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    PRA Updates Supervisory Statement on Credit Risk Mitigation

    July 23, 2019

    PRA published the policy statement (PS14/19) containing the updated supervisory statement (SS17/13) on credit risk mitigation (Appendix). PS14/19 also provides feedback to responses to the consultation paper (CP1/19) that proposed changes to SS17/13 to clarify expectations about the eligibility of financial collateral as funded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of Capital Requirements Regulation or CRR (575/2013). The changes to SS17/13 will be effective on publication of PS14/19.

    PS14/19 is relevant to UK banks, building societies, and PRA-designated UK investment firms that are subject to CRR. It is not relevant to the UK branches of firms in other European Economic Area (EEA) countries and non-EEA countries, or to insurance firms. SS17/13 sets out the PRA expectations in respect of the recognition of credit risk mitigation in the calculation of certain risk-weighted exposure amounts. SS17/13 covers elements of the following topics:

    • Eligibility of financial institutions as protection providers
    • Recognized exchanges
    • Conditions for applying a 0% volatility adjustment under the Financial Collateral Comprehensive Method (FCCM)
    • Permission to use "own estimates of volatility adjustments" under the FCCM
    • Netting of liabilities that may be subject to bail-in

    PRA received three responses to CP1/19. In a number of areas, respondents welcomed the clarifications from PRA regarding the eligibility of financial collateral. However, respondents raised concerns aboutthe proposals and their impact on certain types of transactions. Some respondents also requested further clarification on certain aspects of the proposals. The PRA feedback to these responses, along with the final policy decisions, has been set out in Chapter 2 of PS14/19. Following the consideration of responses, PRA has made a number of minor changes to the draft policy that was set out in CP1/19. These changes clarify:

    • Where the obligor and the collateral issuer share the same country, this does not necessarily imply there is a material positive correlation
    • What assets PRA would consider relevant when it refers to "all of the assets to which the lender has legal recourse"
    • How the PRA expectations apply when firms have recourse to a financial collateral asset that is an index instrument

    The policy set out in PS14/19 has been designed in the context of the current UK and EU regulatory framework. PRA has assessed that the proposals will not be affected in the event that UK leaves EU with no implementation period in place.


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    Effective Date: July 23, 2019 (SS17/13)

    Keywords: Europe, UK, Banking, Credit Risk Mitigation, Credit Risk, CRR, CP 1/19, SS 17/13, PS 14/19, PRA

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