Overall, the PRA has clarified the scope of application, notably on branches and UK trading banks and regarding Article 21c of CRD6. It has also modified some language around booking responsibilities and trade capture and improved the clarity of drafting in multiple areas.
Conflicts with other regulators’ expectations
The PRA notes that regulators do not have a common set of expectations about firms’ booking arrangements. It will continue to work “cooperatively and collaboratively” with home state regulators to address differences and agree “mutually acceptable outcomes”. This will typically be covered under Memoranda of Understanding with overseas regulators. Firms will be expected to comply with the expectations of the PRA and other regulators where possible. Where this will not be possible, firms should engage proactively with the PRA.
The PRA and ECB are continuing to work closely together on the Desk Mapping Review (DMR), to review proposed arrangements on a case-by-case basis.
Scope of application
The PRA has clarified that:
- The expectations apply to regulated activities carried on in the UK by an international or UK trading bank; and
- For UK trading banks, the expectations apply to the UK authorised firm — the authorised firm is expected to work closely with affiliates to ensure that it meets the booking expectations.
‘Complex risks and complex activities’
The PRA has expanded the range of examples to clarify that banking book activities such as secured financing, leveraged finance and warehouse loans that have a close link to investment banking activities are likely to be in-scope of SS5/21. It has also confirmed that cash products and derivatives are within the scope of the booking expectations.
CRD6 Article 21c
Article 21c of CRD6 introduced a significant change by prohibiting third-country institutions from providing core banking services such as deposit-taking, lending, guarantees and commitments into the EU on a cross-border basis without a physical presence. To deliver these services, non-EU banks must now establish a branch in a Member State and apply for authorisation.
The PRA has clarified that, where firms are in scope for both, it expects firms to consider its booking expectations when implementing Article 21c, noting that:
- Some business within scope of the booking expectations and which may fall within the scope of Article 21c (e.g. secured financing for corporate borrowers), has already been looked at within the DMR.
- The amended application of the PRA’s booking expectations to banking book activities,) does not extend to all core banking activities likely to be in scope of Article 21c implementation, in particular where they do not pose substantially similar booking risks to cash and derivative products in the trading book.
Notification of material booking changes
The PRA has clarified that it will not expect frequent changes ‘in the normal course of business’ and included more examples of how to assess materiality of changes.
Split desks
No change to proposals but some further clarification around operation of split desks.
Single consolidated risk function
The PRA has clarified that consolidated risk management should be set at a level that is commensurate with the structure of the relevant business division and that it is neither mandating the use of collateral pooling nor proposing any changes to Senior Manager Functions (SMFs).
Remote booking and back-to-back trading
Following the indication in the CP that the PRA would be unlikely to accept a booking structure with all traders remote from the risk hub, respondents queried whether local ownership, accountability for and supervision of the books could render this acceptable. The PRA has clarified that any existing arrangements where there is 100% remote booking into the UK should be ‘subject to greater scrutiny and require high levels of evidence that they are appropriately controlled’.
The PRA also confirms that it continues to include cross location back to backs as part of the ‘legitimate movement of risk’ within a bank.
Metrics
The PRA will not prescribe the precise metrics that firms might use. Firms therefore have some flexibility and should assess which metrics are most material for their business.
Trader controls
The PRA has clarified that it does not prescribe the mix of directive, preventative and detective controls that firms should choose. Consultation responses expressed some resistance to the use of pre trade, hard technological preventative blocks. It is for firms to assess the appropriate mix of preventative, detective, ‘hard’ and ‘soft’ controls and explain their reasoning.
Pre-existing control weaknesses
The PRA confirms that it does not expect to receive attestations that there are no pre-existing control weaknesses when firms request changes to booking models. It will expect to have been made aware of any material weaknesses already.