Prudential Requirements (Part II) Flashcards
What criteria must be met to include guarantees received as capital in determining a member’s financial resources?
- Guarantor approved by Director: Market Regulation.
- Guarantee irrevocable for a period of 3 months into the future.
- Guarantee capable of being drawn upon on presentation.
Itemise 6 types of assets which are not included in adjusted liquid capital?
- Intangible assets (Goodwill, etc.)
- The maximum current exposure of the member arising from any guarantee given or assets pledged to secure the obligations of a third party.
- Holding in credit institutions and investment firms IF
a. greater than 10% of Issuer’s capital; or
b. greater than 10% of member’s available capital resources
From the following information calculate the member’s surplus liquid capital.
13 weeks fixed expenditure base requirement R 500 000
Risk requirements:
Equity position risk R 80 000
Bond position risk R 32 000
Counterparty risk R 13 000
Large exposure risk R 21 000
Adjusted liquid capital R 700 000
Motor cars which have been fully paid for can be sold for R120 000 cash
BERR R 500 000
PRR Equities R 80 000
PRR Bonds R 32 000
CRR R 13 000
LER R 21 000
Total Risk Requirement R 646 000
ALC R 700 000
Cash for motor cars R 120 000
Total ALC R 820 000
Surplus ALC R 174 000
Calculate the position risk requirement from the following positions reflected on a member’s stock scan.
Share type Long (L) /Short (S) Book value (R) Market value (R)
A Illiquid L 45 000 50 000
B Highly liquid L 63 000 60 000
C Normal L 81 000 70 000
D Illiquid S 82 000 80 000
E Highly liquid S 83 000 90 000
General risk
Share A 50 000 x 8% 4 000
Share B 60 000 x 8% 4 800
Share C 70 000 x 8% 5 600
Share D (80 000) x 8% (6 400)
Share E (90 000) x 8% (7 200)
800
Specific risk
Share A 50 000 x 15% 7 500
Share B 60 000 x 5% 3 000
Share C 70 000 x 10% 7 000
Share D (80 000) x 15% 12 000
Share E (90 000) x 5% 4 500
34 000
Total PRR 34 800
Calculate the position risk requirements on the following open positions of the various member firms -
Member A
Long R2 000 000 RSA bond stock redeemable between 5 and 7 years hence.
Market value is R1 620 000.
Member B
Short R1 000 000 listed non-government guaranteed bond stock redeemable in 8 years time.
Market value is R890 000
Member C
Short R2 000 000 listed non-government guaranteed bond stock redeemable in 110 months time. Market value is R1 700 000
AND
Long R1 000 000 listed non-government guaranteed bond stock redeemable in 90 months hence. Market value is R890 000
Member A
Specific Risk Govt. guaranteed Nil
General Risk 5-7 years to redemption 3.25% x R1 620 000 52 650
Total PRR 52 650
Member B
Specific Risk Not Govt. guaranteed and more than 24 months to redemption
1.6% x R 890 000 14 240
General Risk 7-10 years to redemption 3.75% x R 890 000 33 375
Total PRR 47 615
Member C
Specific Risk Not Govt. guaranteed and more than 24 months to redemption
1.6% x R1 700 000 27 200
1.6% x R 890 000 14 240
General Risk 7-10 years to redemption 3.75% x R1 700 000 63 750
3.75% x R 890 000 (33 375)
+10% of offset amount as stocks are in the same maturity band 3 337
Total PRR 75 152
A member’s commitment to underwrite a new issue of 200,000 illiquid non-mining shares at R 2.00 each commences on Day 1;
On Day 2, 40,000 are sub-underwritten;
On Day 3, 50,000 are allocated;
On Day 4, 30,000 are allocated; and
On Day 5, the balance is taken up by the member.
Determine the risk requirements at the close of business each day from Day 1 to Day 5.
Rates applicable -
General - 8%
Specific - Illiquid 15%
NOTE: End of Days 1 and 2 underwriting risk is 10% of position risk requirement. End of Days 3 and 4 underwriting risk is 25% of position risk requirement. Thereafter 100% of PRR.
Show your workings
Day Market value Risk % PRR Underwriting Risk % Total Risk Requirement
Day 1 400 000 23% 92 000 10% R 9 200
Day 2 320 000 23% 73 600 10% R 7 360
Day 3 220 000 23% 50 600 25% R 12 650
Day 4 160 000 23% 36 800 25% R 9 200
Day 5 160 000 23% 36 800 R 36 800
What PRR applies to units in a collective investment scheme?
10% of realisable value.
How is counterparty risk on unsettled securities transactions on behalf of controlled clients calculated?
From trade date onwards
1. 100% of the difference between the transaction value and market value plus
2. Position risk requirement on the net unsettled purchase and sale transactions per security on each client’s account.
