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.
- 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
Previous ArticleOSFI Clarifies Treatment of Real Estate Secured Lending Products
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.