Featured Product

    PRA Proposed Approach to DLT Assessments and Transition to SONIA

    January 07, 2021

    In the consultation paper CP1/21, PRA has proposed an approach to deep, liquid, and transparent, or DLT, assessments and the transition of Solvency II technical information from the London Interbank Offered Rate (LIBOR) to the Sterling Overnight Index Average (SONIA) in 2021. The proposals in CP1/21 would result in changes to the statement of policy on the approach of PRA to the publication of Solvency II technical information (Appendix). PRA proposes to implement the transition for GBP technical information to SONIA from, and including, July 31, 2021. The consultation period ends on March 31, 2021.

    CP1/21 is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, and to the Society of Lloyd’s and its managing agents. Non-Directive firms are out of the scope of this consultation. From December 31, 2020, PRA is required to publish technical information for each relevant currency. The technical information includes the basic risk-free rates and fundamental spreads used in the calculation of the matching adjustment and volatility adjustment. The proposals in CP1/21 cover the following:

    • Proposed approach to the deep, liquid, and transparent assessment process for all relevant currencies
    • Transition of the GBP risk-free rate and associated technical information from LIBOR to SONIA and transition timetable for other LIBOR currencies
    • Determination of the credit risk adjustment for SONIA technical information and the proposal that, given the characteristics of the SONIA rates, the residual credit risk is considered to be negligible
    • The way in which the calculation of long-term average spread would reflect the transition to SONIA
    • Impact on the transitional measure for technical provisions for business written before 2016
    • Impact of the transition on firms with approval to apply the matching adjustment and internal models

    The Working Group on Sterling Risk-Free Reference Rates recommended that SONIA be used as the preferred replacement for LIBOR for sterling markets. PRA will, therefore, transition the GBP Solvency II technical information to reference SONIA swap rates before the end of 2021. The Solvency II technical information for GBP, USD, and JPY currently references LIBOR rates. In December 2020, ICE Benchmark Administration, which is the administrator of LIBOR, published a consultation on its intention for the GBP, JPY, and some USD LIBOR panels to cease at the end of 2021 and for the remainder of USD panels to cease at the end of June 2023. PRA will also transition the JPY and USD technical information references from LIBOR to an Overnight Indexed Swap (OIS) rate although the date and approach to these transitions will depend on the liquidity of swaps referencing the Tokyo Overnight Average Rate and the Secured Overnight Financing Rate.

    The GBP LIBOR-based rates are currently higher than the equivalent SONIA-based rates. If this continues to be the case at the time of the proposed transition, this would generally result in an increase in technical provisions. This issue is in part mitigated by several proposals included in CP1/21, notably the proposals on transitional relief and the calculation of the long-term average spread. The proposals set out in CP1/21 have been designed in the context of UK having left EU and the transition period having come to an end. Unless otherwise stated, any references made to legislation, including that which is "retained EU law," relate to the UK version. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.

     

    Related Links

    Comment Due Date: March 31, 2021

    Effective Date: July 31, 2021 (proposed)

    Keywords: Europe, UK, Insurance, Solvency II, SONIA, LIBOR, Interest Rate Benchmarks, Risk-Free Rates, PRA

    Featured Experts
    Related Articles
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write Down and Conversion Powers

    The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.

    September 17, 2021 WebPage Regulatory News
    News

    ECB to Consider Climate Risks When Reviewing Collateral Framework

    In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.

    September 17, 2021 WebPage Regulatory News
    News

    SRB Provides Update on Approach to Prior Permissions Regime

    The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.

    September 16, 2021 WebPage Regulatory News
    News

    APRA Issues Further Guidance on Application of Securitization Standard

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.

    September 16, 2021 WebPage Regulatory News
    News

    ACPR Publishes Corrective Version of RUBA Taxonomy

    The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.

    September 15, 2021 WebPage Regulatory News
    News

    Nordea Bank and EIB Sign Agreement to Fund Green Projects in Nordics

    The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.

    September 15, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQs on Capital Treatment of Overseas Subsidiaries

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.

    September 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7487