PRA sets out adjustments to its market risk internal model approach under Basel 3.1

CP9/26 – Basel 3.1:
Adjustments to the internal model approach (IMA) for market risk Consultation paper 9/26 Opens

Published on 19 June 2026
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Contents
Privacy statement
1: Overview
Scope
Background
Implementation
Responses and next steps
2: The PRA’s proposals
Proposal 1: Extend the monitoring period for the profit and loss attribution test (PLAT) to three years Proposal 2: Adjust the Risk Factor Eligibility Test (RFET) Proposal 3: Introduce targeted adjustments and operational simplifications to the NMRF framework Proposal 4: Reduce barriers to gradual IMA approval for individual firms Proposal 5: Implement operational simplifications to the treatment of collective investment undertakings (CIUs) Proposal 6: Minor adjustments and clarifications to the IMA framework Proposal 7: Update reporting and disclosure requirements to align with the above proposals 3: PRA objectives and cost benefit analysis PRA objectives analysis Cost benefit analysis 4: ‘Have regards’ analysis 5: Other legal requirements Accountability framework Impact on mutuals Equality and diversity Appendices

Privacy statement
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When you respond to this consultation paper, please tell us in your response if you agree to the publication of your name, or the name of the organisation you are responding on behalf of, in the PRA’s feedback response to this consultation. Please make it clear if you are responding as an individual or on behalf of an organisation. Where your name comprises ‘personal data’ within the meaning of data protection law, please see the Bank’s Privacy Notice above, about how your personal data will be processed. Please note that you do not have to give your consent to the publication of your name. If you do not give consent to your name being published in the PRA’s feedback response to this consultation, please make this clear with your response. If you do not give consent, the PRA may still collect, record and store it in accordance with the information provided above. You have the right to withdraw, amend or revoke your consent at any time. If you would like to do this, please contact the PRA using the contact details set out below. Responses can be sent by email to: CP9_26@bankofengland.co.uk. Alternatively, please address any comments or enquiries to:
Darren Massey
Market and Counterparty Credit Risk Policy Team Bank of England Threadneedle Street London EC2R 8AH 1: Overview
1.1 This Prudential Regulation Authority (PRA) consultation paper (CP) sets out proposed
adjustments to the Basel 3.1 internal model approach (IMA) for market risk.
1.2 The PRA published the final rules and policy for the IMA in policy statement (PS) 1/26 –
Implementation of Basel 3.1: Final rules as part of finalising its implementation of the Basel
3.1 standards. In PS1/26, the PRA confirmed that, while the implementation date for most of
the final Basel 3.1 rules and policy would be 1 January 2027, the implementation of the IMA Opens

would be delayed to 1 January 2028. The delay reflected continued uncertainty over the timing of the implementation of the Basel 3.1 market risk framework in some other jurisdictions.
1.3 Since publication of the final rules, proposals for implementation of the IMA in other key
jurisdictions have become clearer. In addition, the PRA has reviewed data from the Basel Committee on Banking Supervision’s (BCBS) Quantitative Impact Study (QIS) and firms’ applications for IMA approval. As a result, it has identified a small number of areas where the current rules may not fully achieve their intended objectives, may be unduly burdensome or may require additional time to assess their impact. Consistent with this view, a surprisingly small number of firms had been planning to adopt internal models. While the decision to adopt internal models is a cost-benefit decision for each firm, the PRA would expect a reasonable number of firms to make use of the more risk sensitive approach. The PRA considers that this is an appropriate time to consult on proposed adjustments to the IMA. This would support an international level playing field and the business models and competitiveness of banks in the UK operating internationally. Scope
1.4 This CP is relevant to PRA-authorised banks, building societies, PRA-designated
investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies (collectively ‘firms’). This CP is particularly relevant to firms with existing IMA approval and those considering applying for IMA approval under Basel 3.1. Background
1.5 The global financial crisis revealed material weaknesses in the market risk framework.
Market risk capital requirements proved insufficient to absorb losses. As an immediate response, the BCBS introduced a set of revisions to the market risk framework in July 2009, which are commonly referred to as ‘Basel 2.5’. The Basel 2.5 amendments were a necessary short-term fix, but they made the framework significantly more fragmented and did not address all of the issues revealed by the crisis. The Basel 3.1 standards introduce a comprehensive set of amendments to the market risk framework, commonly referred to as the fundamental review of the trading book (FRTB).
1.6 On 30 November 2022, the PRA consulted on proposals to implement the Basel 3.1
package in the UK in CP16/22 – Implementation of the Basel 3.1 standards. CP16/22 included proposals to implement the FRTB in PRA rules and policy and, in particular, proposals to introduce a new IMA for market risk to replace the existing modelled approach. The PRA proposed to implement the final policy on 1 January 2025. Opens

