On 23 July 2019, the PRA published Policy Statement 14/19: Credit risk mitigation: Eligibility of financial collateral (PS14/19). In PS14/19 the PRA provides feedback to responses to Consultation Paper 1/19: Credit risk mitigation: Eligibility of financial collateral (CP1/19). It contains in the Appendix the updated Supervisory Statement 17/13: Credit risk mitigation (SS17/13).

In CP1/19 the PRA consulted on clarifications to expectations regarding the eligibility of financial collateral as funded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the Capital Requirements Regulation (CRR). Our blog on CP1/19 is here.

PS14/19 is relevant to UK banks, building societies and PRA designated UK investment firms that are subject to the CRR. It is not relevant to UK branches of firms in other EEA countries and non-EEA countries, or to insurance firms.

The PRA states that in light of the responses to CP1/19 it has made a number of changes to the draft policy. These changes clarify:

  • that where the obligor and the collateral issuer share the same country this does not necessarily imply there is a material positive correlation;
  • what assets the PRA would consider relevant when it refers to ‘all of the assets to which the lender has legal recourse’; and
  • how the PRA’s expectations apply when firms have resource to a financial collateral asset that is an index instrument.

Further details on the changes are set out in chapter 2 of PS14/19. The PRA considers that the changes will not have a significant impact on firms and will not have a significantly different impact on mutuals than for other firms. As a result, the cost benefit analysis has not been updated in respect of the changes.

The changes to SS17/13 are effective on the date of publication of PS14/19. If firms have concerns about their ability to comply with these expectations, they should get in touch with their usual PRA supervisory contact.

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