Mansion House: PRA consults on adjustments to its Basel 3.1 market risk framework

HM Treasury (HMT) and the UK Prudential Regulation Authority (PRA) have published updates with proposed changes to the expected implementation of Basel 3.1. The changes relate to delaying the implementation of the new internal model approach under the Fundamental Review of the Trading Book (FRTB-IMA) by a year, and to the advanced standardised approach (ASA) – specifically, the treatment of collective investment undertakings (CIUs) and the application of the residual risk add-on (RRAO) component.

The PRA consultation on adjustments to the Basel 3.1 market risk framework makes four proposals, accompanied by draft updates to rules and guidance set out in various appendices.

• Proposal 1, which proposes to delay FRTB-IMA implementation to 1 January 2028. All other aspects of Basel 3.1 would proceed on 1 January 2027, as would the implementation of the Strong and Simple capital regime. This proposal recognises the challenges and operational complexity faced by firms with varying business models across multiple jurisdictions. In the interim period, firms with existing IMA permissions would retain those permissions, and positions not in scope of those permissions would move to the ASA. Otherwise, positions not in scope of existing IMA permissions would move to the new standardised approaches (whether ASA or simplified standardised approach, in accordance with the near-final market risk rules and related supervisory statement previously published).
• Proposal 2, which proposes to simplify the treatment of CIUs under the ASA to make the market risk treatment of such undertakings more proportionate while preserving the boundary between the trading and non-trading book. The PRA proposes to use a 90% threshold to mitigate the impact, in particular, of changes in underlying investments as follows:
  • Firms must allocate CIU positions to the trading book where at least 90% of its underlying holdings would be allocated to the trading book, and the residual position would be capitalised under the ASA fall-back approach.
  • Firms may use the market risk look-through approach where at least 90% of the undertaking′s underlying holdings can be looked through, and the residual position would be capitalised under the ASA fall-back approach.
• Proposal 3, which proposes introducing a permissions regime for the RRAO component of the ASA. This would allow firms able to demonstrate that the RRAO is disproportionate to use an internal approach to set appropriate capital for those risks, with such methodology needing to be submitted to the PRA for approval.
• Proposal 4, which concerns consequential amendments to reporting and disclosure requirements for consistency with proposal 1, if the FRTB-IMA implementation is delayed to 1 January 2028.

HMT has confirmed in its updated policy note its intention to legislate for the purposes of the FRTB-IMA implementation delay, and published a draft statutory instrument (The Capital Requirements Regulation (Amendment) Regulations 2025) to insert a transitional provision in the UK CRR legislation so that firms do not apply the relevant PRA rules before 1 January 2028. If made, the instrument would come into force on 30 December 2026, that date being the day immediately before the relevant provisions of the UK CRR (which the FRTB-IMA rules are replacing) are revoked.

Additionally, in its press release accompanying the PRA's consultation and related publications on market risk, the Bank of England has confirmed the PRA's announcement of prospective plans to help mid-sized banks compete in the mortgage market and the publication of a discussion paper mid-summer on adjusting barriers to gaining permissions to build internal ratings based models for residential mortgages.

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