On 9 April 2025, the Prudential Regulation Authority (PRA) published a Dear Chief Financial Officer letter setting out its expectations on significant risk transfer financing.

The Dear CFO letter highlights certain practices the PRA has observed in relation to illiquid and structured financing portfolios across regulated firms.

The letter covers:

  • The PRA’s core prudential concerns and specific areas of focus arising from its recent supervisory activities.
  • Associated ongoing expectations of firms.
  • Supervisory expectations with respect to relevant near-final policy changes published as part of policy statement (PS) 9/24 – Implementation of the Basel 3.1 standards near-final part 2.

Next steps

The PRA expects firms to consider the Dear CFO letter to all relevant financing portfolios. Banks engaged in these businesses should ensure that the regulatory capital approach they adopt appropriately reflects the substance of the transactions, including the liquidity of the underlying collateral.

PRA supervisors will be in contact with relevant firms to request a response to the Dear CFO letter.

Such firms should provide a written response by 11 June 2025 and as part of this, the PRA requests that firms outline:

  1. The policies and procedures in place to ensure compliance with Article 299(2)(c) UK Capital Requirements Regulation, which governs collateral eligibility for securities financing transactions (SFTs) in the trading book.
  2. Any proposed enhancements to these policies and procedures in response to the Dear CFO letter, including any resulting changes to the regulatory capital approach for SFTs associated with specific collateral types and the impact of these changes.
  3. The current regulatory capital approach applied to SFTs for specific collateral types. This should be sufficiently granular to capture details of the trading book/banking book boundary as currently applied, including any changes related to (b) above. Summary metrics (e.g. financing or collateral balances) showing the materiality of each specific collateral type should be provided. Highly liquid collateral can be excluded from this list.