1.7 Subsequently, the PRA published its near-final rules and policy material covering the
proposals in CP16/22 in PS17/23 – Implementation of the Basel 3.1 standards near-final
part 1 and PS9/24 – Implementation of the Basel 3.1 standards near-final part 2,
including near-final rules and policy on the FRTB. As part of PS9/24, the PRA confirmed that it intended to delay the implementation of Basel 3.1 to 1 January 2026.
1.8 Given continued uncertainty about the timing of implementation of the Basel 3.1 package
in some major jurisdictions, on 17 January 2025, in consultation with HM Treasury, the PRA announced a further delay to implementation to 1 January 2027. The delay was to allow time for clarity to emerge about plans for implementation in the United States, and to assess potential implications for competitiveness and growth considerations. At the time, the PRA noted it would continue to monitor developments. On 12 June 2025, the European Commission subsequently announced a one-year delay to the EU implementation of the FRTB (to 1 January 2027), also citing ongoing uncertainty around implementation timing in other major jurisdictions.
1.9 On 15 July 2025, the PRA published CP17/25 – Basel 3.1: Adjustments to the market
risk framework. CP17/25 proposed to implement almost all aspects of the FRTB alongside the rest of the Basel 3.1 rules on 1 January 2027. The PRA delayed the implementation of the IMA to 1 January 2028 to allow time for international coordination, given that IMA is predominantly used by major trading firms including international groups engaged in cross￾border trading activity. The PRA published final rules and policy for IMA alongside final rules for all of Basel 3.1 in PS1/26, confirming the delay to implementation of IMA to 1 January 2028.
1.10 In this context, the PRA has continued to monitor the implementation of the FRTB. This
has included feedback from firms on the practical operation of the IMA and developments in other major jurisdictions. The monitoring has identified a number of areas where targeted adjustments could improve the proportionality and operational effectiveness of the framework, while maintaining robust prudential standards.
1.11 This CP therefore sets out a package of targeted proposals to refine specific elements of
the IMA, including the treatment of non‑modellable risk factors, the calibration and operation of key model performance tests, and the interaction between IMA and the standardised approach. Implementation
1.12 The PRA proposes that the implementation date for the IMA, including the changes
resulting from this CP, will remain 1 January 2028.
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Responses and next steps
1.13 This consultation closes on Friday 18 September 2026. The PRA invites feedback on the
proposals set out in this consultation. Please address any comments or enquiries to CP 9_26@bankofengland.co.uk.
1.14 When providing your response, please tell us whether or not you consent to the PRA
publishing your name, and/or the name of your organisation, as a respondent to this CP.
1.15 Please indicate in your response if you believe any of the proposals in this consultation
paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be. 2: The PRA’s proposals
2.1 As set out in Chapter 1, the PRA is consulting on a targeted set of adjustments to the
market risk IMA rules and related policy materials finalised in PS1/26. The proposals reflect evidence since publication, as well as increased clarity regarding the approaches being taken in other major jurisdictions. Collectively, the proposals will maintain robust standards for model approval and market risk capitalisation, while improving the proportionality and operational functioning of the framework and international consistency. The PRA proposes the following adjustments, which are outlined in more detail in this chapter:

