocal cross holdings,                           the amount of direct, indirect and synthetic holdings of the Tier 2 instruments of that financial sector entity are treated                           as falling within point (d) of Article 66.                  

4.Institutions shall apply the following to the residual amount of the items referred to in points (c) and (d) of Article 66:                  

(a)the amount relating to direct holdings that is required to be deducted in accordance with points (c) and (d) of Article 66                           is deducted half from Tier 1 items and half from Tier 2 items;                  

(b)the amount relating to indirect and synthetic holdings that is required to be deducted in accordance with points (c) and (d)                           of Article 66 is not be deducted and is subject to a risk weight under Chapter 2 or 3 of Title II of Part Three and the requirements                           laid down in Title IV of Part Three, as applicable.                  

##### Sub-Section 4U.K.Applicable percentages for deduction

###### Article 478U.K.Applicable percentages for deduction from Common Equity Tier 1, Additional Tier 1 and Tier 2 items

1.The applicable percentage for the purposes of Article 468(4), points (a) and (c) of Article 469(1), point (a) of Article 474                           and point (a) of Article 476 shall fall within the following ranges:                  

(a)20 % to 100 % for the period from 1 January 2014 to 31 December 2014;                  

(b)40 % to 100 % for the period from 1 January 2015 to 31 December 2015;                  

(c)60 % to 100 % for the period from 1 January 2016 to 31 December 2016;                  

(d)80 % to 100 % for the period from 1 January 2017 to 31 December 2017.                  

2.By way of derogation from paragraph 1, for the items referred in point (c) of Article 36(1) that existed prior to 1 January 2014, the applicable percentage for the purpose of point (c) of Article 469(1) shall fall within the following ranges:                  

(a)0 % to 100 % for the period from 1 January 2014 to 31 December 2014;                  

(b)10 % to 100 % for the period from 1 January 2015 to 31 December 2015;                  

(c)20 % to 100 % for the period from 1 January 2016 to 31 December 2016;                  

(d)30 % to 100 % for the period from 1 January 2017 to 31 December 2017;                  

(e)40 % to 100 % for the period from 1 January 2018 to 31 December 2018;                  

(f)50 % to 100 % for the period from 1 January 2019 to 31 December 2019;                  

(g)60 % to 100 % for the period from 1 January 2020 to 31 December 2020;                  

(h)70 % to 100 % for the period from 1 January 2021 to 31 December 2021;                  

(i)80 % to 100 % for the period from 1 January 2022 to 31 December 2022;                  

(j)90 % to 100 % for the period from 1 January 2023 to 31 December 2023.                  

3.Competent authorities shall determine and publish an applicable percentage in the ranges specified in paragraphs 1 and 2 for                           each of the following deductions:                  

(a)the individual deductions required pursuant to points (a) to (h) of Article 36(1), excluding deferred tax assets that rely                           on future profitability and arise from temporary differences;                  

(b)the aggregate amount of deferred tax assets that rely on future profitability and arise from temporary differences and the                           items referred to in point (i) of Article 36(1) that is required to be deducted pursuant to Article 48;                  

(c)each deduction required pursuant to points (b) to (d) of Article 56;                  

(d)each deduction required pursuant to points (b) to (d) of Article 66.                  

#### Section 4U.K.minority interest and additional Tier 1 and Tier 2 instruments issued by subsidiaries

##### Article 479U.K.Recognition in consolidated Common Equity Tier 1 capital of instruments and items that do not qualify as minority interests

1.By way of derogation from Title II of Part Two, during the period from 1 January 2014 to 31 December 2017, recognition in consolidated own funds of the items that would qualify as consolidated reserves in accordance with national                           transposition measures for Article 65 of Directive 2006/48/EC that do not qualify as consolidated Common Equity Tier 1 capital                           for any of the following reasons shall be determined by the competent authorities in accordance with paragraphs 2 and 3 of                           this Article:                  

(a)the instrument does not qualify as a Common Equity Tier 1 instrument, and the related retained earnings and share premium                           accounts consequently do not qualify as consolidated Common Equity Tier 1 items;                  

(b)the items do not qualify as a result of Article 81(2);                  

(c)the items do not qualify because the subsidiary is not an institution or an entity that is subject by virtue of applicable                           national law to the requirements of this Regulation and Directive 2013/36/EU;                  

(d)the items do not qualify because the subsidiary is not included fully in the consolidation pursuant to Chapter 2 of Title                           II of Part One.                  

2.The applicable percentage of the items referred to in paragraph 1 that would have qualified as consolidated reserves in accordance                           with the national transposition measures for Article 65 of Directive 2006/48/EC shall qualify as consolidated Common Equity                           Tier 1 capital.                  

3.For the purposes of paragraph 2, the applicable percentages shall fall within the following ranges:                  

(a)0 % to 80 % for the period from 1 January 2014 to 31 December 2014;                  

(b)0 % to 60 % for the period from 1 January 2015 to 31 December 2015;                  

(c)0 % to 40 % for the period from 1 January 2016 to 31 December 2016;                  

(d)0 % to 20 % for the period from 1 January 2017 to 31 December 2017.                  

4.Competent authorities shall determine and publish the applicable percentage in the ranges specified in paragraph 3.                  

##### Article 480U.K.Recognition in consolidated own funds of minority interests and qualifying Additional Tier 1 and Tier 2 capital

1.By way of derogation from point (b) of Article 84(1), point (b) of Article 85(1) and point (b) of Article 87(1), during the                           period from 1 January 2014 to 31 December 2017, the percentages referred to in those Articles shall be multiplied by an applicable factor.                  

2.For the purposes of paragraph 1, the applicable factor shall fall within the following ranges:                  

(a)0,2 to 1 in the period from 1 January 2014 to 31 December 2014;                  

(b)0,4 to 1 in the period from 1 January 2015 to 31 December 2015;                  

(c)0,6 to 1 in the period from 1 January 2016 to 31 December 2016; and                  

(d)0,8 to 1 in the period from 1 January 2017 to 31 December 2017.                  

3.Competent authorities shall determine and publish the value of the applicable factor in the ranges specified in paragraph                           2.                  

#### Section 5U.K.Additional filters and deductions

##### Article 481U.K.Additional filters and deductions

1.By way of derogation from Articles 32 to 36, 56 and 66, during the period from 1 January 2014 to 31 December 2017, institutions shall make adjustments to include in or deduct from Common Equity Tier 1 items, Tier 1 items, Tier 2 items                           or own funds items the applicable percentage of filters or deductions required under national transposition measures for Articles                           57, 61, 63, 63a, 64 and 66 of Directive 2006/48/EC, and for Articles 13 and 16 of Directive 2006/49/EC, and which are not                           required in accordance with Part Two of this Regulation.                  

2.By way of derogation from Article 36(1)(i) and Article 49(1), during the period from the 1 January 2014 to 31 December 2014, competent authorities may require or permit institutions to apply the methods referred to in Article 49(1) where the requirements                           laid down in point (b) of Article 49(1) are not met, rather than the deduction required pursuant to Article 36(1). In such                           cases, the proportion of holdings of the own funds instruments of a financial sector entity in which the parent undertaking                           has a significant investment that is not required to be deducted in accordance with Article 49(1) shall be determined by the                           applicable percentage referred to in paragraph 4 of this Article. The amount that is not deducted shall be subject to the                           requirements of Article 49(4), as applicable.                  

3.For the purposes of paragraph 1, the applicable percentage shall fall within the following ranges:                  

(a)0 % to 80 % for the period from 1 January 2014 to 31 December 2014;                  

(b)0 % to 60 % for the period from 1 January 2015 to 31 December 2015;                  

(c)0 % to 40 % for the period from 1 January 2016 to 31 December 2016;                  

(d)0 % to 20 % for the period from 1 January 2017 to 31 December 2017.                  

4.For the purpose of paragraph 2, the applicable percentage shall fall between 0 % and 50 % for the period from 1 January 2014 to 31 December 2014.                  

5.For each filter or deduction referred to in paragraphs 1 and 2, competent authorities shall determine and publish the applicable                           percentages in the ranges specified in paragraphs 3 and 4.                  

6.EBA shall develop draft regulatory technical standards to specify the conditions according to which competent authorities                           shall determine whether adjustments made to own funds, or elements thereof, in accordance with national transposition measures                           for Directive 2006/48/EC or Directive 2006/49/EC that are not included in Part Two of this Regulation are, for the purposes                           of this Article, to be made to Common Equity Tier 1 items, Additional Tier 1 items, Tier 1 items, Tier 2 items or own funds.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

##### Article 482U.K.Scope of application for derivatives transactions with pension funds

In respect of those transactions referred to in Article 89 of Regulation (EU) No 648/2012 and entered into with a pension                        scheme arrangement as defined in Article 2 of that Regulation, institutions shall not calculate own funds requirements for                        CVA risk as provided for in Article 382(4)(c) of this Regulation.                   

### CHAPTER 2U.K.Grandfathering of capital instruments

#### Section 1U.K.Instruments constituting State aid

##### Article 483U.K.Grandfathering of State aid instruments

1.By way of derogation from Articles 26 to 29, 51, 52, 62 and 63, during the period from 1 January 2014 to 31 December 2017 this Article applies to capital instruments and items where the following conditions are met:                  

(a)the instruments were issued prior to 1 January 2014;                  

(b)the instruments were issued within the context of recapitalisation measures pursuant to State aid rules. Insofar as part of                           the instruments are privately subscribed, they must be issued prior to 30 June 2012 and in conjunction with those parts that are subscribed by the Member State;                  

(c)the instruments were considered compatible with the internal market by the Commission under Article 107 TFEU.                  

Where the instruments are subscribed by both the Member State and private investors and there is a partial redemption of the                        instruments subscribed by the Member State, a corresponding share of the privately subscribed part of the instruments shall                        be grandfathered in accordance with Article 484. When all the instruments subscribed by the Member State have been redeemed,                        the remaining instruments subscribed by private investors shall be grandfathered in accordance with Article 484.                   

2.Instruments that qualified in accordance with the national transposition measures for point (a) of Article 57 of Directive                           2006/48/EC shall qualify as Common Equity Tier 1 instruments notwithstanding either of the following:                  

(a)the conditions laid down in Article 28 of this Regulation are not met;                  

(b)the instruments were issued by an undertaking referred to in Article 27 of this Regulation and the conditions laid down in                           Article 28 of this Regulation or, where applicable, Article 29 of this Regulation are not met.                  

3.Instruments referred to in point (c) of paragraph 1 of this Article that do not qualify under national transposition measures                           for point (a) of Article 57 of Directive 2006/48/EC shall qualify as Common Equity Tier 1 instruments notwithstanding the                           fact that the requirements of point (a) or (b) of paragraph 2 of this Article are not met, provided that the requirements                           of paragraph 8 of this Article are met.                  

