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(a) under international accounting standards, or

(b) under UK GAAP if the entity which is the parent or parent
undertaking for the UK sub-group or the largest UK sub-group
45prepares its financial statements under UK GAAP.

(7) The following liabilities of a relevant member are to be left out—

Finance (No. 3) BillPage 317

(a) liabilities to other relevant members, and

(b) liabilities to a relevant foreign bank covered by paragraph 17(17) so
far as the bank’s assets corresponding to the liabilities are assets of
the permanent establishment through which the bank carries on a
5trade in the United Kingdom as determined at Step 2 in paragraph
24(1).

(8) Sub-paragraph (12) applies if—

(a) an entity (“M”) within sub-paragraph (9) has liabilities to another
entity (“N”) not within that sub-paragraph, and N has assets which
10correspond to those liabilities (“M’s liabilities”),

(b) M also has assets which correspond to liabilities which N has to M
(“N’s liabilities”),

(c) there is in place an agreement between M and N which makes
provision for there to be a single net settlement of all M’s liabilities
15(so far as covered by the provision) and all N’s liabilities (so far as
covered by the provision) if the netting event occurs, and

(d) the provision mentioned in paragraph (c) is legally effective and
enforceable.

(9) An entity is within this sub-paragraph if it is—

(a) 20a member of a relevant UK sub-group, or

(b) a relevant member within sub-paragraph (2)(b) or (c).

(10) For the purposes of sub-paragraph (8)

(a) “agreement” includes an agreement which forms part of a multi-
lateral agreement, arrangement or trading facility,

(b) 25if N is a relevant foreign bank covered by paragraph 17(17), liabilities
of M to N are to be ignored so far as N’s assets corresponding to
those liabilities are assets of the permanent establishment through
which N carries on a trade in the United Kingdom as determined at
Step 2 in paragraph 24(1),

(c) 30references to assets of one party which correspond to liabilities of
another party are to amounts receivable by that first party which
correspond to amounts due from that other party,

(d) a liability which M has to N to which sub-paragraph (11) applies is
to be treated as a liability to which an asset of N corresponds, and

(e) 35“the netting event occurs” if the insolvency or bankruptcy of M or N
gives rise to the termination of any arrangements under which any
liability covered by the provisions mentioned in sub-paragraph
(8)(c) arises.

(11) This sub-paragraph applies to a liability which M has to N if—

(a) 40as at the end of the chargeable period, the assets of M include a
financial asset in respect of an advance of cash made by M to N,

(b) underlying that asset, as collateral, are securities which have been
transferred by M to another person,

(c) the liability is a financial liability in respect of M’s obligation to
45return the securities or similar securities to N, and

(d) the provision mentioned in sub-paragraph (8)(c) covers both the
financial asset mentioned in paragraph (a) and that financial liability.

Section 556 of CTA 2009 (meaning of securities and similar securities)
applies for the purposes of this sub-paragraph as it applies for the purposes
50of Chapter 10 of Part 6 of that Act.

Finance (No. 3) BillPage 318

(12) The amount of M’s net settlement liabilities is to be reduced (but not below
nil) by the amount of M’s net settlement assets.

(13) “M’s net settlement liabilities” means M’s liabilities so far as they—

(a) are covered by the provision mentioned in sub-paragraph (8)(c), and

(b) 5are not excluded liabilities.

(14) “M’s net settlement assets” means M’s assets so far as corresponding to N’s
net settlement liabilities.

(15) “N’s net settlement liabilities” means N’s liabilities so far as they are covered
by the provision mentioned in sub-paragraph (8)(c).

(16) 10If M’s net settlement liabilities exceed M’s net settlement assets, and a
proportion (A%) of those liabilities is long term liabilities and a proportion
(B%) of those liabilities is short term liabilities, under sub-paragraph (12)

(a) the long term liabilities are reduced by A% of M’s net settlement
assets, and

(b) 15the short term liabilities are reduced by B% of those assets.

