PS1/26 – Implementation of Basel 3.1: Final rules

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides the final PRA Rulebook rule instruments, supervisory statements (SSs), statements of policy (SoPs), and disclosure and reporting templates and instructions relating to the Basel 3.1 standards. These policy documents are set out in the appendices to this PS.

1.2 Alongside this PS, the PRA has also published final policy, rules, and supervisory expectations on a number of related banking capital frameworks:

• PS2/26 – Retiring the refined methodology to Pillar 2A – final;
• PS3/26 – Restatement of CRR requirements – 2027 implementation – final; and
• PS4/26 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) – final.

1.3 This PS is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial holding companies or mixed financial holding companies (firms).

Background

1.4. The final policy, rules and supervisory expectations in this PS were published as near-final in PS17/23 – Implementation of the Basel 3.1 standards near-final part 1, PS9/24 – Implementation of the Basel 3.1 standards near-final part 2 and PS7/25 – Update to PS9/24 on the SME and infrastructure lending adjustments.

1.5 On Friday 17 January 2025, the PRA, in consultation with HM Treasury (HMT) announced a delay to the implementation of the Basel 3.1 standards in the UK by one year, to 1 January 2027. The decision was made because of uncertainty over when other major jurisdictions would adopt the standards and to take into account competitiveness and growth considerations.

1.6 The PRA recognises the UK’s role as a key global financial centre in implementing the Basel 3.1 standards. The PRA continues to be cognisant of the cross-border nature of some trading activity that the market risk rules apply to and therefore the benefit of aiming to broadly align implementation for that part of the Basel 3.1 standards. That is why, on Tuesday 15 July 2025, the PRA consulted on targeted amendments to the near-final Basel 3.1 market risk framework, consultation paper (CP) 17/25 – Basel 3.1: Adjustments to the market risk framework. This PS provides the PRA’s feedback to the responses received to CP17/25 (see Chapter 3 – Market risk). The final rule instrument and relevant SS and SoPs incorporate amendments to the market risk framework following that consultation.

Changes to draft policy

1.7 With the exception of the changes to the market risk framework made following CP17/25, the PRA has not made substantive changes to the policy and rules in PS17/23, PS9/24 and PS7/25. The PRA has, however, made minor amendments, corrections and clarifications to the policy, rules, and supervisory statements published as near-final. These amendments are set out in Chapter 2.

1.8 The PRA considers that the changes set out in Chapter 2 will assist firms by providing further clarity and improving readability as compared to the near-final policy and rules set out in PS17/23 and PS9/24.^{footnote [1]} The PRA does not consider that these changes will have a different impact on mutuals relative to the impact of the final policy and rules on other PRA-authorised firms.

1.9 The PRA considers that the aggregated cost benefit analysis and mutuals statement presented in CP16/22 remains appropriate. The PRA considered the costs and benefits underpinning the proposals set out in CP17/25 in relation to the market risk framework and concluded that those changes do not materially change overall firm-level risk weighted assets (RWAs) relative to the near-final Basel 3.1 rules set out in PS17/23 and PS9/24.

1.10 The rule instruments, SSs and SoPs in the appendices also reflect the PRA’s feedback to two other related consultations:

• In 2023, the PRA published proposals in relation to the capitalisation of foreign exchange positions for market risk in CP17/23 – Capitalisation of Foreign Exchange positions for market risk. The PRA’s feedback to responses received to CP17/23 are set out in Chapter 4 – Capitalisation of foreign exchange positions for market risk. The final rule instrument can be found in Appendix 1.
• In 2025, the PRA consulted in LIAC01/25 – Low impact amendments on deleting the Benchmarking Part of the PRA Rulebook. As set out in LIAF02/25, the PRA has reflected this change in the final rule instrument (Appendix 1).

1.11 In 2025, the PRA published CP3/25 – Recognised exchanges policy and transfer of main indices which proposed the transfer of a list of main indices from Commission Implementing Regulation (EU) 2016/1646 to the PRA Rulebook. The definition of main index in the Credit Risk Mitigation (CRR) Part of the final rule instrument (Appendix 1) cross-references this regulation, which is revoked by the commencement regulations made by HMT with effect from Friday 1 January 2027 (see paragraph 1.23). The PRA plans to update this cross-reference when it publishes its response to CP3/25 later this year.

Accountability framework

1.12 In CP16/22, the PRA published an explanation of why the rules proposed by the CP were compatible with its objectives and with its duty to have regard to the regulatory principles and matters required to be considered when making Capital Requirements Regulation (CRR) rules. In PS17/23 and PS9/24, the PRA provided updated explanations, taking into account consultation feedback.^{footnote [2]} The PRA considers the updated explanations remain appropriate subject to the updates set out in Chapter 3. For the final policy set out in Chapter 4, the PRA also considers that the assessment of compatibility with its objectives and “have regards” published in CP17/23 remains appropriate.

1.13 In particular, the PRA considers that the final policy and rules in this PS will advance its primary objective to promote the safety and soundness of the firms it regulates by addressing shortcomings in the RWA framework revealed by the global financial crisis. Those include inadequate Pillar 1 capital requirements in some areas and a ‘worrying degree of variability’ in the calculation of risk weights noted by the Basel Committee on Banking Supervision (BCBS) in December 2017. Addressing these shortcomings is important to underpin confidence that firms are adequately capitalised, given the risks to which they are exposed, which in turn supports financial stability.

1.14 The final policy and rules will also advance the PRA’s secondary objective to facilitate effective competition, for example by introducing more risk-sensitive standardised approaches to calculate RWAs and providing a more consistent and level playing field by introducing an output floor.

1.15 Changes to the PRA’s accountability framework under the Financial Services and Markets Act (FSMA) 2023 to add international competitiveness and growth (subject to alignment with international standards) as a secondary objective, do not apply to the final policy and rules set out in this PS. These provisions are disapplied by regulation 4 of the FSMA 2023 (Commencement No. 2 and Transitional Provisions) Regulations 2023 (as amended). Nevertheless, as the PRA noted in CP16/22, PS17/23, PS9/24, PS7/25 and CP17/25, international competitiveness and growth considerations, and alignment with international standards, are factors the PRA must ‘have regard’ to. These factors, alongside the relative standing of the UK as a place for internationally active firms to operate, were strongly considered by the PRA in developing the final policy and rules.

1.16 In considering these factors and the characteristics of the UK’s financial system, the proposals in CP16/22 incorporated some adjustments relative to international standards to support the international competitiveness of the UK, while advancing the PRA’s primary objectives. These included, for example, targeted measures to address concerns with respect to the risk-weighting of exposures to unrated corporates to increase risk-sensitivity under the credit risk standardised approach. Informed by evidence submitted during the consultation process, further adjustments were made in the near-final rules, including the introduction of the SME and infrastructure lending adjustments. The lending adjustments will ensure that the removal of existing Pillar 1 support factors does not cause an increase in overall capital requirements for SME and infrastructure exposures. They therefore provide stability and certainty for firms to continue to lend to those important sectors of the economy.

