PRA Updates Supervisory Statement on Counterparty Credit Risk
PRA published the final policy statement PS22/20, which contains the updated supervisory statement SS12/13 on counterparty credit risk. PS22/20 also contains feedback to responses to the consultation paper CP17/19 on the treatment of model limitations and assumptions under Part Three, Title II, Chapter 6, Section 6 (the internal model for counterparty credit risk) of the Capital Requirements Regulation (CRR). The updated SS12/13 becomes effective on October 14, 2020.
In CP17/19, PRA had consulted on changes covered in two broad areas—monitoring of model limitations and assumptions and setting a minimum level for certain exposures in the presence of excess collateral. PRA has received three responses to the proposals in CP17/19. The responses were broadly supportive of the principle of a centralized inventory for monitoring model limitations and assumptions and were broadly opposed to the principle of a floor for over-collateralized exposures. After considering the responses received, PRA has made a minor change to the draft policy to clarify that, where quantitative models are used to estimate the materiality of model limitations and assumptions, the level of independent challenge to these models that PRA expects should be commensurate with materiality. Chapter 2 of PS22/20 sets out the PRA feedback to the responses received to the consultation, along with the final policy decisions.
PRA has also included guidance in SS12/13, which has already been published in a statement on March 30, 2020, related to the treatment of unsettled margin in the internal models method. This has been included as a clarification of a pre-existing expectation that will aid firms in their implementation of the internal models method. Minor changes have been made to the original wording to clarify the intended scope of the guidance. PRA has taken the opportunity to add a new example, related to the aforementioned guidance on the treatment of unsettled margin, to the list of typical limitations that it would expect to see included in the inventory of model limitations and assumptions. PRA has also taken the opportunity to make amendments to the format of SS12/13, to bring it into line with other statements.
The final policy has been designed in the context of the current UK and EU regulatory framework. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that the proposals will not be affected in the event that UK leaves EU with no implementation period in place.
Related Links
Effective Date: October 14, 2020
Keywords: Europe, UK, Banking, Counterparty Credit Risk, CRR, PS22/20, CP17/19, SS12/13, SA-CCR, Regulatory Capital, Internal Models, Basel, 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.
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Related Articles
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.
