EBA Updates Single Rulebook Q&As: June 26, 2015

On June 26, 2015, the European Banking Authority (EBA) updated its Q&As on the single rulebook, publishing eight new questions.

The single rulebook Q&As relate to the CRD IV package of reforms (that is, the CRD IV Directive (2013/36/EU) and the Capital Requirements Regulation (Regulation 575/2013) (CRR) and the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD)).

The question IDs and topics for the new answers published are:

  • ID: 2014_889: Definition of Additional Tier 1 instruments for the purposes of Article 141 of the CRD IV Directive.
  • ID: 2014_1415: Significance of the term “without prejudice” in Article 86 of the CRR.
  • ID: 2015_1741: Exemption of deduction under transitional arrangements. Calculation of the threshold of Article 470 of the CRR.
  • ID: 2014_1665: Inconsistencies in FINREP validation rules for allowances and provisions for impaired debt instruments, defaulted guarantees and defaulted commitments.
  • ID: 2015_1855: Reporting of secured lending if an institution has no possession of collateral.
  • ID: 2015_2034: FINREP: reporting of accumulated changes in fair value due to credit risk and FINREP sign convention.
  • ID: 2014_1011: Basel I floor.
  • ID: 2015_1740: Excess of deductions from AT1 items over AT1 capital that must be deducted from CET1, but is caused by the impact of transitional arrangements.

ISDA’S Standard Initial Margin Model (SIMM) For Uncleared Derivatives: Draft Documents

On June 19, 2015, the International Swaps and Derivatives Association, Inc. (ISDA) published three draft documents relating to its proprietary Standard Initial Margin Model (SIMM) for non-cleared derivatives. The SIMM project aims to provide a common methodology for the calculation of initial margin.

The draft SIMM documents comprise:

  • Discussion Document: Uncleared Initial Margin Calculations and Processes Related to the ISDA Working Group on Margin Requirements (WGMR) SIMM Initiative – outlining current implementation challenges surrounding risk-based uncleared margin.
  • ISDA SIMM Methodology: Version 2.12 – describing the calculations and methodology for calculating initial margin under the ISDA SIMM for uncleared derivatives.
  • ISDA SIMM Methodology: Risk Data Standards, Version 1.12 – setting standards for the details of risk calculation and data exchange and proposing a common standard for interchange of SIMM risk between participants.

IAIS Consults On Higher Loss Absorbency Requirement For Global Systemically Important Insurers

On June 25, 2015, the International Association of Insurance Supervisors (IAIS) published a consultation paper on the higher loss absorbency (HLA) requirement for global systemically important insurers (G-SIIs), seeking feedback on several options relating to the design, development and calibration of the HLA.

The primary purpose of the HLA is to help reduce the probability and impact on the financial system of the distress or failure of a G-SII. When the HLA requirement is implemented G-SIIs will be expected to hold regulatory capital that is not less than the sum of the required capital amounts from the basic capital requirements (BCR) and the HLA.

The HLA is to be delivered to the G20 for endorsement in November 2015 and will apply to G-SIIs from 2019.

The consultation closes on August 21, 2015.

ISDA Launches BRRD Implementation Monitor

The implementation of the European Bank Recovery and Resolution Directive (BRRD) is currently ongoing in all EU member states, and is at different stages of the respective legislative process. In order to keep track of the status of implementation, ISDA has launched the BRRD Implementation Monitor that covers all EU/EFTA/EEA member states. The BRRD Implementation Monitor has a particular focus on the derivatives-specific provisions, and will be updated on a regular basis to reflect the progress made in each jurisdiction.

ISDA Publishes EMIR Frontloading Additional Termination Event Amendment Agreement

On June 12, 2015, ISDA published its EMIR Frontloading Additional Termination Event Amendment Agreement and an accompanying explanatory memorandum. The amendment agreement allows parties to an ISDA Master Agreement to amend the agreement to incorporate a new additional termination event covering frontloading.

