CP3/25 – Recognised exchanges policy and transfer of main indices

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Responses are requested by Wednesday 18 June 2025.

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In the policy statement for this consultation, the PRA will publish an account, in general terms, of the representations made as part of this consultation and its response to them. In the policy statement, the PRA is also required to publish a list of respondents to its consultations, where respondents have consented to such publication.

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Responses can be sent by email to: CP3_25@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Ioana Neamtu / Market and Counterparty Credit Risk
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed conditions an investment exchange must meet to be a ‘recognised exchange’ (RE) for the purposes of Article 4(1)(72)(c) of the assimilated Capital Requirements Regulation No 575/2013 (CRR). This CP is relevant to firms that use or accept assets traded on non-UK exchanges for credit risk mitigation, liquidity risk, and market and counterparty credit risk purposes.

1.2 The PRA also proposes to restate the list of ‘main indices’ in the PRA Rulebook without any policy changes. A main index is a list of securities that are traded on a stock exchange, which are treated as eligible for recognition as Credit Risk Mitigation. The list is currently in Commission Implementing Regulation 2016/1646 (the Technical Standard or the TS). The PRA is engaging with HM Treasury (HMT) and it is expected that the TS will be revoked in two stages to facilitate the PRA’s proposed implementation set out in paragraphs 1.19 and 1.20.

1.3 The proposals in this CP would result in changes to the following Parts of the PRA Rulebook:

• the introduction of a new Recognised Exchanges (CRR) Part;
• Glossary Part;
• Counterparty Credit Risk (CRR) Part;
• Credit Risk Mitigation (CRR) Part; and
• SDDT Regime – Interim Capital Regime Part.

1.4 The policy proposals included in this CP set out:

• conditions for the purposes of identifying recognised exchanges or assets traded on such exchanges under Article 4(1)(72)(c) UK CRR;
• implementation and evaluation proposals of the REs policy;
• revocation of supervisory statement 20/13;^{footnote [1]}
• an amendment to the definition of ‘higher risk equity exposures’ that was included in the PRA’s near-final rules implementing the Basel 3.1 standards to make related changes to the near-final treatment of listed equities under the standardised approach (SA) for credit risk;^{footnote [2]} and
• restatement in the PRA Glossary of the list of ‘main indices’ currently situated in the TS.

1.5 In November 2024, HMT made amendments to the definition of REs in CRR Article 4(1)(72).^{footnote [3]} In particular, under Article 4(1)(72)(c) UK CRR, an investment exchange will be an RE if it satisfies any conditions specified in the PRA Rulebook for the purpose of identifying REs or assets traded on such exchanges. Such assets receive a preferential treatment within the prudential framework, ie the capital treatment is more risk sensitive as it recognises the risk reducing measures in place from being an RE. The PRA’s proposals in this CP mainly address the conditions under which an overseas exchange can become an RE. Once these conditions are finalised, it will be firms’ responsibility to make an assessment in line with the conditions.

1.6 The PRA’s proposed conditions reflect the importance of exchange and market structure risk practices, alongside asset liquidity, as key in determining the appropriate risk treatment within the prudential framework. The proposals jointly advance the safety and soundness of PRA regulated firms and facilitate international competitiveness, through a flexible and risk-based approach that promotes doing business in the UK using assets traded in foreign jurisdictions. On promoting safety and soundness, the proposals closely align the prudential treatment to the risks posed by particular assets or market structures. The proposals facilitate international competitiveness and the relative standing of the UK financial sector by contributing to levelling the international playing field and increasing asset eligibility, complementing existing rules.

1.7 The PRA’s proposal to transfer the main index section of the TS into the PRA Rulebook also facilitates the accessibility and transparency of the regulatory framework.

1.8 This CP is relevant to PRA-authorised UK banks, building societies, Small Domestic Deposit Takers (SDDTs), SDDT consolidated entities, PRA-designated UK investment firms, and PRA-approved, or PRA-designated, financial or mixed financial holding companies.

1.9 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. 

1.10 None of the statutory panels were consulted about the proposals in this CP. However, the PRA engaged with a number of PRA-regulated firms, and an industry association, on the topic.

1.11 The PRA’s Cost Benefit Analysis Panel was not consulted on the CBA as it was below the materiality threshold.

1.12 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.