1.17 The PRA considers that the changes to the near-final policy in PS9/24 and the policy consulted on in CP17/23 and CP17/25 continue to appropriately reflect risks in a proportionate manner, reduce operational burden on firms, enhance the relative standing of the UK and improve the clarity of rules in a manner that aligns with the PRA’s statutory objectives.  

1.18 Further details on all substantive issues raised in responses to CP17/23 and CP17/25, and any related amendments to the draft policy, are set out in the relevant chapters of this PS. The PRA has considered the cost benefit analysis presented in CP16/22, CP17/23 and CP17/25 and concludes they remain appropriate. The PRA does not consider the changes to the policies consulted upon to be significant.^{footnote [3]} Therefore, a fully revised CBA and mutuals statement has not been produced.

1.19 The PRA does not consider that the impact of the final policy and rules would have a significantly different impact on mutuals relative to the impact of the draft policy and rules on mutuals, or relative to the impact of the final policy and rules on other PRA-authorised firms.

1.20 The summary of the purpose of the rules is in Appendix 2. Also, the PRA has updated the corresponding and restatement provisions documents to reflect the changes to the near-final rules. The updated versions of these documents are in Appendix 3 and 4.

1.21 The PRA has considered, and consulted HMT on, the likely effect of the rules on relevant equivalence decisions and received no comments.

1.22 The final technical standards instrument (Appendix 5) revokes PRA Standards Instrument: Technical Standards (Economic Downturn) 2021, which is being transferred into the PRA Rulebook. The technical standards instrument was submitted to HMT for approval on 26 November 2025. HMT approved the technical standards instrument on 1 December 2025.

Implementation

1.23 HMT has made the commencement regulations^{footnote [4]} that revoke the relevant provisions of the CRR. Those provisions will be replaced by the rules set out in Appendix 1. The Basel 3.1 policy, rules, supervisory statements, and statements of policy will take effect on Friday 1 January 2027.

1.24 The internal model approach for market risk will come into effect on Saturday, 1 January 2028. See chapter 3 – Market risk for further details.

1.25 The SSs relating to the policy in this PS have been updated to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU, or assimilated, legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [5]}

1.26 The PRA will shortly publish a final reporting taxonomy reflecting the final policy and rules set out in this PS. The Basel 3.1 reporting requirements will take effect from Friday 1 January 2027.

2: Amendments, corrections and clarifications

2.1 With the exception of the changes to the market risk framework made following CP17/25, the PRA has not made substantive changes to the near-final policy and rules in PS17/23, PS9/24 and PS7/25. The PRA has, however, made minor amendments, corrections and clarifications to the policy, rules, and supervisory statements. Further detail is set out below on a sub-set of these changes to clarify their intent.

2.2 The document titled Comparison of the final PRA Rulebook: CRR Firms (CRR) Instrument [2025] against PRA Rulebook: CRR Firms: (CRR) Instrument 2026 contains a comparison of the final rules with the near-final rules as set out in PS9/24 for ease of identifying all the rule-related changes made.^{footnote [6]}

Definitions

Policy and rules

2.3 HMT previously indicated, in its policy update on applying the FSMA model to the CRR, that it would make amendments to the definitions of probability of default (‘PD’), loss given default (‘LGD’) and ‘conversion factor’ which are set out in CRR Articles 4(1)(54), 4(1)(55) and 4(1)(56) respectively in the event that they remained in legislation at the time the PRA implements the Basel 3.1 standards. These amendments would have defined PD and LGD more accurately in the context of dilution risk, introduced references to facilities where appropriate, and removed the concept of ‘unadvised limits’ from the definition of ‘conversion factor’. The PRA subsequently consulted in CP19/25 on transferring these definitions to the PRA Rulebook Glossary with similar amendments to those previously set out by HMT. The PRA received one response in relation to these definitions which was supportive of the proposed change to the definition of ‘conversion factor’.

2.4 The CRR definitions of ‘PD’, ‘LGD’ and ‘conversion factor’ have since been revoked by The Financial Services and Markets Act 2023 (Commencement No. 12, Saving and Transitional Provisions) Regulations 2026 with effect from 1 January 2027, and the PRA has therefore decided to add the versions of these definitions that were consulted on in CP19/25 (with one further minor amendment) to the PRA Rulebook Glossary via the final rule instrument set out in Appendix 1. The PRA has also italicised these terms throughout the final rule instrument where the Glossary definitions are to be applied and left these terms unitalicised where the Glossary definitions are not relevant. The PRA considers that these changes are necessary for the final rules to be coherent and to have their intended effect.

Required level of own funds

Policy and rules

2.5 The following minor changes, though not substantive, require further explanation for clarity:

• An additional point (d) has been added to Article 92(2A) of the Required Level of Own Funds (CRR) Part to clarify that for a firm that is an international subsidiary, the total risk exposure amount (TREA) shall be the unfloored total risk exposure amount (U-TREA) calculated in accordance with Article 92(3);
• Article 92(3A) of the Required Level of Own Funds (CRR) Part has been streamlined to clarify the calculation of the standardised total risk exposure amount (S-TREA) for the purposes of a firm’s output floor calculation. S-TREA shall be calculated as the sum of points (a) to (f) of Article 92(3) without use of the approaches listed in Article 92(3A)(b)(i-v), or as if permission to use those approaches had not been granted;
• Amendments have been made throughout to streamline and improve the clarity of the requirements relating to the level of application of the output floor by: clarifying that the definition of ‘international subsidiary’ does not include ring-fenced banks, which is the policy as published in CP16/22 and PS9/24; deleting Required Level of Own Funds (CRR) Part 2.3, which was deemed unnecessary and therefore removed to improve clarity; and amending Article 92(2A) to improve clarity by ensuring that the rules more clearly match the policy as published in CP16/22 and PS9/24; and
• The transitional factors listed in Article 92(5)(a-d), used for the purposes of an ‘institution’ or ‘CRR consolidation entity’ to calculate TREA, have been updated to reflect the PRA’s delay to implementation of Basel 3.1 to Friday 1 January 2027.

