PRU A7.1.1

(1) (a) (i) An Authorised Person which uses the Basic Indicator Approach must calculate its Operational Risk Capital Requirement equal to the average over the previous three years of a fixed percentage (denoted by alpha) of positive annual gross income.
 (ii) For any year that annual gross income is zero or negative, that year must be excluded from both the numerator and the denominator in the calculation.
   (b) (i) Where an Authorised Person does not have sufficient data to meet the three-year requirement in (a) it must use its forecast annual gross income projections for that part of the three year time period for which it does not have sufficient historical data.
  (ii) The Authorised Person must start using historical data as soon as it is available.
(2) In (1), if the figure for annual gross income in any of the previous three years is zero or negative an Authorised Person must exclude such amounts from the calculation of the average.
(3) The Operational Risk Capital Requirement in (1) must be calculated according to the following formula:

KBIA = [[Σ(GI1... n × α)] / n

where:

KBIA = the Operational Risk Capital Requirement under the Basic Indicator Approach

GI = the gross annual income, where positive, over the previous three years

n = number of the previous three years for which gross income is positive

α = 15%,

(4) For the purpose of (1), "gross income" is net interest income plus net non-interest income and must:
(a) be gross of any provisions (e.g. for unpaid interest);
(b) be gross of operating expenses, including fees paid to outsourcing service providers;
(c) exclude realised profits/losses from the sale of Securities in the Non-Trading Book; and
(d) exclude extraordinary or irregular items as well as income derived from insurance recoveries.