• PRU A6.8 PRU A6.8 Securities Underwriting Risk Capital Requirement

    • Guidance

      Section A6.8 presents the method for calculating a net Underwriting position or reduced net Underwriting position, which is then included in the calculation of Market Risk Capital Requirements as specified in this Chapter. Section A6.8 also deals with Concentration Risk.

    • PRU A6.8.1

      (1) An Authorised Person which calculates its Securities Underwriting Risk Capital Requirement in accordance with Rule 5.10.7(b) must apply the Rules in this Section.
      (2) An Authorised Person which underwrites or sub-underwrites an issue of Securities must, for the purposes of calculating its Market Risk Capital Requirement:
      (a) identify commitments to underwrite or sub-underwrite which give rise to an Underwriting position;
      (b) identify the time of initial commitment; and
      (c) calculate the net Underwriting position, reduced net Underwriting position or the net Underwriting Exposure.

    • PRU A6.8.2 PRU A6.8.2

      An Authorised Person must include the net Underwriting position or reduced net Underwriting position where:

      (a) debt Securities are being underwritten;
      (b) equities are being underwritten; or
      (c) Warrants are being underwritten.

      • Guidance

        1. Sub-Underwriting is a commitment given by one firm to someone other than the Issuer or seller of the Securities to sub-underwrite all or part of an issue of Securities. The net Underwriting position calculated in Rule A6.8.6 will also be used in calculating the net Underwriting Exposure under Rules A6.8.11 to A6.8.14.
        2. The net Underwriting position or reduced net Underwriting position arising from Underwriting or sub-Underwriting a rights or Warrants issue should be calculated using the current market price of the underlying Security for the purposes of the Equity Risk Capital Requirement or Option Risk Capital Requirement. However, the risk Capital Requirements will be limited to the value of the net Underwriting position calculated using the initial issue price of the rights or Warrants. Where there is no market price because the rights or Warrants are in relation to a new class of Securities and the initial price has not been set the net Underwriting position or reduced net Underwriting is the amount of the commitment.

    • Commitment to underwrite Securities

      • PRU A6.8.3 PRU A6.8.3

        (1) For the purpose of Rule A6.8.1, an Authorised Person underwrites or sub-underwrites an issue of Securities where:
        (a) it gives a commitment to an Issuer of Securities to underwrite an issue of Securities;
        (b) in the case of new Securities (as defined in Rule A6.8.4) it gives a commitment to a seller of Securities to underwrite a sale of those Securities;
        (c) it gives a commitment to a Person, other than the Issuer of Securities or, if (b) applies, the seller of the Securities, to sub-underwrite an issue of Securities; or
        (d) it is a member of a syndicate or Group that gives a commitment of the type described in (a) to (c).
        (2) Unless a Rule deals with an issue of Securities separately or the context otherwise requires, a provision of Section A6.8 that deals with Underwriting also applies to sub-Underwriting.

        • Guidance

          Block trades, including bought deals, and private placements are not within the scope of this Chapter because they involve an outright purchase by an Authorised Person of the relevant Securities.

      • PRU A6.8.4

        For the purposes of Rule A6.8.3(b), an Authorised Person must treat Securities as being new if they are:

        (a) Securities that, prior to the allotment following the Underwriting, were not in issue; or
        (b) Securities that have not previously been offered for sale or subscription to the public and have not been admitted to trading on a market operated by a Recognised Body or an overseas investment exchange.

    • Grey market transactions

      • PRU A6.8.5 PRU A6.8.5

        (1) An Authorised Person that buys and sells Securities before issue is dealing in the grey market for the purposes of this Section.
        (2) The other Rules in Section A6.8 do not apply to an Authorised Person with respect to its dealings in the grey market unless the Authorised Person:
        (a) has an Underwriting commitment to the Issuer in respect of those Securities; or
        (b) has a sub-Underwriting commitment in respect of those Securities and is using the grey market solely for the purpose of reducing that sub-Underwriting commitment.
        (3) The other Rules in Section A6.8 do not apply to an Authorised Person with respect to its dealings in the grey market if the transaction is undertaken by the proprietary trading part of the Authorised Person or is undertaken for proprietary trading purposes.

        • Guidance

          In Rule A6.8.5, the grey market is the market in which dealers "buy" and "sell" Securities ahead of issue. In reality the dealers are buying and selling promises to deliver the Securities when issued.

    • Calculating the net Underwriting position

      • PRU A6.8.6

        An Authorised Person must calculate a net Underwriting position from the date of initial commitment until the Underwriting process ends, as the initial gross commitment adjusted for:

        (a) Underwriting or sub-Underwriting commitments obtained from others since the time of initial commitment;
        (b) purchases or sales of the Securities since the time of initial commitment;
        (c) any allocation of Securities granted or received, arising from the commitment to underwrite the Securities, since the time of initial commitment; and
        (d) in the case of sales in the grey market, as defined in Rule A6.8.5, any sales of the Securities as at the time of initial commitment or since the time of initial commitment is subject, in both cases, to the following conditions:
        (i) any sales of the Securities as at the time of initial commitment must be confirmed in writing at the time of initial commitment;
        (ii) sales must be net of any purchases in the grey market; and
        (iii) any allocation of Securities granted or received, arising from the commitment to underwrite the Securities, since the time of initial commitment.

      • PRU A6.8.7 PRU A6.8.7

        If the allocation of Securities has not been fixed, an Authorised Person must calculate the gross amount of its commitment, for the purpose of Rule A6.8.6, by reference to the maximum amount it has committed to underwrite until the time the allocation is set. An Underwriting commitment may only be reduced under this Rule on the basis of a formal agreement.

