Explainer

UK Basel 3.1 and CVA: what changes on 1 January 2027

From 1 January 2027 every UK bank with a material derivatives book reports CVA capital under BA-CVA or SA-CVA, and the UK's exemptions for sovereigns, corporates and pension funds end for new trades. What changes, what the PRA kept or added, and what to settle before the date.

The short answer

From 1 January 2027 the UK applies the Basel 3.1 framework for credit valuation adjustment (CVA) risk. Internal models for CVA disappear. A UK bank with a material derivatives book reports CVA capital under one of two approaches, the basic approach (BA-CVA) or, with the PRA’s permission, the standardised approach (SA-CVA); a small book can use a simpler alternative. The UK’s exemptions for trades with non-financial corporates, pension schemes and sovereigns end for new trades. Trades entered before the start date can be excluded, or discounted, until 1 January 2030. For banks that relied on those exemptions, the CVA charge rises; how far depends on the approach each bank chooses for its book.

The date

The PRA first consulted on 1 January 2025 (CP16/22), moved to 1 July 2025 in its near-final rules (PS17/23), and in January 2025 announced the start date of 1 January 2027. The final rules, PS1/26 and the rulebook instrument PRA2026/1, were published in January 2026 and take effect on that date. The CVA transitional still ends on 1 January 2030 (Credit Valuation Adjustment Risk Part, rule 7.1), so the phase-in is three years.

What applies from that date

The UK rules follow the Basel standard (MAR50) with a small number of UK choices, described below.

• Two approaches. BA-CVA, in a reduced version that recognises no hedges and a full version that recognises credit default swap hedges of the counterparty spread; and SA-CVA, a sensitivities-based charge that recognises both credit-spread and exposure hedges. A bank with SA-CVA permission may carve out netting sets to BA-CVA (MAR50.8). How the two compare on a book is set out in SA-CVA or BA-CVA: how to decide on your own book.
• A simple alternative for small books. A firm whose notional of non-centrally cleared derivatives is less than GBP 88 billion, and which has no SA-CVA permission, may use the alternative approach instead of BA-CVA: CVA capital equal to 100% of its counterparty credit risk capital, applied to the whole portfolio, recognising no CVA hedges, after notifying the PRA in writing (rules 6.1 to 6.4). The Basel standard sets a similar option at EUR 100 billion (MAR50.9).
• SA-CVA needs permission. The PRA grants SA-CVA by permission. Its supervisory statement sets expectations for the method: a documented process for inputs that cannot be obtained on a given day, model risk in margined exposures, a documented margin period of risk policy, and how sensitivities may be computed (SS12/13, section 8).

The exemptions end for new trades

Under the UK’s current rules, transactions with non-financial counterparties below the clearing threshold, pension schemes and sovereign-type counterparties carry no CVA charge. From 1 January 2027 those exemptions end for new trades (PS17/23, 4.3; rule 7.1 lists the three groups). Two exemptions stay. Derivatives arising from client clearing are outside the scope of CVA capital (Credit Valuation Adjustment Risk Part, rule 1.2, definition of covered transaction). Intragroup transactions may be excluded when the counterparty is consolidated or the trade is eliminated on consolidation, risk is controlled centrally, and nothing impedes the transfer of own funds, after notifying the PRA three months ahead (rules 3.2 and 3.3).

For a bank whose derivatives business is mostly with corporate clients, this is the change that matters. Trades that never carried CVA capital now do, under whichever approach the bank uses.

The transitional to 2030

For trades entered into before 1 January 2027 with those counterparties, a firm may choose one of two treatments until 1 January 2030, and not both (rules 7.1 and 7.5):

1. Exclusion. Leave those legacy trades out of the CVA calculation (rule 7.1(1)).
2. Discount. Include them, and apply a discount scalar to the whole CVA charge, based on a legacy exempt ratio: the share of CVA capital that came from previously exempt trades on 1 January 2027, under reduced BA-CVA. The discount shrinks each year, with transitional weighting caps of 70% in 2027, 80% in 2028 and 90% in 2029 (rules 7.1(2) to 7.3). The ratio is recalculated whenever the firm’s business with those counterparties changes materially (rule 7.3; SS12/13, 9B).

A legacy trade not excluded on 1 January 2027 stays in the calculation until it matures (rule 7.4). A trade amended materially during the transition, for example in notional, maturity, by novation or through compression, may count as a new trade (SS12/13, 9A). For the same legacy trades, the counterparty-credit exposure carries a shrinking add-on for the alpha change described below: 60% of it in 2027, 40% in 2028, 20% in 2029 (Counterparty Credit Risk Part, Article 274(2A)).

The practical effect: every new trade with a corporate, a pension scheme or a sovereign from 1 January 2027 carries CVA capital, and the legacy book comes into scope by 2030.

What the PRA changed for UK firms

The UK rules contain choices the Basel standard does not:

• A lower exposure multiplier for corporates and pension schemes. In the standardised approach for counterparty credit risk (SA-CCR), the multiplier α is 1 instead of 1.4 for non-financial counterparties and pension scheme arrangements (Counterparty Credit Risk Part, Article 274(2)). SA-CCR exposure is also the input to BA-CVA, so this lowers both the default-risk charge and the BA-CVA charge on those clients.
• A pension fund sector in BA-CVA, at a risk weight of 3.5% investment grade and 8.5% high yield or unrated, against 5% and 12% for other financials (Credit Valuation Adjustment Risk Part, rule 4.4), and a matching pension fund bucket in SA-CVA.
• Clarifications on the BA-CVA maturity floor for collateralised transactions (PS17/23, chapter 4).

What to settle before the date

1. Which approach, for which netting sets. With the exemptions gone, the CVA charge on corporate and pension fund books becomes material. Whether SA-CVA is the lower number depends on the book and its hedges; it is a calculation, not a rule of thumb.
2. The transitional choice. Exclusion or discount for the legacy book, one or the other until 1 January 2030 (rule 7.5), decided with the approach, since the discount ratio is set on 1 January 2027.
3. SA-CVA permission, if it is the answer. Permission takes preparation: a CVA desk or equivalent function, CVA sensitivities to every supervisory risk factor at least monthly, and the documented processes the PRA expects (MAR50.28 and 50.30; SS12/13, section 8).
4. Pricing to corporate clients. CVA capital on new corporate trades now has a cost; it belongs in the price of each new trade.

How to decide

Compute both approaches on your own book as of one date, with and without hedge recognition, and with the exempt trades in and out, so the capital committee sees the charge it will carry from 1 January 2027 and in 2030. Norma’s Capital Study does this on an agreed scope of your book, within days of clean data.

Sources

• Prudential Regulation Authority, PS17/23, Basel 3.1 near-final policy statement part 1, December 2023, chapter 4
• Prudential Regulation Authority, announcement of the 1 January 2027 implementation date, January 2025
• Prudential Regulation Authority, PS1/26, Basel 3.1 final rules, January 2026, and rulebook instrument PRA2026/1: Credit Valuation Adjustment Risk Part, rules 1.2, 3.2, 3.3, 4.4, 6.1 to 6.4, 7.1 to 7.5; Counterparty Credit Risk Part, Article 274
• Prudential Regulation Authority, SS12/13, January 2026 update, sections 8 and 9
• Prudential Regulation Authority, CP16/22, chapter 7, CVA and counterparty credit risk, November 2022
• Basel Committee, MAR50, Credit valuation adjustment framework