Background

1.13 The TS contains a list of REs and a list of main indices (MI). The list of REs is consistent with the CRR RE definition as set out in SS20/13. Under UK CRR, financial instruments traded on an RE may be used as eligible collateral or firms may apply a risk-based preferential capital treatment in the prudential framework. The MI list is used in the Credit Risk Mitigation framework to determine (i) collateral eligibility under the Financial Collateral Simple Method and (ii) preferential haircuts under the Financial Collateral Comprehensive Method.

1.14 After the exit of the UK from the EU, HMT amended the definition of REs in the CRR and empowered the PRA to maintain the list of eligible exchanges in the TS. Due to links between the list of REs and the equivalence provision under paragraph 8 of Schedule 3 to Regulation (EU) No 600/2014 of the Markets in Financial Instruments Directive (MiFIR) and that no equivalence decisions have been made, the list of eligible exchanges was limited to UK exchanges.

1.15 In 2022, HMT consulted on changes that would facilitate the competitiveness of the prudential regime in the UK, including the definition of REs under the CRR. As a result, HMT amended the definition of REs in the CRR in November 2024.^{footnote [4]} Under limb (c) of the Article 4(1)(72) UK CRR definition, an exchange will be an RE if it is ‘an investment exchange (other than a recognised overseas investment exchange) that satisfies any conditions specified in the PRA Rulebook for the purpose of identifying recognised exchanges or assets traded on such exchanges’.

1.16 This CP proposes the introduction of rules specifying conditions under Article 4(1)(72)(c) of UK CRR and consequential amendments to its near-final rules implementing the Basel 3.1 standards.

1.17 As part of a gradual approach to transferring certain assimilated law into the PRA Rulebook, this CP also proposes to restate the list of ‘main indices’ currently in the TS in the Glossary Part of the PRA Rulebook.

1.18 The proposed changes to REs and MIs also lead to several consequential amendments: the revocation of SS20/13, which provided clarity on the list of REs specified in the TS, as well as consequential amendments to the PRA Rulebook to the Counterparty Credit Risk (CRR) Part, the Credit Risk Mitigation (CRR) Part and the SDDT – Interim Capital Regime Part.

Implementation

1.19 The PRA proposes that the implementation date for the rules specifying conditions under CRR Article 4(1)(72)(c) and the revocation of SS20/13 would be Wednesday 1 July 2026.

1.20 The PRA proposes that the changes resulting from this CP to its near-final rules implementing the Basel 3.1 standards would be introduced alongside the broader implementation of these standards.^{footnote [5]}

Responses and next steps

1.21 This consultation closes on Wednesday 18 June 2025. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP3_25@bankofengland.co.uk.

1.22 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.

1.23 Please also 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

Proposal 1 – Definition of recognised exchanges

2.1 The PRA proposes to introduce a new Recognised Exchanges (CRR) Part. This Part will specify conditions under Article 4(1)(72)(c) UK CRR, which focus on two areas:

• exchange and market structure risk; and
• asset liquidity risk.

First stage: Exchange and market structure risk

2.2 The first set of criteria pertains to the exchange and market structure. It broadly reflects the requirements that were used to initially construct the TS list of REs. The assessment focuses on key conditions that promote the safety and soundness of an exchange and robust clearing and margining requirements for certain contracts (predominately derivatives). It also includes market structure conditions, which are designed to give a broad level of assurance that the safeguards associated with market structures are consistent with those safeguards in the UK.

2.3 The PRA proposes that an investment exchange meets the first set of criteria if the investment exchange:

‘(i) brings together or facilitates the bringing together of parties for the purpose of buying and selling interests in financial instruments;

(ii) is authorised (or otherwise recognised) and subject to ongoing supervision by a regulator or other public authority;

(iii) functions regularly on every business day in the relevant jurisdiction;

(iv) functions based on non-discretionary rules defining:

(1) the conditions for the operation of the investment exchange;

(2) access to or membership of the investment exchange;

(3) admission of financial instruments to trading; and

(4) suspension or removal of financial instruments from trading;

(v) has a robust clearing and settlement mechanism consistent with international standards; and

(vi) applies margining practices consistent with international standards to contracts listed in Annex II of CRR’.^{footnote [6]}

Second stage: Asset liquidity risk

2.4 In conjunction with the exchange and market structure criteria, the PRA proposes a second set of criteria pertaining to asset liquidity. An asset liquidity assessment is needed to ensure that risks are mitigated sufficiently to warrant a more risk-sensitive prudential treatment. For example, a stock can be traded on a reputable exchange meeting the criteria in paragraph 2.3 but can be very illiquid at the same time. If a firm receives that stock as collateral for credit risk mitigation purposes, and it needs to liquidate it, the market for that specific stock on the exchange may not be liquid enough to realise its assumed value.