Instruments that qualify as Common Equity Tier 1 pursuant to the first subparagraph shall not qualify as Additional Tier 1                        instruments or Tier 2 instruments under paragraph 5 or 7.                   

4.Instruments that qualified in accordance with the national transposition measures for point (ca) of Article 57 and for Article                           66(1) of Directive 2006/48/EC shall qualify as Additional Tier 1 instruments notwithstanding that the conditions laid down                           in Article 52(1) of this Regulation are not met.                  

5.Instruments referred to in point (c) of paragraph 1 of this Article that do not qualify under the national transposition measures                           for point (ca) of Article 57 of Directive 2006/48/EC shall qualify as Additional Tier 1 instruments notwithstanding that the                           conditions laid down in Article 52(1) of this Regulation are not met, provided that the requirements of paragraph 8 of this                           Article are met.                  

Instruments that qualify as Additional Tier 1 instruments pursuant to the first subparagraph shall not qualify as Common Equity                        Tier 1 instruments or Tier 2 instruments under paragraph 3 or 7.                   

6.Items that qualified in accordance with national transposition measures for points (f), (g) or (h) of Article 57 and for Article                           66(1) of Directive 2006/48/EC shall qualify as Tier 2 instruments notwithstanding that the items are not referred to in Article                           62 of this Regulation or that the conditions laid down in Article 63 of this Regulation are not met.                  

7.Instruments referred to in point (c) of paragraph 1 of this Article that do not qualify under the national transposition measures                           for point (f), (g) or (h) of Article 57 and for Article 66(1) of Directive 2006/48/EC shall qualify as Tier 2 instruments                           notwithstanding that the items are not referred to in Article 62 of this Regulation or that the conditions laid down in Article                           63 of this Regulation are not met, provided that the conditions in paragraph 8 of this Article are met.                  

Instruments that qualify as Tier 2 instruments pursuant to the first subparagraph shall not qualify as Common Equity Tier                        1 instruments or Additional Tier 1 instruments under paragraph 3 or 5.                   

8.Instruments referred to paragraphs 3, 5 and 7 may qualify as own funds instruments referred to in those paragraphs only where                           the condition in point (a) of paragraph 1 is met and where they are issued by institutions that are incorporated in a Member                           State that is subject to an Economic Adjustment Programme, and the issuance of those instruments is agreed or eligible under                           that programme.                  

#### Section 2U.K.Instruments not constituting State aid

##### Sub-Section 1U.K.Grandfathering eligibility and limits

###### Article 484U.K.Eligibility for grandfathering of items that qualified as own funds under national transposition measures for Directive 2006/48/EC

1.This Article shall apply only to instruments and items that were issued on or prior to 31 December 2011 and that were eligible as own funds on 31 December 2011 and are not those referred to in Article 483(1).                  

2.By way of derogation from Articles 26 to 29, 51, 52, 62 and 63, this Article shall apply from 1 January 2014 to 31 December 2021.                  

3.Subject to Article 485 of this Regulation and to the limit specified in Article 486(2) thereof, capital within the meaning                           of Article 22 of Directive 86/635/EEC, and the related share premium accounts, that qualified as original own funds under                           the national transposition measures for point (a) of Article 57 of Directive 2006/48/EC shall qualify as Common Equity Tier                           1 items notwithstanding that the conditions laid down in Article 28 or, where applicable, Article 29 of this Regulation are                           not met.                  

4.Subject to the limit specified Article 486(3) of this Regulation, instruments, and the related share premium accounts, that                           qualified as original own funds under national transposition measures for point (ca) of Article 57 and Article 154(8) and                           (9) of Directive 2006/48/EC shall qualify as Additional Tier 1 items, notwithstanding that the conditions laid down in Article                           52 of this Regulation are not met.                  

5.Subject to the limits specified in Article 486(4) of this Regulation, items, and the related share premium accounts, that                           qualified under national transposition measures for points (e), (f), (g) or (h) of Article 57 of Directive 2006/48/EC shall                           qualify as Tier 2 items, notwithstanding that those items are not included in Article 62 of this Regulation or that the conditions                           laid down in Article 63 of this Regulation are not met.                  

###### Article 485U.K.Eligibility for inclusion in the Common Equity Tier 1 of share premium accounts related to items that qualified as own funds                           under national transposition measures for Directive 2006/48/EC

1.This Article shall apply only to instruments that were issued prior to 31 December 2010 and are not those referred to in Article 483(1).                  

2.Share premium accounts related to capital within the meaning of Article 22 of Directive 86/635/EEC that qualified as original                           own funds under the national transposition measures for point (a) of Article 57 of Directive 2006/48/EC shall qualify as Common                           Equity Tier 1 items if they meet the conditions laid down in points (i) and (j) of Article 28 of this Regulation.                  

###### Article 486U.K.Limits for grandfathering of items within Common Equity Tier 1, Additional Tier 1 and Tier 2 items

1.From 1 January 2014 to 31 December 2021, the extent to which instruments and items referred to in Article 484 shall qualify as own funds shall be limited in accordance                           with this Article.                  

2.The amount of items referred to in Article 484(3) that shall qualify as Common Equity Tier 1 items is limited to the applicable                           percentage of the sum of the amounts specified in points (a) and (b) of this paragraph:                  

(a)the nominal amount of capital referred to in Article 484(3) that were in issue on 31 December 2012;                  

(b)the share premium accounts related to the items referred to in point (a).                  

3.The amount of items referred to in Article 484(4) that shall qualify as Additional Tier 1 items is limited to the applicable                           percentage multiplied by the result of subtracting from the sum of the amounts specified in points (a) and (b) of this paragraph                           the sum of the amounts specified in points (c) to (f) of this paragraph:                  

(a)the nominal amount of instruments referred to in Article 484(4), that remained in issue on 31 December 2012;                  

(b)the share premium accounts related to the instruments referred to in point (a);                  

(c)the amount of instruments referred to in Article 484(4) which on 31 December 2012 exceeded the limits specified in the national transposition measures for point (a) of Article 66(1) and Article 66(1a) of                           Directive 2006/48/EC;                  

(d)the share premium accounts related to the instruments referred to in point (c);                  

(e)the nominal amount of instruments referred to Article 484(4) that were in issue on 31 December 2012 but do not qualify as Additional Tier 1 instruments pursuant to Article 489(4);                  

(f)the share premium accounts related to the instruments referred to in point (e).                  

4.The amount of items referred to in Article 484(5) that shall qualify as Tier 2 items is limited to the applicable percentage                           of the result of subtracting from the sum of the amounts specified in points (a) to (d) of this paragraph the sum of amounts                           specified in points (e) to (h) of this paragraph:                  

(a)the nominal amount of instruments referred to in Article 484(5) that remained in issue on 31 December 2012;                  

(b)the share premium accounts related to the instruments referred to in point (a);                  

(c)the nominal amount of subordinated loan capital that remained in issue on 31 December 2012, reduced by the amount required pursuant to national transposition measures for point (c) of Article 64(3) of Directive 2006/48/EC;                  

(d)the nominal amount of items referred to in Article 484(5), other than the instruments and subordinated loan capital referred                           to in points (a) and (c) of this paragraph, that were in issue on 31 December 2012;                  

(e)the nominal amount of instruments and items referred to in Article 484(5) that were in issue on 31 December 2012 that exceeded the limits specified in the national transposition measures for point (a) of Article 66(1) of Directive 2006/48/EC;                  

(f)the share premium accounts related to the instruments referred to in point (e);                  

(g)the nominal amount of instruments referred to in Article 484(5) that were in issue on 31 December 2012 that do not qualify as Tier 2 items pursuant to Article 490(4);                  

(h)the share premium accounts related to the instruments referred to in point (g).                  

5.For the purposes of this Article, the applicable percentages referred to in paragraphs 2 to 4 shall fall within the following                           ranges:                  

(a)60 % to 80 % during the period from 1 January 2014 to 31 December 2014;                  

(b)40 % to 70 % during the period from 1 January 2015 to 31 December 2015;                  

(c)20 % to 60 % during the period from 1 January 2016 to 31 December 2016;                  

(d)0 % to 50 % during the period from 1 January 2017 to 31 December 2017;                  

(e)0 % to 40 % during the period from 1 January 2018 to 31 December 2018;                  

(f)0 % to 30 % during the period from 1 January 2019 to 31 December 2019;                  

(g)0 % to 20 % during the period from 1 January 2020 to 31 December 2020;                  

(h)0 % to 10 % during the period from 1 January 2021 to 31 December 2021.                  

6.Competent authorities shall determine and publish the applicable percentages in the ranges specified in paragraph 5.                  

###### Article 487U.K.Items excluded from grandfathering in Common Equity Tier 1 or Additional Tier 1 items in other elements of own funds

1.From 1 January 2014 to 31 December 2021, institutions may, by way of derogation from Articles 51, 52, 62 and 63, treat as items referred to in Article 484(4), capital,                           and the related share premium accounts, referred to in Article 484(3) that are excluded from Common Equity Tier 1 items because                           they exceed the applicable percentage specified in Article 486(2), to the extent that the inclusion of that capital and the                           related share premium accounts, does not exceed the applicable percentage limit referred to in Article 486(3).                  

2.From 1 January 2014 to 31 December 2021, institutions may, by way of derogation from Articles 51, 52, 62 and 63, treat the following as items referred to in Article                           484(5), to the extent that their inclusion does not exceed the applicable percentage limit referred to in Article 486(4):                  

(a)capital, and the related share premium accounts, referred to in Article 484(3) that are excluded from Common Equity Tier 1                           items because they exceed the applicable percentage specified in Article 486(2);                  

(b)instruments, and the related share premium accounts, referred to in Article 484(4) that exceed the applicable percentage referred                           to in Article 486(3).                  

3.EBA shall develop draft regulatory technical standards to specify the conditions for treating own funds instruments referred                           to in paragraphs 1 and 2 as falling under Article 486(4) or (5) during the period from 1 January 2014 to 31 December 2021.                  

EBA shall submit those draft regulatory technical standards to the Commission by 28 July 2013.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

###### Article 488U.K.Amortisation of items grandfathered as Tier 2 items

The items referred to in Article 484(5) that qualify as Tier 2 items referred to in Article 484(5) or Article 486(4) shall                        be subject to the requirements laid down in Article 64.                   

##### Sub-Section 2U.K.Inclusion of instruments with a call and incentive to redeem in additional Tier 1 and Tier 2 items

###### Article 489U.K.Hybrid instruments with a call and incentive to redeem

1.From 1 January 2014 to 31 December 2021, instruments referred to in Article 484(4) that include in their terms and conditions a call with an incentive for them to                           be redeemed by the institution shall, by way of derogation from Articles 51 and 52, be subject to this Article.                  

2.The instruments shall qualify as Additional Tier 1 instruments provided that the following conditions are met:                  

(a)the institution was able to exercise a call with an incentive to redeem only prior to 1 January 2013;                  

(b)the institution did not exercise the call;                  

(c)the conditions laid down in Article 52 are met from 1 January 2013.                  

