On Apr. 9, UK PRA issued letter on significant risk transfer financing.
PRA published letter to firms' Chief Financial Officers on prudential expectations around significant risk transfer (SRT) financing, following observations made by the regulator.
Follows UK PRA Sep. 2024 near final rules on Basel 3.1 standards, see #226103.
PRA Letter
Highlights practices seen re illiquid and structured financing portfolios across firms.
Principal concerns relate to supervisory information received re SRT financial activities.
But PRA expects firms to consider application of feedback in letter to all relevant financing portfolios, should ensure that their regulatory capital approach reflects the substance of the transactions, including the liquidity of the underlying collateral.
Concerns
Letter covers PRA's core financial concerns and specific areas of focus arising from recent supervisory activities; regulator's associated ongoing expectations of firms.
And supervisory expectations with respect to relevant near-final policy changes issued as part of policy statement PS9/24 on near-final Basel 3.1 standards implementation.
Scale and complexity of financing portfolios and effectiveness of risk management and control frameworks varies across firms, PRA expects firms to analyze characteristics of different collateral types when determining appropriate regulatory capital treatment.
Regulator is concerned that, in certain areas, not all banks are demonstrating a sufficiently thorough assessment of collateral eligibility, particularly surrounding collateral eligibility for securities financing transactions in the trading book.
Has identified that for certain financing portfolios, banks have adopted an imprudent approach associated with the recognition of collateral for regulatory capital purposes, resulting in a potential undercapitalization of the risks, an example is provided.
PRA expects risks described in letter to be appropriately capitalized by firms under Pillar 1 of UK capital framework, SFTs backed by illiquid collateral which fails to meet requirements for trading book inclusion must follow rules for banking book exposures.
Use Pillar 2A to capitalize risks that are not or only partially addressed under Pillar 1.
These expectations are aligned with near-final rule changes announced in PS9/24, will introduce 3 additional collateral eligibility requirements for SFTs in the trading book.
Firms will be responsible for demonstrating compliance with these requirement, PRA's letter sets out what it expects them to consider when analyzing collateral eligibility.
Next Steps
PRA expects firms to consider concerns highlighted, and where necessary ensure that associated policies, control frameworks, reporting are enhanced to address any issues.
Supervisors will be in contact with relevant firms to request a response, such firms should provide a written response by Jun. 11, 2025, giving details requested by PRA.
These are: the policies and procedures in place to ensure compliance with Article 299(2)(c) UK CRR, which governs collateral eligibility for SFTs in the trading book.
Any proposed enhancement to these policies and procedures in response to PRA's letter, including any resulting changes to the regulatory capital approach for SFTs associated with specific collateral types and the impact of these changes.
And the current regulatory capital approach applied to SFTs for specific collateral types, to be sufficiently granular to capture details of trading book/banking book boundary.
Subject to responses, PRA will consider the need for further engagement with firms either on a bilateral or cross-firm basis, consistent with 2025 supervisory priorities.
Effectiveness
Relevant firms should submit their written responses to the PRA by Jun. 11, 2025.
