PRA Sets Out Application Dates for FRTB Approaches, Reviews SIMM Model
The Prudential Regulation Authority (PRA) issued a letter setting out the approach and timeline for firms to submit new market risk internal model and standardized approach applications, ahead of the UK implementation of Basel 3.1. Also published was a letter on use of the Standardized Initial Margin Methodology (SIMM) model by firms in scope of the Mandatory Margining Rules for non-centrally cleared derivatives. In addition, the UK central bank's Financial Policy Committee (FPC) confirmed that it will withdraw the mortgage market affordability test recommendation, with effect from August 01, 2022. The test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
Recently, PRA had announced its intent to consult on the UK implementation of Basel 3.1, including the Fundamental Review of Trading Book (FRTB), in the fourth quarter of 2022, with a planned implementation date of January 01, 2025. Assuming this implementation date, in this recent letter, PRA has set out an expected timetable for firms to submit the new market risk internal model approach (IMA) applications to PRA for review and decision, ahead of the UK implementation of FRTB. Due to the changes in the new market risk framework, the existing internal model permissions for market risk are expected to become redundant. Therefore, the current internal model approach firms would automatically move to the new standardized approach when the new rules are implemented, unless they are granted a new internal model approach permission under FRTB. To allow sufficient time to review the applications, PRA would expect firms to submit the final pre-application materials at least 12 months in advance of the implementation data—that is, by January 01, 2024. Again, A number of provisions in the new standardized approach are also expected to require regulatory permission (for example, the use of firms’ own risk-sensitivity calculations). Given the larger number of firms that will use the standardized approach, again, PRA would expect firms to submit any related pre-application materials at least 12 months in advance of UK implementation.
As another one of its supervisory initiatives, PRA had conducted a review of the use of the Standardized Initial Margin Methodology (SIMM) model by large banks, to monitor performance during the COVID-19 pandemic market stress period and assess model compliance against the regulations governing exchange of margin on non-centrally cleared derivatives. The review identified issues primarily relating to the SIMM model governance and firms’ capability to identify and remediate model underperformance on a timely basis. Based on the findings of its review, PRA has outlined certain actions for the Category 1 banks using SIMM and it expect firms to take the indicated steps (in the Annex to the letter), where relevant, by December 2022 and then report the findings to their supervisors. In this context, PRA expects firms to undertake a self-assessment of their implementation of the mandatory margining for non-centrally cleared OTC derivatives requirements against the relevant regulations and provide a corrective action plan for any gaps identified.
Related Links
- Letter on FRTB Timelines
- Letter on Review of SIMM Model
- Press Release on Mortgage Affordability Test
- Response to Consultation on Mortgage Affordability Test
Keywords: Europe, UK, Banking, Basel, Market Risk, Internal Models, Standardized Approach, FRTB, SIMM, ISDA, FPC, Credit Risk, Derivatives, Mortgage Affordability Test, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
OSFI Clarifies Treatment of Real Estate Secured Lending ProductsRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.