PIB A5.8 PIB A5.8 Securities Underwriting Risk Capital Requirement
PIB A5.8 Guidance
PIB section A5.8 presents the method for calculating a net
Underwritingposition or reduced net Underwritingposition, which is then included in the calculation of Market Risk Capital Requirementsas specified in this chapter. PIB section A5.8 also deals with Concentration Risk.
PIB A5.8.1(1) An
Authorised Firmwhich calculates its Securities Underwriting Risk Capital Requirementin accordance with PIB Rule 5.10.7(b) must apply the Rulesin this section.(2) An Authorised Firmwhich underwrites or sub-underwrites an issue of Securitiesmust, 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 Underwritingposition, reduced net Underwritingposition or the net Underwriting Exposure.
PIB A5.8.2 PIB A5.8.2
Authorised Firmmust include the net Underwritingposition or reduced net Underwritingposition where:(a) debt Securitiesare being underwritten;(b) equities are being underwritten; or(c) Warrantsare being underwritten.
PIB A5.8.2 Guidance1. Sub-underwriting is a commitment given by one firm to someone other than the
Issueror seller of the Securitiesto sub-underwrite all or part of an issue of Securities. The net Underwritingposition calculated in PIB Rule A5.8.6 will also be used in calculating the net Underwriting Exposureunder Rules PIB A5.8.11 to PIB A22.214.171.124. The net Underwritingposition or reduced net Underwritingposition arising from Underwritingor sub-underwriting a rights or Warrantsissue should be calculated using the current market price of the underlying Securityfor the purposes of the Equity Risk Capital Requirementor Option Risk Capital Requirement. However, the risk Capital Requirementswill be limited to the value of the net Underwritingposition calculated using the initial issue price of the rights or Warrants. Where there is no market price because the rights or Warrantsare in relation to a new class of Securitiesand the initial price has not been set the net Underwritingposition or reduced net Underwritingis the amount of the commitment.
Commitment to Underwrite Securities
PIB A5.8.3 PIB A5.8.3(1) For the purpose of PIB Rule A5.8.1, an
Authorised Firmunderwrites or sub-underwrites an issue of Securitieswhere:(a) it gives a commitment to an Issuerof Securitiesto underwrite an issue of Securities;(b) in the case of new Securities(as defined in PIB Rule A5.8.4) it gives a commitment to a seller of Securitiesto underwrite a sale of those Securities;(c) it gives a commitment to a person, other than the Issuerof Securitiesor, 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 Groupthat gives a commitment of the type described in (a) to (c).(2) Unless a Ruledeals with an issue of Securitiesseparately or the context otherwise requires, a provision of PIB section A5.8 that deals with Underwritingalso applies to sub-underwriting.
PIB A5.8.3 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 Firmof the relevant Securities.
For the purposes of PIB Rule A5.8.3(b), an
Authorised Firmmust treat Securitiesas being new if they are:(a) Securitiesthat, prior to the allotment following the Underwriting, were not in issue; or(b) Securitiesthat have not previously been offered for sale or subscription to the public and have not been admitted to trading on a market operated by an Authorised Market Institutionor an overseas investment exchange.
Grey Market Transactions
PIB A5.8.5 PIB A5.8.5(1) An
Authorised Firmthat buys and sells Securitiesbefore issue is dealing in the grey market for the purposes of this section.(2) The other Rulesin PIB section A5.8 do not apply to an Authorised Firmwith respect to its dealings in the grey market unless the Authorised Firm:(a) has an Underwritingcommitment to the Issuerin respect of those Securities; or(b) has a sub-underwriting commitment in respect of those Securitiesand is using the grey market solely for the purpose of reducing that sub-underwriting commitment.(3) The other Rulesin PIB section A5.8 do not apply to an Authorised Firmwith respect to its dealings in the grey market if the transaction is undertaken by the proprietary trading part of the Authorised Firmor is undertaken for proprietary trading purposes.
PIB A5.8.5 Guidance
In PIB Rule A5.8.5, 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
Authorised Firmmust calculate a net Underwritingposition from the date of initial commitment until the Underwritingprocess ends, as the initial gross commitment adjusted for:(a) Underwritingor sub-underwriting commitments obtained from others since the time of initial commitment;(b) purchases or sales of the Securitiessince the time of initial commitment;(c) any allocation of Securitiesgranted 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 PIB Rule A5.8.5, any sales of the Securitiesas 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 Securitiesas 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 Securitiesgranted or received, arising from the commitment to underwrite the Securities, since the time of initial commitment.