Credit risk: Standardised Approach

Policy and rules

2.6 The following minor changes, though not substantive, require further explanation for clarity:

• Table A1 in Article 111 of the Credit Risk: Standardised Approach (CRR) Part has been amended to ensure the final rules do not result in consequential changes to the Net Stable Funding Ratio under Articles 428ra and 428s of the Liquidity (CRR) Part. The PRA considers that these amendments do not change the near-final policy applicable to the relevant exposures under the standardised approach;
• In its near-final policy, the PRA removed the ‘institutions and corporates with a short-term credit assessment’ exposure class from Article 112 of the Credit Risk: Standardised Approach (CRR) Credit Risk Part of the PRA Rulebook as these exposures will be treated under the institutions exposure class or corporate exposure class, as appropriate. The PRA has maintained this approach in its final rules. The PRA clarifies that this affects the definition of relevant credit exposures used in the Countercyclical Capital Buffer (CCyB) and the Small Domestic Deposit Takers (SDDT) criteria and has not made any amendments to the relevant SDDT and CCyB rules in response to the changes to Article 112. The PRA considers that its analysis in relation to this change set out in PS9/24 remains appropriate;
• Article 123B of the Credit Risk: Standardised Approach (CRR) Part has been amended to clarify the treatment of revolving facilities that can be drawn in multiple currencies. Firms are expected to ignore any current drawings and assume that the facility is fully drawn in a currency that differs from the main source of income, and which would not be sufficiently hedged, unless the facility cannot be drawn in any currency meeting these conditions. The same article has also been amended to clarify that in the case where there is a special purpose vehicle (SPV) with one or more individual guarantor(s), hedges held by the guarantor can be considered in addition to hedges held by the obligor when determining whether a mismatch is hedged;
• Articles 123 and 124L of the Credit Risk: Standardised Approach (CRR) Part have been amended to clarify that where an exposure is to a natural person who meets the definition of a small and medium sized enterprise (SME), firms must treat it as an exposure to an SME for the purpose of determining if it is a retail exposure and for determining the relevant counterparty risk weight for real estate exposures. The PRA notes that exposures to SMEs must only be classified as retail exposures if they meet the criteria to be deemed a regulatory retail exposure. Unsecured exposures to SMEs which do not meet these criteria and for which a credit assessment by a nominated external credit assessment institution (ECAI) is not available will receive the 85% risk weight for an exposure to SME that is not a retail exposure, as opposed to the 100% risk weight assigned to ‘other retail’ exposures;
• The requirements to revalue real estate collateral in Article 124D of the Credit Risk: Standardised Approach (CRR) Part have been clarified. Firstly, the PRA has clarified that firms must obtain an updated valuation due to a broader decrease in market prices if they estimate that the value of the property has fallen by more than 10% from the recorded value of the property at the last valuation event. Secondly, the PRA has amended Article 124D such that, for existing exposures where the most recent value at origination was obtained more than five years ago (or three years ago in certain circumstances), firms may use the most recent valuation obtained prior to 1 January 2027 (ie it does not need to be the value at origination). The PRA notes that firms would have to update this valuation within a reasonable amount of time if it was obtained more than three or five years ago (as applicable). The PRA considers that this change is consistent with the requirement to use the most recent valuation where firms cannot practically obtain a prior value at origination;
• Changes have been made to Article 124E (which states that an exposure is materially dependent on cash-flows generated by the property unless certain criteria are met) to clarify that firms must carry out an assessment of whether a real estate exposure is materially dependent on the cash-flows generated by the property for all residential and commercial real estate exposures. Therefore, firms will need to undertake an assessment by 1 January 2027 for all existing exposures at that date; and
• The permission in Article 129(1B) of the Credit Risk: Standardised Approach (CRR) Part of the near-final rules has been removed to reflect that the permission will be obsolete due to broader changes to the treatment of eligible covered bonds in Article 129 of the Credit Risk: Standardised Approach (CRR) Part.

Supervisory statements

2.7 The PRA has made non-substantive changes to SS10/13 – Credit risk standardised approach (Appendix 6) to:

• introduce further expectations to clarify how the PRA expects firms to nominate ECAIs for risk weighting purposes in accordance with Article 138 of the Credit Risk: Standardised Approach (CRR) Part and how it expects firms to select the appropriate credit assessment to determine the risk weight where no issue-specific credit assessment is available; and
• provide greater clarity on the two elements involved in determining whether there is a currency mismatch in accordance with Article 123B of the Credit Risk: Standardised Approach (CRR) Part and the situations when it is necessary to reassess whether the currency mismatch multiplier should apply.

Credit risk: Internal Ratings Based Approach

Policy and rules

2.8 The following minor changes, though not substantive, require further explanation for clarity:

• Articles 160, 161, 163 and 164 of the Credit Risk: Internal Ratings Based Approach (CRR) Part have been amended to clarify the relationship between the possible probability of default (PD) and loss given default (LGD) treatments of purchased receivables, and which methods are available under the foundation internal ratings based (IRB) (FIRB) approach or the advanced IRB (AIRB) approach; and
• Article 164 of the Credit Risk: Internal Ratings Based Approach (CRR) Part has been amended to correct an error in the calculation of the LGD input floor for retail exposures, where the near-final rules published with PS9/24 erroneously set an LGD floor of 25% for the unsecured portion of a partially secured exposure, rather than 30% as described in CP16/22.

Supervisory statements

2.9 The PRA confirms that its final policy withdraws SS11/13 – Internal Ratings Based approaches with effect from Friday 1 January 2027.

Permissions

2.10 The PRA set out in paragraph 3.11 of PS9/24 that it would use its power under section 144G of FSMA 2000 to amend saved internal rating based (IRB) approach permissions such that firms would be required to implement restrictions on the scope of IRB models with effect from Thursday 1 January 2026. To reflect the subsequent delay to the implementation of Basel 3.1, the effective date has been updated to Friday 1 January 2027. Relatedly, the PRA clarifies that:

• where a firm has permission to use the FIRB approach or the AIRB approach for income-producing real estate (IPRE) (which may include high-volatility commercial real estate (HVCRE) as defined in the final rules), the PRA will amend saved IRB permissions to require the firm to adopt the SA instead. The firm may however apply to the PRA to adopt the slotting approach instead for these portfolios; and
• where a firm is using the slotting approach for exposures that are currently categorised as IPRE, the PRA will amend saved IRB permissions to require firms to instead categorise these exposures as HVCRE where the exposures meet the definition of HVCRE set out in the final rules.