3.The instruments shall qualify as Additional Tier 1 instruments with their recognition reduced in accordance with Article 484(4)                           until the date of their effective maturity and thereafter shall qualify as Additional Tier 1 items without limit provided                           that:                  

(a)the institution was able to exercise a call with an incentive to redeem only on or after 1 January 2013;                  

(b)the institution did not exercise the call on the date of the effective maturity of the instruments;                  

(c)the conditions laid down in Article 52 are met from the date of the effective maturity of the instruments.                  

4.The instruments shall not qualify as Additional Tier 1 instruments, and shall not be subject to Article 484(4), from 1 January 2014 where the following conditions are met:                  

(a)the institution was able to exercise a call with an incentive to redeem between 31 December 2011 and 1 January 2013;                  

(b)the institution did not exercise the call on the date of the effective maturity of the instruments;                  

(c)the conditions laid down in Article 52 are not met from the date of the effective maturity of the instruments.                  

5.The instruments shall qualify as Additional Tier 1 instruments with their recognition reduced in accordance with Article 484(4)                           until the date of their effective maturity, and shall not qualify as Additional Tier 1 instruments thereafter, where the following                           conditions are met:                  

(a)the institution was able to exercise a call with an incentive to redeem on or after 1 January 2013;                  

(b)the institution did not exercise the call on the date of the effective maturity of the instruments;                  

(c)the conditions laid down in Article 52 are not met from the date of the effective maturity of the instruments.                  

6.The instruments shall qualify as Additional Tier 1 instruments in accordance with Article 484(4) where the following conditions                           are met:                  

(a)the institution was able to exercise a call with an incentive to redeem only prior to or on 31 December 2011;                  

(b)the institution did not exercise the call on the date of the effective maturity of the instruments;                  

(c)the conditions laid down in Article 52 were not met from the date of the effective maturity of the instruments.                  

###### Article 490U.K.Tier 2 items with an incentive to redeem

1.By way of derogation from Articles 62 and 63, during the period from 1 January 2014 to 31 December 2021, items referred to in Article 484(5) that qualified under the national transposition measures for point (f) or (h) of Article                           57 of Directive 2006/48/EC and include in their terms and conditions a call with an incentive for them to be redeemed by the                           institution shall be subject to this Article.                  

2.The items shall qualify as Tier 2 instruments provided that:                  

(a)the institution was able to exercise a call with an incentive to redeem only prior to 1 January 2013;                  

(b)the institution did not exercise the call;                  

(c)from 1 January 2013 the conditions laid down in Article 63 are met.                  

3.The items shall qualify as Tier 2 items in accordance with Article 484(5) until the date of their effective maturity, and                           shall qualify thereafter as Tier 2 items without limit, provided that the following conditions are met:                  

(a)the institution was able to exercise a call with an incentive to redeem only on or after 1 January 2013;                  

(b)the institution did not exercise the call on the date of the effective maturity of the items;                  

(c)the conditions laid down in Article 63 are met from the date of the effective maturity of the items.                  

4.The items shall not qualify as Tier 2 items from 1 January 2014 where the following conditions are met:                  

(a)the institution was able to exercise a call with an incentive to redeem only between 31 December 2011 and 1 January 2013;                  

(b)the institution did not exercise the call on the date of the effective maturity of the items;                  

(c)the conditions laid down in Article 63 are not met from the date of the effective maturity of the items.                  

5.The items shall qualify as Tier 2 items with their recognition reduced in accordance with Article 484(5) until the date of                           their effective maturity, and shall not qualify as Tier 2 items thereafter, where:                  

(a)the institution was able to exercise a call with an incentive to redeem on or after 1 January 2013;                  

(b)the institution did not exercise the call on the date of their effective maturity;                  

(c)the conditions set out in Article 63 are not met from the date of effective maturity of the items.                  

6.The items shall qualify as Tier 2 items in accordance with Article 484(5) where:                  

(a)the institution was able to exercise a call with an incentive to redeem only prior to or on 31 December 2011;                  

(b)the institution did not exercise the call on the date of the effective maturity of the items;                  

(c)the conditions laid down in Article 63 are not met from the date of the effective maturity of the items.                  

###### Article 491U.K.Effective maturity

For the purposes of Articles 489 and 490, effective maturity shall be determined as follows:                   

for the items referred to in paragraphs 3 and 5 of those Articles, the date of the first call with an incentive to redeem                                 occurring on or after 1 January 2013;                            

for the items referred to in paragraph 4 of those Articles, the date of the first call with an incentive to redeem occurring                                 between 31 December 2011 and 1 January 2013;                            

for the items referred to in paragraph 6 of those Articles, the date of the first call with an incentive to redeem prior to                                 31 December 2011.                            

### CHAPTER 3U.K.Transitional provisions for disclosure of own funds

#### Article 492U.K.Disclosure of own funds

1.Institutions shall apply this Article during the period from 1 January 2014 to 31 December 2021.                  

2.From 1 January 2014 to 31 December 2015, institutions shall disclose the extent to which the level of Common Equity Tier 1 capital and Tier 1 capital exceed the                           requirements laid down in Article 465.                  

3.From 1 January 2014 to 31 December 2017, institutions shall disclose the following additional information about their own funds:                  

(a)the nature and effect on Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital and own funds of the individual                           filters and deductions applied in accordance with Articles 467 to 470, 474, 476 and 479;                  

(b)the amounts of minority interests and Additional Tier 1 and Tier 2 instruments, and related retained earnings and share premium                           accounts, issued by subsidiaries that are included in consolidated Common Equity Tier 1 capital, Additional Tier 1 capital,                           Tier 2 capital and own funds in accordance with 4 of Chapter 1;                  

(c)the effect on Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital and own funds of the individual filters                           and deductions applied in accordance with Article 481;                  

(d)the nature and amount of items that qualify as Common Equity Tier 1 items, Tier 1 items and Tier 2 items by virtue of applying                           the derogations specified in Section 2 of Chapter 2.                  

4.From 1 January 2014 to 31 December 2021, institutions shall disclose the amount of instruments that qualify as Common Equity Tier 1 instruments, Additional Tier                           1 instruments and Tier 2 instruments by virtue of applying Article 484.                  

5.EBA shall develop draft implementing technical standards to specify uniform templates for disclosure made in accordance with                           this Article. The templates shall include the items listed in points (a), (b), (d) and (e) of Article 437(1), as amended by                           Chapters 1 and 2 of this Title.                  

EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013.                   

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                        accordance with Article 15 of Regulation (EU) No 1093/2010.                   

### CHAPTER 4U.K.Large exposures, own funds requirements, leverage and the Basel I Floor

#### Article 493U.K.Transitional provisions for large exposures

1.The provisions on large exposures as laid down in Articles 387 to 403 shall not apply to investment firms whose main business                           consists exclusively of the provision of investment services or activities in relation to the financial instruments set out                           in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (35)  did not apply on 31 December 2006. This exemption is available until 31 December 2017 or the date of entry into force of any amendments pursuant to paragraph 2 of this Article, whichever is the earlier.                  

2.By 31 December 2015, the Commission shall, on the basis of public consultations and in the light of discussions with the competent authorities,                           report to the European Parliament and the Council on:                  

(a)an appropriate regime for the prudential supervision of investment firms whose main business consists exclusively of the provision                           of investment services or activities in relation to the commodity derivatives or derivatives contracts set out in points 5,                           6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC;                  

(b)the desirability of amending Directive 2004/39/EC to create a further category of investment firm whose main business consists                           exclusively of the provision of investment services or activities in relation to the financial instruments set out in points                           5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC relating to energy supplies.                  

On the basis of that report, the Commission may submit proposals to amend this Regulation.                   

3.By way of derogation from Article 400(2) and (3), Member States may, for a transitional period until the entry into force                           of any legal act following the review in accordance with Article 507, but not after 31 December 2028, fully or partially exempt the following exposures from the application of Article 395(1):                  

(a)covered bonds falling within Article 129(1), (3) and (6);                  

(b)asset items constituting claims on regional governments or local authorities of Member States where those claims would be                           assigned a 20 % risk weight under Part Three, Title II, Chapter 2 and other exposures to or guaranteed by those regional governments                           or local authorities, claims on which would be assigned a 20 % risk weight under Part Three, Title II, Chapter 2;                  

(c)exposures, including participations or other kinds of holdings, incurred by an institution to its parent undertaking, to other                           subsidiaries of that parent undertaking or to its own subsidiaries, in so far as those undertakings are covered by the supervision                           on a consolidated basis to which the institution itself is subject, in accordance with this Regulation, Directive 2002/87/EC                           or with equivalent standards in force in a third country. Exposures that do not meet those criteria, whether or not exempted                           from Article 395(1) of this Regulation, shall be treated as exposures to a third party;                  

(d)asset items constituting claims on and other exposures, including participations or other kinds of holdings, to regional or                           central credit institutions with which the credit institution belongs to a network in accordance with legal or statutory provisions                           and which are responsible, under those provisions, for cash-clearing operations within the network;                  

(e)asset items constituting claims on and other exposures to credit institutions incurred by credit institutions, one of which                           operates on a non-competitive basis and provides or guarantees loans under legislative programmes or its statutes, to promote                           specified sectors of the economy under some form of government oversight and restrictions on the use of the loans, provided                           that the respective exposures arise from such loans that are passed on to the beneficiaries via credit institutions or from                           the guarantees of these loans;                  

(f)asset items constituting claims on and other exposures to institutions, provided that those exposures do not constitute such                           institutions' own funds, do not last longer than the following business day and are not denominated in a major trading currency;                  

(g)asset items constituting claims on central banks in the form of required minimum reserves held at those central banks which                           are denominated in their national currencies;                  

(h)asset items constituting claims on central governments in the form of statutory liquidity requirements held in government                           securities which are denominated and funded in their national currencies provided that, at the discretion of the competent                           authority, the credit assessment of those central governments assigned by a nominated ECAI is investment grade;                  

(i)50 % of medium/low risk off-balance sheet documentary credits and of medium/low risk off-balance sheet undrawn credit facilities                           referred to in Annex I and subject to the competent authorities' agreement, 80 % of guarantees other than loan guarantees                           which have a legal or regulatory basis and are given for their members by mutual guarantee schemes possessing the status of                           credit institutions;                  

(j)legally required guarantees used when a mortgage loan financed by issuing mortgage bonds is paid to the mortgage borrower                           before the final registration of the mortgage in the land register, provided that the guarantee is not used as reducing the                           risk in calculating the risk- weighted exposure amounts;                  

(k)assets items constituting claims on and other exposures to recognised exchanges.                  