• Proposal 1: Extend the monitoring period for the profit and loss attribution test (PLAT) from
  one year to three years. During this period, the PLAT test will not be binding.
• Proposal 2: Adjust the risk factor eligibility test (RFET) by:
• reducing the number of required verifiable prices to pass the quantitative RFET from 24
  to 16 for risk factors with a liquidity horizon of greater than 20 days; and
• introducing a proportionate RFET requirement for new issuances.
• Proposal 3: Introduce targeted adjustments and operational simplifications to the non￾modellable risk factors (NMRF) framework by:
• Introducing a new category of NMRFs that satisfy qualitative data standards, but do not
  meet the quantitative verifiable price requirements (Type 1). Type 1 NMRFs would be included within the expected shortfall (ES) model. Reflecting that these risk factors do not have a sufficient number of verifiable prices, they would also be subject to an NMRF capital add-on, with an assumption of zero correlation between the risk factors. Risk factors that fail both the quantitative and qualitative requirements (Type 2) would Opens

2.2 In addition to the changes set out above, the PRA also proposes a number of adjustments
to clarify and ease the operational burden of the IMA framework:
2.3 A brief summary of the purpose of the rules is in paragraphs 1.10 and 1.11. The
proposals in this CP would modify the following sections of the PRA Rulebook:
continue to be capitalised as set out in PS1/26.

• Making a number of operational simplifications, including aligning the NMRF stress
  period with the stress period used for the expected shortfall (ES) model, reducing the calculation frequency for Type 2 NMRFs to monthly, and removing the distinction between idiosyncratic and non-idiosyncratic NMRFs.
• Proposal 4: Reduce barriers to the gradual nature of IMA approval for any given firm by:
• recognising diversification between Advanced Standardised Approach (ASA) and IMA
  portfolios through a marginal ASA adjustment; and
• replacing the existing partial caps on IMA capital with a permission-based cap on IMA
  capital at the full ASA level.
• Proposal 5: Adjust the treatment of collective investment undertakings (CIUs) by
  introducing a 90% de minimis look-through threshold for IMA inclusion and extending the ASA treatment of index-tracking funds to IMA.
• Proposal 6: Make a number of minor operational adjustments and clarifications to the IMA
  framework, including:
• clarifying the process for determining the own funds requirements for general interest
  rate risk internal hedges desks;
• providing IMA firms with the option to use alternative tests to assess the reduced set of
  risk factors, subject to notifying their respective PRA supervisors; and
• clarifying the treatment of listed closed-ended investment funds that also meet the
  definition of a CIU within the trading book boundary.
• Proposal 7: Update reporting and disclosure obligations to align with the above proposals.
• Trading Book (CRR);
• Market Risk: Internal Model Approach (CRR); and
• Reporting (CRR).
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Proposal 1: Extend the monitoring period for the profit and loss attribution test (PLAT) to three years
2.4 As set out in the PRA rules published in PS1/26, firms using the IMA are required to
satisfy a range of ongoing quantitative tests at trading-desk level in order to continue using the IMA. These include back-testing requirements and the PLAT.
2.5 The PLAT is a set of tests of model accuracy. The PLAT applies two statistical tests that
compare the time series of daily profit and loss (P&L) calculated using the risk factors and pricing models in the ES model, to the daily P&L of the trading desk. Simplifications in the ES model will cause the two time series to differ – if the tests show the differences exceed specified thresholds, this indicates there are material inaccuracies in the model and the desk would no longer be permitted to be treated under the IMA.
2.6 The two statistical tests are:
2.7 Under the PRA rules, in line with the BCBS standard if a trading desk fails either test, the
desk would automatically no longer be eligible for IMA and would instead be capitalised under the ASA.
2.8 Since the BCBS standards were finalised, authorities have been monitoring the
application of the PLAT to real portfolios. Firms have also raised concerns regarding the ability of the tests to distinguish between good and poor alignment of models in some situations, and the calibration of the thresholds they must meet to pass the tests.
2.9 The PRA considers that the PLAT is an important safeguard within the IMA framework. It
supports the objective of ensuring that firms’ internal models appropriately capture the risks generated by trading activity. It also supports effective risk management by requiring close alignment between firms’ risk measurement and front-office systems. To ensure appropriate calibration of the pass/fail thresholds, the PRA’s final rules implemented a one-year monitoring period, during which automatic reallocation to ASA would not apply.
2.10 Having considered further evidence from firms, the PRA considers that more time will be
needed to properly assess the calibration of the PLAT. The PRA therefore proposes to extend the existing PLAT monitoring period from one year to three years following implementation of the IMA framework. During the monitoring period, firms using IMA would continue to report

