PS12/21 | CP1/21 – Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA

Policy Statement 12/21 | Consultation Paper 1/21

PS12/21 – Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA

Published on 03 June 2021

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 1/21 ‘Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA’ (page 2 of 2). It also contains the PRA’s final policy, as an updated Statement of Policy (SoP) ‘The PRA’s approach to the publication of Solvency II technical information’ (Appendix 1).

This PS is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, and to the Society of Lloyd’s and its managing agents. Non-Directive firms are out of the scope of this PS. 

Summary of responses

The PRA received 10 responses to the CP. Respondents generally welcomed the PRA’s proposals on DLT assessments, the publication of indicative SONIA OIS-based curves, the Credit Risk Adjustment (CRA) for SONIA OIS, the LTAS, the TMTP, MA applications, and internal models. 

Some respondents noted the financial impact of the GBP RFR transition to SONIA OIS, and asked the PRA to consider smoothing this impact, by either: 

  • giving firms a window of time to make the change; 
  • introducing a new transitional measure; 
  • adding an ‘upwards adjustment’ to the SONIA OIS curve; or 
  • allowing an immediate recalculation of the TMTP at the transition date, regardless of whether the usual criteria for a recalculation were met. 

There were also requests for clarification on some points. The PRA’s feedback to both the smoothing proposals and the clarification requests are set out in Chapter 2.

Some responses expressed views about more fundamental aspects of the construction of Solvency II RFRs (such as the hierarchy of instruments to be used as inputs to the RFR curves, and the choice of interpolation methodology), and about the PRA’s publication of technical information, which were outside of the scope of the proposals in CP1/21. Those points are not addressed further here. 

Implementation

The new policy will take effect from the date of publication of this PS and updated SoP, Thursday 3 June 2021, except for the transition to the new GBP RFR, which will take effect in technical information published with reference dates from Saturday 31 July 2021. Next steps are outlined in Chapter 1 of the CP.

The proposals set out in this PS have been designed in the context of the UK having left the European Union and the transition period having come to an end. Unless otherwise stated, any references to EU or EU derived legislation refer to the version of that legislation which forms part of retained EU law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.

Appendix


CP1/21 – Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA

Published on 07 January 2021

Overview

This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA’s) proposed approach to deep, liquid and transparent (DLT) assessments and the transition of Solvency II technical information (TI) from the London Interbank Offered Rate (Libor) to the Sterling Overnight Index Average (SONIA) in 2021. 

The proposals in this CP would result in changes to the PRA Statement of Policy (SoP) ‘The PRA’s approach to the publication of Solvency II technical information’ (Appendix).

This CP is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, and to the Society of Lloyd’s and its managing agents. Non-Directive firms are out of the scope of this CP. 

Implementation

The PRA proposes to implement the transition for GBP TI to SONIA from and including Saturday 31 July 2021. 

Responses and next steps

This consultation closes on Wednesday 31 March 2021. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP01_21@bankofengland.co.uk

The proposals set out in this CP have been designed in the context of the UK having left the European Union and the transition period having come to an end. Unless otherwise stated, any references made to legislation, including that which is ‘retained EU law’, relate to the UK version. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework. 

Consultation Paper 1/21

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