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

What Changed

• - The PRA confirms that the Basel 3.1 internal model approach for market risk (FRTB‑IMA) will be implemented in the UK on 01 January 2028, with no further delay to the already-announced date.
• The PRA proposes to extend the monitoring period for the profit and loss attribution (PLA) test from one year to three years before PLA outcomes are used to drive capital consequences for IMA trading desks.
• The PRA proposes a more targeted approach for positions with limited trading data, adjusting the identification of risks that cannot be modelled under IMA so that more positions can be treated as modellable where appropriate, improving risk sensitivi
• The PRA proposes to modify the treatment of positions subject to a mix of IMA and standardised approaches, to avoid scenarios where capital requirements increase mechanically as firms gradually migrate desks or risk factors from standardised approach
• The PRA proposes operational simplifications and amendments to the IMA rules to improve proportionality, including simplifications in how firms evidence modellability, run tests, and manage the approvals and ongoing validation of IMA trading desks.
• The PRA reiterates that for market risk under Basel 3.1, firms will be able to use standardised approaches (SSA/ASA) and IMA in combination at desk level, subject to supervisory permission and trading book boundary rules already set in the final Base

Suggested Considerations

• Review the PRA consultation on the Basel 3.1 market risk internal model approach in detail and map each proposed change (PLA monitoring, modellability, mixed‑use treatment, operational simplifications) to current and planned IMA designs and policies.
• Update the Basel 3.1 implementation roadmap for market risk to reflect that all non‑IMA Basel 3.1 rules start in January 2027, while IMA goes live on 01 January 2028, ensuring dependencies between standardised and IMA implementations are clearly sequenced.
• Reassess the design, calibration, and governance of the profit and loss attribution framework to accommodate a three‑year monitoring period, including data retention, desk‑level analytics, exception management, and documentation of PRA engagement during the monitoring phase.
• Perform an inventory of trading book risk factors and positions with limited trading data and assess how the PRA’s more targeted approach to non‑modellable risks will change modellability classifications, capital impacts, and desk‑level model scope.
• Analyse current and planned use of mixed IMA and standardised approaches across desks to ensure that migration pathways do not inadvertently increase capital requirements and adjust transition plans, capital forecasts, and management information accordingly.
• Review and update internal model governance, model change policies, and documentation (including model descriptions, assumptions, limitations, and validation reports) to incorporate the PRA’s operational simplifications and any new expectations for IMA desk approval and ongoing review.

Key Dates

Who is Affected