#### Article 494U.K.Transitional provisions for eligible capital

By way of derogation from points (71)(a)(ii) and (b)(ii) of Article 4(1), eligible capital may include Tier 2 capital up to                        the following amounts:                   

100 % of Tier 1 capital during the period from 1 January 2014 to 31 December 2014;                            

75 % of Tier 1 capital during the period from 1 January 2015 to 31 December 2015;                            

50 % of Tier 1 capital during the period from 1 January 2016 to 31 December 2016.                            

#### Article 495U.K.Treatment of equity exposures under the IRB Approach

1.Until 31 December 2017, the competent authorities may, by way of derogation from Chapter 3 of Part Three, exempt from the IRB treatment certain                           categories of equity exposures held by institutions and EU subsidiaries of institutions in that Member State as at 31 December 2007. The competent authority shall publish the categories of equity exposures which benefit from such treatment in accordance                           with Article 143 of Directive 2013/36/EU.                  

The exempted position shall be measured as the number of shares as at 31 December 2007 and any additional share arising directly as a result of owning those holdings, provided that they do not increase the proportional                        share of ownership in a portfolio company.                   

If an acquisition increases the proportional share of ownership in a specific holding the part of the holding which constitutes                        the excess shall not be subject to the exemption. Nor shall the exemption apply to holdings that were originally subject to                        the exemption, but have been sold and then bought back.                   

Equity exposures subject to this provision shall be subject to the capital requirements calculated in accordance with the                        Standardised Approach under Part Three, Title II, Chapter 2 and the requirements set out in Title IV of Part Three, as applicable.                   

Competent authorities shall notify the Commission and EBA of the implementation of this paragraph.                   

2.In the calculation of risk-weighted exposure amounts for the purposes of Article 114(4), until 31 December 2017 the same risk weight shall be assigned in relation to exposures to the central governments or central banks of Member States                           denominated and funded in the domestic currency of any Member State as would be applied to such exposures denominated and                           funded in their domestic currency.                  

3.EBA shall develop draft regulatory technical standards to specify the conditions according to which competent authorities                           shall afford the exemption referred to in paragraph 1.                  

EBA shall submit those draft regulatory technical standards to the Commission by 30 June 2014.                   

Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in                        accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.                   

#### Article 496U.K.Own funds requirements for covered bonds

1.Until 31 December 2017, competent authorities may waive in full or in part the 10 % limit for senior units issued by French Fonds Communs de Créances                           or by securitisation entities which are equivalent to French Fonds Communs de Créances laid down in points (d) and (f) of                           Article 129(1), provided that both of the following conditions are fulfilled:                  

(a)the securitised residential property or commercial immovable property exposures were originated by a member of the same consolidated                           group of which the issuer of the covered bonds is a member, or by an entity affiliated to the same central body to which the                           issuer of the covered bonds is affiliated, where that common group membership or affiliation shall be determined at the time                           the senior units are made collateral for covered bonds;                  

(b)a member of the same consolidated group of which the issuer of the covered bonds is a member, or an entity affiliated to the                           same central body to which the issuer of the covered bonds is affiliated, retains the whole first loss tranche supporting                           those senior units.                  

2.Until 31 December 2014, for the purposes of point (c) of Article 129(1), the senior unsecured exposures of institutions which qualified for a 20                           % risk weight under national law before 28 June 2013 shall be considered to qualify for credit quality step 1.                  

3.Until 31 December 2014, for the purposes of Article 129(5), the senior unsecured exposures of institutions which qualified for a 20 % risk weight                           under national law before 28 June 2013shall be considered to qualify for a 20 % risk weight.                  

#### Article 497U.K.Own funds requirements for exposures to CCPs

1.Until 15 months after the date of entry into force of the latest of the regulatory technical standards referred to in Articles                           16, 25, 26, 29, 34, 41, 42, 44, 45, 47 and 49 of Regulation (EU) No 648/2012, or until a decision is made under Article 14                           of that Regulation on the authorisation of the CCP, whichever is earlier, an institution may consider that CCP to be a QCCP,                           provided that the CCP was authorised in its Member State of establishment to provide clearing services in accordance with                           the national law of that Member State before all the regulatory technical standards in Articles 5, 8 to 11, 16, 18, 25, 26,                           29, 34, 41, 42, 44, 45, 46, 47, 49, 56 and 81 of that Regulation have been adopted.                  

2.Until 15 months after the date of entry into force of the latest of the regulatory technical standards referred to in Articles                           16, 26, 29, 34, 41, 42, 44, 45, 47 and 49 of Regulation (EU) No 648/2012, or until a decision is made under Article 25 of                           that Regulation on the recognition of the CCP established in a third country, whichever is earlier, an institution may consider                           that CCP to be a QCCP,                  

3.The Commission may adopt an implementing act under Article 5 of Regulation (EU) No 182/2011 extending the transitional provisions                           in paragraphs 1 and 2 of this Article by a further six months, in exceptional circumstances where it is necessary and proportionate                           to avoid disruption to international financial markets.                  

4.Until the deadlines defined in paragraphs 1 and 2, and extended under paragraph 3, as applicable, where a CCP neither has                           a default fund nor has in place a binding arrangement with its clearing members that allows it to use all or part of the initial                           margin received from its clearing members as if they were pre-funded contributions, an institution shall substitute the right                           formula for calculating the own funds requirement (Ki) in Article 308(2) with the following one:                  

                   

where                   

IM

=

the initial margin posted to the CCP by clearing member i                      

IM

=

the total amount of initial margin communicated to the institution by the CCP.                      

#### Article 498U.K.Exemption for Commodities dealers

1.The provisions on own funds requirements as set out in this Regulation shall not apply to investment firms the main business                           of which consists exclusively of the provision of investment services or activities in relation to the financial instruments                           set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to which Directive 93/22/EEC did not                           apply on 31 December 2006.                  

This exemption shall apply until 31 December 2017 or the date of entry into force of any amendments pursuant to paragraphs 2 and 3, whichever is the earlier.                   

2.By 31 December 2015, the Commission shall, on the basis of public consultations and in the light of discussions with the competent authorities,                           report to the European Parliament and the Council on:                  

(a)an appropriate regime for the prudential supervision of investment firms whose main business consists exclusively of the provision                           of investment services or activities in relation to the commodity derivatives or derivatives contracts set out in points 5,                           6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC;                  

(b)the desirability of amending Directive 2004/39/EC to create a further category of investment firm whose main business consists                           exclusively of the provision of investment services or activities in relation to the financial instruments set out in points                           5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC relating to energy supplies, including electricity, coal,                           gas and oil.                  

3.On the basis of the report referred to in paragraph 2, the Commission may submit proposals to amend this Regulation.                  

#### Article 499U.K.Leverage

1.By way of derogation from Articles 429 and 430, during the period between 1 January 2014 and 31 December 2021, institutions shall calculate and report the leverage ratio by using both of the following as the capital measure:                  

(a)Tier 1 capital;                  

(b)Tier 1 capital, subject to the derogations laid down in Chapters 1 and 2 of this Title.                  

2.By way of derogation from Article 451(1), institutions may choose whether to disclose the information on the leverage ratio                           based on either just one or both of the definitions of the capital measure specified in points (a) and (b) of paragraph 1                           of this Article. Where institutions change their decision on which leverage ratio to disclose, the first disclosure that occurs                           after such change shall contain a reconciliation of the information on all leverage ratios disclosed up to the moment of the                           change.                  

3.By way of derogation from Article 429(2), during the period from 1 January 2014 to 31 December 2017, competent authorities may permit institutions to calculate the end-of-quarter leverage ratio where they consider that institutions                           may not have data of sufficiently good quality to calculate a leverage ratio that is an arithmetic mean of the monthly leverage                           ratios over a quarter.                  

#### Article 500U.K.Transitional provisions — Basel I floor

1.Until 31 December 2017, institutions calculating risk-weighted exposure amounts in accordance with Part Three, Title II, Chapter 3 and institutions                           using the Advanced Measurement Approaches as specified in Part Three, Title III, Chapter 4 for the calculation of their own                           funds requirements for operational risk shall meet both of the following requirements:                  

(a)they shall hold own funds as required by Article 92;                  

(b)they shall hold own funds which are at all times more than or equal to 80 % of the total minimum amount of own funds that                           the institution would be required to hold under Article 4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC                           of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions (36)  stood prior to 1 January 2007.                  

2.Subject to the approval of the competent authorities, the amount referred to in point (b) of paragraph 1 may be replaced by                           a requirement to hold own funds which are at all times more than or equal to 80 % of the own funds that the institution would                           be required to hold under Article 92 calculating risk-weighted exposure amounts in accordance with Part Three, Title II, Chapter                           2, and Part Three, Title III, Chapter 2 or 3, as applicable, instead of in accordance with Part Three, Title II, Chapter 3,                           or Part Three, Title III, Chapter 4, as applicable.                  

3.A credit institution may apply paragraph 2 only if it started to use the IRB Approach or the Advanced Measurements Approaches                           for the calculation of its capital requirements on or after 1 January 2010.                  

4.Compliance with the requirements of point (b) of paragraph 1 shall be on the basis of amounts of own funds fully adjusted                           to reflect differences in the calculation of own funds under Directive 93/6/EEC and Directive 2000/12/EC as those Directives                           stood prior to 1 January 2007 and the calculation of own funds under this Regulation deriving from the separate treatments of expected loss and unexpected                           loss under Part Three, Title II, Chapter 3, of this Regulation.                  

5.The competent authorities may, after consulting EBA, waive the application of point (b) of paragraph 1 to institutions provided                           that all the requirements for the IRB Approach set out in Part Three, Title II, Chapter 3, Section 6 or the qualifying criteria                           for the use of the Advanced Measurement Approach set out in Part Three, Title III, Chapter 4, as applicable, are met.                  

6.By 1 January 2017, the Commission shall submit a report to the European Parliament and the Council on whether it is appropriate to extend the                           application of the Basel I floor beyond 31 December 2017 to ensure that there is a backstop to internal models, taking into account international developments and internationally                           agreed standards. That report shall be accompanied by a legislative proposal if appropriate.                  

#### Article 501U.K.Capital requirements deduction for credit risk on exposures to SMEs

1.Capital requirements for credit risk on exposures to SMEs shall be multiplied by the factor 0,7619.                  

2.For the purpose of this Article:                  

(a)the exposure shall be included either in the retail or in the corporates or secured by mortgages on immovable property classes.                           Exposures in default shall be excluded;                  

(b)an SME is defined in accordance with Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (37) . Among the criteria listed in Article 2 of the Annex to that Recommendation only the annual turnover shall be taken into                           account;                  

(c)the total amount owed to the institution and parent undertakings and its subsidiaries, including any exposure in default,                           by the obligor client or group of connected clients, but excluding claims or contingent claims secured on residential property                           collateral, shall not, to the knowledge of the institution, exceed EUR 1,5 million. The institution shall take reasonable                           steps to acquire such knowledge.                  

