Basel 3.1: Final rules key focus

While the near final rules set out the PRA’s intended direction, the final package introduces a series of refinements, clarifications and targeted amendments designed to ensure the regime is coherent, internally consistent and ready for implementation in January 2027. 

Although the PRA emphasises that the overall policy direction remains unchanged, the final rules incorporate both substantive updates in market risk and numerous technical adjustments across credit risk, operational risk, credit risk mitigation and reporting. The result is a more stable and operationally workable framework for firms preparing for Basel 3.1. 

The focus for banks in 2026 should be on ensuring comprehensive impact analysis has been completed, and teams are working through plans to address any operations, process, data and reporting gaps with appropriate governance and assurance to ensure plans will deliver compliance within the rules by the stated timeframes. 

Market Risk: The only area with material policy change 

The PRA have formally adopted the CP17/25 proposal to delay the FRTB-IMA roll-out to 1 January 2028. In the interim (starting from 1 January 2027) firms can continue using their old market risk internal models for positions within this scope. Positions not in scope should apply the new standardised approach, either the Advanced Standardised Approach (ASA) or Simplified Standardised Approach (SSA). Clarifications: 

• Old IMA eligible trading book positions may stay in IMA even if not eligible under FRTBIMA. 
• Securitisation and correlation trading risks may remain under the old SA if no IMA permission exists. 
• Interest rate internal hedges can continue within IMA. 
• Doublecounting issues must be escalated to supervisors. 
• PRA rejects full retention of old SA due to competition concerns. 

The PRA have also adopted the simplification for collective investment undertakings (CIU) and has proposed the following boundary conditions:  

• Trading book eligibility: more than 90% of underlying assets must be trading‑book eligible (residual gets 70% RW under ASA fallback). 
• Look Through Approach (LTA): threshold reduced from 90% to 50% to ease operational burden. 
• Clarifications: 
  • Definition of “value” for threshold calculations. 
  • FCA’s replacement of “premium listing” with “closed ended investment fund”. 
  • REITs/REIFs qualifying as CIUs remain trading book eligible. 

Further, they suggested a permissions regime under the ASA to allow firms to demonstrate where the residual risk add-on should be calibrated proportionately.   

• Firms may apply to use alternative methodologies where RRAO is disproportionate. 
• Permission granted per instrument type (oneoff application). 
• Updated permission forms and supervisory expectations published. 
• Offsetting allowed for identical instruments when held with thirdparty counterparties 

Finally, the PRA has proposed changes to align reporting with the adjusted timing and approaches (e.g., delayed IMA templates).   

• Existing IMA templates remain in force until 1 January 2028. 
• FRTB‑IMA reporting begins only from 2028. 
• ASA reporting clarified for interest rate internal hedge portfolios. 
• Cross‑jurisdiction aggregation requirements follow CRR Part rules. 

We believe the industry will broadly support the PRA’s decision to delay the FRTB-IMA roll-out, as this adjustment brings the UK’s timeline into closer alignment with other regulators. The simplifications for CIUs, especially the reduction in the LTA threshold, should ease operational challenges. The introduction of RRAO permissions offers proportionate treatment for niche scenarios, though it could further incentivise the adoption of the standardised approach over the IMA. Meanwhile, the reporting changes are likely to facilitate a smoother transition and help mitigate implementation risks. 

However, we note several potential concerns. The transition period, where firms may need to run both IMA and ASA in parallel, could introduce operational complexity. There is an ongoing risk of inconsistencies or double-counting, and the challenge of obtaining sufficiently granular CIU data remains. Finally, the additional governance requirements for new permissions may increase the compliance burden for some institutions. These areas will require continued attention to ensure the effectiveness and fairness of the new regime. 

Credit Risk: Clarifications rather than policy shifts 

The credit risk framework remains largely unchanged from the near final rules, but the PRA has introduced several important clarifications: 

• New PRA Rulebook definitions for PD, LGD and conversion factors, replacing revoked CRR definitions. 
• Clearer guidance on the Standardised Approach, including SME classification, real estate collateral revaluation and multicurrency revolving facilities. 
• To the IRB framework, including the 30% LGD floor for partially secured retail exposures and clarifications for purchased receivables. 

Credit Risk Mitigation: Improved coherence  

The final rules also refine the credit risk mitigation (CRM) framework. The PRA has clarified the eligibility of unrated securities, confirmed the treatment of long settlement transactions and provided a clearer definition of repurchase transactions. These changes resolve drafting inconsistencies in the near final rules and support more consistent application across firms. 

Output Floor: Clarified application and scope 

The output floor, a key component of Basel 3.1, remains unchanged in substance, but the PRA has clarified how firms should calculate Standardised Total Risk Exposure Amount (STREA) and how the floor applies to international subsidiaries and ringfenced banks. These refinements reduce ambiguity and support more predictable capital outcomes. 

Operational Risk: Minor clarifications to support consistency 

Operational risk rules are unchanged in policy terms, but the PRA has clarified that the Business Indicator must include current year estimates and has provided clearer guidance on the treatment of legal risk related losses. These adjustments help ensure consistent interpretation across firms. 

Reporting and disclosure: Updated templates and removal of obsolete references 

The final rules update several reporting and disclosure templates to reflect the finalised Basel 3.1 framework. The PRA has also removed obsolete CRR references, including Article 430a and template C15.00, ensuring the reporting suite aligns with the new regime. 

Basel 3.1 final rules in summary 

The PRA’s final Basel 3.1 rules largely confirm the near final framework but introduce a series of refinements that improve clarity, consistency and operational readiness. While market risk is the only area with substantive policy change, the numerous technical clarifications across the rulebook ensure that firms can implement Basel 3.1 with greater confidence and fewer ambiguities. As the UK moves toward the 2027 go live date, these final rules provide the foundation for a more robust and internationally aligned capital regime.