        • Guidance

          Allocations may arise, after date of initial commitment, from the agreement to underwrite. For example, obligations or rights may be allocated to or from the Issuer, the Underwriting Group or syndicate.

    • Time of initial commitment

      • PRU A6.8.8

        (1) Subject to (2), the time of initial commitment is the earlier of:
        (a) in the case of Underwriting, the time the Authorised Person agrees with the Issuer of Securities to underwrite those Securities;
        (b) in the case of Underwriting falling under Rule A6.8.3(b), the time the Authorised Person agrees with the seller of Securities to underwrite those Securities;
        (c) in the case of sub-Underwriting, the time the Authorised Person agrees with the Person referred to Rule A6.8.3(c) to sub-underwrite those Securities;
        (d) in the case of Rule A6.8.3(d), the time the Group or syndicate in question (or a member of that Group or syndicate on behalf of the others) agrees with the Issuer or other Person to whom the commitment is given as referred to in Rule A6.8.3(d) to underwrite or sub-underwrite the Securities in question; or
        (e) if the firm at that time has a commitment (whether legally or binding or not), the time the price and allocation of the issue or offer are set.
        (2) If an Authorised Person has an irrevocable and unfettered right to withdraw from an Underwriting commitment, exercisable within a certain period, the commitment commences (and thus the time of initial commitment occurs) when that right expires.

    • Working day 0

      • PRU A6.8.9 PRU A6.8.9

        For the purposes of Section A6.8, working day 0 is the business day on which a firm that is Underwriting or sub-Underwriting becomes unconditionally committed to accepting a known quantity of Securities at a specified price.

        • Guidance

          For debt issues and Securities which are issued in a similar manner, working day 0 is the later of the date on which the Securities are allotted and the date on which payment for them is due. For equity issues and Securities which are issued in a similar manner, working day 0 is the later of the date on which the offer becomes closed for subscriptions and the date on which the allocations are made public. For rights issues, working day 0 is the first day after the date on which the offer becomes closed to acceptances for subscription.

    • Calculating the reduced net Underwriting position

      • PRU A6.8.10

        To calculate the reduced net Underwriting position an Authorised Person must apply the reduction factors in the table below to the net Underwriting position calculated under Rule A6.8.6 as follows:

        (a) in respect of debt Securities, an Authorised Person must calculate two reduced net Underwriting positions; one for inclusion in the Authorised Person's interest rate Specific Risk calculation, the other for inclusion in its interest rate General Market Risk calculation; and
        (b) in respect of equities, an Authorised Person must calculate only one reduced net Underwriting position, and then include it in the simplified equity method.

    • Reduction Factors

      Underwriting Timeline Debt Issue Equity Issue
      General Market risk Specific Risk General Market Risk Specific Risk
      Date of initial commitment until working day 0 0% 100% 90% 90%
      Working day 1 0% 90% 90% 90%
      Working day 2 0% 75% 75% 75%
      Working day 3 0% 75% 75% 75%
      Working day 4 0% 50% 50% 50%
      Working day 5 0% 25% 25% 25%
      Working day 6 and onwards 0% 0% 0% 0%

    • Large Exposure risk from Underwriting Securities: Calculating the net Underwriting Exposure

      • PRU A6.8.11

        For Large Exposures purposes, the total amount of an Authorised Person's Trading Book Exposures to any Person must include net Underwriting Exposure to that Person.

      • PRU A6.8.12

        An Authorised Person must include any other Exposures arising out of Underwriting (including any Counterparty Exposures to any sub-underwriters) for the purposes of calculating the total amount of its Trading Book Exposures to a Person for Large Exposures purposes.

      • PRU A6.8.13

        An Authorised Person, before entering into a new Underwriting commitment, must be able to recalculate the Counterparty Credit Risk capital component to the level of detail necessary to ensure that the firm's Capital Resources Requirement does not exceed the firm's Capital Resources.

      • PRU A6.8.14 PRU A6.8.14

        An Authorised Person must calculate the net Underwriting Exposure to an Issuer by applying the relevant reduction factors in the table below to its net Underwriting position calculated under Rule A6.8.6.

        Time Reduction factor to be applied to net Underwriting position
        Initial commitment to working day 0 100%
        Working day 0 100%
        Working day 1 90%
        Working day 2 75%
        Working day 3 75%
        Working day 4 50%
        Working day 5 25%
        Working day 6 onwards 0%

        • Guidance

          The effect of the Rule and the table above is that there is no concentration limit for net Underwriting

          Exposures between initial commitment and the end of working day 0.

    • Risk management

      • PRU A6.8.15 PRU A6.8.15

        (1) An Authorised Person must take reasonable steps to establish and maintain such systems and controls to monitor and manage its Underwriting and sub-Underwriting business as are appropriate to the nature, scale and complexity of its Underwriting and sub-Underwriting business.
        (2) In particular, an Authorised Person must have systems to monitor and control its Underwriting Exposures between the time of the initial commitment and working day one in the light of the nature of the risks incurred in the markets in question.

        • Guidance

          An Authorised Person should take reasonable steps to:

          a. allocate responsibility for the management of its Underwriting and sub-Underwriting business;
          b. allocate adequate resources to monitor and control its Underwriting and sub-Underwriting business;
          c. satisfy itself that its systems to monitor Exposure to Counterparties will calculate, revise and update its Exposure to each Counterparty arising from its Underwriting or sub-Underwriting business;
          d. satisfy itself of the suitability of each Person who performs functions for it in connection with the firm's Underwriting and sub-Underwriting business having regard to the Person's skill and experience; and
          e. satisfy itself that its procedures and controls to monitor and manage its Underwriting business address, on an on-going basis, the capacity of sub-underwriters to meet sub-Underwriting commitments.