PIB A5.8.7 PIB A5.8.7
If the allocation of
Securitieshas not been fixed, an Authorised Firmmust calculate the gross amount of its commitment, for the purpose of PIB Rule A5.8.6, by reference to the maximum amount it has committed to underwrite until the time the allocation is set. An Underwritingcommitment may only be reduced under this Ruleon the basis of a formal agreement.
PIB A5.8.7 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 Groupor syndicate.
Time of Initial Commitment
PIB A5.8.8(1) Subject to (2), the time of initial commitment is the earlier of:(a) in the case of
Underwriting, the time the Authorised Firmagrees with the Issuerof Securitiesto underwrite those Securities;(b) in the case of Underwritingfalling under PIB Rule A5.8.3(b), the time the Authorised Firmagrees with the seller of Securitiesto underwrite those Securities;(c) in the case of sub-underwriting, the time the Authorised Firmagrees with the Personreferred to PIB Rule A5.8.3(c) to sub-underwrite those Securities;(d) in the case of PIB Rule A5.8.3(d), the time the Groupor syndicate in question (or a member of that Groupor syndicate on behalf of the others) agrees with the Issueror other Personto whom the commitment is given as referred to in PIB Rule A5.8.3(d) to underwrite or sub-underwrite the Securitiesin 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 Firmhas 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
PIB A5.8.9 PIB A5.8.9
For the purposes of PIB section A5.8, working day 0 is the business day on which a firm that is
Underwritingor sub-underwriting becomes unconditionally committed to accepting a known quantity of Securitiesat a specified price.
PIB A5.8.9 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
To calculate the reduced net
Underwritingposition an Authorised Firmmust apply the reduction factors in the table below to the net Underwritingposition calculated under PIB Rule A5.8.6 as follows:(a) in respect of debt Securities, an Authorised Firmmust calculate two reduced net Underwritingpositions; one for inclusion in the Authorised Firm'sinterest rate Specific Riskcalculation, the other for inclusion in its interest rate General Market Riskcalculation; and(b) in respect of equities, an Authorised Firmmust calculate only one reduced net Underwritingposition, and then include it in the simplified equity method.
Debt Issue Equity Issue UnderwritingTimeline 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
Concentration Riskpurposes, the total amount of an Authorised Firm's Trading Book Exposuresto any Personmust include net Underwriting Exposureto that Person.
Authorised Firmmust include any other Exposuresarising out of underwriting (including any Counterparty Exposuresto any sub-underwriters) for the purposes of calculating the total amount of its Trading Book Exposuresto a Personfor Concentration Riskpurposes.
Authorised Firm, before entering into a new Underwritingcommitment, must be able to recalculate the Concentration Riskcapital component to the level of detail necessary to ensure that the firm's Capital ResourcesRequirement does not exceed the firm's Capital Resources.
PIB A5.8.14 PIB A5.8.14
Authorised Firmmust calculate the net Underwriting Exposureto an Issuerby applying the relevant reduction factors in the table below to its net Underwritingposition calculated under PIB Rule A5.8.6. 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%
PIB A5.8.14 Guidance
The effect of the
Ruleand the table above is that there is no concentration limit for net Underwriting Exposuresbetween initial commitment and the end of working day 0.
PIB A5.8.15 PIB A5.8.15(1) An
Authorised Firmmust take reasonable steps to establish and maintain such systems and controls to monitor and manage its Underwritingand sub-underwriting business as are appropriate to the nature, scale and complexity of its Underwritingand sub-underwriting business.(2) In particular, an Authorised Firmmust have systems to monitor and control its Underwriting Exposuresbetween 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.
PIB A5.8.15 Guidance
Authorised Firmshould take reasonable steps to:a. allocate responsibility for the management of its Underwritingand sub-underwriting business;b. allocate adequate resources to monitor and control its Underwritingand sub-underwriting business;c. satisfy itself that its systems to monitor Exposureto Counterpartieswill calculate, revise and update its Exposureto each Counterpartyarising from its Underwritingor sub-underwriting business;d. satisfy itself of the suitability of each person who performs functions for it in connection with the firm's Underwritingand sub-underwriting business having regard to the person's skill and experience; ande. satisfy itself that its procedures and controls to monitor and manage its Underwritingbusiness address, on an on-going basis, the capacity of sub-underwriters to meet sub-underwriting commitments.