3.Institutions shall report to competent authorities every three months on the total amount of exposures to SMEs calculated                           in accordance with paragraph 2.                  

4.The Commission shall, by 28 June 2016, report on the impact of the own funds requirements laid down in this Regulation on lending to SMEs and natural persons and                           shall submit that report to the European Parliament and to the Council, together with a legislative proposal, if appropriate.                  

5.For the purpose of paragraph 4, EBA shall report on the following to the Commission:                  

(a)an analysis of the evolution of the lending trends and conditions for SMEs over the period referred to in paragraph 4;                  

(b)an analysis of effective riskiness of Union SMEs over a full economic cycle;                  

(c)the consistency of own funds requirements laid down in this Regulation for credit risk on exposures to SMEs with the outcomes                           of the analysis under points (a) and (b).                  

## TITLE IIU.K.REPORTS AND REVIEWS

### Article 502U.K.Cyclicality of capital requirements

The Commission, in cooperation with EBA, ESRB and the Member States, and taking into account the opinion of the ECB, shall                        periodically monitor whether this Regulation taken as a whole, together with Directive 2013/36/EU, has significant effects                        on the economic cycle and, in the light of that examination, shall consider whether any remedial measures are justified.                   

By 31 December 2013, EBA shall report to the Commission on whether, and if so how, methodologies of institutions under the IRB Approach should                        converge with a view to more comparable capital requirements while mitigating pro-cyclicality.                   

Based on that analysis and taking into account the opinion of the ECB, the Commission shall draw up a biennial report and                        submit it to the European Parliament and to the Council, together with any appropriate proposals. Contributions from credit                        taking and credit lending parties shall be adequately acknowledged when the report is drawn up.                   

By 31 December 2014, the Commission shall review, and report on, the application of Article 33(1)(c) and shall submit that report to the European                        Parliament and the Council, together with a legislative proposal, if appropriate.                   

With respect to the potential deletion of Article 33(1)(c) and its potential application at the Union level, the review shall                        in particular ensure that sufficient safeguards are in place to ensure financial stability in all Member States.                   

### Article 503U.K.Own funds requirements for exposures in the form of covered bonds

1.The Commission shall, by 31 December 2014, after consulting EBA, report to the European Parliament and to the Council, together with any appropriate proposals, on                           whether the risk weights laid down in Article 129 and the own funds requirements for specific risk in Article 336(3) are adequate                           for all the instruments that qualify for these treatments and whether the criteria in Article 129 are appropriate.                  

2.The report and the proposals referred to in paragraph 1 shall take into account:                  

(a)the extent to which the current regulatory capital requirements applicable to covered bonds adequately differentiate between                           variances in the credit quality of covered bonds and the collateral against which they are secured, including the extent of                           variations across Member States;                  

(b)the transparency of the covered bond market and the extent to which this facilitates comprehensive internal analysis by investors                           in respect of the credit risk of covered bonds and the collateral against which they are secured and the asset segregation                           in case of the issuer's insolvency, including the mitigating effects of the underlying strict national legal framework in                           accordance with Article 129 of this Regulation and Article 52(4) of Directive 2009/65/EC on the overall credit quality of                           a covered bond and its implications on the level of transparency needed by investors; and                  

(c)the extent to which covered bond issuance by a credit institution impacts on the credit risk to which other creditors of the                           issuing institution are exposed.                  

3.The Commission shall, by 31 December 2014, after consulting EBA, report to the European Parliament and the Council on whether loans secured by aircrafts (aircraft                           liens) and residential loans secured by a guarantee but not secured by a registered mortgage, should under certain conditions                           be considered an eligible asset in accordance with Article 129.                  

4.The Commission shall, by 31 December 2016, review the appropriateness of the derogation set out in Article 496 and, if relevant, the appropriateness of extending similar                           treatment to any other form of covered bond. In the light of that review, the Commission may, if appropriate, adopt delegated                           acts in accordance with Article 462 to make that derogation permanent, or make legislative proposals to extend it to other                           forms of covered bonds.                  

### Article 504U.K.Capital instruments subscribed by public authorities in emergency situations

The Commission shall, by 31 December 2016, after consulting EBA, report to the European Parliament and the Council, together with any appropriate proposals, whether                        the treatment set out in Article 31 needs to be amended or deleted.                   

### Article 505U.K.Review of long-term financing

By 31 December 2014, the Commission shall report to the European Parliament and to the Council, together with any appropriate proposals, about                        the appropriateness of the requirements of this Regulation in light of the need to ensure adequate levels of funding for all                        forms of long-term financing for the economy, including critical infrastructure projects in the Union in the field of transport,                        energy and communications.                   

### Article 506U.K.Credit risk — definition of default

EBA shall, by 31 December 2017, report to the Commission on how replacing 90 days by 180 days past due, as provided in point (b) of Article 178(1), impacts                        risk-weighted exposure amounts and the appropriateness of the continued application of that provision after 31 December 2019.                   

On the basis of that report, the Commission may submit a legislative proposal to amend this Regulation.                   

### Article 507U.K.Large exposures

By 31 December 2015, the Commission shall review and report on the application of Article 400(1)(j) and Article 400(2), including whether the                        exemptions set out in Article 400(2) is to be discretionary, and shall submit that report to the European Parliament and to                        the Council, together with a legislative proposal, if appropriate.                   

With respect to the potential elimination of the national discretion under Article 400(2)(c) and its potential application                        at the Union level, the review shall in particular take into account the efficiency of group risk management while ensuring                        that sufficient safeguards are in place to ensure financial stability in all Member States in which an entity belonging to                        a group is incorporated.                   

### Article 508U.K.Level of application

1.By 31 December 2014, the Commission shall review, and report on, the application of Part One, Title II, and Article 113(6) and (7) and shall                           submit that report to the European Parliament and the Council, together with a legislative proposal, if appropriate.                  

2.By 31 December 2015, the Commission shall report on whether and how the liquidity coverage requirement laid down in Part Six should apply to                           investment firms and shall, after consulting EBA, submit that report to the European Parliament and to the Council, together                           with a legislative proposal, if appropriate.                  

3.By 31 December 2015, the Commission shall, after consulting EBA and ESMA and in the light of discussions with the competent authorities, report                           to the European Parliament and to the Council on an appropriate regime for the prudential supervision of investment firms                           and of firms referred to in points (2)(b) and (c) of Article 4(1). Where appropriate the report shall be followed by a legislative                           proposal.                  

### Article 509U.K.Liquidity requirements

1.EBA shall monitor and evaluate the reports made in accordance with Article 415(1), across currencies and across different                           business models. EBA shall, after consulting the ESRB, non-financial end-users, the banking industry, competent authorities                           and the ESCB central banks, annually and for the first time by 31 December 2013 report to the Commission on whether a specification of the general liquidity coverage requirement in Part Six based on the                           items to be reported in accordance with Part Six, Title II and Annex III, considered either individually or cumulatively,                           is likely to have a material detrimental impact on the business and risk profile of institutions established in the Union                           or on the stability and orderly functioning of financial markets or on the economy and the stability of the supply of bank                           lending, with a particular focus on lending to SMEs and on trade financing, including lending under official export credit                           insurance schemes.                  

The report referred to in the first subparagraph shall take due account of markets and international regulatory developments                        as well as of the interactions of the liquidity coverage requirement with other prudential requirements under this Regulation                        such as the risk-based capital ratios as set out in Article 92 and the leverage ratio.                   

The European Parliament and the Council shall be given the opportunity to state their views on the report referred to in the                        first subparagraph.                   

2.EBA shall, in the report referred to in paragraph 1, assess the following, in particular:                  

(a)the provision of mechanisms restricting the value of liquidity inflows, in particular with a view to determining an appropriate                           inflow cap and the conditions for its application, taking into account different business models including pass through financing,                           factoring, leasing, covered bonds, mortgages, issuance of covered bonds, and the extent to which that cap should be amended                           or removed to cater for the specificities of specialised financing;                  

(b)the calibration of inflows and outflows referred to in Part Six, Title II, in particular under Article 422(7) and Article                           425(2);                  

(c)the provision of mechanisms restricting the coverage of liquidity requirements by certain categories of liquid assets, in                           particular assessing the appropriate minimum percentage for liquid assets referred to in points (a), (b) and (c) of Article                           416(1) to the total of liquid assets, testing a threshold of 60 % and taking into account international regulatory developments.                           Assets owed and due or callable within 30 calendar days should not count towards the limit unless the assets have been obtained                           against collateral that also qualifies under points (a), (b) and (c) of Article 416(1);                  

(d)the provision of specific lower outflow and/or higher inflow rates for intragroup flows, specifying under which conditions                           such specific in- or outflow rates would be justified from a prudential point of view and setting out the high level outline                           of a methodology using objective criteria and parameters in order to determine specific levels of inflows and outflows between                           the institution and the counterparty when they are not established in the same Member State;                  

(e)the calibration of the draw-down rates applicable to the undrawn committed credit and liquidity facilities that fall under                           Article 424(3) and (5). In particular, EBA shall test a draw-down rate of 100 %;                  

(f)the definition of retail deposit in point (2) of Article 411, in particular the appropriateness of introducing a threshold                           on deposits of natural persons;                  

(g)the need to introduce a new retail deposit category with a lower outflow in the light of the specific characteristics of such                           deposits that could justify a lower outflow rate and taking into account international developments;                  

(h)derogations from requirements on the composition of the liquid assets institutions will be required to hold, where in a given                           currency the institutions' collective justified needs for liquid assets are exceeding the availability of those liquid assets                           and conditions to which such derogations should be subject;                  

(i)the definition of Shari'ah-compliant financial products as an alternative to assets that would qualify as liquid assets for                           the purposes of Article 416, for the use of Shari'ah-compliant banks;                  

(j)the definition of circumstances of stress, including principles for the use of the stock of liquid assets and the necessary                           supervisory reactions under which institutions would be able to use their liquid assets to meet liquidity outflows and how                           to address non-compliance;                  

(k)the definition of an established operational relationship for non-financial customer as referred to in Article 422(3)(c);                  

(l)the calibration of the outflow rate applicable to correspondent banking and prime brokerage services as referred to in the                           first subparagraph of Article 422(4);                  

(m)mechanisms for the grandfathering of government guaranteed bonds issued to credit institutions as part of government support                           measures with Union State aid approval, such as bonds issued by the National Asset Management Agency (NAMA) in Ireland and                           by the Spanish Asset Management Company in Spain, designed to remove problem assets from the balance sheets of credit institutions,                           as assets of extremely high liquidity and credit quality until at least December 2023.                  

3.EBA shall, after consulting ESMA and the ECB, by 31 December 2013, report to the Commission on appropriate uniform definitions of high and of extremely high liquidity and credit quality of                           transferable assets for the purposes of Article 416 and appropriate haircuts for assets that would qualify as liquid assets                           for the purposes of Article 416, with the exception of assets referred to in points (a), (b) and (c) of Article 416(1).                  

