The UK’s Prudential Regulation Authority (PRA) has finalized changes to its large exposures framework, effective Jan. 1, 2028, for banks, building societies and other firms within its scope. The package makes substitution mandatory when firms use eligible credit risk mitigation, removes internal models for measuring securities financing exposures and revises trading book and intragroup limits. Targeted exemptions and recalibrated limits address consultation concerns about collateral use and existing booking arrangements.
Under mandatory substitution, firms will have to recognize a corresponding exposure to the collateral issuer or protection provider when credit risk mitigation reduces an exposure to the original counterparty. This requirement applies to all firms, including smaller firms, and covers corporate collateral. However, indirect exposures arising from sovereign collateral received as funded credit protection and collateral received under tri-party repurchase agreements facilitated by tri-party agents will be exempt from large exposures limits. Sovereign guarantees will qualify for exemption only where the protection provider carries a 0% credit risk weight. Indirect exposures, including exempt exposures, must still be reported separately from direct exposures.
To accommodate increases in measured exposures caused by removing internal models, a higher Non-Core Large Exposures Group (NCLEG) permission will allow trading book exposures to certain overseas group entities up to 350% of Tier 1 capital, versus the proposed 250%. The corresponding non-trading book limit remains 100%. Rather than abolishing the excess allowance for trading book exposures to third parties, the rules retain a cap of 85% of Tier 1 capital for no more than 10 business days, subject to additional capital, reporting without delay and non-trading book exposures remaining within usual limits. The intragroup trading book excess allowance also falls to 85%, subject to additional capital requirements. Firms may apply for new NCLEG or higher NCLEG permissions from July 1, 2027. Existing permissions and modifications remain valid until expiry.