Posts by: Emily Yung

EMMI Report on Outcome of EURIBOR Pre-Live Verification Program


On May 5, 2017, the European Money Markets Institute (“EMMI“) published a report on the outcome of the Euro Interbank Offered Rate (“EURIBOR“) pre-live verification (“PLV“) program.

The PLV program has given EMMI an in-depth view of the market underpinning EURIBOR. It confirmed that market activity has changed as a result of current regulatory requirements, other sources of liquidity available to market participants, and other external factors. In this context, EMMI concluded that:

  • The rate and volatility levels under both methodologies (that is, current quote-based vs. fully transaction-based) are insufficiently similar for a seamless transition to be feasible under current market conditions.
  • The decreased level of daily market activity under current market conditions does not allow for a methodology that is fully based on transactions, as this would not yield a sufficiently sound and robust benchmark.

In its FAQs published alongside the report, EMMI stressed that there will be no immediate changes to the EURIBOR methodology and that the current quote-based EURIBOR will continue for the period necessary to develop an alternative methodology. EMMI stated that it remains committed to align the EURIBOR benchmark with the EU Benchmarks Regulation ((EU) 2016/1011). Accordingly, it will work on a hybrid methodology (that is, a model that is supported by transactions whenever available and relies on other pricing sources when necessary).

EBA Amends ITS on Benchmarking of Internal Approaches for 2018 Benchmarking Exercise


On May 4, 2017, the European Banking Authority (“EBA“) published an amended version of its implementing technical standards (“ITS“) on benchmarking of internal approaches under Article 78(8) of the CRD IV Directive (2013/36/EU) (EBA ITS 2017 02).

The final draft ITS are contained in a zip file that has been added to the EBA’s dedicated webpage on regulatory technical standards (RTS) and ITS on benchmarking portfolios. They are intended for use by the EBA and competent authorities in their 2018 assessment of internal approaches for credit and market risk. The ITS have been amended to reflect updates to the Single Rulebook. They also reflect updates to the benchmarking portfolios that were necessary to facilitate the 2018 benchmarking exercise for both credit and market risk so that they remain relevant for supervisors.

The amendments are expected to apply to the submission of initial market valuation data in November 2017 and of other market and credit risk data in April 2018. The EBA has submitted the updated ITS to the European Commission, but the Commission has not yet adopted them.

The EBA aims to annually update the ITS to ensure future benchmarking exercises are relevant and successful.

Brexit – European Council Adopts EU Negotiating Guidelines


On April 29, 2017, a Special European Council, meeting as 27 member states, adopted the Article 50 guidelines to formally define the EU’s position for the Brexit negotiations with the UK.

The guidelines are set out under six headings that cover core principles, a phased approach to the negotiations, an agreement on arrangements for an orderly withdrawal, preliminary and preparatory discussions on a framework for the EU-UK future relationship, the principle of sincere cooperation, and the procedural arrangements for negotiations under Article 50.

On May 22, 2017, the General Affairs Council is expected to authorize the opening of the negotiations, nominate the European Commission as the EU negotiator, and adopt the negotiating directives. The guidelines and the negotiating directives may be updated in the course of the negotiations as necessary.

ESMA Will Not Extend EMIR Exemption for the Collateralization of Bank Guarantees for Energy Derivatives

On November 19, 2015, the European Securities and Markets Authority (“ESMA“) published a statement announcing that it will not further extend the existing three year grace period (expiring March 2016) for non-financial firms’ use of non-collateralized bank guarantees to cover transactions in energy derivatives cleared by EU central counterparties (“CCPs“) under EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories) (Regulation 648/2012).

From March 15, 2016, CCPs authorized under EMIR will need to fully collateralize commercial bank guarantees used to cover transactions in derivatives relating to electricity or natural gas produced.

ESMA considered that an extension would not be appropriate for the following reasons:

  • Allowing fully uncollateralized commercial bank guarantees could mean an undue source of risk for CCPs.
  • The existing three year grace period seemed sufficient for the wholesale energy market to prepare for the incoming collateral obligations.
  • Some EU CCPs already have implemented the EMIR requirements.
  • EMIR requires that a CCP only accepts highly liquid collateral with minimal credit and market risk.
  • A new postponement would maintain a discrepancy with international standards such as the CPMI-IOSCO principles for financial market infrastructures.
  • ESMA expects parties to be ready to implement the collateral obligation relating to commercial bank guarantees by March 2016.

ESMA Launches MiFID Suspensions and Removals Database

On November 17, 2015, the European Securities and Markets Authority (“ESMA“) launched a database of financial instruments that have been suspended or removed from trading under Article 41 of the Markets in Financial Instruments Directive (2004/39/EC) (“MiFID“).

The database contains information about suspensions and removals that has been notified to ESMA under Article 41(2) of MiFID. According to an accompanying press release, the database covers financial instruments admitted to trading in European regulated markets and displays a list of the current suspensions in these markets, but not suspensions linked to them. The database also allows searching for instrument currently or previously suspended to consult the key details of its suspensions.

European Parliament Adopts SFT Regulation

On October 29, 2015, the European Commission published a press release announcing that the European Parliament has adopted the proposed Regulation on reporting and transparency of securities financing transactions (the “SFT Regulation“).

