Posts by: David Griffiths

ESMA Publishes Principles on Stakeholder Engagement in Peer Reviews

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On April 15, the European Securities and Markets Authority (“ESMA”) published a paper on stakeholder engagement in peer reviews.

The paper sets out six high-level principles guiding the interaction with stakeholders with the objective of obtaining background information relevant for the peer review:

  • What entities are considered as stakeholders in the context of a peer review?
  • Who decides if interaction with stakeholders is needed?
  • When does this decision need to be taken? Must national competent authorities (“NCAs“) accept the fact of stakeholder engagement?
  • If an NCA may decline such a possibility, does an NCA need to explain why it would not want to have stakeholder engagement for a particular peer review?
  • How is the interaction organized and how are the stakeholders chosen?
  • What use is made of the outcome of the stakeholder interaction?

The principles contribute to ESMA’s commitment to focus on supervisory convergence in 2016. ESMA may in the future, in light of its experience, prepare a set of procedures for stakeholder engagement in peer reviews, which could be annexed to the Methodology for peer reviews (ESMA/20131709). Paper.

ISDA Publishes Updated EMIR Classification Letter

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On April 13, the International Swaps and Derivatives Association, Inc. (“ISDA”) published an updated classification letter that enables counterparties to notify each other of their status for clearing and other regulatory requirements under the European Market Infrastructure Regulation (“EMIR”).

The updated letter covers the clearing obligation for certain interest rate derivatives classes denominated in EEA currencies and certain credit default swap index classes. The ISDA EMIR classification letter allows market participants to bilaterally communicate their status to their counterparties by answering a series of questions.

The updated letter makes several substantive amendments, including:

  • aligning the definition of “Category 1 entity” to the one used in the final, published version of the G-4 interest rate products regulatory technical standards (“RTS”) (which come into force from June 2016); and
  • providing the ability for entities to make classifications in respect of the draft RTS for EEA rates and the RTS on credit default swap index classes.

Classification Letter.

BCBS Reports on Regulatory Consistency of Risk-Weighted Assets for Credit Risk in the Banking Book

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On April 1, the Basel Committee on Banking Supervision (“BCBS”) issued its second report: an analysis of risk-weighted assets (“RWA”) for credit risk in the banking book.

The report’s first objective is to identify the main drivers of RWA variation and evaluate their effects. The report distinguishes between risk-based drivers (i.e. those drive by underlying differences in risk) and practice-based drivers (i.e. those that reflect differences in bank practices and regulatory environments). The second objective of the report is to highlight where there is potential to modify current standards either to reduce practice-based RWA variation or to simplify the capital framework of internal ratings-based models and increase its comparability.

The report also contains sound practices relating to institutions’ intendent model validation functions, which the BCBS observed during the study. Report.

ESMA Consults on Guidelines on Disclosure of Information on Commodity Derivatives Markets or Related Spot Markets under MAR

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On March 30, the European Securities and Markets Authority (“ESMA”) opened a public consultation on draft guidelines under the Market Abuse Regulation (“MAR”).

ESMA is consulting on its proposed non-exhaustive indicative list of information expected or required to be published on commodity derivatives markets or spot markets for the purposes of determining inside information regarding commodity derivatives and of triggering the prohibitions for insider dealing.

Under MAR, inside information in relation to commodity derivatives must relate to either the commodity derivatives themselves or to the related spot commodity contract. However there is a wide variety of commodities markets and commodity derivatives markets which may require distinguishing between types of information specific to these markets. ESMA is giving further consideration to the scope of the instruments or products concerned.

ESMA will consider all comments received by May 20. Consultation Paper.

EBA Publishes Report on Benchmarking of Remuneration Practices at the European Union Level and Data on High Earners in 2014

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On March 30, the European Banking Authority (“EBA”) published aggregated data on high earners earning €1 million or more per financial year.

The EBA has analyzed the data provided to it for the year 2014 and compared it to the 2013 data. The main results of its analysis are:

  • the number of high earners increased significantly between 2013 and 2014 (+22 per cent);
  • there is now a higher overlap of the population of high earners with that of staff identified as having a material impact on the institution’s risk profile. This percentage increased significantly after the regulatory technical standards on identified staff entered into force in 2014;
  • the supervisory framework for remuneration is still not sufficiently harmonized with the application of deferral and payout in instruments differing significantly among Member States and among institutions;
  • following the introduction of a limitation on the ratio between the variable and the fixed remuneration of 100 per cent (or 200 per cent with shareholders’ approval), the ratio for all identified staff decreased to 65.5 per cent in 2014 from 104 per cent in 2013; and
  • the increase in fixed remuneration for identified staff is not material compared to the overall administrative costs.

The report forms part of the work that the EBA does with the European Commission to review the effectiveness of remuneration provisions. Report.

ECB Publishes Opinion on Proposed Regulation Extending Exemptions for Commodity Dealers under CRR

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On March 4, the European Central Bank (“ECB”) published an opinion on the European Commission’s legislative proposal for a Regulation amending the Capital Requirements Regulation (CRR) to extend certain exemptions for commodity dealers. The opinion is a response to a request made by the Council of the European Union on January 12, 2016.

