PRA – Modification by Consent for 2A Covered Bonds in the LCR

Update: On 17th April 2025, the PRA paused the process and withdrew the Modification by Consent (MbC). The PRA cited the need to address a number of technical comments and requests for clarification as the reasoning.Therefore, firms do not need to modify their approach to recognising 3rd country 2A covered bonds.

On the 8th April, the PRA has announced a Modification by Consent (MbC) for the LCR. An MbC refers to a formal process by which the PRA modifies a regulatory requirement or rule for an individual firm, with that firm’s agreement. Under Section 138A of FSMA, the PRA has the power to: “waive or modify” its own rules for a specific firm, provided certain conditions are met – and the firm agrees to the modification (hence the “by consent” part).

138A Modification or waiver of rules

(1) Either regulator may, on the application or with the consent of a person who is subject to rules made by that regulator, direct that all or any of those rules—
(a) are not to apply to that person, or
(b) are to apply to that person with such modifications as may be specified in the direction.

So what has been happening with LCR reporting?

Previously, some firms had incorrectly been reporting covered bonds as level 2A, under LCR Rulebook Article 11 (1)(d)(ii), when they were issued by 3rd countries on the assumption that those covered bonds were “subject by the national law in the third country to special public supervision designed to protect bondholders and the supervisory and regulatory arrangements” at least equivalent to those in the UK.

PRA LCR Rulebook Article 11 (1)(d)(ii)

(ii) the issuer and the covered bonds are subject by the national law in the third country to special public supervision designed to protect bondholders and the supervisory and regulatory arrangements applied in the third country must be at least equivalent to those applied in the United Kingdom;

The MbC allows firms to opt in to continuing to report these bonds “incorrectly” as level 2A for a limited period of time until the bonds mature or are disposed of. Firms can report a maximum value of these bonds up to the amount reported on 31st Jan 2025. They can not be replaced and the cap will eventually decline to zero. Firms must notify the PRA to opt in.

When can the PRA use an MbC?

The PRA may grant a modification by consent if:

It would not adversely affect the advancement of the PRA’s objectives
The firm consents to the modification in writing
The modification applies to all firms meeting specified criteria, making it a standardised or template change, but still voluntary