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

    EBA Sets Out Roadmap for 2023, Updates Reporting Framework 3.2

    The European Banking Authority (EBA) published its work program for 2023 as well as the technical package for phase 3 of version 3.2 of its reporting framework.

    September 30, 2022 WebPage Regulatory News
    News

    FED Announces Launch of Climate Scenario Analysis Exercise in 2023

    The Board of Governors of the Federal Reserve System (FED) announced a pilot climate scenario analysis exercise for six largest banks in the U.S.

    September 29, 2022 WebPage Regulatory News
    News

    BIS Paper Studies Impact of Fintech Lending on Small Businesses in US

    The Bank for International Settlements (BIS) published a paper that studies impact of fintech lending on credit access for small businesses in U.S.

    September 26, 2022 WebPage Regulatory News
    News

    UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks

    The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms).

    September 26, 2022 WebPage Regulatory News
    News

    EBA Launches EU-Wide Transparency Exercise in 2022

    The European Banking Authority (EBA) launched the EU-wide transparency exercise for 2022, with results of the exercise expected to be published at the beginning of December, along with the annual Risk Assessment Report.

    September 23, 2022 WebPage Regulatory News
    News

    SRB on CRR Quick-Fix to Policy for Multiple Point of Entry Banks

    The Single Resolution Board (SRB) welcomed the adoption of the review of the Capital Requirements Regulation, or CRR, also known as the "CRR quick-fix."

    September 22, 2022 WebPage Regulatory News
    News

    EC Rule Lists Advanced Economies for Market Risk Capital Calculations

    The European Commission (EC) recently adopted the Delegated Regulation 2022/1622, which sets out the regulatory technical standards to specify the countries that constitute advanced economies for the purpose of specifying risk-weights for the sensitivities to equity.

    September 21, 2022 WebPage Regulatory News
    News

    EBA Publishes Final Regulatory Standards on STS Securitizations

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.

    September 20, 2022 WebPage Regulatory News
    News

    ECB Further Reviews Costs and Benefits Associated with IReF

    The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.

    September 15, 2022 WebPage Regulatory News
    News

    EBA Publishes Funding Plans Report, Receives EMAS Certification

    The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).

    September 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8523