The European Parliament and the Council shall be given the opportunity to state their views on that report.                   

The report referred to in the first subparagraph shall also consider:                   

(a)other categories of assets, in particular residential mortgage-backed securities of high liquidity and credit quality;                  

(b)other categories of central bank eligible securities or loans, such as local government bonds and commercial paper; and                  

(c)other non-central bank eligible but tradable assets, such as equities listed on a recognised exchange, gold, major index linked                           equity instruments, guaranteed bonds, covered bonds, corporate bonds and funds based on those assets.                  

4.The report referred to in paragraph 3 shall consider whether, and if so to what extent, standby credit facilities referred                           to in point (e) of Article 416(1) should be included as liquid assets in light of international development and taking into                           account European specificities, including the way monetary policy is performed in the Union.                  

EBA shall in particular test the adequacy of the following criteria and the appropriate levels for such definitions:                   

(a)minimum trade volume of the assets;                  

(b)minimum outstanding volume of the assets;                  

(c)transparent pricing and post-trade information;                  

(d)credit quality steps referred to in Part Three, Title II, Chapter 2;                  

(e)proven record of price stability;                  

(f)average volume traded and average trade size;                  

(g)maximum bid/ask spread;                  

(h)remaining time to maturity;                  

(i)minimum turnover ratio.                  

5.By 31 January 2014, EBA shall also report on the following:                  

(a)uniform definitions of high and extremely high liquidity and credit quality;                  

(b)the possible unintended consequences of the definition of liquid assets on the conduct of monetary policy operation and the                           extent to which:                  

a list of liquid assets that is disconnected from the list of central bank eligible assets may incentivise institutions to                                 submit eligible assets which are not included in the definition of liquid assets in refinancing operations;                            

regulation of liquidity may disincentivise institutions from lending or borrowing on the unsecured money market and whether                                 this may lead to question the targeting of EONIA in monetary policy implementation;                            

the introduction of the liquidity coverage requirement may make it more difficult for central banks to ensure price stability                                 by using the existing monetary policy framework and instruments;                            

(c)the operational requirements for the holdings of liquid assets, as referred in points (b) to (f) of Article 417, in line with                           international regulatory developments.                  

### Article 510U.K.Net Stable Funding Requirements

1.By 31 December 2015, EBA shall report to the Commission, on the basis of the items to be reported in accordance with Part Six, Title III, on                           whether and how it would be appropriate to ensure that institutions use stable sources of funding, including an assessment                           of the impact on the business and risk profile of institutions established in the Union or on financial markets or the economy                           and bank lending, with a particular focus on lending to SMEs and on trade financing, including lending under official export                           credit insurance schemes and pass through financing models, including match funded mortgage lending. In particular EBA shall                           analyse the impact of stable sources of funding on the refinancing structures of different banking models in the Union.                  

2.By 31 December 2015, EBA shall also report to the Commission, on the basis of the items to be reported in accordance with Part Six, Title III                           and, in accordance with the uniform reporting formats referred to in point (a) of Article 415(3) and after consulting the                           ESRB, on methodologies for determining the amount of stable funding available to and required by institutions and on appropriate                           uniform definitions for calculating such a net stable funding requirement, examining in particular the following:                  

(a)the categories and weightings applied to sources of stable funding in Article 427(1);                  

(b)the categories and weightings applied to determine the requirement for stable funding in Article 428(1);                  

(c)methodologies shall provide incentives and disincentives as appropriate to encourage a more stable longer term funding of                           assets, business activities, investment and funding of institutions;                  

(d)the need to develop different methodologies for different types of institutions.                  

3.By 31 December 2016, the Commission shall, if appropriate, taking into account the reports referred to in paragraphs 1 and 2, and taking full                           account of the diversity of the banking sector in the Union, submit a legislative proposal to the European Parliament and                           the Council on how to ensure that institutions use stable sources of funding.                  

### Article 511U.K.Leverage

1.Based on the results of the report referred to in paragraph 3, the Commission shall submit by 31 December 2016 a report on the impact and effectiveness of the leverage ratio to the European Parliament and the Council.                  

2.Where appropriate, the report shall be accompanied by a legislative proposal on the introduction of an appropriate number                           of levels of the leverage ratio that institutions following different business models would be required to meet, suggesting                           an adequate calibration for those levels and any appropriate adjustments to the capital measure and the total exposure measure                           as referred to in Article 429, together with any connected flexibility measures if necessary, including appropriate amendments                           to Article 458 to introduce the leverage ratio within the scope of measures included in that Article.                  

3.For the purposes of paragraph 1, EBA shall report to the Commission by 31 October 2016 on at least the following:                  

(a)whether the leverage ratio framework provided by this Regulation and by Articles 87 and 98 of Directive 2013/36/EU is the                           appropriate tool to eliminate the risk of excessive leverage on the part of the institutions in a satisfactory manner and                           degree;                  

(b)on identifying business models that reflect the overall risk profiles of the institutions and on introducing differentiated                           levels of the leverage ratio for those business models;                  

(c)whether the requirements laid out in Articles 76 and 87 of Directive 2013/36/EU in accordance with Articles 73 and 97 of Directive                           2013/36/EU for addressing the risk of excessive leverage are sufficient to ensure sound management of this risk by institutions                           and, if not, which further enhancements are needed in order to ensure these objectives;                  

(d)whether and, if so, which, changes to the calculation methodology referred to in Article 429 would be necessary to ensure                           that the leverage ratio can be used as an appropriate indicator of an institution's risk of excessive leverage;                  

(e)whether, in the context of the calculation of the total exposure measure of the leverage ratio, the exposure value of contracts                           listed in Annex II determined by using the Original Exposure Method differs in a material way from the exposure value determined                           by using the Mark-to-Market Method;                  

(f)whether using either own funds or Common Equity Tier 1 capital as the capital measure of the leverage ratio could be more                           appropriate for the intended purpose of tracking the risk of excessive leverage and, if so, what would be the appropriate                           calibration of the leverage ratio;                  

(g)whether the conversion factor referred to in point (a) of Article 429(10) for undrawn credit facilities, which may be cancelled                           unconditionally at any time without notice, is appropriately conservative based on the evidence collected during the observation                           period;                  

(h)whether the frequency and format of the disclosure of items referred to in Article 451 are adequate;                  

(i)the appropriate level of the leverage ratio for each of the business models identified in accordance with point (b);                  

(j)whether a range for each level of the leverage ratio should be established;                  

(k)whether introducing the leverage ratio as a requirement for institutions would necessitate any, and, if so, which, changes                           to the leverage ratio framework provided by this Regulation;                  

(l)whether introducing the leverage ratio as a requirement for institutions would effectively constrain the risk of excessive                           leverage on the part of those institutions, and, if so, whether the level for the leverage ratio should be the same for all                           institutions or should be determined in accordance with the risk profile and business model as well as the size of institutions                           and, with regard to this, which additional calibrations or transitional period would be required.                  

4.The report referred to in paragraph 3 shall cover at least the period from 1 January 2014 until 30 June 2016 and shall take account of at least the following:                  

(a)the impact of introducing the leverage ratio, determined in accordance with Article 429, as a requirement that institutions                           would have to meet on:                  

financial markets in general and markets for repurchase transactions, derivatives and covered bonds in particular;                            

the robustness of institutions;                            

the business models and the balance-sheet structures of institutions; in particular as regards low-risk areas of business,                                 such as promotional credit by public development banks, municipal loans, financing of residential property and other low-risk                                 areas regulated under national law;                            

the migration of exposures to entities which are not subject to prudential supervision;                            

financial innovation, in particular the development of instruments with embedded leverage;                            

institutions' risk-taking behaviour;                            

clearing, settlement and custody activities and the operation of a central counterparty;                            

cyclicality of the capital measure and the total exposure measure of the leverage ratio;                            

bank lending, with a particular focus on lending to SMEs, local authorities, regional governments and public sector entities                                 and on trade financing, including lending under official export credit insurance schemes;                            

(b)the interaction of the leverage ratio with the risk-based own funds requirements and the liquidity requirements as specified                           in this Regulation;                  

(c)the impact of accounting differences between accounting standards applicable under Regulation (EC) No 1606/2002, accounting                           standards applicable under Directive 86/635/EEC and other applicable accounting framework and other relevant accounting frameworks                           on the comparability of the leverage ratio.                  

### Article 512U.K.Exposures to transferred credit risk

By 31 December 2014, the Commission shall report to the European Parliament and the Council on the application and effectiveness of the provisions                        of Part Five in the light of international market developments.                   

### Article 513U.K.Macroprudential rules

1.By 30 June 2014, the Commission shall, after consulting the ESRB and EBA, review whether the macroprudential rules contained in this Regulation                           and Directive 2013/36/EU are sufficient to mitigate systemic risks in sectors, regions and Member States including assessing:                  

(a)whether the current macroprudential tools in this Regulation and Directive 2013/36/EU are effective, efficient and transparent;                  

(b)whether the coverage and the possible degrees of overlap between different macroprudential tools for targeting similar risks                           in this Regulation and Directive 2013/36/EU are adequate and, if appropriate, propose new macroprudential rules;                  

(c)how internationally agreed standards for systemic institutions interacts with the provisions in this Regulation and Directive                           2013/36/EU and, if appropriate, propose new rules taking into account those internationally agreed standards.                  

2.By 31 December 2014, the Commission shall, on the basis of the consultation of the ESRB and EBA, report to the European Parliament and the Council                           on the assessment referred to in paragraph 1 and, where appropriate, submit a legislative proposal to the European Parliament                           and the Council.                  

### Article 514U.K.Counterparty credit risk and the Original Exposure Method

By 31 December 2016, the Commission shall review and report on the application of Article 275 and shall submit that report to the European Parliament                        and the Council, and, if appropriate, a legislative proposal.                   

### Article 515U.K.Monitoring and evaluation

1.By 28 June 2014, EBA, together with ESMA, shall report on the functioning of this Regulation with the related obligations under Regulation                           (EU) No 648/2012 and in particular with regard to institutions operating a central counterparty, in order to avoid duplication                           of requirements for derivative transactions and thereby avoid increased regulatory risk and increased costs for monitoring                           by competent authorities.                  

2.EBA shall monitor and evaluate the operation of the provisions for own funds requirements for exposures to a central counterparty                           as set out in Section 9 of Chapter 6 of Title II of Part Three. By 1 January 2015 EBA shall report to the Commission on the impact and effectiveness of such provisions.                  

3.By 31 December 2016, the Commission shall review, and report on, the reconciliation of this Regulation with the related obligations under Regulation                           (EU) No 648/2012, the own funds requirements as set out in Section 9 of Chapter 6 of Title II of Part Three and shall submit                           that report to the European Parliament and the Council, and, if appropriate, a legislative proposal.                  

