CP17/25 – Basel 3.1: Adjustments to the market risk framework

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Responses are requested by Friday 5 September 2025.

Responses can be sent by email to: CP17_25@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:

Market and Counterparty Credit Risk Policy Team

Bank of England

Threadneedle Street

London

EC2R 8AH

1: Overview

1.1 The global financial crisis revealed significant shortcomings in the pre-crisis regulatory framework, particularly with respect to the calculation of risk-weighted capital ratios. Investors lost confidence in capital ratios that were calculated in accordance with earlier iterations of the Basel standards, known as Basel I and Basel II.

1.2 In particular, the crisis revealed material weaknesses in the market risk framework. Market risk capital requirements proved insufficient to absorb losses. As an immediate response, the Basel Committee on Banking Supervision (BCBS) introduced a set of revisions to the market risk framework in July 2009, which we refer to as ‘Basel 2.5’. The Basel 2.5 amendments were a necessary short-term fix, but they made the framework significantly more complex, and did not address all of the issues revealed by the crisis. The Basel 3.1 standards introduce a comprehensive set of amendments to the market risk framework, known as the Fundamental Review of the Trading Book (FRTB).

1.3 On 30 November 2022 the PRA consulted on its proposals to implement the Basel 3.1 package in the UK. With respect to the FRTB, the PRA proposed:

• a more clearly defined scope of the framework by introducing a stricter delineation between positions that should be allocated to the trading book and non-trading book, and specifying the treatment of internal hedges between the two books;
• to retain a recalibrated version of the existing standardised approach (the Simplified Standardised Approach, or SSA) for firms with limited derivatives business. The updated calibration reflected market developments since the approach was initially introduced;
• to introduce a new, more comprehensive standardised approach – the Advanced Standardised Approach (ASA). This would be used by firms that do not meet the criteria to use the SSA and that have not been granted supervisory permission to use an internal model; and
• to introduce a new internal model approach (FRTB-IMA) for firms that have been granted supervisory permission. This approach would replace the existing modelled approach.

1.4 The PRA published its response to the consultation in two parts:

• Part 1, published on 12 December 2023 as policy statement (PS)17/23 – Implementation of the Basel 3.1 standards near-final part 1, included near-final rules and policy material on: scope and the level of application of the rules; the FRTB; credit valuation adjustment and counterparty credit risk; operational risk; interaction with the Pillar 2 framework; and currency redenomination.
• Part 2, published on 12 September 2024 as PS9/24, included near-final rules and policy material on: credit risk, the output floor, and disclosure and reporting requirements, including for the FRTB. The near-final rules published as part of PS9/24 covered the entire Basel 3.1 package, including restating those elements published in PS17/23.

1.5 Since then, there has been uncertainty about the timing of implementation of the Basel 3.1 package in some major jurisdictions. As a result, on 17 January 2025, the PRA, in consultation with HM Treasury (HMT), announced a delay to the implementation of the Basel 3.1 package in the UK by one year until 1 January 2027. The delay was to allow time for clarity to emerge about plans for implementation in the United States, and taking into account competitiveness and growth considerations. At the time the PRA noted it would continue to monitor developments. 

1.6 On 12 June 2025 the European Commission announced a planned one-year delay –until 1 January 2027 – to the EU implementation of the FRTB, citing the ongoing uncertainty around the timing of implementation in other major jurisdictions. Within the EU, the remaining aspects of the Basel 3.1 package had already been implemented on 1 January 2025.

1.7 The PRA recognises the UK’s role as a key global financial centre in implementing the FRTB. It continues to be cognisant of the cross-border nature of some trading activity that the FRTB applies to, and therefore the benefit of aiming to broadly align implementation timelines for that part of the Basel 3.1 package across major jurisdictions for firms engaged in cross-border trading.

1.8 However, the PRA also recognises that the FRTB will be applied by a wide range of firms, including those typically on the Standardised Approaches with limited market risk exposures and limited cross-border activity. The benefits of the FRTB apply equally to those firms, including by improving the coherence of the framework, promoting consistency across firms, and more proportionately addressing the market risks posed by firms’ exposures. The FRTB includes a range of approaches of differing levels of sophistication to support proportionality. 

