FCA explores market risk capital reforms for principal trading firms

What does this mean?

While the UK and EU investment firm prudential regimes currently remain closely aligned, divergence is emerging as both jurisdictions reassess their frameworks, including the degree of alignment with banking capital rules. 

In October 2025, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published their final response to the European Commission’s Call for Advice on the EU investment firm prudential framework. Their recommendations provide useful reference points for UK firms responding to the FCA’s engagement.

In the EP, the FCA sets out a broad range of possible approaches, with no stated preference, and invites feedback on their relative merits.

Amending the existing standardised approach (K-NPR)

The FCA proposes incorporating relevant requirements directly into the FCA Handbook, removing the need for a ‘point-in-time’ cross-reference to the UK CRR.

Potential changes include revisiting risk weights and hedging recognition, noting that the framework remains anchored to legacy calibrations that may no longer reflect current market conditions.

Expanding or adapting margin-based approaches (K-CMG)

K-CMG could be extended to uncleared OTC derivatives using historic margins, or to certain cash products via “derived” margin, subject to appropriate governance and control. Hedging or diversification recognition across multiple clearing portfolios is also under consideration.

K-CMG’s current design can be conservative due to the combined effect of the high-watermark and the scalar. In the EU, the EBA and ESMA recommended replacing the high watermark with a rolling moving average.

Making internal model approaches more proportionate

Whilst firms may seek permission to use market risk internal models under IFPR, none has such a permission in practice due to cost and complexity.

The FCA is exploring whether more proportionate model-based approaches could better align regulatory capital with firms’ internal risk management practices, including techniques such as scenario analysis or Monte Carlo simulation.

Legacy BIPRU approaches (notably “CAD 1 models”) provide useful precedent for simpler, non-VaR-based modelled methodologies aligned to the scale and complexity of principal trading firm activities.

Although certain features of the CAD 1 methodology were incorporated into the current market risk standardised approach, particularly in relation to options, these have been simplified and remain anchored to legacy calibrations. As a result, the design and calibration merit reconsideration.

Considering a Net Capital Rule (NCR) approach

The FCA notes that most jurisdictions outside the UK and EU do not apply Basel-style capital frameworks to non-banks, instead relying on net capital rule (NCR) regimes that require firms to maintain specified minimum levels of net liquid assets to enable an orderly liquidation without causing mutualised losses.

The FCA is exploring the adoption of an NCR approach. This option would, however, lead to a change in paradigm and, therefore, require broader changes beyond market risk capital. It would entail a change in the entire framework.

Considering a sensitivities-based method (drawing on FRTB)

The FCA is seeking views on whether elements of the Fundamental Review of the Trading Book (FRTB) – particularly the sensitivities-based approach (also known as advanced standardised approach, or ASA) – could be applied or adapted for investment firms.

Under the banking regime, firms above relatively low trading book thresholds must apply the ASA, while firms below the threshold may apply the simplified standardised approach (SSA), which retains the current standardised framework but applies asset-class-specific scalars that materially uplift capital requirements relative to K-NPR.

This leads to two significant observations as FRTB is being considered for investment firms:

• The SSA is very punitive due to the scale of the multipliers when compared to the current K-NPR calibration.

• The threshold above which the ASA is compulsory is relatively low, particularly as it is calculated on gross positions, limiting its practical usability.

In the EU, the EBA and ESMA have proposed for FRTB to be made optional for investment firms. Again, industry may choose to support optionality for firms that deal on own account, and which may benefit from this approach. 

Repurposing trading counterparty default (K-TCD) and liquidity-based methods

The FCA also explores whether elements of replacement cost and potential future exposure (used under K-TCD) could be repurposed to capture market price risk, and whether a weighted liquidity exposure approach – linking capital to the time required to liquidate positions – could better reflect the key prudential risks associated with trading firms.

Digital assets: interaction with proposed new k-factor for the market risk of crypto-assets needs to be considered

The FCA’s crypto roadmap envisages a new prudential regime for crypto-asset activities (CRYPTOPRU) that will interact with MIFIDPRU. While largely outside the scope of the EP, the FCA published consultation papers in December proposing a market risk capital treatment for crypto-assets under IFPR, with a new Net Cryptoasset Position (K-NCP) as set out in CP25/42. 

Implementation details remain under consideration, and the proposals may evolve ahead of expected policy finalisation later in 2026. The interaction between the FCA’s market risk review for investment firms and the emerging prudential treatment of crypto-assets therefore warrants further analysis.

What do firms need to do?

The FCA’s EP represents a material inflection point for the UK investment firm prudential regime. By signaling openness to structural reform and explicitly inviting evidence-based input, the FCA has created a genuine opportunity for industry to influence the future architecture of market risk capital requirements.

Firms that can clearly demonstrate where the current framework overstates risk, and propose credible, operationally robust alternatives supported by appropriate governance and safeguards, will be best positioned to shape the direction of travel.

Next steps

Firms should engage actively with the FCA, through written responses by 10 February 2026, and participation in the FCA’s planned industry roundtable in late January 2026.