July 2021 Regulation Update

Leverage Ratio Reporting

The PRA issued consultation paper 14-21 and detailed its proposals for the future leverage ratio framework in the UK. The intention is to remove FSA083 and all COREP leverage ratio templates. In their place will be five new UK specific forms. Frequency of reporting will remain quarterly and submissions required from all institutions. It is understood that most FCA solo regulated investment firms will be moving to the new regime (IFPR) and so these leverage ratio (and disclosure) changes will not be applicable to them.

Disclosures will be impacted through a new leverage ratio form and an amended Key Metrics template.

As at the date of this article, only those firms that have retail deposit liabilities of at least £50bn are subject to the UK Leverage Ratio Framework.

Under the proposal, a firm that has non-UK assets (understood to mean where the counterparty is resident outside of the UK) averaged over three years, of at least £10bn, will be under the framework’s requirements.  These requirements include:

  • 25% minimum leverage ratio
  • 75% of the capital to meet that minimum must be in common equity tier one. Any additional tier one must have a conversion trigger. That trigger needs to occur when common equity tier one falls below 7% of a firm’s total risk weighted exposure.
  • Countercyclical leverage ratio capital buffer
  • Calculation of the leverage ratio using averaged daily on balance sheet exposures

Effective Dates:

1st January 2022

  • New reporting templates that will replace existing FSA083 and COREP leverage
  • Disclosures (revised Key Metrics and leverage ratio forms). Whistlebrook understands that the first affected disclosure will be for a firm’s financial year ending after the aforementioned effective date.
  • Firms that do not meet the £50bn retail deposit liability or £10bn non-UK assets thresholds, will still be expected to adhere to the minimum leverage ratio of 3.25%. Capital needed to for that leverage ratio should be at least 75% in common equity tier one.

1st January 2023

For firms that become subject to the framework for the first time, the following will apply.

  • Leverage ratio capital buffers
  • Additional reporting (leverage ratio calculated using averaging and buffers)

Further details are in CP14/21 – Consultations by the FPC and PRA on changes to the UK leverage ratio framework | Bank of England

OSCA Replacement

The Bank of England hosted a meeting about the OSCA replacement project. Publication by the Bank, of taxonomy 1.2, final version, is delayed until mid-late August. It is understood that this delay is due to a decision by the Bank not to include interval arithmetic in its validation rules.

Basel III

PRA policy statement 17-21 was issued in follow up to CP 5-21 and provides “near final” requirements, effective from 1 January 2022. Of note, Whistlebrook understands that there are a few changes and clarifications.

Counterparty Credit Risk

If a firm were to breach a threshold to use one of the simpler standard methods, it will have six months (rather than 3 proposed) to make the transition.

Large Exposures Reporting

At a consolidated level, firms will need to report:

  • 10 largest exposures to institutions AND
  • 10 largest exposures to shadow banks

Net Stable Funding Reporting

Required stable funding factor for residential mortgages under the simplified NSFR is reduced to 65% (proposed as 85%), in line with the full standardised NSFR.

COREP Market Risk Reporting

The market risk templates (C 90 and C 91) will not be implemented until 1 January 2023. Therefore these templates, proposed in consultation paper 5-21, will not be included in the next release of Wires (expected at the end of July).

UK Mortgages Risk Weight Floors

The PRA published policy statement 16-21, in response to feedback on its consultation paper 14-20. These publications concerned the introduction of risk weight floors on UK residential mortgages, upon which the IRB approach is used. The proposal will be introduced, but not fully.

Only the 10% weighted average risk weight floor will be implemented. The 7% floor at an individual exposure level is not to be applied. Only UK residential mortgages not in default, where IRB is being used to calculate the risk weighted exposure, are relevant here.

The policy will be effective from 1 January 2022.

Bank of England Buy to Let Reporting

Validation rule changes are to be made with this reporting and are effective for report reference dates after 31 July 2021. Once the relevant schema has been issued by the Bank of England, Wires will be updated. The revisions to validations will allow credit scores between 0 and 2000 to be entered. There will be no rules on rates for both gross interest and stress.

Bank of England Taxonomies Clarification

3.4 – update to PRA101-108 to align with changes to certain COREP forms in EBA taxonomy 3.0. The adjustments to the PRA templates are effective from 1 January 2022 and will be made available in Wires nearer the time.

1.2 – associated with changes to Bank of England Statistical reporting (move from OSCA to BEEDS).

This regulatory update is Whistlebrook’s understanding of the position as at 22nd July 2021.