The ECB stated that it had not identified any concrete indications of systemic risk created by commodity dealers that would make it strictly necessary to remove the exemption for requirements concerning large exposures and own funds that apply at present. The EBA explained that given commodity dealers active in Europe are generally less leveraged and have more resilient capital structures than banks. However, the ECB regards a detailed impact analysis as a necessary step in terms of taking the most appropriate decision regarding the removal or the temporary extension of the exemption. In particular, consideration should be given to level playing-field issues relative to credit institutions which trade in commodities.

The ECB believes that the exemption should be of a temporary nature given the European Commission is expected to present a proposal for a comprehensive review of the prudential regulation of investment firms.  Opinion.

EBA Publishes Results of the CRDIV-CRR/Basel III Monitoring Exercise as of June 30, 2015

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On March 2, the European Banking Authority (“EBA”) published its report of its ninth Basel III monitoring exercise, particularly on the impact of the fully implemented Capital Requirements Directive and the Capital Requirements Regulation (CRDIV-CRR).

The exercise allowed the gathering of aggregate results on capital and liquidity ratios for banks in the European Union and the report summarizes the results using data as of June 30, 2015.

The results showed a further improvement of European banks’ capital positions with only a small number of banks suffering from potential capital shortfalls.

The exercise monitored the leverage ratio, as defined in EU legislation, for the first time and indicated that the leverage ratio is a binding regulatory constraint for a significant number of institutions in the sample.

The results showed that there has been an increase in banks’ liquidity coverage ratio over time, which the EBA attributed to structural adjustments and a recalibration of the liquidity coverage ratio framework, which was published in January 2013.  Report.

European Commission Adopts Delegated Regulation Relating to EMIR Clearing Obligations for Certain Credit Derivative Contracts

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On March 1, the European Commission adopted a Delegated Regulation supplementing the European Union regulation on derivatives, central counterparties and trade repositories (“EMIR”).

EMIR requires mandatory clearing of certain over-the-counter (“OTC”) derivatives. The European Securities and Market Authority (ESMA) is required under EMIR to propose the classes of OTC derivatives that should be subject to clearing, as well as the different dates from which the clearing obligation will take effect for the different types of counterparties identified.

OTC derivative contracts concluded between the first authorisation of a central counterparty under EMIR and the later date on which the clearing obligation actually takes effect are also subject to clearing, unless they have a remaining maturity lower than the minimum remaining maturities which are to be laid down in the regulatory technical standards (Frontloading Requirement).

The Delegated Regulation determines the classes of the credit default swaps OTC derivative contracts that are subject to the clearing obligation and four different categories of counterparties for which different phase-in periods apply.

The Delegated Regulation also lays down the minimum remaining maturities for the purposes of the Frontloading Requirement as well as the dates on which the frontloading should start.  Delegated Regulation.

ECB Publishes the Response of the Eurosystem to the European Commission’s Call for Evidence on the EU Regulatory Framework for Financial Services

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On February 4, the European Central Bank (“ECB“) published a response of the ECB and the national central banks of member states of the eurozone (Eurosystem) to the European Commission’s call for evidence on the EU regulatory framework for financial services.

The Eurosystem’s response makes the following remarks:

  • the financial crisis led to much-needed and far-reaching reform of the European regulatory framework and a redesign of its supervisory architecture;
  • the regulatory framework for banks is largely in place, but a few important initiatives on the regulatory agenda for banks and the non-bank sector still need to be finished;
  • initiatives to support the financing of the economy should maintain the robustness of the regulatory framework which resulted from the post-crisis reforms;
  • reaping long-term benefits implies both assuming temporary costs that emerge in the transitional period and complementing regulation with measures to correct any unintended long-term impacts that are identified;
  • it is important to ensure that regulations are able to preserve financial stability, while leaving sufficient room for markets to develop and fully play their role in the economy; and
  • the European exercise should take into account ongoing initiatives at the international level.

The Eurosystem’s response aims to provide evidence from recent impact studies of the effects of the new regulatory framework and to highlight areas where possible improvements could be made, including: (i) rules affecting the ability of the economy to finance itself and to grow; (ii) unnecessary regulatory burdens; (iii) interactions of individual rules, as well as inconsistencies and gaps in the existing regulations; and (iv) rules giving rise to unintended consequences.  Response.

BCBS Finalizes Revised General Guide to Account Opening

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On February 4, the Basel Committee on Banking Supervision (“BCBS“) published a revised draft of its guidelines on “sound management of risks related to money laundering and financing of terrorism” which comprises the Guidelines issued in January 2014 and the addition of a new Annex IV – General Guide to Account Opening.

Annex IV is intended to focus on some of the mechanisms that banks can use in developing an effective consumer identification and verification programme and sets out the information that should be collected at the time of account opening. BCBS acknowledges that customer identification and verification policies and procedures will differ to reflect risks arising from the relevant categories of customers, products and services.

Annex IV is divided into two substantive sections: the first deals with what types of information should be collected and verified for natural persons seeking to open accounts; and the second describes what types of information should be collected and verified for legal persons and legal arrangements.  Guidelines.