PRA proposes one-year delay to Basel 3.1 market risk internal models
The Prudential Regulation Authority (the PRA) published a consultation on its internal model approach to market risk, calling the IMA the final piece of the Basel 3.1 package and proposing a one‑year delay of the Fundamental Review of the Trading Book internal model approach (FRTB‑IMA) to 1 January 2028, along with targeted operational and proportionality measures.
Why the delay matters
The PRA says the delay gives additional time to align the UK’s implementation of the most cross‑border parts of the FRTB with other major jurisdictions and to preserve proportionality for firms with limited market‑risk or cross‑border activity. The consultation describes the change as a way to balance international alignment with practical application across different firm types.
FRTB‑IMA timing and interim supervision
The PRA proposes postponing the start date for FRTB‑IMA to 1 January 2028.
- Existing permissions: Firms with current IMA permissions may continue to use those permissions for eligible positions during the interim period.
- Back‑testing and review: Existing FRTB‑IMA models will remain subject to back‑testing and supervisory review during the one‑year delay; firms will not receive a back‑testing holiday.
- Transitional year mechanics: From 1 January 2027, other elements of Basel 3.1 will take effect while FRTB‑IMA remains deferred, creating a transitional hybrid framework in which in‑scope positions may remain on IMA and out‑of‑scope positions are capitalised under the new standardised approaches.
Trading‑book boundary, CIUs and the ASA
The consultation proposes operational simplifications to the treatment of collective investment undertakings (CIUs) in the trading‑book boundary and the Advanced Standardised Approach (ASA) to make scope and capital outcomes more proportionate.
- CIU de‑minimis threshold: CP17/25 proposes a 90% de‑minimis threshold for CIUs — a CIU would be allocated to the trading book only where at least 90% of the CIU’s underlying holdings (by value) would be allocated to the trading book, with any residual position capitalised under the ASA fallback.
- CIU look‑through threshold: CP17/25 also proposes a 90% look‑through threshold for CIUs — firms may use the market‑risk look‑through approach only where at least 90% of a CIU’s holdings (by value) can be looked through, with the residual capitalised under the ASA fallback.
- Permissions for RRAO: The PRA proposes a permissions regime for the ASA residual risk add‑on (RRAO), allowing firms to apply to use an alternative methodology where the RRAO would be disproportionate.
Industry respondents told the PRA that a 90% threshold is restrictive and asked for a lower level (some suggested 50%) and for a more flexible partial look‑through approach. Respondents also warned of operational challenges for firms using mixed Basel 2.5 IMA and FRTB standardised approaches and sought lighter‑touch scope change processes for split‑permission portfolios.
Proportionate carve‑outs and operational simplifications
The PRA signals several operational simplifications and proportionality measures to reduce burdens for smaller or less‑active trading portfolios. It says it will issue an interim supervisory statement on market risk to sit ahead of the near‑final SS13/13 that takes effect with FRTB‑IMA.
- Targeted permissions: PS1/26 specified that the permissions regime for RRAO would target a small number of instruments where the capital impact is likely to be material, not a broad opt‑out.
Reporting and disclosure
The consultation updates reporting and disclosure obligations to align PRA rulebook sections with the proposed adjustments across the trading‑book boundary, the ASA and the simplified standardised approach (SSA).
Practical effect for capital treatment in 2027
Under the proposals, most elements of the Basel 3.1 package — including changes to the trading‑book boundary, the ASA and the SSA — will come into effect on 1 January 2027, while the IMA permission and its eligibility tests are deferred to 2028. This will produce a year in which firms may hold mixed capital outcomes across portfolios. Firms should expect to capitalise positions moving out of IMA scope under the new ASA in 2027 while continuing to operate IMA for eligible positions where permissions exist, and to continue meeting supervisory back‑testing and review expectations for any models retained.
Legislative path
CP17/25 — “Basel 3.1: Adjustments to the market risk framework” — was first consulted in July 2025 and asked for responses by 5 September 2025; the PRA later extended the consultation period to 12 September in response to requests for more time. The PRA says the implementation date for the changes resulting from this consultation will be 1 January 2027 for the non‑IMA elements and 1 January 2028 for the FRTB‑IMA. The consultation also confirms the PRA will issue an interim SS13/13 ahead of the near‑final supervisory statement taking effect alongside FRTB‑IMA.
The PRA invited responses and enquiries to the published CP contacts.
(Further source material and the PRA’s policy statements and near‑final rules are referenced in CP17/25 and PS1/26.)
--- Sources: https://www.bankofengland.co.uk/news/2026/june/pra-adjustments-market-risk-internal-model-approach-under-basel31 https://www.bankofengland.co.uk/prudential-regulation/publication/2025/july/basel-3-1-adjustments-to-the-market-risk-framework-consultation-paper