1.9 To balance these considerations, and given continued uncertainty over the timing of the implementation of the FRTB in some other jurisdictions, the PRA proposes to delay the implementation of the FRTB-IMA for another year, until 1 January 2028. The internal model approach is predominately used by major trading firms, including international groups engaged in cross-border trading activity. It is therefore the most relevant part of the FRTB for cross-border coordination given the costs and complexity of running different models across jurisdictions. A delay to 1 January 2028 would allow additional time for coordination. All other elements of the FRTB, including the trading book boundary, the ASA, and the SSA, would be implemented on 1 January 2027 alongside the other parts of Basel 3.1. The PRA also proposes a small number of operational adjustments to the trading book boundary and the ASA to ensure efficient outcomes and to simplify their implementation and operation, which would take effect from 1 January 2027.

1.10 This CP sets out the proposed adjustments to the near-final market risk rules published in PS9/24 and the related supervisory statement published in PS17/23, to:

• delay the FRTB-IMA by one year to 1 January 2028. Firms would be able to continue to use existing market risk models in the interim period, or switch to the new standardised approaches, as they prefer;
• implement operational simplifications for the treatment of collective investment undertakings (CIUs) in the trading book boundary and the ASA;
• introduce a permissions regime to support the proportionate capitalisation of residual risks in the ASA; and
• update reporting and disclosure obligations to align with the above proposals.

1.11 The proposals in this CP would modify the following sections of the near-final rules in PRA Rulebook in PS9/24:

• Trading Book (CRR);
• Market Risk: General Provisions (CRR);
• Market Risk: Internal Model Approach (CRR);
• Market Risk: Advanced Standardised Approach (CRR);
• Market Risk: Simplified Standardised Approach (CRR);
• Credit Valuation Adjustment Risk;
• Required Level of Own Funds (CRR);
• Credit Risk Mitigation (CRR);
• Disclosure (CRR);
• Regulatory Reporting; and
• Reporting (CRR).

1.12 The PRA would also introduce an interim SS 13/13 – ‘Market risk’ before the near-final version of SS13/13 published in PS17/23 takes effect on 1 January 2028.

1.13 The implementation of the main elements of the Basel 3.1 package on 1 January 2027 is an important step in finalising the post-crisis regulatory framework in the UK. It will also enable the PRA to finalise Strong and Simple proposals, the UK’s Securitisation regime, and the adoption of the remaining CRR provisions into the PRA rulebook.

Scope

1.14 This CP is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies (collectively ‘firms’).

1.15 The PRA is separately consulting on the application of the market risk framework to Small Domestic Deposit Takers (SDDTs), as set out in CP7/24. The application of the market risk requirements to SDDTs will be confirmed in due course.

Accountability framework

1.16 The PRA has a statutory duty to consult when introducing new rules (FSMA s138J), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so.

1.17 The proposals set out in this CP have been developed by the PRA in accordance with its statutory objectives and informed by the regulatory principles and the matters to which it must have regard in making policy as set out in the Financial Services and Markets Act 2000 (FSMA). The Practitioner’s Panel were informed about the proposals in this CP.

1.18 The Financial Services and Markets Act 2023 (FSMA 2023) provides HMT with a power to revoke provisions from the CRR.^{footnote [1]}  HMT is proposing to use this power to revoke parts of the CRR so that the PRA can make the rules proposed in this CP.^{footnote [2]}  

1.19 Changes to the PRA’s accountability framework under FSMA 2023, including adding international competitiveness and growth (subject to alignment with international standards) as a secondary objective, continues to be disapplied to these further Basel 3.1 proposals by regulation 4 FMSA 2023 (Commencement No. 2 and Transitional Provisions) Regulations 2023 as amended. Nevertheless, international competitiveness considerations and alignment with international standards are factors the PRA has had particular regard to, alongside the relative standing of the UK as a place for internationally active firms to operate. 

1.20 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Implementation

1.21 The PRA proposes that the implementation date for the changes resulting from this CP would be Friday 1 January 2027, when the rest of the Basel 3.1 framework comes into effect.

Responses and next steps

1.22 This consultation closes on Friday 5 September 2025. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP17_25@bankofengland.co.uk.

1.23 Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

2: The PRA’s proposals

2.1 The PRA set out the near-final rules and a related Supervisory Statement to implement the FRTB through two publications: PS17/23 and PS9/24. Relative to the existing market risk framework, the FRTB will introduce important improvements: i) a stricter and clearer delineation between positions that should be allocated to the trading book and non-trading book; ii) a simplified standardised approach (SSA) better suited to firms with limited derivatives business; iii) an advanced standardised approach (ASA) as a risk-sensitive alternative to internal models; and iv) a new, more comprehensive, internal modelled approach (FRTB-IMA).