• the Spearman correlation test, which measures whether the two time series move
  consistently together over time; and
• the Kolmogorov-Smirnov (KS) test, which assesses whether the statistical distributions of
  the two series are sufficiently similar.
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their profit and loss data in accordance with the PRA reporting requirements. However, failing either test would not automatically result in a trading desk becoming ineligible for IMA capitalisation.
2.11 The PRA considers that retaining both tests during the extended monitoring period
would allow additional evidence to be gathered on their performance across different trading activities before considering whether any recalibration or further policy adjustments are appropriate. While the PRA notes concerns raised by some firms about the performance of the Spearman correlation test in particular, it considers that there would be minimal burden on firms to continue reporting its results during the monitoring period. The data gathered would allow the PRA to establish whether an appropriate calibration can be determined. During the monitoring period, firms would remain subject to ongoing supervisory review and the PRA may take further action where it identifies significant concerns regarding model performance or risk management. Proposal 2: Adjust the Risk Factor Eligibility Test (RFET)
2.12 The PRA’s final rules in PS1/26 confirmed the introduction of the RFET, which is
intended to identify risk factors for which there are limited market data generated through trading activity, and which are therefore not well suited to internal modelling.[1] A risk factor may be included in the ES model only where it meets both: (i) a quantitative verifiable prices test; and (ii) qualitative data standards. Where a risk factor fails either test, it is deemed non‑modellable and must instead be capitalised under the non‑modellable risk factor (NMRF) framework.
2.13 The quantitative RFET requires firms, over the preceding 12 months, to evidence for
each risk factor either: at least 24 verifiable prices with no 90‑day period containing fewer than four verifiable prices; or at least 100 verifiable prices. The PRA considers this threshold to be appropriate in general. However, as the IMA ES framework already increases capital requirements for less liquid risk factors through longer liquidity horizons, and NMRFs are similarly assigned longer liquidity horizons, the PRA considers there to be a risk of double‑counting illiquidity.
2.14 To address this concern, the PRA proposes to reduce the minimum verifiable price
requirement from 24 to 16 for risk factors assigned a liquidity horizon of greater than 20 days, where higher capital requirements for illiquidity already apply under the IMA ES. All other aspects of the quantitative RFET would remain unchanged. For risk factors with shorter liquidity horizons, the existing verifiable price requirements would also remain unchanged. footnote Opens