2.11 The PRA has also set out further detail on a number of issues relating to IRB permissions in an amendment to its Authorisations webpage on Basel 3.1 permissions.^{footnote [7]}

Credit risk: Credit Risk Mitigation

Policy and rules

2.12 The following minor changes, though not substantive, require further explanation for clarity:

• Article 197 of the Credit Risk: Credit Risk Mitigation (CRR) Part has been amended to clarify that the central government issuer rating may be used to determine whether unrated securities issued by unrated central banks may be treated as eligible collateral (consistent with the approach set out in Article 114(2A) of the Credit Risk: Standardised Approach (CRR) Part), and to clarify the use of issuer ratings to determine the eligibility of unrated securities issued by central governments or central banks more widely;
• The PRA has amended the Credit Risk Mitigation (CRR) Part of the near-final rules to correct an error relating to the treatment of long settlement transactions (LSTs). The near-final rules did not correctly reflect that, where a firm does not have an IMM permission for LSTs, it may choose to either apply counterparty credit risk or credit risk mitigation provisions to determine capital requirements for LSTs. The PRA further clarifies that the description of this error in paragraph 3.9 to 3.10 of PS19/25 was incorrect and should therefore be disregarded (although the near-final rules published alongside PS19/25 were substantively correct); and
• In paragraphs 4.32 to 4.36 of PS9/24, the PRA clarified the application of rules permitting extended collateral eligibility to margin lending transactions set out in Article 299A of the Counterparty Credit Risk (CRR) Part. This clarification included an incorrect assertion that ‘repurchase transactions’ only include title-transfer transactions. The PRA confirms that the definition of ‘repurchase transaction’ currently set out in CRR Article 4(1)(83) has not changed and PS9/24 should not be read as changing how it is interpreted. The PRA consulted in CP19/25 on transferring this definition to the PRA Rulebook Glossary without amendment, and the PRA will publish its response to that consultation in due course.

Operational risk

Policy and rules

2.13 The following minor changes, though not substantive, require further explanation for clarity:

• Article 5.4 of the Operational Risk Part has had an additional limb (4) added to clarify that at the financial year end, the current financial year must be included in the calculation of the three-year average for the purposes of the Business Indicator. When audited figures for the current financial year are not available, firms should use business estimates rather than outdated audited data; and
• The following amendments were made to reflect the technical amendments made by the Basel Committee on Banking Supervision:^{footnote [8]}
  • Article 7.2 (4)(e) of the Operational Risk Part has been amended to clarify that it does not require the presence of legal risk for a loss resulting from an operational loss event to qualify as an operational loss.
  • Article 7.2 (6)(b) of the Operational Risk Part has been amended to clarify that firms must use the date of accounting in all cases when building the loss data set, including for losses related to legal events.

Supervisory statements

2.14 The PRA confirms that its final policy withdraws SS14/13 – Operational risk with effect from 1 January 2027.

Reporting and disclosure templates and instructions

2.15 The PRA has made non-substantive amendments, corrections and clarifications to reporting and disclosure templates and instructions, including:

• Aligning the disclosure of exposures subject to the IRB Transitional Approach for equity exposures (Rules 4.4 to 4.10 of the Credit Risk: General Provisions (CRR) Part) in templates CMS1 and CMS2 with the approach to reporting these exposures;
• Updating fields in templates pertaining to the output floor calculation (OF 02.00, OF 02.01, UKB CMS 1, PRA 112 and PRA 113), and associated instructions, to align with changes to Article 92(3A) outlined in paragraph 2.5 of this PS;
• Updating instructions for OF 16.03 to clarify what must be reported within each bucket amount in the Business Indicator Component template for the purposes of calculating Operational Risk RWAs;
• Updating instructions and templates for OF 16.04 and UKB OR2, to clarify what must be reported in the Business Indicator and subcomponents template for PRA-approved excluded divested activities; and
• Deleting Article 430a of the Reporting (CRR) Part (the requirement to report losses stemming from exposures secured by immovable property) and template C 15.00, as these will become redundant following the revocation of CRR Article 124(2). This deletion is unrelated to the wider work on deletions the PRA consulted on per its consultation paper CP21/25.

Interim Capital Regime

2.16 As set out in PS20/25 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) – near-final and PS4/26 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) – final, given the implementation dates for the Basel 3.1 standards and SDDT capital regime are aligned, the Interim Capital Regime^{footnote [9]} (ICR) is no longer required and existing ICR-related rules will be revoked and SoP2/23 deleted in its entirety. Therefore, the PRA has not made the ICR-related rules that were in the near-final rule instruments appended to PS17/23 and PS9/24.

3: Market risk

3.1 This chapter provides the PRA’s feedback to responses to CP17/25 – Basel 3.1: Adjustments to the market risk framework, and sets out the PRA’s final policy on market risk.

3.2 The PRA set out the near-final rules and policy material to implement the Basel 3.1 market risk framework, known as the Fundamental Review of the Trading Book (FRTB), through two publications: PS17/23 and PS9/24. Given continued uncertainty over the timing of the implementation of the FRTB in some other jurisdictions, the PRA consulted in CP17/25 on four proposed adjustments to the near-final market risk rules published in PS9/24, and the related supervisory statement published in PS17/23, namely:

• Proposal 1: delay the FRTB internal model approach (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;
• 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 to support the proportionate capitalisation of residual risks in the ASA; and
• Proposal 4: update reporting and disclosure obligations to align with the above proposals.

3.3 The PRA received seven responses to CP17/25. The respondents were supportive of the overall proposed approach. A number requested the PRA consider further measures to reduce the capital and operational impact. The PRA has considered all the responses, and its feedback is set out in the following sections. The structure is consistent with the proposals above. A number of respondents also requested clarifications on the published near-final rules and raised issues outside the scope of the proposals in CP17/25. Feedback to those broader responses is set out in the final section of this chapter.

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

3.4 The PRA proposed to delay implementation of the FRTB-IMA by one year to Saturday 1 January 2028. In the interim period from Friday 1 January 2027, firms would retain existing IMA model permissions. Positions not in scope of existing IMA permissions would move to the new standardised approaches, either the ASA or simplified standardised approach (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.

3.5 The PRA received seven responses to this proposal. All respondents supported the proposed delay to FRTB-IMA implementation. Respondents recognised the importance of international coordination on the market risk framework, including the benefit of aiming to broadly align implementation timelines for that part of the FRTB across major jurisdictions.

3.6 While supportive of the delay, six respondents highlighted a number of potential challenges in implementing the proposal. These included increased operational complexity due to the FRTB approaches having been built on different systems to those for the current market risk framework – both systems would need to be maintained for the interim period in order to run the existing IMA and the ASA. Three respondents noted the potential for double-counting of risks for positions partially modelled under existing IMA permissions. Finally, although not directly related to the proposal, a number of respondents highlighted challenges of identifying which positions need to move from the trading book to the banking book (and vice versa) under the new trading book boundary.

3.7 The respondents raising these challenges argued that the PRA should provide firms an option to retain positions not in scope of existing IMA permissions on the existing Standardised Approach – ie an option to fully delay implementation of the FRTB during the interim period. Respondents also recommended that the PRA delay the implementation of the new trading book boundary for firms alongside the FRTB-IMA delay.