Chargeable equity and liabilities of a relevant non-banking group

19 (1) This paragraph applies if the relevant group is a relevant non-banking
group.

(2) The amount of the chargeable equity and liabilities of the relevant group is
20the sum of all type A, type B, type C and type D equity and liabilities.

(3) Type A equity and liabilities are the chargeable equity and liabilities of any
relevant UK banking sub-group.

(4) UK banking sub-group” means a group of entities—

(a) which is a group for the purposes of those provisions of international
25accounting standards or UK GAAP which relate to the preparation
of consolidated financial statements,

(b) which has as its parent or parent undertaking for the purposes of
those provisions an entity which is a UK resident bank, and

(c) the members of which are all members of the relevant group.

(5) 30A UK banking sub-group is “relevant” if—

(a) consolidated financial statements for the chargeable period are
prepared for it under international accounting standards or UK
GAAP, and

(b) its members are not members of any larger UK banking sub-group
35for which such financial statements are prepared.

(6) To determine the amount of the chargeable equity and liabilities of a
relevant UK banking sub-group—

(a) determine the amount of the sub-group’s equity and liabilities (other
than excluded equity and liabilities) as at the end of the chargeable
40period,

(b) adjust the amount in accordance with paragraphs 20 and 43 (so far as
applicable), and

(c) finally, reduce the amount (but not below nil) by—

(i) the amount of the sub-group’s high quality liquid assets as at
45the end of that period, other than any asset which for the

Finance (No. 3) BillPage 319

purposes of an adjustment under paragraph (b) is an asset to
which paragraph 20(12) applies, and

(ii) where sub-paragraph (8) applies, the amount determined
under that sub-paragraph.

(7) 5Sub-paragraph (8) applies where—

(a) as at the end of the chargeable period, the assets of the relevant UK
banking sub-group include a financial asset in respect of an advance
of cash made by a member of the sub-group,

(b) that financial asset is not an asset which, for the purposes of an
10adjustment under sub-paragraph (6)(b), is an asset to which
paragraph 20(12) applies, and

(c) underlying that asset, as collateral, is an item (“the collateral”) owned
by that member which would form part of the sub-group’s high
quality liquid assets as at the end of that period were the collateral,
15rather than the financial asset, an asset of the sub-group.

(8) The amount within sub-paragraph (6)(c)(ii) is—

(a) the amount of the financial asset as at the end of that period or, if
lower, an amount equal to the fair value of the collateral as at that
time, or

(b) 20if this sub-paragraph applies in relation to more than one financial
asset, the total of the amounts determined under paragraph (a) in
respect of each of those assets.

(9) For the purposes of this paragraph and paragraph 20 the assets, equity and
liabilities of a relevant UK banking sub-group are to be determined by
25reference to the amounts recognised in its consolidated financial statements
for the chargeable period.

(10) Type B equity and liabilities are the chargeable equity and liabilities of any
UK resident bank which—

(a) is a member of the relevant group, but

(b) 30is not a member of a relevant UK banking sub-group.

(11) Type C equity and liabilities are the chargeable equity and liabilities of any
entity (apart from a UK resident bank) which—

(a) is a member of the relevant group, and

(b) is a member of a UK banking sub-group but is not a member of a
35relevant UK banking sub-group.

(12) To determine the amount of the chargeable equity and liabilities of an entity
covered by sub-paragraph (10) or (11)

(a) determine the amount of the entity’s equity and liabilities (other than
excluded equity and liabilities) as at the end of the chargeable period,

(b) 40adjust the amount in accordance with paragraphs 20 and 43 (so far as
applicable), and

(c) finally, reduce the amount (but not below nil) by—

(i) the amount of the entity’s high quality liquid assets as at the
end of that period, other than any asset which for the
45purposes of an adjustment under paragraph (b) is an asset to
which paragraph 20(12) applies, and

(ii) where sub-paragraph (14) applies, the amount determined
under that sub-paragraph.

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