Shearman & Sterling LLP | FinReg | UK Regulator Publishes Policy Statement on Eligibility of Financial Collateral Under Capital Requirements Regulation
Financial Regulatory Developments Focus
This links to the home page
  • UK Regulator Publishes Policy Statement on Eligibility of Financial Collateral Under Capital Requirements Regulation
    The U.K. Prudential Regulation Authority has published the final version of its amended Supervisory Statement on credit risk mitigation, providing additional clarity on the eligibility of financial collateral under the Capital Requirements Regulation. The Supervisory Statement is published alongside the PRA's Policy Statement, which provides feedback on the responses to the PRA's consultation paper on the same topic launched in January this year. The amendments to the Supervisory Statement are effective as of July 23, 2019, the date the Policy Statement is published. Firms with concerns about their ability to comply with the revised Supervisory Statement are advised to liaise with their usual supervisory contacts.
    The PRA's consultation was triggered by the PRA's finding that firms were not always determining the eligibility of their financial collateral correctly, in particular as to whether the credit quality of the obligor had a material positive correlation to the value of the collateral. In its Policy Statement, the PRA sets out the responses it received from consultation participants on the CRR requirements on correlated collateral, the material positive correlation in transactions with no or limited recourse to other assets beyond financial collateral. It also sets out responses on other issues such as the impact of the PRA's guidance on the U.K. structured lending market and the possibility of alternatives to the PRA's proposed policy given the significant change in regulatory treatment that the policy would entail. The PRA rejected the call for further consultation, but has taken into account certain other suggestions of the consultation participants.
    The amended Supervisory Statement now contains guidance confirming that:
    • Firms should consider the characteristics of the obligor, transaction and collateral when establishing whether a financial collateral asset is eligible for the purposes of the CRR;
    • Any financial collateral asset whose value has a material positive correlation with the total value of all the assets to which the lender has legal recourse would be regarded as having a material positive correlation for the purposes of the CRR; and
    • The PRA expects firms to disregard collateral that has a material positive correlation when modelling the effect of collateral using internal approaches.
    View the PRA's amended Supervisory Statement.
    View the PRA's Policy Statement.
    View details of the PRA's Consultation Paper.
    Return to main website.