2.5 The proposed asset liquidity conditions mirror requirements under the Liquidity Framework (LF), which firms already implement as part of their liquid assets assessment. It is proposed that an eligible asset is one that meets the conditions that are identical to those set out in Articles 7(5) and (6) of the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook (the relevant provisions of Article 7(6) for these purposes are those that apply to assets admitted to trading in an organised venue, which is not an RE). In summary, these provisions generally require that the value of the assets should be capable of being determined based on widely disseminated and easily available market prices, are part of an active and sizeable market, have historical evidence of low bid-ask spreads, have high trading volume, and have a large and diverse number of participants with a robust market infrastructure.

Implementation and evaluation

2.6 The PRA proposes that firms should undertake the exchange and asset liquidity risk assessment themselves. To mitigate the risk that firms adopt inconsistent approaches to the exchange and asset liquidity conditions, the PRA proposes to evaluate the implemented approaches through post implementation thematic reviews. If needed, the PRA can then issue further guidance on the rule interpretation.

Amendment to the definition of higher risk equity exposure

2.7 In PS9/24 – Implementation of the Basel 3.1 standards near-final part 2, the PRA published its near-final rules that will implement the Basel 3.1 standards from 1 January 2027. In accordance with the PRA’s near-final rules, equity exposures must either be assigned a 400% or a 250% risk weight under the standardised approach (SA) for credit risk. Firms will be required to apply the higher 400% risk weight to exposures to businesses that are less than five years old and are not listed on an RE.

2.8 The PRA proposes to amend the definition of ‘higher risk equity exposures’ that are assigned the higher 400% risk weight. The PRA proposes to amend its near-final rules such that, for the purpose of the listing condition, an equity exposure would only be classified as a ‘higher risk equity exposure’ if it is not listed on an exchange that meets the criteria pertaining to the exchange and market structure.

2.9 The PRA notes that its proposal may result in a greater proportion of equity exposures receiving the lower 250% risk weight under the SA than would be the case under its near-final rules published alongside PS9/24. However, the PRA considers that the proposed requirements would ensure that a lower risk weight is assigned to listed equities where risk mitigants such as greater transparency of information and accountability to shareholders are in place.^{footnote [7]} The PRA does not consider it necessary to require that the exchange meets the proposed criteria for REs pertaining to asset liquidity as the risk weight assigned to the exposure is not based on a firm’s ability to quickly liquidate it (as opposed to where equities are used as a form of credit risk mitigation).

2.10 The PRA does not propose to amend the other criteria that an exposure is only classified as a ‘higher risk equity exposure’ if it is an exposure to a business that is less than five years of age. The PRA proposes that its proposed amendment to the definition of ‘higher risk equity exposures’ would be introduced alongside the broader implementation of the Basel 3.1 standards.

PRA objectives analysis

2.11 This proposal specifies conditions under Article 4(1)(72)(c) that, if met, would allow firms to benefit from the risk-sensitive prudential treatment associated with holding assets that are traded on an RE. The proposal would expand the number of eligible REs relative to the current position and the additional liquidity tests will mitigate the risk sufficiently to warrant a more risk-sensitive capital treatment. Therefore, the proposal advances the PRA’s safety and soundness objective. The PRA considers its proposal in relation to the treatment of equity exposures under the SA for credit risk would advance its primary objective in a more proportionate and risk sensitive manner than its near-final rules published alongside PS9/24.

2.12 The PRA has assessed whether this proposal facilitates effective competition between firms, the international competitiveness of the UK economy and its growth in the medium to long term. The proposal is expected to increase the availability of a risk sensitive prudential treatment associated with an asset being traded on an RE beyond the current levels, which should facilitate international competitiveness and the relative standing of the UK financial sector by contributing to level the international playing field. The proposal should have a limited but positive impact on competition. They will allow UK headquartered firms to compete more effectively with international branches in the UK.

2.13 The PRA notes that its proposal may result in a greater proportion of equity exposures receiving the lower 250% risk weight under the SA than would be the case under its near-final rules published alongside PS9/24. This proposed amendment is more closely aligned to the approaches taken in other major jurisdictions. While the PRA does not expect its proposal in relation to the treatment of equity exposures to have a material impact on a firm’s capital requirements, it considers that its proposal may support the international competitiveness of UK firms.

