Greg Kilminster
Head of Product - Content
PS17/23: PRA publishes near-final policy statements on Basel 3.1 standards
The Prudential Regulation Authority (PRA) has published the first of two near-final policy statements covering the implementation of the Basel 3.1 standards for market, credit, counterparty credit, and operational risk. The proposals aim to implement the final package of banking prudential reforms developed by the Basel Committee on Banking Supervision (BCBS). The package makes significant changes to how firms calculate risk-weighted assets (RWAs) to calculate risk-based capital ratios, aiming to improve the measurement of risk and make firms’ capital ratios more consistent and comparable.
The near-final policy statement takes account of feedback received to the PRA’s consultation paper (CP) on the Basel 3.1 standards published in November 2022 (CP16/22).
Key elements retained from CP16/22
Scope and levels of application: the proposals:
- Replicate the Capital Requirements Regulation (CRR) scope of application, excluding Transitional Capital Regime (TCR) firms and TCR consolidation entities.
- Replicate the CRR levels of application and CRR provisions relating to prudential consolidation.
- Revise the definition of a Simpler-regime Firm alongside introducing the TCR to ensure eligible firms and consolidation entities do not have to implement the Basel 3.1 standards before they have the option of moving to the permanent strong and simple risk-based capital framework.
Market risk: the proposals introduce new requirements for determining which positions should be allocated to the trading book and two new approaches for calculating market risk capital requirements, which replace the existing methodologies:
- The advanced standardised approach (ASA), a risk-sensitive approach for firms without permission to use an IM.
- The internal model approach (IMA).
CVA and counterparty credit risk: the proposals:
- Introduce three new approaches for calculating the CVA risk capital requirement to replace the existing methodologies: the fall-back alternative approach (AA-CVA) for firms with limited exposure to non-centrally cleared derivatives; the basic approach (BA-CVA) and the standardised approach (SA-CVA).
- Adjust the calibration of the existing standardised approach for counterparty credit risk (SA-CCR).
Operational risk: the proposals implement a new SA to replace the existing IM and standardised approaches. The proposals also exercised a national discretion within the international standards to remove the mechanical link between operational risk capital requirements and historic operational risk losses.
Currency redenomination: the proposals convert certain euro (EUR) and US dollar (USD) references in the international standards to pound sterling (GBP).
Pillar II framework: in the CP, the PRA did not propose any policy changes with respect to its Pillar 2 framework but provided a high-level description of the implications for Pillar 2 of the changes proposed to the Pillar 1 framework. The PRA plans to conduct an off-cycle review of firm-specific Pillar 2 capital requirements ahead of the implementation date of the Basel 3.1 standards on 1 July 2025 (‘day 1’) to address potential double counting. On that basis, the PRA intends to publish a second near-final PS in Q2 2024, providing feedback to responses to the chapters of CP16/22 not addressed in this near-final PS (including those related to credit risk and the output floor).
Key adjustments to CP16/22
Considering the responses to CP16/22, the PRA has identified several adjustments and corrections to the draft policy where it considers them appropriate. The most material changes include:
- Removing the ability for firms to receive permission to use the market risk IM for the default risk of exposures to sovereigns
- Introducing an additional, optional, transitional arrangement in the CVA risk framework for transactions for which existing exemptions from capital requirements are being removed
Next steps
The PRA intends to publish its second near-final policy statement in Q2 2024 on the remaining elements of the Basel 3.1 package, which includes credit risk, the output floor, reporting and disclosure requirements. The Basel 3.1 standards implementation timeline is on 1 July 2025, with a 4.5-year transitional period ending on 1 January 2030.
Based on its latest data, the PRA estimates that the impact of Basel 3.1 requirements will be low and result in an average increase in Tier 1 capital requirements for UK firms of around 3% once fully phased in (ie in 2030).
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MAS seeks feedback on proposed regulations for information sharing via COSMIC
The Monetary Authority of Singapore (MAS) has published a consultation seeking feedback on the proposed regulations that will define the scope of relevant parties whose information can be shared via COSMIC (Collaborative Sharing of Money Laundering/Terrorism Financing Information & Cases).
On 9 May 2023, the Financial Services and Markets (Amendments) Act 2023 was passed by Parliament. This act establishes an electronic information-sharing system for prescribed financial institutions (FIs) that will enable them to disclose, publish, and share risk information to prevent and detect money laundering (ML), terrorism financing (TF), and proliferation financing (PF). This new system, COSMIC, aims to improve information exchange between FIs to deter and disrupt criminal activities.
COSMIC will allow prescribed FIs to share securely with each other risk information on a “relevant party” who exhibits multiple red flags that may indicate potential financial crime concerns, as long as the stipulated thresholds in the FSMA are met. This public consultation relates to the proposed definition of “relevant party”.
MAS is also running a related public consultation on a new COSMIC Notice that outlines requirements for sharing information through COSMIC.
This consultation period ends on 5 January 2024.
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APRA writes to firms to advise on new standards
The Australian Prudential Regulation Authority (APRA) has written to all banks and other authorised deposit-taking institutions (ADIs) to advise on the timetable for implementation of two forthcoming reporting standards Reporting Standard ARS 117.0 Repricing Analysis (ARS 117.0) and Reporting Standard ARS 117.1 Interest Rate Risk in the Banking Book IRRBB (ARS 117.1).
ADIs are advised to note that APRA intends to finalise the standards during 2024 ensuring they are effective for reporting periods ending 31 December 2025. In order to maintain these dates, APRA has requested comments be made on the draft standards by 1 March 2024.
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Hong Kong’s SFC provides quarterly update
Hong Kong’s Securities and Futures Commission has published its quarterly report for the period July to September 2023.
The report highlights a number of key developments during the period including the following:
- A consensus was reached with the China Securities Regulatory Commission (CSRC) to introduce block trading (manual trades) to further enhance trading efficiency and promote the mutual development of the Mainland and Hong Kong capital markets.
- Five corporations and five individuals were disciplined during the quarter and these actions resulted in total fines of $28.9 million.
- A joint statement with the Accounting and Financial Reporting Council (AFRC) on combatting misconduct by listed issuers was published.
- The consultation on risk management guidelines for licensed persons dealing in futures contracts was completed. The guidelines set out a comprehensive risk management framework for futures brokers and will become effective on 25 February 2024.
- The proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs took effect on 29 September.
- The consultation conclusions on proposed amendments to enforcement related provisions of the Securities and Futures Ordinance were published
- A joint consultation with the HKMA on proposed amendments to the Clearing Rules5 for over-the-counter (OTC) derivative transactions.
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FCA issues warning to investment platforms over uninvested cash practices
The Financial Conduct Authority (FCA) has issued a letter to investment platforms and SIPP operators and of interest to other consumer investment firms that hold retail customers’ uninvested cash. The letter outlines the FCA’s expectations regarding Consumer Duty (the Duty) and the treatment of interest earned on customers’ cash balances.
The FCA has highlighted specific actions that these firms need to take to ensure they meet their expectations, including reviewing their approach, ensuring fair value for customers, ceasing the practice of double-dipping, and updating terms and conditions where necessary.
Firms that received the letter are required to provide the FCA with information details and confirmations listed iby 31 January 2024. They must also make any necessary changes by 29 February 2024.
The FCA will review the responses and take further action if necessary to ensure consumer protection and support good outcomes.
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