3.8 The PRA acknowledges the proposal would result in some operational challenges for those firms that take the option to retain their IMA model for the interim year. However, those challenges should be considered alongside the benefit of the additional flexibility the proposal provides for firms – at their own discretion – above that provided in PS17/23 and PS9/24. The PRA notes the available evidence suggests that the operational challenges do not impact all positions and all firms. At the same time, the PRA can confirm that firms will retain the option to implement the ASA for their entire trading book from Friday 1 January 2027.

3.9 Having considered respondents’ arguments to delay the ASA for firms with existing IMA permissions, the PRA is of the view that this would distort competition. Firms without IMA permissions would be subject to the newest risk metrics and risk calibration, while the firms with IMA permissions – typically those with the largest market risks - could continue to remain on outdated calibrations and risk metrics. The PRA also notes that all firms have to calculate the ASA for the purpose of the output floor, so firms with existing IMA permissions would have to calculate it in any case. Similarly, delaying the boundary requirements for IMA firms only would mean different firms would allocate and capitalise the same position differently. The PRA considers this would not facilitate the secondary competition objective.

3.10 Having considered the responses; the PRA has decided to implement the proposed FRTB-IMA delay as set out in CP17/25. However, to address firms’ concerns on the challenges to implement the proposal, the PRA is clarifying that during the interim period:

• firms can continue to include trading book positions in their internal models in accordance with their existing IMA permission, where those trading book positions would otherwise be ineligible under FRTB-IMA (for example securitisation positions);
• for specific risks relating to securitisation and credit derivative positions and correlation trading portfolio as set out in Article 364(2) and (3) of Part A of Annex 3 of the Internal Model Approach (IMA) Part, firms can continue to capitalise these risks through the existing standardised approach where the firms do not have IMA permission for these specific risks;
• firms can continue to capitalise their interest rate internal hedge positions in the same portfolio with other trading book positions under their existing IMA permission, where those interest rate internal hedge positions would otherwise need to be capitalised separately under FRTB-IMA; and
• where firms’ existing IMA permission leads to double-counting of risk as a result of the FRTB-IMA delay, firms should raise this with their respective supervisors.

3.11 One respondent separately asked the PRA to clarify the process to revoke or amend existing IMA permissions during the interim period. The PRA can clarify that the existing process for revoking IMA permissions will apply, in accordance with Part 8 of the Capital Requirements Regulations 2013. Where firms intend to move completely to the ASA, this application and assessment will be proportionate to the risks. Where firms want to revoke part of their IMA permission, this would constitute a change to the permission. Firms must comply with the requirements for making changes to the permission in accordance with Article 363(3) of Part A of Annex 3 of the Market Risk: Internal Model Approach (CRR) Part. The PRA can also clarify that existing IMA permissions would cease to apply automatically at the end of the interim period.

Proposal 2: Implement operational simplifications to the treatment of CIUs in the trading book boundary and the ASA

3.12 The PRA proposed to implement two de minimis thresholds to make the market risk treatment more proportionate and reduce the frequency of cliff-edges in the framework, such that:

• 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 with a 70% risk weight under the ASA fall-back approach (FBA); and
• firms may use the market risk look-through approach (LTA) where at least 90 per cent of the CIU’s holdings (by value) can be looked through. The residual position would be capitalised with a 70% risk weight under the ASA FBA.

3.13 The PRA received five responses to this proposal. Respondents generally supported a de minimis threshold for trading book eligibility, noting that it would reduce cliff-edge effects and operational burden.

3.14 Four respondents argued that the proposed 90% threshold for LTA eligibility should be lower. They noted that it would still be challenging to obtain such a high level of transparency of CIUs holdings on a consistent basis, particularly for large or frequently traded CIUs. Instead, they suggested that the PRA either remove or lower the threshold to 50%. They noted that the residual positions would be conservatively capitalised under the ASA FBA and were of the opinion that such an approach would therefore not undermine the primary objective.

3.15 Having considered the responses, the PRA has decided to implement the de minimis threshold for trading book eligibility as consulted. However, for the LTA eligibility de minimis threshold, the PRA acknowledges the feedback that there could remain costs from some operational challenges for obtaining the required high level of transparency on CIUs on a consistent basis if a 90% threshold were applied. While the PRA notes that removing the threshold entirely would not directly lead to imprudent capital requirements, the PRA considers that firms should, as a matter of good risk management, have sufficient information on the products they invest in, and the risks they are exposed to. Therefore, prescribing a threshold is necessary to reflect that firms should only use the most advanced risk measures where they have a sufficient level of information on their underlying CIUs exposures, but that needs to be balanced against the costs of collecting the information. The PRA therefore has decided to retain a threshold for LTA eligibility but lower it to 50%.

3.16 The PRA considers this change advances the PRA’s primary objective and facilitates its secondary competition objective, by ensuring firms are managing the risk appropriately while reducing operational complexity.

3.17 Two respondents also requested clarification on the following issues related to CIUs:

• the definition of a CIU’s ‘value’ for the purposes of applying the relevant de minimis thresholds in the proposal;
• the treatment of ‘premium listings’ CIUs under FRTB, in light of the Financial Conduct Authority’s (FCA) decision to remove the term ‘premium listings’ and introduce the term ‘closed-ended investment funds’; and
• the treatment of real estate investment trusts (REITs) and real estate investment funds (REIFs) for trading book eligibility, where these instruments also qualify as CIUs.

3.18 Having considered the responses, the PRA has introduced clarifications by amending:

• SS13/13 to clarify how firms should estimate the ‘value’ of CIUs for the purposes of applying the relevant de minimis thresholds referred to this in this section;
• Article 325az(9) of the Market Risk: Internal Model Approach (CRR) Part and Article 325j of the Market Risk: Advanced Standardised Approach (CRR) Part respectively, to clarify that ‘closed-ended investment funds’ as defined in the FCA Handbook can be treated as listed equity; and
• Article 104(2)(h) of the Trading Book (CRR) Part, to clarify that shares or units in REITs and REIFs that also qualify as CIUs are not outside of the trading book solely under this provision.

Proposal 3: Introduce a permissions regime to support the proportionate capitalisation of residual risks in the ASA

3.19 In CP17/25, the PRA acknowledged that there may be a small number of instruments or business lines where the residual risk add-on (RRAO) capital requirement could be disproportionate to the risk. The PRA therefore proposed to introduce a permissions regime for the RRAO. Under the regime, where firms can demonstrate that the RRAO capital requirement is disproportionate, they may apply to the PRA to capitalise such risks using an alternative methodology. The PRA expects that the permission regime would only be applicable to a small number of instruments where the capital impact is likely to be material to firms.