2.15 The PRA also recognises that the current RFET does not adjust requirements for new
issuances where less than 12 months of observable data are available. As a result, firms may be unable to include new issuances in their internal models even where proportionately sufficient data exist to support modellability.
2.16 The PRA therefore proposes to allow firms to pro-rate the verifiable price requirement
during the first 12 months after issuance to reflect the shorter observation period available.
2.17 Finally, the PRA acknowledges that aspects of the current drafting of rules impose
constraints that in practice are more onerous than intended. In particular, these include modelling constraints of risk factors belonging to curves, surfaces and cubes, as well as audit requirements where verifiable prices are obtained from regulated exchanges and trading platforms. The PRA proposes to update the rules to provide a more proportionate overall approach.
2.18 The PRA considers that these proposed adjustments to the RFET would improve the
proportionality and operational effectiveness of the framework, while maintaining robust standards for the risk factors that are included in the ES model. The proposed operational clarifications would also reduce unnecessary implementation complexity and support more consistent application of the framework. Proposal 3: Introduce targeted adjustments and operational simplifications to the NMRF framework
2.19 The NMRF framework is a new feature in the Basel standard, linked to the RFET. For
risk factors that fail the RFET tests, the NMRF framework is intended to ensure adequate capital requirements. The PRA has existing expectations for firms to consider capital add-ons for these types of risks (the risks not in VaR (RNIV) framework), which fulfils a similar purpose.
2.20 BCBS QIS data show that the NMRF framework drives a material portion of IMA capital
requirements. Significantly more factors are identified as NMRF than would be expected based on, for example, the PRA’s existing RNIV framework. One cause is that by applying both the quantitative and qualitative RFET tests, the NMRF framework does not distinguish sufficiently well between: (i) risk factors that are less liquid but still modellable; and (ii) risk factors that are genuinely unobservable.
2.21 The PRA proposes to introduce a new, intermediate category of non-modellable risk
factors that are treated conservatively but not removed entirely from the ES model:

• Type 1 NMRFs: Risk factors that fail the quantitative verifiable price test set out in the
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2.22 In addition, the PRA proposes to simplify the operation of the NMRF framework by:
2.23 The PRA considers that the proposed adjustments would improve risk-sensitivity and
proportionality without inappropriately lowering prudential standards and reduce operational burden. They would enable firms to better distinguish between risk factors that lack sufficient verifiable prices but can nonetheless be modelled robustly and risk factors that are genuinely non‑modellable. Proposal 4: Reduce barriers to gradual IMA approval for individual firms
2.24 Under the PRA’s market risk rules published in PS1/26, firms using a combination of the
ASA and IMA would separately calculate capital requirements under each approach and add them together as a simple sum. The rules recognise an interaction between IMA and ASA, but only partially. They include a partial cap that limits total IMA capital requirements at the corresponding full ASA level, while recognising that an IMA estimate of risk for individual modelled desks can, rightly, be higher than that estimated by ASA for the same desks.
2.25 One outcome of this simple approach is that as a firm starts to move from predominantly
using ASA to applying IMA for a small part of their portfolio, capital requirements can increase artificially. While the positions that move will usually have a lower stand-alone capital requirement under IMA, because they are now separated from the rest of the ASA portfolio, RFET but pass the qualitative data standards. These risk factors would remain in the ES model but also attract a NMRF capital add-on to reflect the increased risks identified through the failure of the verifiable price quantitative test. This capital add-on is more risk sensitive than for type 2 NMRFs (below), as it recognises full diversification benefits (ie using a zero correlation assumption) across these risk factors.