2.2 As set out in the Overview chapter, given the ongoing uncertainty over the timing of implementation of Basel 3.1 in other major jurisdictions, and the cross-border nature of some of the trading activities to which the FRTB applies, the PRA proposes a number of adjustments to the near-final rules and Supervisory Statement, outlined in more detail in this chapter:

• Proposal 1: delay the FRTB-IMA by one year to 1 January 2028. Firms may continue to use existing market risk models in the interim period;
• Proposal 2: implement operational simplifications to the treatment of collective investment undertakings (CIUs) in the trading book boundary and the Advanced Standardised Approach (ASA);
• Proposal 3: introduce a permissions regime for the capitalisation of residual risks in the ASA; and
• Proposal 4: update reporting and disclosure obligations to align with the above proposals.

2.3 The proposals would implement most aspects of the FRTB as planned on 1 January 2027, in turn facilitating the implementation of all other elements of the Basel 3.1 package on the same date, whilst allowing time for greater clarity to emerge about implementation plans in other jurisdictions on the part of the FRTB most relevant for cross-border activities.

Proposal 1: Delay FRTB-IMA implementation to 1 January 2028

2.4 Given the cross-border nature of certain trading activity that the FRTB applies to, particularly activity within scope of existing IMA permissions held by firms, the PRA recognises the benefit of aiming to broadly align implementation timelines for that part of the FRTB across major jurisdictions. The PRA considers that there could be significant operational complexity for firms in operating multiple types of models for regulatory purposes within an international group for a significant period of time.

2.5 The PRA therefore proposes to delay implementation of the FRTB-IMA by one year to 1 January 2028. In the interim period from 1 January 2027, firms would retain existing IMA model permissions.^{footnote [3]}

2.6 Positions not in scope of existing IMA permissions would move to the new standardised approaches, either the ASA or SSA, under the requirements set out in PS17/23 and PS9/24. For firms with existing IMA permissions, this would result in positions not in scope of those permissions moving to the ASA.

2.7 The retention of the existing IMA would require a number of consequential amendments to the rules in PS9/24 and policy materials in PS17/23. These include:

• introducing the existing CRR IMA rules into the PRA Rulebook (Appendix 1);
• introducing an interim supervisory statement SS13/13 that retains the existing modelling text, while incorporating the near-final updates to SS13/13 that relate to other (non-modelling) components of the FRTB. When the new IMA framework is implemented, the SS13/13 finalised as part of PS17/23 would take effect (Appendix 2); and
• updating the monitoring period for the Profit and Loss Attribution Test to apply for one year after implementation of the FRTB-IMA; and
• updating the reporting and disclosure requirements to retain existing reporting and disclosure obligations for the current IMA (Appendix 3 – 11).

2.8 The aspects of the supervisory statement, rules, and reporting and disclosure obligations presented in PS17/23 and PS9/24 that relate to the FRTB-IMA would take effect on 1 January 2028.

Proposal 2: Implement operational simplifications to the treatment of CIUs under the ASA

2.9 In PS17/23, the PRA confirmed that it would introduce the new, more prescriptive requirements in the FRTB that determine the scope of positions to which the market risk framework would apply (the ‘boundary’). When applied to CIUs, its underlying positions can determine which capital framework a fund would be allocated to. To be allocated to the trading book, the CIU is not permitted to hold any investment in non-trading book assets. The entire CIU would instead be allocated to the non-trading book.

2.10 The PRA also confirmed in PS17/23 that it would implement four methods for calculating CIU capital requirements using the ASA.^{footnote [4]} The look-through approach (LTA) requires firms to know the exact holdings of the entire CIU and calculate a capital requirement as if it held those positions directly. The external party approach (EPA) allows a similar look-through to be applied by a third-party to calculate the capital requirement on behalf of a firm if they know the exact holdings. Alternatively, firms may construct a conservative hypothetical CIU portfolio if they have the investment mandate of the CIU. In cases where the firm cannot apply any of those approaches, the treatment defaults to the most conservative fall-back approach of applying a 70% risk weight to the whole position (FBA).

2.11 The PRA recognises that the variety of CIUs and variability of their investment holdings may lead to cliff-edges in the allocation or capitalisation of those funds. Small changes in a CIU underlying investment may result in reclassification from the trading book to the non-trading book (or vice versa). For CIUs with limited numbers of underlying positions, the requirement to look through to 100 per cent of holdings or develop a hypothetical portfolio to avoid defaulting to the FBA is straightforward. However, where a CIU has a large number of underlying positions, the operational requirements can increase significantly.