3.20 The PRA received five responses to this proposal. All respondents welcomed the more proportionate treatment for instruments under RRAO. But some raised concerns that a permission regime could introduce disproportionate operational burden to firms, particularly for relatively simple, well-understood instruments that can be hedged and where they consider the risks are not material. They also noted that a permission regime could lead to inconsistent treatment of the same risk across firms, and across jurisdictions in cases where they apply exemptions. Instead, respondents argued that the PRA should exempt a pre-defined list of instruments from the RRAO framework.

3.21 Having considered the responses, the PRA has decided to implement the RRAO permissions regime as consulted.

3.22 In PS17/23, the PRA noted that positions in scope of the RRAO were subject to risks – potentially material – that are not captured elsewhere in the market risk framework. It follows that fully exempting instruments could leave risks uncapitalised, which would be inconsistent with the PRA’s primary objective. While the PRA also acknowledges the permissions regime may lead to some variation in approaches across firms, where differences arise, these should reflect firms’ own risk assessment and therefore appropriately align with how they manage those risks. Where firms identify that the residual risk is immaterial, the outcomes should not be materially different from jurisdictions that choose to exempt a list of products.

3.23 With regard to concerns over operational burden, while the PRA expects the methodology proposed by firms to be subjected to comparable internal governance and review processes that would be expected for an internal model, the RRAO application process will be separate from the internal models review. Given the approach is expected to apply only to a small number of material instruments, the application burden would be proportionate to the materiality of the risks. The PRA can also clarify that the permissions regime will operate on an ongoing basis, with permissions granted for each type of instrument to cover all current and future exposures to that instrument. Firms will be required to make a one-off application, identifying instruments within the scope of the RRAO where they can demonstrate that the RRAO is disproportionate. This one-off process per instrument ensures that ongoing operational burden remain minimal beyond the initial application.

3.24 Respondents also asked for clarification on the application process, including interaction with Pillar 2 requirements, and the interpretation of the rules related to offsetting in the RRAO.

3.25 To provide greater clarity and transparency on the approvals process, the PRA has updated the Permissions (CRR firms) webpage with documents setting out the format and content of the supporting information expected for Permissions applications to use alternative RRAO calculation, including expected timelines for approval.

3.26 With regard to offsetting of positions in the calculation of the RRAO, the PRA has clarified in Article 325u(4)(a) of the Market Risk: Advanced Standardised Approach (CRR) Part that firms can offset positions in the same instrument where the instruments are identical in all respects except for their notional amount, provided the offsetting position is with a third party. The PRA also expects firms to incorporate any relevant changes into their Pillar 2A calculation as a result of applying for the permission.

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

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

• retain the existing IMA reporting and disclosure templates for the period to Friday 1 January 2028;
• delay the introduction of the FRTB-IMA reporting and disclosure templates until Friday 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 Saturday 1 January 2028.

3.28 The PRA received three responses to the proposal. All respondents supported it. Respondents requested clarification on two issues:

• the reporting of the interest rate internal hedge portfolio under ASA; and
• the aggregation of reporting and disclosure requirements for PRA supervised firms with entities operating under different jurisdictions, particularly where some jurisdictions have not yet implemented Basel 3.1. 

3.29 Having considered the responses, the PRA has decided to implement the proposals as consulted on. The PRA has updated the market risk ASA reporting instructions to clarify the reporting requirements for firms with an interest rate internal hedge portfolio. The PRA notes that PRA-supervised firms with entities across different jurisdictions can find details of aggregation requirements in the Reporting (CRR) Part, and Disclosure (CRR) Part respectively.

Other responses not directly linked to proposals

3.30 In addition to responses linked to the CP proposals, the PRA also received comments requesting clarification on the PRA near-final rules related to the FRTB, and other broader comments that were outside the scope of this consultation.

3.31 Two respondents requested clarification on the treatment of To-be-Announced (TBAs) and deliverable pools eligible as Uniform Mortgage-Backed Securities (UMBS) under the ASA. The PRA can clarify that firms should treat Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank System as separate obligors. As the single security initiative led by Fannie Mae and Freddie Mac has homogenized the mortgage pool and security characteristics for UMBS, the PRA can also clarify that firms may treat TBAs and deliverable pools eligible as UMBS as a single name issuer, either to Fannie Mae or Freddie Mac, when applying the ASA.

3.32 Three respondents provided comments on the FRTB-IMA. The PRA notes that CP17/25 proposed a delay to the FRTB-IMA but did not at this stage suggest any changes while the PRA await greater clarity on the implementation plans in other jurisdictions. These areas are therefore outside the scope of the proposals in CP17/25, and the PRA has decided not to address them here.

3.33 Five respondents provided a range of other comments on technical adjustments to aspects of the ASA beyond those proposed in CP17/25, some of which were also raised and considered as part of developing the near-final rules. These are outside the scope of the consultation, and the PRA has therefore decided not to make these changes.

PRA objectives and ‘have regards’ analysis

3.34 The PRA considers that the assessment of its statutory objectives and the ‘have regards’ analysis due to the changes to the de minimis threshold for the LTA eligibility under the ASA and the clarification on the RRAO offsetting provision made above are materially consistent with the assessment set out in CP17/25. The PRA therefore considers that the assessment of its statutory objectives and the ‘have regards’ analysis presented in CP17/25 remains appropriate.

Amendments, corrections and clarifications to PS17/23

3.35 The PRA has also made minor amendments, corrections and clarifications to the policy, rules, and supervisory statements published as near-final in PS17/23. These include:

• The CRR risk weight for credit spread risk for non-securitisations and securitisations for the UK central government and Bank of England in Articles 325ah and 325ak of the Market Risk: Advanced Standardised Approach (CRR) Part, which has been re-instated to correct its unintentional omission in the near-final rules.

4: Capitalisation of foreign exchange positions for market risk

4.1 This chapter provides feedback to responses to CP17/23 – Capitalisation of foreign exchange positions for market risk, which set out the PRA’s proposed clarifications and amendments when capitalising foreign exchange (FX) exposures under the market risk framework. The PRA proposed that the changes would be implemented at the same time as Basel 3.1. This chapter also sets out the PRA’s final policy on capitalisation of FX positions for market risk following the consultation.

