EIOPA Consultation Paper

On October 30, 2015 the European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the proposal for preparatory guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors.

The guidelines will be addressed to competent authorities and will provide support and guidance on how to proceed in the preparatory period leading up to the transposition of the Insurance Distribution Director (IDD).

The paper invites consultation responses – responses must be received by January 29, 2016.

EU Council Information Note on SFT Regulation

Following the first reading of the proposed Regulation on reporting and transparency of securities financing transactions (SFT Regulation) in the European Parliament, the Council of the EU has published a note setting out the proposals.

The Council’s note explains what the policy makers aim to achieve through the new regulation and also sets out the outcomes of the Parliament’s first reading, including discussion of proposed amendments to the regulation.

EBA Announces Details of 2016 EU-Wide Stress Test

The European Banking Authority (EBA) published on November 5, 2015 its EU-wide stress test and draft methodology for discussion. The stress-test exercise to be carried out in 2016 will assess a sample of banks covering broadly 70% of the banking sector in the EU against a common macroeconomic baseline and adverse scenario. The objective will be to provide supervisors, banks and other market participants with a common analytical framework to compare and assess the resilience of the EU banking system to shocks.

Details of the stress test are set out in a press release published by the EBA, and the draft methodology note is also available for review.

BCBS Consultation Document on Haircut Floors

The Basel Committee on Banking Supervision (BCBS) has published a consultation document on haircut floors for non-centrally cleared securities financing transactions.

The report is published following a recommendation by the Financial Stability Board that the BCBS incorporate the haircut floors into capital requirements for non-centrally cleared SFTs by setting significantly higher capital requirements for transactions traded below the haircut floors.

The document welcomes consultation responses, and specifically asks whether the public sees any weakness in the proposals or any specific implementation challenges. Responses must be received by January 5, 2016.

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 Report on Capital Requirements for Covered Bonds

On October 20, 2015, the European Commission published a report (COM(2015) 509 final), addressed to the European Parliament and the Council of the EU, on capital requirements for covered bonds as required by Article 503 of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The Commission’s report follows on from the recommendations in the July 2014 report of the European Banking Authority (EBA) on EU covered bond frameworks and capital treatment.

In the report the Commission considers:

Preferential risk weighting for covered bonds. Credit institutions investing in covered bonds qualifying under Article 129 of the CRR are allowed to hold lower levels of regulatory capital in relation to those instruments than would otherwise apply to senior unsecured bank debt. The Commission agrees with the EBA’s recommendation that the preferential risk weights in Article 129 and the own fund requirements for specific risk in Article 336(3) of the CRR remain an adequate prudential treatment for qualifying covered bonds.

Preferential risk weighting for aircraft loans. Covered bonds secured by aircraft loans are not currently eligible assets under Article 129. The EBA concluded that it would not be appropriate to include these loans as eligible assets and accordingly the Commission has decided not to make any proposals to amend Article 129 of the CRR for this purpose.

Preferential weighting for guaranteed residential loans. Guaranteed residential loans are currently subject to the eligibility requirements in Article 129(1)(e). The Commission’s view is that it is appropriate to continue treating these loans as eligible assets.

Article 496 derogation. The Commission was mandated by Article 503 to review whether the derogation set out in Article 496 of the CRR is appropriate and should be applied to other types of covered bonds. Article 496 sets out a derogation for senior units issued by French Fonds Communs de Creances or equivalent securitization instruments. The Commission intends to await feedback to its September 2015 consultation paper on an EU covered bond framework before taking decisions on these issues.

Joint Committee of ESAs Consults on Risk-Based Supervision and Risk Factors Guidelines

On October 21, 2015, the Joint Committee of the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority ( together , the European Supervisory Authorities “ESAs”) published two consultation papers on guidelines required under Article 48(10) of the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4).

The committee’s consultation paper on the risk-based supervision guidelines (JC 2015 060) focuses on the characteristics of a risk-based approach to anti-money laundering (AML) and counter financing of terrorism (CFT) supervision and the steps supervisors should take when conducting supervision on a risk-sensitive basis. The aim is to create both a common understanding of risk-based supervision (RBS) and to establish consistent and effective supervisory practices across the EU, complaint with the Financial Action Task Force’s standards. RBS is characterized as an ongoing and cyclical process that includes four steps:

  • identification of the money laundering (ML) and terrorist financing (TF) risk factors,
  • risk assessment (whereby competent authorities use this information to obtain a holistic view of the ML/TF risk associated with each credit or financial institution),
  • allocation of AML/CFT supervisory resource based on the risk assessment; and
  • monitoring to ensure the risk assessment and associated allocation of supervisory resource remains up to date and appropriate.

The guidelines make recommendations for each of these steps and build on a preliminary report published by the ESAs in October 2013.

The ESAs are required to issue the guidelines on the risk factors under Article 17 and 18(4) of MLD4. The committee’s consultation paper on the guidelines (JC 2015 061) covers simplified and enhanced customer due diligence and the factors which credit and financial institutions should consider when assessing the AML/CFT risk associated with individual business relationships and occasional transactions. The aim is to promote the development of a common understanding by firms and competent authorities across the EU of what the risk-based approach to AML/CFT entails and how it should be applied.

  • Title II of the guidelines is generic and applies to all credit and financial institutions. It is designed to equip firms with the tools they need to make informed, risk-based decisions when identifying, assessing and managing AML/CFT risk associated with individual business relationships or occasional transactions.
  • Title III of the guidelines is sector specific. It sets out risk factors that are of particular importance in certain sectors, including retail banks, wealth management and life insurance undertakings, and provides guidance on the risk-sensitive application of customer due diligence measures by firms in those sectors. The guidelines are likely to be finalized in spring 2016 and, once adopted, the ESAs will keep them under review and update them as appropriate.

Comments on both consultation papers should be received by January 22, 2016. The ESAs will hold a public hearing on the draft guidelines on December 15, 2015.

EBA Updates Single Rulebook Q&As

On October 16, 2015, the European Banking Authority (EBA) updated its Q&As on the single rulebook, publishing four new questions. The single rulebook Q&As relate to the CRD IV package of reforms, namely the CRD IV Directive (2013/36/EU), the Capital Requirements Regulation (Regulation 575/2013) and the Bank Recovery and Resolution Directive (2014/59/EU).

BCBS October 2015 Progress Report on Implementation of Basel Regulatory Framework

On October 15, 2015, BCBS issued its ninth progress report (BCBS 338) on BCBS members’ implementation of Basel II, Basel 2.5 and Basel III, as at the end of September 2015.

The report focuses on the status of domestic rule-making processes to ensure that the Basel standards are transformed into national law or regulation according to the internationally agreed timeframes. It includes the status of adoption of the risk-based capital standards, the liquidity standards, the framework for systemically important banks, the leverage ratio, the revised Pillar 3 disclosure requirements and the large exposure framework.