### Article 516U.K.Long-term financing

By 31 December 2015, the Commission shall report on the impact of this Regulation on the encouragement of long-term investments in growth promoting                        infrastructure.                   

### Article 517U.K.Definition of eligible capital

By 31 December 2014, the Commission shall review, and report on, the appropriateness of the definition of eligible capital being applied for                        the purposes of Title III of Part Two and Part Four and shall submit that report to the European Parliament and the Council,                        and, if appropriate, a legislative proposal.                   

### Article 518U.K.Review of capital instruments which may be written down or converted at the point of non-viability

By 31 December 2015, the Commission shall review, and report on, whether this Regulation should contain a requirement that Additional Tier 1                        or Tier 2 capital instruments are to be written down in the event of a determination that an institution is no longer viable.                        The Commission shall submit that report to the European Parliament and the Council, together with a legislative proposal,                        if appropriate.                   

### Article 519U.K.Deduction of defined benefit pension fund assets from Common Equity Tier 1 items

By 30 June 2014, EBA shall prepare a report on whether the revised IAS 19 in conjunction with the deduction of net pension assets as set                        out in Article 36(1)(e) and changes in the net pension liabilities lead to undue volatility of institutions' own funds.                   

Taking into account the EBA report, the Commission shall by, 31 December 2014 prepare a report for the European Parliament and the Council on the issue referred to in the first paragraph, together with                        a legislative proposal, if appropriate, to introduce a treatment which adjusts defined net benefit pension fund assets or                        liabilities for the calculation of own funds.                   

## TITLE IIIU.K.AMENDMENTS

### Article 520U.K.Amendment of Regulation (EU) No 648/2012

Regulation (EU) No 648/2012 is amended as follows:                   

the following Chapter is added in Title IV:                            

#### ‘CHAPTER 4U.K.Calculations and reporting for the purposes of Regulation (EU) No 575/2013

##### Article 50aCalculation of KCCP

1.For the purposes of Article 308 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms(38), a CCP shall calculate KCCP as specified in paragraph 2 of this Article for all contracts and transactions it clears for all its clearing members falling                                       within the coverage of the given default fund.                           

2.A CCP shall calculate the hypothetical capital (KCCP) as follows:                           

                           

where:                           

EBRM

=

exposure value before risk mitigation that is equal to the exposure value of the CCP to clearing member i arising from all                                       the contracts and transactions with that clearing member, calculated without taking into account the collateral posted by                                       that clearing member;                              

IM

=

the initial margin posted to the CCP by clearing member i;                              

DF

=

the pre-funded contribution of clearing member i;                              

RW

=

a risk weight of 20 %;                              

capital ratio

=

8 %.                              

All values in the formula in the first subparagraph shall relate to the valuation at the end of the day before the margin                                    called on the final margin call of that day is exchanged.                           

3.A CCP shall undertake the calculation required by paragraph 2 at least quarterly or more frequently where required by the                                       competent authorities of those of its clearing members which are institutions.                           

4.For the purpose of paragraph 3, EBA shall develop draft implementing technical standards to specify the following:                           

(a)the frequency and dates of the calculation laid down in paragraph 2;                           

(b)the situations in which the competent authority of an institution acting as a clearing member may require higher frequencies                                       of calculation and reporting than those referred to in point (a).                           

EBA shall submit those draft implementing technical standards to the Commission by 1 January 2014.                           

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                                    accordance with Article 15 of Regulation (EU) No 1093/2010.                           

##### Article 50bGeneral rules for the calculation of KCCP

For the purposes of the calculation laid down in Article 50a(2), the following shall apply:                           

a CCP shall calculate the value of the exposures it has to its clearing members as follows:                                    

for exposures arising from contracts and transactions listed in Article 301(1)(a) and (d) of Regulation (EU) No 575/2013 it                                                      shall calculate them in accordance with the mark-to-market method laid down in Article 274 thereof;                                             

for exposures arising from contracts and transactions listed in Article 301(1)(b), (c) and (e) of Regulation (EU) No 575/2013                                                      it shall calculate them in accordance with the Financial Collateral Comprehensive Method specified in Article 223 of that                                                      Regulation with supervisory volatility adjustments, specified in Articles 223 and 224 of that Regulation. The exception set                                                      out in point (a) of Article 285(3) of that Regulation, shall not apply;                                             

for exposures arising from transactions not listed in Article 301(1) of Regulation (EU) No 575/2013 and which entails settlement                                                      risk only it shall calculate them in accordance with Part Three, Title V of that Regulation;                                             

for institutions that fall under the scope of Regulation (EU) No 575/2013 the netting sets are the same as those defined in                                             Part Three, Title II of that Regulation;                                    

when calculating the values referred to in point (a), the CCP shall subtract from its exposures the collateral posted by its                                             clearing members, appropriately reduced by the supervisory volatility adjustments in accordance with the Financial Collateral                                             Comprehensive Method specified in Article 224 of Regulation (EU) No 575/2013;                                    

where a CCP has exposures to one or more CCPs it shall treat any such exposures as if they were exposures to clearing members                                             and include any margin or pre-funded contributions received from those CCPs in the calculation of KCCP;                                    

where a CCP has in place a binding contractual arrangement with its clearing members that allows it to use all or part of                                             the initial margin received from its clearing members as if they were pre-funded contributions, the CCP shall consider that                                             initial margin as prefunded contributions for the purposes of the calculation in paragraph 1 and not as initial margin;                                    

when applying the Mark-to-Market Method as set out in Article 274 of Regulation (EU) No 575/2013, a CCP shall replace the                                             formula in point (c)(ii) of Article 298(1) of that Regulation with the following:                                    

                                    

where the numerator of NGR is calculated in accordance with Article 274(1) of that Regulation and just before the variation                                             margin is actually exchanged at the end of the settlement period, and the denominator is gross replacement cost;                                    

where a CCP cannot calculate the value of NGR as set out in point (c)(ii) of Article 298(1) of Regulation (EU) No 575/2013,                                             it shall:                                    

notify those of its clearing members which are institutions and their competent authorities about its inability to calculate                                                      NGR and the reasons why it is unable to carry out the calculation;                                             

for a period of three months, it may use a value of NGR of 0,3 to perform the calculation of PCEred specified in point (h) of this Article;                                             

where, at the end of the period specified in point (ii) of point (i), the CCP would still be unable to calculate the value                                             of NGR, it shall do the following:                                    

stop calculating KCCP;                                             

notify those of its clearing members which are institutions and their competent authorities that it has stopped calculating                                                      KCCP;                                             

for the purpose of calculating the potential future exposure for options and swaptions in accordance with the Mark-to-Market                                             Method specified in Article 274 of Regulation (EU) No 575/2013, a CCP shall multiply the notional amount of the contract by                                             the absolute value of the option's deltaas set out in point (a) of Article 280(1) of that Regulation;                                    

where a CCP has more than one default fund, it shall carry out the calculation laid down in Article 50a(2) for each default                                             fund separately.                                    

##### Article 50cReporting of information

1.For the purposes of Article 308 of Regulation (EU) No 575/2013, a CCP shall report the following information to those of its                                       clearing members which are institutions and to their competent authorities:                           

(a)the hypothetical capital (KCCP);                           

(b)the sum of pre-funded contributions (DFCM);                           

(c)the amount of its pre-funded financial resources that it is required to use — by law or due to a contractual agreement with                                       its clearing members — to cover its losses following the default of one or more of its clearing members before using the default                                       fund contributions of the remaining clearing members (DFCCP);                           

(d)the total number of its clearing members (N);                           

(e)the concentration factor (β), as set out in Article 50d.                           

Where the CCP has more than one default fund, it shall report the information in the first subparagraph for each default fund                                    separately.                           

2.The CCP shall notify those of its clearing members which are institutions at least quarterly or more frequently where required                                       by the competent authorities of those clearing members.                           

3.EBA shall develop draft implementing technical standards to specify the following:                           

(a)the uniform template for the purpose of the reporting specified in paragraph 1;                           

(b)the frequency and dates of the reporting specified in paragraph 2;                           

(c)the situations in which the competent authority of an institution acting as a clearing member may require higher frequencies                                       of reporting than those referred to in point (b).                           

EBA shall submit those draft implementing technical standards to the Commission by 1 January 2014.                           

Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in                                    accordance with Article 15 of Regulation (EU) No 1093/2010.                           

##### Article 50dCalculation of specific items to be reported by the CCP

For the purposes of Article 50c, the following shall apply:                           

where the rules of a CCP provide that it use part or all of its financial resources in parallel to the pre-funded contributions                                             of its clearing members in a manner that makes those resources equivalent to pre-funded contributions of a clearing member                                             in terms of how they absorb the losses incurred by the CCP in the case of the default or insolvency of one or more of its                                             clearing members, the CCP shall add the corresponding amount of those resources to DFCM;                                    

where the rules of a CCP provide that it use part or all of its financial resources to cover its losses due to the default                                             of one or more of its clearing members after it has depleted its default fund, but before it calls on the contractually committed                                             contributions of its clearing members, the CCP shall add the corresponding amount of those additional financial resources                                             to the total amount of pre-funded contributions (DF) as follows:                                    

.                                    

a CCP shall calculate the concentration factor (β) in accordance with the following formula:                                    

                                    

where:                                    

PCE

=

the reduced figure for potential future credit exposure for all contracts and transaction of a CCP with clearing member *i*;                                       

PCE

=

the reduced figure for potential future credit exposure for all contracts and transaction of a CCP with the clearing member                                                that has the largest PCEred value;                                       

PCE

=

the reduced figure for potential future credit exposure for all contracts and transaction of a CCP with the clearing member                                                that has the second largest PCEred value.’;                                       

in Article 11(15), point (b) is deleted;                            

in Article 89, the following paragraph is inserted:                            

‘5a.Until 15 months after the date of entry into force of the latest of the regulatory technical standards referred to in Articles                                       16, 25, 26, 29, 34, 41, 42, 44, 45, 47 and 49, or until a decision is made under Article 14 on the authorisation of the CCP,                                       whichever is earlier, that CCP shall apply the treatment specified in the third subparagraph of this paragraph.                           

Until 15 months after the date of entry into force of the latest of the regulatory technical standards referred to in Articles                                    16, 26, 29, 34, 41, 42, 44, 45, 47 and 49, or until a decision is made under Article 25 on the recognition of the CCP, whichever                                    is earlier, that CCP shall apply the treatment specified in the third subparagraph of this paragraph.                           

Until the deadlines defined in the first two subparagraphs of this paragraph, and subject to the fourth subparagraph of this                                    paragraph, where a CCP neither has a default fund nor has in place a binding arrangement with its clearing members that allows                                    it to use all or part of the initial margin received from its clearing members as if they were pre-funded contributions, the                                    information it is to report in accordance with Article 50c(1) shall include the total amount of initial margin it has received                                    from its clearing members.                           