4.2 In CP17/23, the PRA proposed:

• to make changes to Article 325 of the proposed Market Risk: General Provisions (CRR) Part of the PRA Rulebook to clarify that items held on the balance sheet at historical FX rates are not to be included as a risk position for the purposes of calculating Pillar 1 capital requirements for market risk;
• that firms should take account of, and where necessary capitalise, the contingent FX risk arising from positions held at historical FX rates in the Internal Capital Adequacy Assessment Process (ICAAP) Pillar 2 calculations under the Internal Capital Adequacy Assessment (ICAA) Part of the PRA Rulebook;
• to amend Article 325(9) of the proposed Market Risk: General Provisions (CRR) Part of the PRA Rulebook and SS13/13 – Market Risk to set out the types of positions which firms can exclude from the calculation of own funds requirements for foreign exchange risk where they have a permission under Article 325(9) to do so (an ‘SFX Permission’);^{footnote [10]}
• to set out expectations in SS13/13 on the calculation of the maximum net FX risk position and the overall net FX position for the own funds calculation for firms with an SFX Permission; and
• to update the supplementary application form for an SFX Permission.

4.3 The PRA received five responses to the proposals. Three respondents welcomed the PRA’s proposal to clarify capitalisation of FX positions under the market risk framework. All respondents asked for further clarification in some areas. Comments focused on:

• the treatment of items held at historical FX rates in the Pillar 1 market risk calculation;
• how contingent FX risk should be considered under Pillar 2;
• the proposed changes to rules and expectations regarding SFX Permissions; and
• the process to update SFX Permissions.

4.4 Having considered the responses, the PRA has decided to amend the draft rules and expectations in certain areas. This chapter describes the comments and amendments that the PRA considers are more material. The PRA has also made a number of non-substantive amendments and clarifications, which are not described in this chapter. All amendments are reflected in the appendices to this PS.

4.5 The appendices to this policy statement contain the PRA’s final policy, which will:

• amend Article 325 (Approaches for Calculating the Own Funds Requirements for Market Risk) in the Market Risk: General Provisions (CRR) Part of the PRA Rulebook (see Appendix 1);
• amend SS13/13 – Market Risk (see Appendices 11 and 12); and
• amend Annex II – Instructions for reporting on own funds and own funds requirements (see Appendix 17).

4.6 The sections below have been structured broadly along the same lines as CP17/23, covering the main areas where the PRA received comments from respondents, as follows:

• treatment of items held at historical FX rates in the Pillar 1 market risk calculation;
• the Pillar 1 structural FX treatment; and
• other items, including process-related aspects.

Treatment of items held at historical FX rates in the Pillar 1 market risk calculation

4.7 In CP17/23, the PRA proposed to clarify that positions held at historical FX rates in accordance with the relevant accounting principles are not to be included in the calculation of own funds requirements for market risk as these positions do not typically affect capital ratios. The PRA proposed to achieve this by amending Article 325 of the Market Risk: General Provisions (CRR) Part of the PRA Rulebook. The PRA proposed that this would apply to all market risk calculation approaches, including the SSA, ASA and IMA. The PRA noted that it considers that firms should take account of, and where necessary capitalise, the contingent FX arising from these positions in the ICAAP Pillar 2 calculations under the ICAA Part of the PRA Rulebook.

4.8 The PRA received two responses to these proposals. Both respondents welcomed the PRA’s proposal that positions held at historical FX rates in accordance with the relevant accounting principles are not to be included in the calculation of own funds requirements for market risk. One respondent pointed out that some adjustments may be needed to cover situations where an item is held at historical cost on the entity balance sheet but retranslated in the consolidated balance sheet. Both respondents asked for further detail on how the assessment of contingent FX would work under Pillar 2.

4.9 Having considered the responses, the PRA has updated SS13/13 to provide additional guidance in paragraph 3B.2A on how the requirements to exclude certain items held at historical FX rates from the Pillar 1 market risk calculation are to be applied.

4.10 The PRA has also amended the rule requiring positions held at historical cost to be excluded from the Pillar 1 market risk calculation, to better reflect its policy intent, as follows:

• to clarify that items held at historical FX rates should be excluded from the calculation of own funds requirements for foreign exchange risk (not the calculation of own funds requirements of all aspects of market risk);
• to remove the criteria which specified that items must only be excluded if they are subject to the risk of impairment due to foreign exchange risk, as retaining this would preclude the exclusion of liability or equity items held at historical cost; and
• to make minor amendments to the numbering of the rule.

4.11 In relation to the assessment of contingent FX under Pillar 2, the PRA intends to consider this as part of Phase 2 of its Pillar 2A review.

The Pillar 1 Structural FX treatment

4.12 In CP17/23, the PRA proposed to replace its expectation on firms seeking an SFX Permission that they segregate their SFX positions from other trading activities, with a requirement for firms to do so. The PRA also proposed to further clarify its expectations for the calculation of the net FX risk position, and the expectations for the SFX Permission by specifying:

• the consolidation level for booking the risk positions;
• the calculation of the overall FX risk position;
• a proposed formula for the calculation of the net maximum risk position per currency used for the SFX Permission;
• the treatment of credit risk and non-credit risk RWAs in the calculation of the net maximum risk position; and
• the removal of several expectations which are already incorporated in, or proposed as, rules.

4.13 One respondent commented that, in their view, it was unclear at which level of application the requirements and expectations should be met in relation to an SFX Permission. The respondent suggested that assessments should be made at the highest relevant level of consolidation for risk positions deliberately taken or transacted to manage SFX risk as applying these to standalone RWA portfolios would be unnecessarily burdensome. Another respondent suggested that the PRA’s proposed expectations around the consolidation level for booking the risk positions could be misinterpreted as the PRA suggested that solo entities subject to FX risk are not allowed to take advantage of the SFX Permission.

4.14 Having considered the responses, the PRA has provided updated guidance in paragraphs 3B.2A and 3B.2B of SS13/13 on the level of application at which requirements and expectations should be met in relation to an SFX Permission. The updated guidance explains that:

• firms will need to assess the criteria for exclusion of positions at the level of application for which positions are being considered for exclusion;
• a firm seeking to exclude a position under an SFX Permission should consider the effects on its capital ratios at both consolidated and solo levels of the positions it uses to hedge against the adverse effect of foreign exchange rates on its capital ratios; and
• the PRA will generally only consider applications to exclude a position at the level(s) of consolidation for which the position acts as a hedge against the adverse effect of foreign exchange rates on the firm’s capital ratios.

4.15 One respondent noted that in practice hedging transactions may not always be undertaken by the entity exposed to the SFX risk but by another entity in the group, and then a ‘back-to-back’ model utilised to move the economic exposure to the right entity location. The respondent asked for confirmation that the SFX Permission should be applicable in the entity where the economic exposure exists, rather than in the entity executing the trade external to the group.

4.16 Having considered the response, the PRA considers that the additional guidance it has set out in paragraphs 3B.2A and 3B.2B of SS13/13 would address situations where a firm makes use of such back-to-back arrangements. Provided the relevant entity is able to meet the PRA’s requirements and expectations for use of the SFX Permission at the relevant level of application:

• the group would be able to exclude the position undertaken with the counterparty external to the group from the calculation of consolidated own funds requirements for foreign exchange risk; and
• the entity with a ‘back-to-back’ transaction with another group entity would be able to exclude that position from the calculation of its individual own funds requirements for foreign exchange risk.

