On 11 May 2023, the PRA published Policy Statement 5/23 ‘Risks from contingent leverage’ (PS5/23).

PS5/23 provides feedback to responses to Consultation Paper 12/22 ‘Risks from contingent leverage’ (CP12/22) and also provides the final policy.

Previous consultation

In CP12/22, the PRA proposed to:

  • Update its supervisory expectations for firms undertaking an internal capital adequacy assessment process (ICAAP) in relation to the risks from contingent leverage (the ICAAP expectations).
  • Introduce a new data reporting requirement for firms subject to the leverage ratio minimum requirement (LREQ firms), collecting data on trading exposures where these risks may most likely arise.

The PRA considered that the proposals would help firms better understand the significance of these risks, and better manage them should they materialise.

Final policy

The PRA received one response to CP12/22. The response broadly welcomed the measures proposed, while seeking clarification on aspects of the proposed ICAAP expectations and reporting requirement, and suggested targeted changes to the reporting requirement. The PRA covers the points raised in Chapter 2 of PS5/23.

Generally, the PRA has added a clarification on the business lines and trade structures in scope of the ICAAP expectations, and how to assess the materiality of contingent leverage risks to a firm’s business. It has also made minor changes to the reporting requirement including postponing the entry into force of the requirement to 1 January 2024, with a first reporting reference date of 30 June 2024, to give more time for firms to build and test their reports.

The PRA’s final policy is set out as follows:

  • Updated supervisory statement (SS) 31/15 – ‘The ICAAP and the Supervisory Review and Evaluation Process (SREP)’
  • Amendments to the Reporting (CRR) part of the PRA Rulebook.
  • Introduction of reporting templates LV49-52.
  • Updated ‘Instructions for reporting on leverage’.
  • Updated SS45/15 – ‘The UK leverage ratio framework’, to add LV49-52 to the list of leverage reporting templates.

Next steps

The ICAAP expectations for firms undertaking an ICAAP will take effect on publication of PS5/23.

The reporting requirement for LREQ firms will take effect on 1 January 2024, with a first reporting reference date of 30 June 2024.