The deadlines referred to in the first and second subparagraphs of this paragraph may be extended by six months in accordance                                    with a Commission implementing act adopted pursuant to Article 497(3) of Regulation (EU) No 575/2013.’ .                           

# PART ELEVENU.K.FINAL PROVISIONS

## Article 521U.K.Entry into force and date of application

1.This Regulation shall enter into force on the day following that of its publication in the *Official Journal of the European Union*.                  

2.This Regulation shall apply from 1 January 2014, with the exception of:                  

(a)Article 8(3), Article 21 and Article 451(1), which shall apply from 1 January 2015;                  

(b)Article 413(1), which shall apply from 1 January 2016;                  

(c)the provisions of this Regulation that require the ESAs to submit to the Commission draft technical standards and the provisions                           of this Regulation that empower the Commission to adopt delegated acts or implementing acts, which shall apply from 28 June 2013.                  

This Regulation shall be binding in its entirety and directly applicable in all Member States.                      

## ANNEX IU.K.Classification of off-balance sheet items

### 1.Full risk:U.K.

guarantees having the character of credit substitutes, (e.g. guarantees for the good payment of credit facilities);                            

credit derivatives;                            

acceptances;                            

endorsements on bills not bearing the name of another institution;                            

transactions with recourse (e.g. factoring, invoice discount facilities);                            

irrevocable standby letters of credit having the character of credit substitutes;                            

assets purchased under outright forward purchase agreements;                            

forward deposits;                            

the unpaid portion of partly-paid shares and securities;                            

asset sale and repurchase agreements as referred to in Article 12(3) and (5) of Directive 86/635/EEC;                            

other items also carrying full risk.                            

### 2.Medium risk:U.K.

trade finance off-balance sheet items, namely documentary credits issued or confirmed (see also ‘Medium/low risk’);                            

other off-balance sheet items:                            

shipping guarantees, customs and tax bonds;                                     

undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or acceptance facilities) with an original                                          maturity of more than one year;                                     

note issuance facilities (NIFs) and revolving underwriting facilities (RUFs);                                     

other items also carrying medium risk and as communicated to EBA.                                     

### 3.Medium/low risk:U.K.

trade finance off-balance sheet items:                            

documentary credits in which underlying shipment acts as collateral and other self-liquidating transactions;                                     

warranties (including tender and performance bonds and associated advance payment and retention guarantees) and guarantees                                          not having the character of credit substitutes;                                     

irrevocable standby letters of credit not having the character of credit substitutes;                                     

other off-balance sheet items:                            

undrawn credit facilities which comprise agreements to lend, purchase securities, provide guarantees or acceptance facilities                                          with an original maturity of up to and including one year which may not be cancelled unconditionally at any time without notice                                          or that do not effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness;                                     

other items also carrying medium/low risk and as communicated to EBA.                                     

### 4.Low risk:U.K.

undrawn credit facilities comprising agreements to lend, purchase securities, provide guarantees or acceptance facilities                                 which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation                                 due to deterioration in a borrower's creditworthiness. Retail credit lines may be considered as unconditionally cancellable                                 if the terms permit the institution to cancel them to the full extent allowable under consumer protection and related legislation;                            

undrawn credit facilities for tender and performance guarantees which may be cancelled unconditionally at any time without                                 notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness; and                            

other items also carrying low risk and as communicated to EBA.                            

## ANNEX IIU.K.Types of derivatives

### 1.Interest-rate contracts:U.K.

single-currency interest rate swaps;                            

basis-swaps;                            

forward rate agreements;                            

interest-rate futures;                            

interest-rate options purchased;                            

other contracts of similar nature.                            

### 2.Foreign-exchange contracts and contracts concerning gold:U.K.

cross-currency interest-rate swaps;                            

forward foreign-exchange contracts;                            

currency futures;                            

currency options purchased;                            

other contracts of a similar nature;                            

contracts of a nature similar to (a) to (e) concerning gold.                            

### 3.Contracts of a nature similar to those in points 1(a) to (e) and 2(a) to (d) of this Annex concerning other reference items                           or indices. This includes as a minimum all instruments specified in points 4 to 7, 9 and 10 of Section C of Annex I to Directive                           2004/39/EC not otherwise included in point 1 or 2 of this Annex.U.K.

## ANNEX IIIU.K.Items subject to supplementary reporting of liquid assets

### 1.Cash.U.K.

### 2.Central bank exposures, to the extent that these exposures can be drawn down in times of stress.U.K.

### 3.Transferable securities representing claims on or claims guaranteed by sovereigns, central banks, non-central government public                           sector entities, regions with fiscal autonomy to raise and collect taxes and local authorities, the Bank for International                           Settlements, the International Monetary Fund, the European Union, the European Financial Stability Facility, the European                           Stability Mechanism or multilateral development banks and satisfying all of the following conditions:U.K.

they are assigned a 0 % risk-weight under Chapter 2, Title II of Part Three;                            

they are not an obligation of an institution or any of its affiliated entities.                            

### 4.Transferable securities other than those referred to in point 3 representing claims on or claims guaranteed by sovereigns                           or central banks issued in domestic currencies by the sovereign or central bank in the currency and country in which the liquidity                           risk is being taken or issued in foreign currencies, to the extent that holding of such debt matches the liquidity needs of                           the bank's operations in that third country.U.K.

### 5.Transferable securities representing claims on or claims guaranteed by sovereigns, central banks, non-central government public                           sector entities, regions with fiscal autonomy to raise and collect taxes and local authorities, or multilateral development                           banks and satisfying all of the following conditions:U.K.

they are assigned a 20 % risk-weight under Chapter 2, Title II of Part Three;                            

they are not an obligation of an institution or any of its affiliated entities.                            

### 6.Transferable securities other than those referred to in points 3, 4 and 5 that qualify for a 20 % or better risk weight under                           Chapter 2, Title II of Part Three or are internally rated as having an equivalent credit quality, and fulfil any of the following                           conditions:U.K.

they do not represent a claim on an SSPE, an institution or any of its affiliated entities;                            

they are bonds eligible for the treatment set out in Article 129(4) or (5);                            

they are bonds as referred to in Article 52(4) of Directive 2009/65/EC other than those referred to in point (b) of this point.                            

### 7.Transferable securities other than those referred to in points 3 to 6 that qualify for a 50 % or better risk weight under                           Chapter 2, Title II of Part Three or are internally rated as having an equivalent credit quality, and do not represent a claim                           on an SSPE, an institution or any of its affiliated entities.U.K.

### 8.Transferable securities other than those referred to in points 3 to 7 that are collateralised by assets that qualify for a                           35 % or better risk weight under Chapter 2, Title II of Part Three or are internally rated as having an equivalent credit                           quality, and are fully and completely secured by mortgages on residential property in accordance with Article 125.U.K.

### 9.Standby credit facilities granted by central banks within the scope of monetary policy to the extent that these facilities                           are not collateralised by liquid assets and excluding emergency liquidity assistance.U.K.

### 10.Legal or statutory minimum deposits with the central credit institution and other statutory or contractually available liquid                           funding from the central credit institution or institutions that are members of the network referred to in Article 113(7),                           or eligible for the waiver provided in Article 10, to the extent that this funding is not collateralised by liquid assets,                           if the credit institution belongs to a network in accordance with legal or statutory provisions.U.K.

### 11.Exchange traded, centrally cleared common equity shares, that are a constituent of a major stock index, denominated in the                           domestic currency of the Member State and not issued by an institution or any of its affiliates.U.K.

### 12.Gold listed on a recognised exchange, held on an allocated basis.U.K.

All items with the exception of those referred to in points 1, 2 and 9 must satisfy all of the following conditions:                   

they are traded in simple repurchase agreements or cash markets characterised by a low level of concentration;                            

they have a proven record as a reliable source of liquidity by either repurchase agreement or sale even during stressed market                                 conditions;                            

they are unencumbered.                            

## ANNEX IVU.K.Correlation table

1

[X1OJ C 105, 11.4.2012, p. 1.]                            

2

[X1OJ C 68, 6.3.2012, p. 39.]                            

3

[X1OJ L 177, 30.6.2006, p. 1.]                            

4

[X1OJ L 177, 30.6.2006, p. 201.]                            

5

[X1OJ L 176, 27.6.2013, p. 338.]                            

6

[X1OJ L 331, 15.12.2010, p. 1.]                            

7

[X1OJ L 331, 15.12.2010, p. 12.]                            

8

[X1Council Decision 2009/937/EU of 1 December 2009 adopting the Council's Rules of Procedure (OJ L 325, 11.12.2009, p. 35).]                            

9

[X1OJ L 372, 31.12.1986, p. 1.]                            

10

[X1OJ L 193, 18.7.1983, p. 1.]                            

11

[X1OJ L 243, 11.9.2002, p. 1.]                            

12

[X1OJ L 145, 30.4.2004, p. 1.]                            

13

[X1OJ L 35, 11.2.2003, p. 1.]                            

14

[X1OJ L 201, 27.7.2012, p. 1.]                            

15

[X1OJ L 302, 17.11.2009, p. 97.]                            

16

[X1OJ L 281, 23.11.1995, p. 31.]                            

17

[X1OJ L 8, 12.1.2001, p. 1.]                            

18

[X1OJ L 55, 28.2.2011, p. 13.]                            

19

[X1OJ C 175, 19.6.2012, p. 1.]                            

20

[X1OJ L 335, 17.12.2009, p. 1.]                            

21

[X1OJ L 302, 17.11.2009, p. 32.]                            

22

[X1OJ L 174, 1.7.2011, p. 1.]                            

23

[X1OJ L 319, 5.12.2007, p. 1.]                            

24

[X1OJ L 222, 14.8.1978, p. 11.]                            

25

[X1OJ L 302, 17.11.2009, p. 1.]                            

26

[X1OJ L 331, 15.12.2010, p. 48.]                            

27

[X1OJ L 331, 15.12.2010, p. 84.]                            

28

[X1OJ L 141, 11.6.1993, p. 1.]                            

29

[X1OJ L 250, 2.10.2003, p. 10.]                            

30

[X1OJ L 135, 31.5.1994, p. 5.]                            

31

[X1OJ C 119, 25.4.2013, p. 1.]                            

32

[X1OJ L 3, 7.1.2004, p. 36.]                            

33

[X1Commission Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament                                 and of the Council (OJ L 320, 29.11.2008, p. 1).]                            

34

[X1Commission Regulation (EU) No 1205/2011 of 22 November 2011 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC)                                 No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standard (IFRS) 7                                 (OJ L 305, 23.11.2011, p. 16).]                            

35

[X1OJ L 141, 11.6.1993, p. 27.]                            

36

[X1OJ L 126, 26.5.2000, p. 1.]                            

37

[X1OJ L 124, 20.5.2003, p. 36.]                            

38

[X1OJ L 176, 27.6.2013,p.1.’;]                            

Editorial Information

X1Substituted by Corrigendum to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements                                    for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).