4.17 One respondent asked that the formula proposed by the PRA for the maximum size of the eligible position to be exempted under the SFX Permission be updated to include additional items such as derivative hedging, non-derivative hedging and currency Common Equity Tier 1 (CET1) deductions, or that the PRA confirm that these items be included when calculating the net open FX position calculated under Article 352.

4.18 Having considered the response, the PRA has introduced a derogation to Article 325(1) to require an institution not to calculate own funds requirements for foreign exchange risk for trading book positions and non-trading book positions that are subject to foreign exchange risk where those positions are deducted from the institution’s own funds. Instead, the institution will be required to document its use of the derogation, including its impact and materiality, and make the information available, upon request, to the PRA.

4.19 One respondent asked the PRA to update its expectation of amounts which can be exempted under the SFX Permission to also exempt FX transactions which may act as hedges of equity-accounted foreign currency denominated Additional Tier 1 (AT1) instruments in the year of an expected call of the AT1 instrument. The respondent explained that such transactions would currently be included in the calculation of capital requirements from FX risk, which could result in intra-year capital volatility which, in its view, could discourage firms from taking an effective risk management approach in relation to the AT1 call.

4.20 Having considered the response, the PRA has decided not to exempt under the SFX Permission any FX transactions which may act as FX hedges of equity accounted foreign currency denominated AT1 in the year of an expected call on the AT1 instrument. The PRA notes that, prior to the exercise of a call on such an AT1 instrument, there is uncertainty over whether the FX position arising from the call will crystallise. For example, the firm could decide not to call the equity accounted foreign currency AT1 instrument, or the firm could decide to call the instrument and immediately reissue a similar instrument in the same currency to replace it. The PRA considers that granting capital relief for potential hedges on an uncertain event is not in line with the principle of risk sensitivity under the capital framework as the transactions do not reduce existing risk. Firms are able to put such transactions in place should they wish to hedge potential FX risk arising from potential AT1 calls but will need to include the relevant FX position in the calculation of their capital requirements arising from FX risk.

4.21 One respondent indicated that the maximum size of the eligible position to be exempted under the SFX Permission should be based on the firm’s target ratio instead of its current ratio.

4.22 The PRA considers that the maximum size of the eligible position to be exempted under the SFX Permission should be based on the firm’s current ratio as this reflects the actual currency amount for which the firm’s capital ratio is not sensitive to exchange rate movements and not forecasts or targets which are subject to change and uncertainty. The PRA has updated SS13/13 to make it clear that the maximum risk position should be calculated based on the current capital ratio, at the relevant level of application of the entity. The PRA has further updated SS13/13 to clarify that: a firm should confirm that only mismatches resulting in an open structural FX position other than those it deliberately takes or maintains to protect its capital ratios should be avoided as far as possible; and that firms should confirm that they minimise any residual risks arising from structural FX positions, and consider such residual risks in their Pillar 2 assessment.

4.23 One respondent supported the PRA’s proposal that firms should at a minimum include their foreign currency credit risk RWAs for the purposes of determining the maximum position to be excluded under the SFX Permission and may include foreign currency non-credit RWAs provided the PRA has reviewed and agreed their methodology for doing so. However, the respondent asked for further clarity on the definition of which RWAs are to be considered as ‘credit risk’ RWAs under the PRA’s proposal.

4.24 The PRA has updated its expectation in SS13/13 to clarify that ‘credit risk’ RWAs for the purposes of the PRA’s expectation refers to the definition in Article 92(3)(a) of the Required Level of Own Funds (CRR) Part of the PRA Rulebook.

Other items

Implementation date

4.25 In CP17/23, the PRA proposed to implement the changes arising from the consultation on 1 January 2025, alongside the PRA’s implementation of Basel 3.1. The PRA received no responses commenting on this proposal.

4.26 The PRA has determined that the final policy will be implemented alongside the PRA’s updated implementation date for Basel 3.1 on Friday 1 January 2027.

Process

4.27 In CP17/23, the PRA proposed to update the supplementary application form to be submitted by firms applying for SFX Permissions.

4.28 One respondent asked for further details on the process to be followed for obtaining the PRA’s agreement to the firm’s proposed methodology for inclusion of non-credit risk RWAs in the maximum risk position per currency. The respondent asked the PRA to consider a transitional period to ensure any change in approaches can be made before the PRA’s proposed changes to rules and expectations take effect. Another respondent asked that existing SFX Permissions continue rather than having to seek new SFX Permissions in light of changes to the PRA’s SFX policy and permission application forms. The respondent considered that new or updated permissions should be sought only when there are material changes such as a fundamental change to strategy or hedging approach.

4.29 The PRA notes that existing SFX Permissions issued under Article 352(2) CRR will be saved under the Basel 3.1 transitional rules as if granted by the PRA under Article 325(9) of the Market Risk: General Provisions (CRR) Part of the PRA Rulebook.^{footnote [11]} The PRA notes further that, as set out in paragraph 2.34 of CP17/23, the PRA considers that existing SFX Permissions incorporate the changes the PRA had proposed in that CP.

4.30 The PRA therefore does not consider that firms with existing SFX Permissions will be required to update those permissions simply because of the publication of this final policy. However, should a firm with an existing SFX Permission propose to make changes to its approach following publication of this final policy, it should discuss the proposed changes with its supervisors as the firm may need to apply for a new SFX Permission in light of the changes to its approach.

4.31 The PRA considers that the implementation date of Friday 1 January 2027 provides firms with sufficient time to implement any such changes in approach and therefore no specific transition period is necessary.

4.32 The PRA has also published the updated supplementary application form to be submitted by firms applying for SFX Permissions under the final Basel 3.1 rules to incorporate the changes made in the final policy.^{footnote [12]}

Examples

4.33 One respondent asked that the PRA provide an example of how the formulae set out in the CP17/23 should be used and interpreted.

4.34 The PRA has decided not to provide an example as it considers that the explanations it has provided in this chapter, together with the additional guidance it has provided in the accompanying appendices, provide firms with the information they need to understand how the final policy should be used and interpreted.

Changes to reporting instructions

4.35 The PRA has made changes to Annex II – Instructions for reporting on own funds and own funds requirements (see Appendix 17) to incorporate the changes set out in this chapter in the reporting instructions for the OF 22.00 template.

PRA objectives and ‘have regards’ analysis

4.36 The final policy set out in this chapter is materially aligned with the proposals in CP17/23 and the PRA therefore considers its analysis of its objectives and ‘have regards’ in CP17/23 remains appropriate.