2.12 The PRA therefore proposes to implement a de minimis threshold to make the market risk treatment more proportionate and reduce the frequency of cliff-edges in the framework:

• firms must allocate CIU positions to the trading book where at least 90 per cent of the CIU’s underlying holdings (by value) would be allocated to the trading book. The residual position would be capitalised under the ASA FBA approach; and
• firms may use the market risk LTA where at least 90 per cent of the CIU’s holdings (by value) can be looked through. The residual position would be capitalised in the ASA FBA approach.

2.13 The PRA considers that the proposed threshold would reduce volatility in CIU allocation and capitalisation. Setting a threshold would ensure the boundary between the trading and non-trading book remains sufficiently strict and clear, without incurring disproportionate operational costs. The use of the FBA for capitalisation of the de minimis position would ensure unidentified holdings are capitalised appropriately.

Proposal 3: Introduce a permissions regime for the ASA residual risk add-on

2.14 Under the ASA, the Residual Risk Add-On (RRAO) component capitalises complex or exotic risks not otherwise captured by the approach. The RRAO calculation is designed to be simple. It is calculated as the sum of gross notional amounts of instruments with complex or exotic risks, multiplied by 1% for exotic underlying risk, and by 0.1% for instruments with other residual risks.

2.15 The PRA considers that the RRAO is essential for capturing complex risks in the ASA. A standardised approach will never be able to capture exotic risks without excessive complexity. Excluding risks from the RRAO, in effect setting no capital requirement for them, would not be consistent with the PRA’s primary objective. However, the PRA acknowledges that there may be a small number of products or business lines where the RRAO capital requirement could be disproportionate to the risk.

2.16 The PRA proposes to introduce a permissions regime for the RRAO. Under the regime, firms would need to identify risks in scope of the RRAO where they can demonstrate that the RRAO is disproportionate, and submit a methodology for PRA approval that sets appropriate capital for those risks. We expect the methodology would be subject to comparable internal governance and review processes that would be expected for an internal model.

2.17 When considering an application for a permission to capitalise residual risk via an internal approach for each individual product, the PRA would also consider whether granting the permission would be consistent with advancing its statutory objectives as set out in Part 1A, chapter 2 of FSMA. The PRA would also consider whether granting the permission in a particular case may undermine any of the purposes for which the rule was made, including the matters set out in s144C of FSMA (‘Matters to be considered when making CRR rules’).

Proposal 4: Update reporting and disclosure requirements to align with the above proposals

2.18 The PRA proposes to make consequential amendments to the reporting and disclosure requirements to align with the proposals above. In particular, the PRA proposes to:

• retain the existing IMA reporting and disclosure templates for the period to 1 January 2028;
• delay the introduction of the FRTB-IMA reporting and disclosure templates until 1 January 2028; and
• update reporting and disclosure templates that cross-refer to the FRTB-IMA and replace these with references to the existing IMA for the period to 1 January 2028.

PRA objectives analysis^{footnote [5]}

2.19 The PRA considers that the proposals set out in this CP would advance its primary objective to promote the safety and soundness of the firms that it regulates.

2.20 As set out in PS17/23, the FRTB will advance the safety and soundness of firms. Although the proposals in this CP would delay implementation of the FRTB-IMA for one year, existing models would still be subject to back-testing and supervisory review to ensure they are sufficiently robust during the interim period as is the case under current requirements.

2.21 The proposed changes to the ASA treatment of CIUs would remove operational complexities and potential cliff-edges in capital requirements by introducing a de minimis threshold before positions switch between the trading / non-trading book and/or capital treatments. The treatment of those de minimis positions via the FBA would provide a conservative capital treatment and preserve the integrity of the trading book boundary. Introducing a permissions regime for the RRAO would improve firms’ identification and measurement of complex risks where the ASA may not be proportionate.

2.22 With regard to facilitating effective competition, the PRA considers that the delay in implementing the new internal model approach would facilitate effective competition between firms during the period when the implementation plans of other major jurisdictions are becoming clearer, by ensuring they can continue with their established business operations and IMA approaches for the interim period.

2.23 The proposals to provide more flexibility for capitalising CIUs would ensure that firms with such exposures have a proportionate and operationally efficient approach to continue trading them in the UK. Finally, allowing firms to propose alternative approaches to capitalise complex risks under the ASA would facilitate competition by better aligning risk capital for specific business lines or hedging strategies, which would support competition in those segments of the banking sector.

