Few days ago, the Prudential Regulation Authority (PRA) published a letter to firms on the Fundamental Review of the Trading Book, setting out its proposed approach to implementation. Check-out CubeMatch UK Head of Risk Management, Francis Kiwanuka's key takeaways.
Internal Model Approach
- Planned UK implementation date: Wednesday 1 January 2025.
- Existing IMA methodologies will be removed, replacing them with an entirely new Basel 3.1 framework.
- Current model permissions for market risk will become redundant post finalization of draft rules and results of forthcoming consultation.
- PRA is not planning to consult on any temporary extension of existing modelling regimes or permissions.
- When new rules take effect, current IMA firms would automatically move to SA; unless PRA grants IMA permission under FRTB.
- Firms are supposed to submit final pre-application materials at least 12 months before the implementation date: Monday 1 January 2024.
- Firms submitting after this date will use the SA pending completion of their model review.
- PRA is planning reviews/ feedback for new features of FRTB-IMA in:
- 1) Q4-2022 – Default Risk Charge (DRC).
- 2) Q1-2023 – Risk factor eligibility test (RFET).
- 3) Q2-2023 – Non-modellable risk factors (NMRF).
- 4) Q3-2023 – P&L attribution test (PLAT) and back-testing.
- Numerous provisions in the standardized approach will require regulatory permission.
- Firms are supposed to submit pre-application materials at least 12 months in advance of UK implementation; to allow sufficient time for review.
- To maintain the accuracy and consistency of firms’ implementation of the SA, the PRA will benchmark PRA-regulated firms in the scope of the new SA in 2023/2024.
- The methodology is unlikely to deviate significantly from the recent round of ISDA FRTB-SA benchmarking voluntarily undertaken by firms.