Frontloading refers to the requirement for certain derivative transactions to be cleared in accordance with the clearing obligation under EMIR where the transactions are entered into during a given period before the clearing obligation takes effect. According to ISDA, in such cases, if clearing is not possible by the time the clearing obligation takes effect, the only way the parties can avoid breach of the frontloading requirement (or stop a breach that has occurred from continuing) is to terminate the problem contract. The amendment agreement provides the required termination right, thereby reducing the risk of regulatory breach faced by market participants subject to frontloading.

ECON Adopts Resolution on CMU

On June 16, 2015, the European Parliament published a press release announcing that its Economic and Monetary Affairs Committee (ECON) has adopted a resolution on the capital markets union (CMU).

The adopted resolution has not yet been published, although the press release highlights:

  • ECON wants to see a balanced approach towards the CMU, with non-bank sources of finance being developed.
  • The need for effective cross-border insolvency rules needs to be addressed.
  • Possible changes and additions to the existing regulatory regime should aim at removing entry barriers for small and medium-sized enterprises (SMEs).

ESMA Comments on MiFID II Implementing Measures

On June 16, 2015, the European Securities and Markets Authority (ESMA) published a statement by on its work on implementing measures under MiFID II (Directive 2014/65/EU) and MiFIR (Regulation 600/2014).

The statement explains that the following three areas are receiving the most attention from stakeholders:

  • Non-equity transparency.  ESMA acknowledges that it will not be able to find the ideal system that perfectly balances transparency and liquidity and that will satisfy the preferences of all market participants. However, ESMA is trying to find reasonable and workable compromises and it is ready to look at the non-equity rules again, once they are in operation, to react to potential deficiencies. ESMA is also thinking about a more flexible system that better reflects market developments and that can be based on better quality data. ESMA’s approach on bond market transparency is likely to look different to the position consulted on.
  • Position limits. The range of contracts captured varies from highly liquid to completely illiquid. This wide variation implies that ESMA has to be cautious and that a one-size-fits-all approach cannot be the solution.
  • Ancillary activity. There will be “major refinements” in ESMA’s proposal compared to the text that was consulted on in relation to the test of whether non-investment firms perform investment services as an ancillary activity to their main business.

EBA 2014 Annual Report

On June 15, 2015, the European Banking Authority (EBA) published its annual report for 2014.

The report provides an overview of the EBA’s activities and achievements in 2014, including the development of the single rulebook in banking, the continued promotion of supervisory convergence and the assessment of risks, as well as continued work to increase transparency within the EU banking sector.

Fair and Effective Markets Review Publishes Final Report

On June 10, 2015, the Fair and Effective Markets Review (FEMR), established by the Chancellor in June 2014 to conduct a review of fixed income, currency and commodity markets, published its final report. The report contains 21 policy recommendations aimed at preventing a repeat of the recent years’ misconduct in fixed income, currencies and commodities markets. The recommendations largely rely on market-led initiatives, or suggest legislative reforms to formalize regulators’ existing practices and extend incoming reforms to previously under-regulated markets.

The recommendations include the creation of a Market Standards Board to improve dialogue between regulators and the industry,  the extension of the senior managers’ regime to non-banks and (as the key element of the review) regulation of spot foreign exchange (FX). In the UK, spot FX has previously been treated as falling outside the scope of financial regulation and securities laws since it involves trading cash for cash but the recent probe into FX benchmark rigging in the UK and US identified spot FX as the market where most wrongdoing occurred.

EC and Banks Disagree on Capital Markets Union Priorities

Of the five priorities for early action listed in the European Commission’s Capital Markets Union green paper (lowering barriers to accessing capital markets, widening the investor base for SMEs, building sustainable securitization, developing European private placement markets, and boosting long-term investment), bankers speaking at the International Capital Market Forum’s annual conference earlier this month strongly agreed with only one of them: securitization. The other early priorities were not listed by panelists as immediate concerns.

Panelists agreed that it would make sense to approach first those aspects where there is political will and change is already underway, such as the Prospectus Directive review and regulatory relief for simple and transparent securitizations (which was highlighted as the area where benefits would be seen most quickly).

Participants said that the regulatory distinction between market making and proprietary trading also needed to be an early action item for the CMU, though their other priorities, namely the harmonization of EU insolvency laws, were at odds with the immediate priorities listed in the CMU green paper.