Cost benefit analysis

2.24 The PRA has considered a range of factors that contribute to the cost benefit analysis (CBA) underpinning the proposals, particularly in relation to the treatment of specific elements of market risk relative to the benefits and costs previously assessed in CP16/22, and from subsequent adjustments made in PS17/23 and PS9/24. Given that near-final policies PS17/23 and PS9/24 did not materially change the expected costs and benefits, CP16/22 serves as a primary baseline for this assessment. While this section does not include quantified estimates of costs or benefits, the PRA considers the assessment in CP16/22 would remain broadly appropriate following the proposals set out in this CP. Where proposals could change costs or benefits, the additional analysis is described below.

2.25 The PRA considers the proposed adjustments to the ASA would provide a benefit from more risk-sensitive and proportionate outcomes relative to the near-final rules in PS9/24. The adjustments would provide a more proportionate capital treatment of CIUs by reducing cliff edges in the capital treatment. The proposed amendments to the RRAO would also clarify the PRA’s expectations and provide the option for a more proportionate, risk-sensitive capital treatment for affected positions. As the proposals do not impose new mandatory requirements but instead provide optional adjustments, the PRA does not expect them to result in additional operational or compliance costs. Both proposals could also mean firms avoid incurring potential costs for exiting the relevant businesses where the capital treatment would otherwise be disproportionate. And the introduction of the de minimis threshold for CIUs should similarly lower costs by reducing operational friction when allocating CIUs to the trading book or non-trading book.

2.26 Regarding the FRTB-IMA delay, the PRA considers the proposal could provide a benefit by allowing more time for firms to plan to implement it if they intend to do so, potentially allowing greater use of the more risk-sensitive FRTB-IMA upon implementation, while allowing positions capitalised under internal models today to continue on that approach for an additional year. The FRTB-IMA delay would also enable the PRA to better align with the implementation dates in other major jurisdictions, marginally reducing the costs of operating and monitoring differing types of models across international groups.

2.27 Overall, the PRA notes that the proposals in this CP do not intend to materially change overall firm-level RWAs relative to the near-final Basel 3.1 rules set out in PS17/23 and PS9/24. Market risk typically represents a relatively small portion of firms’ overall RWAs. As such, the prudential impact from the proposals set out in this CP would not be materially different to previous assessments. Given the low expected impact of the proposals and the limitations of granular data related to the adjustments, the PRA has not included quantitative estimates for the proposals in this analysis.

‘Have regards’ analysis

2.28 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy as set out in the HMT recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

Relative standing of the UK as a place for internationally active firms to operate (FSMA CRR rules) and competitiveness (HMT recommendation letter):

• The PRA considers that the proposals would allow time to ensure that the implementation of the FRTB can be better aligned with other major jurisdictions. Given the ongoing uncertainty over their implementation plans, the proposals would ensure that UK firms can take advantage of the improvements to risk measurement in the non-modelled elements of the FRTB, while avoiding interim divergence in modelling approaches between domestic and international firms while the final implementation plans of other major jurisdictions become clear.

Relevant international standards (FSMA CRR rules):

• The PRA considers the proposals would result in implementation of the SSA, ASA, and trading book boundary, aligned with the Basel 3.1 standards. The adjustments to the ASA retain the intent of the international standard, whilst reducing operational challenges. Although the introduction of the FRTB-IMA will be delayed, the near-final rules to be applied from 1 January 2028 as set out in PS9/24 remain unchanged and are aligned with the international standard.

Proportionality (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006):

• The PRA considers that the proposals improve proportionality relative to PS9/24. Delaying the FRTB-IMA would provide more time for firms to adapt models to comply with the approach. The adjustments to the treatment of CIUs and capitalisation of the RRAO are designed to ensure that requirements are proportionate to the risk.

Different business models (s.3B FSMA) and consistency (LRRA 2006)

• The PRA considers that the proposals recognise the variability of the firms that the PRA supervises. The proposal to delay the FRTB-IMA would enable UK firms and major global firms to operate under broadly the same requirements in the period while clarity emerges on international timelines. Implementing the ASA and SSA as currently planned on 1 January 2027 would enable firms with less material trading activities to take advantage of the benefits of more proportionate and risk-sensitive approaches without any further delay. Finally, the adjustments for CIUs and the RRAO address the potential for particular business lines to be disproportionately affected by the ASA.

Impact on mutuals

2.29 The PRA considers that the impact of the proposed changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

2.30 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.