PRA sends firms letters on trading book fundamental review

The Prudential Regulation Authority (PRA) has sent firms a letter setting out its approach to the “Fundamental Review of the Trading Book” (FRTB), on which it will consult in Q4-2022 as part of its review of the UK implementation of Basel 3.1 with a planned implementation date of 1 January 2025.

The Basel 3.1 framework removes the existing IMA methodologies, replacing them with new market risk rules introduced by FRTB, thereby making existing internal model permissions for market risk redundant. Current IMA firms would automatically move to the new standardised approach (SA) when the new rules are implemented and be granted new IMA permissions under FRTB by the PRA. Firms should submit final pre-application materials at least 12 months in advance by 1 January 2024.

The PRA has also planned in-depth reviews on selected topics of the new FRTB-IMA including:

  • Q4-2022 – Default Risk Charge (DRC)
  • Q1-2023 – Risk factor eligibility test (RFET)
  • Q2-2023 – Non-modellable risk factors (NMRF)
  • Q3-2023 – P&L attribution test (PLAT) and back-testing

The PRA intends to conduct a further round of benchmarking ahead of implementation to gain further assurance on the accuracy and consistency of firms’ implementation of the SA. This will take place during 2023/2024 and cover all PRA-regulated firms in scope of the new SA.

FIN. Team