ESMA’s New Q and A Responses on the Application of AIFMD and Consultation on New Guidelines

The European Securities and Markets Authority (ESMA) has published updated questions and answers on the application of the Alternative Investment Fund Managers Directive (AIFMD), which includes updated and new questions and answers on reporting to national authorities and the calculation of the total value of assets under management (AUM). In the same week, it has launched a consultation on proposed guidelines on sound remuneration policies under AIFMD and the UCITS V Directive (the latest changes to the Undertakings for Collective Investments in Transferable Securities Directive).

UCITS V includes rules that UCITS must comply with when establishing and applying a remuneration policy for certain staff categories and the proposed UCITS Remuneration Guidelines further clarify the Directive’s provisions. The proposed Guidelines aim to ensure a convergent application of the remuneration provisions and will provide guidance on issues such as proportionality, governance of remunerations, requirements on risk alignment and disclosure. The consultation paper also proposes a revision of the AIFMD Remuneration Guidelines by clarifying that, in a group context, non-AIFM sectoral prudential supervisors of group entities may deem certain staff of an AIFM in that group to be identified staff for the purpose of their sectoral remuneration rules.

ESMA will consider the feedback received to the consultation and is aiming to finalize and publish the UCITS Remuneration Guidelines and a final report by Q1 2016, ahead of the transposition deadline for the UCITS V Directive (March 18, 2016). It is expected that the final report will also include the revision of the AFIMD Remuneration Guidelines.

ESMA Publishes 17th Extract from EECS’ Enforcement Decisions

The European Securities and Markets Authority (ESMA) has published extracts from the European Enforcers Coordination Sessions confidential database of enforcement decisions on financial statements. European Enforcers monitor and review International Financial Reporting Standards (IFRS) statements and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law. The decisions included in this publication were taken by national enforcers in the period from February 2013 to November 2014

The aim of the publication is to provide issuers and users of financial statements with relevant information on the appropriate application of the IFRS. It will inform market participants about which accounting treatments European national enforcers may consider as complying with IFRS – namely, whether treatments are considered as being within the accepted range of those permitted by IFRS. The publication of the decisions, together with the reasoning behind them, will contribute to a consistent application of IFRS in the EEA.  Release.

EBA Publishes RWA Assessment as the Next Step in Improving Consistency of Internal Model Outcomes

The European Banking Authority (EBA) has published two reports on the consistency of Risk-Weighted Assets (RWAs) across large EU institutions for large corporate, sovereign and institutions’ Internal Ratings-Based (IRB) portfolios (collectively referred to as “low default portfolios”, or LDP). The LDP analysis explains how much of the variability in RWAs is led by difference in riskiness (namely, idiosyncratic portfolio features), and tries to identify residual drivers that are linked to banks’ practices. The CCR benchmarking report considers the calculation of counterparty credit risk (CCR) exposures under the Internal Model Method (IMM) and the credit value adjustments (CVA) according to the advanced approach (ACVA).

The reports summarize the findings obtained from two benchmarking exercises aimed at improving the comparability of EU banks’ RWAs. A key finding is that around 75% of the observed difference in global charge (GC) levels across institutions could be explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. As for the CCR and ACVA analyses, the report shows that there is significant variability across banks in the calculation of CCR and ACVA, especially for equity and foreign exchange OTC derivatives.

ISDA Publishes EMIR Classification Letter

On July 13, 2015, ISDA published a classification letter that will enable counterparties to notify each other of their status for clearing and other regulatory requirements under Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and repositories (EMIR) (Classification Letter).

EMIR imposes a number of regulatory obligations on counterparties in the derivatives market. The application of the EMIR requirements depends on how counterparties are classified. The Classification Letter has been prepared as a bilateral version of the classification tools that currently exist on ISDA Amend and is intended to facilitate compliance with EMIR by allowing counterparties to communicate their status by answering a series of questions. ISDA has published an explanatory memorandum to accompany the Classification Letter.

The clearing categorization in the Classification Letter covers interest rate derivatives only. It is anticipated that the Classification Letter will be expanded in the future to cover other classes of products that may become subject to the clearing obligation.

EBA Opinion and Report on the Establishment of a European Framework for Qualifying Securitizations

The European Banking Authority (EBA) has published an Opinion and Report on the establishment of a European framework for qualifying securitizations.

The Opinion contains five recommendations for establishing of a European framework for qualifying securitizations including a need to:

  • conduct a review of the entire regulatory framework for securitizations and other investment products;
  • create a framework for qualifying securitizations; and
  • establish criteria to define both qualifying term securitizations and qualifying asset-backed commercial paper (ABCP).

The Report proposes a more risk-sensitive approach to capital regulation for long-term securitization instruments, as well as for ABCP and illustrates how the capital charges set out in the recent revision of the Basel Committee on Banking Supervision 2014 securitization framework should be lowered to recognize the relatively lower risk of qualifying products, while at the same time maintaining restraints on regulatory capital.

EBA Issues Guidelines and Standards Under BRRD

Over the last week the EBA has published final draft regulatory technical standards (RTS), implementing standards (ITS) and guidelines on a number of Articles of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD). The materials published by the EBA include:

  • final draft regulatory technical standards, implementing standards and guidelines relating to group financial support under Article 23;
  • final draft implementing standards and guidelines relating to the application of simplified obligations under Article 4;
  • final draft implementing technical standards on procedures, forms and templates for the provision of information for resolution plans under Article 11(3);
  • final draft regulatory technical standards on the contractual recognition of write-down and conversion powers under Article 55(3);
  • final draft regulatory technical standards on resolution colleges under Article 88(7);
  • final draft regulatory technical standards on independent valuers under Article 36(14); and
  • final draft regulatory technical standards on criteria to set the minimum requirement for own funds and eligible liabilities under Article 45.

The EBA has submitted the RTS and the ITS to the European Commission for endorsement. The guidelines will be translated into all EU languages and apply two months and one day after their publication in all EU languages.

European Parliament Adopts Non-Binding Resolution on Building a Capital Markets Union (CMU)

On July 9, 2015, the European Parliament announced its adoption of a non-binding resolution stating that the building blocks for a fully functional CMU should be in place no later than 2018. The Parliament calls on the European Commission to speed up its work on the action plan and put forward legislative and non-legislative proposals as soon as possible to achieve the objective of a fully integrated single EU capital market by the end of 2018.

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.