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.
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
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