United Kingdom (and EU regulation)

PRA letter to firms on the FRTB and the timetable for submission of internal model/standard approach pre-applications

By Jochen Vester (UK) and Simon Lovegrove (UK) on June 28, 2022 Posted in Capital adequacy, United Kingdom

On 27 June 2022, the PRA published a letter sent to firms concerning its proposed approach concerning the submission of new market risk internal model approach (IMA) applications.

The Basel 3.1 framework removes the existing IMA methodologies, replacing them with a completely new framework. The PRA expects existing internal model permissions for market risk to become redundant as part of the legislative changes required to introduce Basel 3.1 in the UK.

Given the new market risk rules introduced by the Fundamental Review of the Trading Book (FRTB) are substantially different to the existing rules, it is not currently the PRA’s intention to consult on any temporary extension of the existing modelling regimes or permissions.

The PRA has previously announced that it will consult on the UK implementation of Basel 3.1, including the FRTB, in Q4 2022 and as part of the consultation will consult on a planned implementation date of 1 January 2025. The PRA will be providing further details including those relating to the materials to be expected to be included in model/standard approach pre-applications and the application confirmation process will be provided at a later date.

The PRA will expect firms to submit final pre-application materials at least 12 months in advance i.e. by 1 January 2024. Firms submitting after this date should expect to have to use the standardised approach, at least for an initial period, pending the completion of their model review. As the PRA expects to give priority to firms that have submitted by the requested date it may mean that pre-application reviews of firms applying later may take longer than 12 months.

In terms of pre-engagement with firms, the PRA is planning a schedule of reviews covering the main new features of the FRTB:

Q4-2022 – Default Risk Charge.
Q1-2023 – Risk factor eligibility test.
Q2-2023 – Non-modellable risk factors.
Q3-2023 – P&L attribution test and back-testing.

In 2023/24 the PRA will conduct further benchmarking of the standardised approach. It will also expect firms to submit any related pre-application materials at least 12 months in advance of UK implementation, in order to allow sufficient time for these to be reviewed.