• Type 2 NMRFs: risk factors that fail both the quantitative and qualitative RFET tests.
  These would be treated as set out in the PRA’s existing Basel 3.1 rules – they would continue to be removed from the model and capitalised under the NMRF framework.
• removing the different approaches to calculating NMRF requirements between
  idiosyncratic and non‑idiosyncratic risk factors. The PRA considers this distinction to be significantly less material under the proposed introduction of Type 1 and Type 2 NMRFs;
• aligning the stress period used by firms in their ES models with the stress period used to
  calculate NMRF capital requirements, removing the need for firms to identify and maintain separate stress data windows; and
• reducing the calculation frequency for Type 2 NMRFs from daily to monthly.
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diversification benefit is lost. The PRA considers that the current aggregation calculation does not completely reflect the combined risk of the portfolio and may create an unintended barrier to gradual adoption of IMA.
2.26 The PRA therefore proposes to introduce an adjustment to the aggregation of ASA and
IMA capital requirements for firms using a mixture of both approaches to recognise diversification and hedging across the portfolio, notwithstanding the different calculation approaches. Instead of ASA requirements for non-modelled positions being added to IMA capital requirements as a simple sum, the difference between the ASA for all positions and the ASA for IMA positions would be used. This would mean the diversification benefit that the IMA positions provide in the ASA calculation would be retained in the calculation.
2.27 Given the above change, the PRA considers that the retention of the overall caps within
the capital requirements calculation are not necessary. For rare situations where resulting capital requirements are counter-intuitive, the PRA proposes to replace the existing caps with a permission that would allow a firm to apply to cap total market risk capital requirements at the corresponding full ASA level. The PRA considers that this approach would provide a simpler and more operationally effective solution, while maintaining appropriate prudential safeguards. In light of the proposals in this CP, the PRA does not expect this permission to be widely applicable.
2.28 The PRA considers that these proposals would support a more proportionate calculation
of portfolio risk and support gradual transition to IMA for firms that wish to pursue that approach. Over time, as firms expand IMA coverage, the effect of the diversification adjustment would diminish as capital requirements converge towards the full IMA outcome. The PRA therefore considers that the proposals would support incremental model adoption without changing the long-run calibration or overall structure of the market risk framework. Proposal 5: Implement operational simplifications to the treatment of collective investment undertakings (CIUs)
2.29 In PS1/26, the PRA confirmed that firms may apply IMA to positions in CIUs without
modelling each underlying position separately, provided that: (i) the firm can fully look through to the underlying positions of the CIU; and (ii) the firm demonstrates to the PRA, at least annually, that the outcomes of its CIU modelling are consistent with, or more conservative than, modelling based on a full look‑through to the underlying positions. Opens

2.30 The PRA acknowledges that the full look‑through requirement can be operationally
burdensome. In addition, the diversity of CIUs and the variability of their underlying investment holdings mean that small changes in a CIU’s composition can give rise to cliff effects in the allocation to the trading book or the capitalisation of those positions. The PRA made amendments to the ASA framework in PS1/26 to address these concerns.
2.31 The PRA proposes to similarly address these concerns for IMA. The PRA proposes that:
2.32 The proposed look-through threshold for IMA is higher than the 50% applied for the
ASA. This reflects a higher expectation for risk management for IMA firms. Firms using the IMA should have a sufficiently robust understanding of underlying risks to support prudent modelling. It also reflects the additional flexibility available to IMA firms, including the ability to model CIU positions at an aggregate level rather than modelling each underlying position individually. It provides a graduated framework whereby firms that cannot look through to 90% but can look through to at least 50% of a CIU’s underlying holdings can apply the look‑through approach under the ASA.
2.33 The PRA considers that the proposed changes would reduce volatility in the approaches
applied to CIU positions and the resulting capital requirements. The proposals would also provide IMA firms with additional options to model CIU positions where they have a sufficiently robust understanding of the underlying risks. Proposal 6: Minor adjustments and clarifications to the IMA framework
2.34 The PRA proposes to make a number of additional minor adjustments and clarifications
to the IMA framework to improve risk sensitivity and remove ambiguity. These include:

• Firms may include CIU positions in IMA and model the looked-through portion at an
  aggregate level without separately modelling each underlying position, where at least 90% of the CIU’s underlying holdings (by value) can be looked through on a quarterly basis. The residual position would be capitalised under the ASA‑FBA.
• Firms may treat a position in a CIU that tracks an index benchmark as a position in the
  tracked index itself where the absolute annualised return difference between the CIU and the tracked index benchmark over the preceding 12 months is below 1%, excluding fees and commissions.
• Introducing, subject to PRA notification, an alternative coverage test where firms elect to
  model using a reduced set of risk factors. The alternative approach should result in substantively similar coverage to 75% of the variability of the full set of risk factors required Opens

