On 14 October 2020, the PRA published Policy Statement 22/20: Counterparty credit risk: Treatment of model limitations in banks’ internal models (PS22/20).
PS22/20 is relevant to UK banks, building societies and PRA-designated UK investment firms that are subject to the Capital Requirements Regulation (CRR). It is not relevant to UK branches of firms in other European Economic Area (EEA) countries and non-EEA countries, nor to insurance firms.
The PRA’s final policy is set out in the form of an updated version of ‘Supervisory Statement 12/13: Counterparty credit risk’ (SS12/13) which is located in the Appendix to PS22/20. The PRA’s final policy covers two broad areas: monitoring of model limitations and assumptions and a minimum exposure level in the presence of excess collateral.
The PRA has also included guidance in SS12/13, which has already been published in a statement on 30 March 2020, relating to the treatment of unsettled margin in the internal models method (IMM). This has been included as a clarification of a pre-existing expectation which will aid firms in their implementation of the IMM. Minor changes have been made to the original wording to clarify the intended scope of the guidance.
The changes to SS12/13 become effective on the publication of PS22/20. If firms have concerns about their ability to comply with these expectations, they should get in touch with their usual supervisory contacts.