Securities financing transactions (“SFTs“) allow market participants to access secured funding, in order to secure financing for their activities. This involves the temporary exchange of assets as collateral for a funding transaction.

The Regulation, proposed by the European Commission in January 2014, enhances transparency in the shadow banking sector in three ways:

  • introduction of reporting by any EU financial or non-financial counterparty (excluding SMEs) of all SFTs, except those concluded with central banks, to central databases known as trade repositories. Depending on their category, firms should start reporting at different stages from 12 to 21 months after the entry into force of the relevant regulatory technical standards;
  • requirement for investment funds to disclose information regarding their use of SFTs and total return swaps to investors in their regular reports and in their pre-contractual documents from the entry into force of the Regulation, while the existing funds will have 18 months to amend them; and
  • introduction 6 months after the entry into force of the Regulation of some minimum transparency conditions that should be met on the reuse of collateral, such as
    • counterparty’s consent to the reuse must have been obtained in a written agreement;
    • the potential risks must have been disclosed to the counterparty;
    • the collateral reused must be shifted from the account of the counterparty to the account of the re-user.

The provisions relating to reuse apply to all EU entities as well as third country entities which reuse collateral belonging to an EU entity.

The Commission has also published FAQs on the SFT Regulation.

Following adoption by Parliament, the SFT Regulation will be formally adopted by the Council in the near future, and will be published in the Official Journal of the EU.

European Commission Adopts Delegated Regulation on RTS Relating to Prudent Valuation Under CRR

On October 26, 2015, the European Commission published the text C(2015) 7245 final of a Delegated Regulation it has adopted on regulatory technical standards (RTS) for prudent valuation under Article 105(14) of the Capital Requirements Regulation  (Regulation 575/2013).

The Delegated Regulation specifies how additional valuation adjustments (“AVAs“) should be applied to fair-value positions to determine a prudent value that achieves an appropriate degree of certainty having regard to:

  • the dynamic nature of trading book positions;
  • the demands of prudential soundness; and
  • the mode of operation and purpose of capital requirements in respect of trading book positions.

The Delegated Regulation specifies two approaches for calculating AVAs for the purposes of determining the prudent value of fair-valued positions: a simplified approach and a core approach.

A separate Annex to the Delegated Regulation sets out the formulae to be used for the purpose of aggregating AVAs.

The next step will be for the Council of the EU and the European Parliament to consider the Delegated Regulation.

European Commission Adopts Delegated Regulation Amending Solvency II Delegated Regulation on Treatment of infrastructure and ELTIF Investments

The European Commission has adopted a Delegated Regulation amending the Solvency II Delegated Regulation (EU 2015(35)) concerning the calculation of regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings, in particular infrastructure investments and investments in European long-term investment funds (ELTIFs).

The aim of the amending Regulation is to remove specific regulatory impediments to the financing of long-term investment projects by insurers. The revisions made to the Solvency II Delegated Regulation relate to issues including:

  • Infrastructure investments. The amending Regulation introduces a specific treatment in the solvency capital requirements for infrastructure investments (being investments in special purpose entities that own, finance, develop or operate infrastructure assets that provide or support essential public services).
  • Investments in ELTIFs. The amending Regulation extends to ELTIFs the provisions in the Solvency II Delegated Regulation concerning the treatment of European venture capital funds and European social entrepreneurship funds.

The amending Regulation also contains provisions concerning the treatment of equities traded on multilateral trading facilities and the scope of the equity transitional measure in Article 173 of the Solvency II Delegated Regulation. The next step will be for the Council of the EU and the European Parliament to consider the amending Regulation. The Commission intends the amendments made by the amending Regulation to be in place as soon as possible.

Legislative Proposal for an EU Framework for Simple, Transparent and Standardized Securitization

On September 30, 2015 the European Commission (EC) published a legislative proposal for an EU framework for simple, transparent and standardized securitization. It has also published a legislative proposal for a regulation amending the Capital Requirements Regulation (Regulation 575/2013) (CRR) which deletes certain articles and extensively revises the capital requirements for securitizations.

The proposed Securitization Regulation is based on what has been put in place in the EU to address the risks in complex and risky securitizations but is intended to help differentiate simple, transparent and standardized products and apply a more risk-sensitive prudential framework.

The purpose of the CRR Amendment Regulation is to revise the EU regime relating to capital changes for credit institutions and investment firms originating, sponsoring or investing in securitization instruments, to provide for a more risk-sensitive regulatory treatment for simple, transparent and standardized securitizations.

The proposals are part of the Capital Markets Union action plan adopted by the EC on September 30, 2015.

EBA Report on Asset Encumbrance: September 2015

On October 1, 2015, the European Banking Authority (EBA) published its first report analyzing asset encumbrance in EU banks.

The aim of the report is to monitor the extent of and the changes in the levels of asset encumbrance at an EU level and the sources for asset encumbrance. The report is based on data reported in December 2014 and March 2015 in accordance with the implementing technical standards on asset encumbrance reporting contained in European Commission Implementing Regulation 2015/79.

The EBA found there was no indication of a general increase in the level of asset encumbrance across EU banks in recent years, based on a comparison with a similar analysis performed by the European Systemic Risk Board in 2011. In March 2015, the overall weighted average encumbrance ratio was 27%, with a wide dispersion across institutions and countries.