Proposal 7: Update reporting and disclosure requirements to align with the above proposals
2.35 The PRA proposes to make consequential amendments to the reporting and disclosure
requirements to align with the proposals above.
3: PRA objectives and cost benefit analysis
PRA objectives analysis
3.1 The PRA considers that the proposals set out in this CP would advance its primary
objective of promoting the safety and soundness of the firms it regulates.
3.2 The Basel 3.1 IMA framework enhances the risk-sensitivity of market risk capital
requirements while maintaining robust standards for model approval. The proposals in this CP build on that framework by addressing identified calibration and operational issues, improving proportionality while preserving overall prudential standards.
3.3 The proposed adjustments to the PLAT and NMRF framework would support prudent risk
management by facilitating the use of internal models where these can be applied robustly and appropriately. In particular, the proposed changes to the NMRF framework would introduce a more proportionate distinction between risk factors that have limited data availability but can still be modelled reliably and those that are genuinely non-modellable. This would allow certain risk factors to remain in the ES model, while continuing to apply an appropriate capital surcharge to reflect residual risk. Extending the PLAT monitoring period would allow additional evidence to be gathered on the calibration and operation of the framework before PLAT failures automatically result in a trading desk becoming ineligible for IMA. under the PRA’s existing final rules.

• Clarification that a general interest rate risk (GIRR) internal hedges desk that meets the
  IMA eligibility requirements may apply the same stress period and reduced set of risk factors as other market risk covered positions when calculating IMA capital. The own funds requirement for the GIRR internal hedges portfolio, including any capital surcharge, must continue to be calculated on a standalone basis.
• Clarification that listed closed-ended investment funds are excluded from the relevant CIU
  boundary requirements where the fund also meets the definition of a CIU. Opens

3.4 The proposals relating to recognition of diversification between ASA and IMA portfolios
and the treatment of CIUs would support the proportionality and operational effectiveness of the framework by reducing unintended frictions during phased adoption of IMA, as well as limiting operational burden and cliff-edge effects associated with the capitalisation of CIUs within IMA under the current Basel 3.1 rules.
3.5 With regard to the PRA secondary objective of facilitating effective competition, the
proposals would reduce unnecessary operational barriers to IMA adoption for firms with material trading activities. In particular, the proposals would support a more proportionate framework for firms seeking to expand internal modelling capability incrementally at trading￾desk level. The PRA considers that this could facilitate competition in wholesale financial markets by enabling a broader range of firms to use appropriately risk-sensitive approaches to measure and capitalise market risk. The PRA does not expect all firms to want to adopt IMA models, which is a cost-benefit decision for firms themselves. It does, however, want to remove barriers to adoption that have limited prudential value.
3.6 The PRA considers that the proposed changes would support, so far as reasonably
possible, its secondary objective of international competitiveness and growth in the UK economy over the medium to long term. The proposals respond to identified operational and calibration issues within the Basel 3.1 market risk standards, while maintaining its overall prudential objectives. The PRA notes that other major jurisdictions are also considering or implementing targeted adjustments in similar areas. To the extent appropriate, greater alignment with the approaches adopted in other major trading jurisdictions may reduce unnecessary operational complexity and compliance costs for internationally active firms and support the continued competitiveness of UK wholesale financial markets. Cost benefit analysis
3.7 The IMA is primarily used by large trading firms, including international groups active in
cross‑border markets. The proposals mainly affect wholesale capital markets, not retail lending or insurance. However, they could indirectly influence firms’ participation in, and the supply of, hedging services used by the real economy.
3.8 The cost benefit analysis (CBA) estimates annual benefits to firms of between £1.8 million
and £60 million. These benefits mainly arise from increased IMA adoption, and from changes to the NMRF capital framework. The CBA also assesses qualitatively that the proposals support firms’ resilience and financial stability and help retain trading activity in the UK by improving PRA firms’ ability to offer derivative products to end-users. The cost-benefit analysis is set out in Appendix 1. Opens