‘Have regards’ analysis

2.14 In developing this proposal, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from 2024. The PRA has also had regard to considerations related to CRR rules (as defined in section 144A of FSMA) where the proposed new rules are being revoked and recreated in PRA rules. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal: 

1. Proportionality (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006) and efficient and economic use of PRA resources (FSMA regulatory principles). The PRA’s engagement with firms indicated that the REs provision affects a limited number of firms with complex business models. The PRA’s proposal to have firms evaluate criteria was assessed against the alternative of having the PRA designate specific exchanges or eligible assets. Given the potential resource burden on the PRA to create and regularly update such a list, the PRA considered it both proportionate and an efficient and economic use of PRA resources to have firms dynamically evaluate assets.
2. Maintaining and enhancing the UK’s position as a world-leading global finance hub (2024 HMT recommendation letter to PRC). The PRA’s proposal promotes flexibility, breadth and depth in core principles of asset evaluation considering the business complexity of financial institutions operating in the UK. The proposal contributes to the UK’s position as a financial hub.
3. Ensuring the UK’s capital markets are competitive and support UK growth (2024 HMT recommendation letter to PRC). The PRA proposal facilitate international competitiveness in capital markets and incentivise firms to increase operations using a wider range of assets from other jurisdictions than at present. This could attract further business in the UK and support the growth of the UK economy.
4. Relevant international standards (FSMA CRR rules). The PRA considers its proposal on the scope of application would align with international standard. It would have a positive impact for the relative standing of the UK as a place for internationally active investment firms to be based or to carry on activities.

2.15 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Proposal 2 – Transfer of main indices list to the PRA Rulebook

2.16 The list of ‘main indices’ currently in the assimilated Commission Implementing Regulation 2016/1646 is used in the Credit Risk Mitigation framework to determine (i) collateral eligibility under the financial collateral simple method and (ii) preferential haircuts under the financial collateral comprehensive method. The PRA considers it appropriate to restate the main index definition into the Glossary Part of the PRA Rulebook. The PRA does not propose to make any policy changes to the current main indices list.

PRA objectives analysis

2.17 This proposal is intended to facilitate greater transparency through consolidating all relevant requirements in one place. Through enhanced clarity and easier navigation of PRA requirements, the PRA considers that this restatement is consistent with its primary objective of promoting safety and soundness of firms.

2.18 The PRA does not consider its proposal will have any impact on its secondary objectives to facilitate effective competition, the international competitiveness of the UK economy and the growth of the economy in the medium to long term.

‘Have regards’ analysis

2.19 In developing this proposal, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from 2024. The PRA has also had regard to considerations related to CRR rules (as defined in section 144A of FSMA) where the proposed new rules are being revoked and recreated in PRA rules. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

1. Transparent exercise of the PRA’s functions: Consolidating all relevant requirements into the PRA Rulebook will facilitate greater transparency and ease of understanding of requirements across firms.

2.20 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Cost Benefit Analysis

2.21 The PRA does not expect firms to incur additional costs of more than minimal significance as a direct result of the REs proposal, where the current alternative is no method of recognising an exchange. Firms will benefit from a dynamic and more flexible approach to asset evaluation for credit risk mitigation, liquidity risk, and market and counterparty credit risk purposes. In terms of costs, firms will not be able to rely on an existing list of exchanges so there may be some capital cost if they currently do not assess the exchange. Firms will also have to evaluate exchanges and asset liquidity criteria. The asset liquidity criteria mirror evaluation criteria under the LF, so that should not impose an additional burden.

2.22 This is a permissive change so firms can choose to exercise it if the benefits exceed the costs. Market intelligence indicates that firms using the RE provision are knowledgeable of exchange functioning and margining requirements through their existing business operations and they already evaluate liquidity criteria when accepting collateral. The PRA does not foresee any other costs from this proposal – it will not have a negative impact on firms’ resilience because the proposed criteria limit eligibility to safe and liquid assets, traded in a manner consistent with UK practices.

2.23 The PRA does not expect its proposals in relation to the SA for credit risk to create additional burdens of more than minimal significance given the proposed criteria are aligned with the broader proposed criteria for REs. The PRA notes the proposals may result in a reduction in capital requirements for equity exposures but does not expect this to be material (particularly as it only affects exposures to businesses that are less than five years old), and, therefore, does not foresee any negative impact on firms’ resilience. The PRA does not expect its proposal to transfer the main index section of the Technical Standards to PRA rules to impose material costs or benefits on firms, as it is not proposing to make any policy changes.

Impact on mutuals

2.24 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms subject to the CRR.

Equality and diversity

2.25 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 given the nature of the proposed impact.