4: ‘Have regards’ analysis
4.1 In developing these proposals, the PRA has had regard to the FSMA regulatory
principles, the aspects of the Government’s economic policy set out in the HMT recommendation letter from 2021, and the supplementary recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

1. Proportionality (FSMA regulatory principles and Legislative and Regulatory Reform
   Act 2006):
2. Recognition of differences in business models (FSMA regulatory principles):
3. Relative standing of the UK as a place for internationally active firms to operate
   (FSMA CRR rules) and competitiveness (HMT recommendation letter):
4. Sustainable growth (FSMA regulatory principles):

• The PRA considers the proposed amendments provide more proportionate treatment
  in the market risk framework through reducing the regulatory burden and cost impact on firms where possible. The proposal to simplify the NMRF framework, including removing idiosyncratic risk factor identification, less frequent calculation for Type 2 NMRFs, and simplifying the treatment of CIUs would all act to increase the proportionality of the framework by better aligning operational burden with risk. The proposals would also ease cross-border trading and competition by removing immaterial operational frictions.
• The PRA considers proposed adjustments to the NMRF classification and verifiable price
  requirements support those firms with large, but not extensive trading business. The proposal to introduce a diversification adjustment between IMA and ASA would support those firms that may have smaller exposures and those in the early stages of developing and implementing internal models.
• The PRA considers that the proposals would support the attractiveness of the UK as an
  international financial centre by reducing unnecessary operational frictions for internationally active firms while maintaining robust prudential standards. Where appropriate, alignment with other major trading jurisdictions may also reduce compliance costs for cross-border firms.
• The PRA considers that the proposals may support sustainable growth over the medium to
  long term by facilitating the provision of hedging, financing and market intermediation Opens

5. Efficient and economic use of PRA resources (FSMA regulatory principles and
   Legislative and Regulatory Reform Act 2006):
   5: Other legal requirements
   Accountability framework
   5.1 The PRA has a statutory duty to consult when introducing new rules (FSMA s138J) or
   new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so.
   5.2 The proposals set out in this CP have been developed by the PRA in accordance with its
   statutory objectives and informed by the regulatory principles and the matters to which it must have regard in making policy as set out in the Financial Services and Markets Act 2000 (FSMA). The Practitioner’s Panel was not informed about the proposals in this CP, but the PRA has had extensive contact with industry associations and directly with a range of firms that operate internal models.
   5.3 In carrying out its policymaking functions, the PRA is required to comply with several legal
   obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals. Impact on mutuals
   5.4 The PRA considers that the impact of the proposed changes on mutuals is expected to be
   no different from the impact on other firms. services in the UK through a more proportionate and operationally effective market risk framework.

• The PRA has had regard to the efficient and economic use of its resources. The proposals
  are intended to simplify aspects of the IMA framework where this can be achieved without compromising prudential outcomes. While the proposals may lead to an increase in applications for IMA permissions over time, this is consistent with the operation of a more proportionate and risk‑sensitive framework. Opens

Appendices
Equality and diversity
5.5 In developing its proposals, the PRA has had due regard to the equality objectives under
s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.

1. Risk factors are the market rates and prices that affect the value of the bank’s trading positions, for instance, an equity
   price.
   Appendix 1: Cost benefit analysis (PDF 1.5MB)OPENS
   Appendix 2: PRA Rulebook: CRR Firms: Market Risk (CRR) Instrument 2026 (PDF
   1.4MB)OPENS
   Appendix 3: Annex II: Reporting Instructions (PDF 1.3MB)OPENS
   Appendix 4: Annex I: OF 24.02 Market Risk: Internal Model Approach 1B (IMA1B) (XLSX
   0.1MB)
   Appendix 5: Draft amendments to SS13/13 – Market risk (PDF 1.6MB)OPENS
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