Posts by: Shaun Malone

FSB Statement on Reforms to Interest Rate Benchmarks


On July 12, 2018, the Financial Stability Board (“FSB“) published a statement on reforms to interbank offered rates (“IBORs“) and the development of overnight risk-free rates (“RFRs“) and term rates. The FSB’s comments include the following.

  • Benchmarks that are used extensively must be especially robust to ensure financial stability. The FSB welcomes the progress that has been made by public authorities and the private sector in identifying and developing overnight RFRs that are sufficiently robust.
  • Overnight RFRs are robust because they are anchored in active, liquid underlying markets. However, the lack of underlying transactions in the term interbank and wholesale unsecured funding markets could make IBORs susceptible to manipulation. The FSB therefore encourages the development and adoption of overnight RFRs where appropriate, for example in businesses where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable.
  • In the markets where IBORs are disappearing, for example, those currently reliant on the London Interbank Offered Rate (“LIBOR“), there needs to be a transition to new reference rates. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, in tandem with their efforts to identify and facilitate the wider use of RFRs.
  • An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.

The EC has Published the Draft Text of a Regulation on Sovereign Bond-Backed Securities and Seeks Market Feedback on its Proposals


On May 24, 2018, the European Commission (“EC“) published a proposal for a Regulation of the European Parliament and of the Council on sovereign bond-backed securities (2018/0171 (COD)). Sovereign bond-backed securities (“SBBS“) are euro-denominated debt securities, created by private entities and backed by a pre-determined, diverse pool of bonds issued by euro-area national governments.

Akin to securitisation bonds, this new type of financial instrument is designed to be issued in tranched notes, appealing to a range of risk appetites. Senior ranking notes would pay a lower return than junior notes, in exchange for a lower risk profile. Junior notes would bear losses before senior notes but would be rewarded with a higher coupon.

Rather than being subject to the same regulatory treatment as securitisation bonds, the proposal seeks to grant SBBS the same regulatory treatment as national euro-area sovereign bonds denominated in euro; reflecting the relatively low risk and high liquidity of the pre-determined and diverse underlying portfolio of sovereign debt.

The draft Regulation follows the Commission’s publication of an impact assessment on enabling a regulatory framework for the development of SBBS, in January 2018.

The proposal includes measures relating to:

  • Eligibility and composition of the underlying portfolio and tranching of SBBSs issues (Articles 4 to 6 of the draft Regulation).
  • Issuance and management of SBBSs (Articles 7 and 8).
  • Use of the designation “Sovereign Bond-Backed Securities” (Article 9).
  • SBBSs notification and transparency requirements (Articles 10 to 12).

Specifically, the proposed Regulation requires:

  • The underlying portfolio to include sovereign bonds of all euro area Member States, with relative weights in line with each Member State’s contribution to the capital of the European Central Bank (the so-called ECB capital key).
  • The size of the senior tranche to be fixed at 70% of the overall SBBS issuance. The remaining 30% can be divided in as many sub-senior (or subordinate) claims as the issuer finds best suited to the demand of its investors.

The Commission is inviting market feedback on its proposals. The feedback period is open and ends on July 26, 2018.

The EC has Published Proposals to Amend Existing Legislation to Promote the Use of Small and Medium-Sized Enterprise (SME) Growth Markets


On May 24, 2018, the European Commission (“EC“) published:

  • A draft Regulation to amend the Market Abuse Regulation (Regulation 596/2014) (“MAR“) and the Prospectus Regulation ((EU) 2017/1129) in respect of promotion of the use of small and medium-sized enterprise (“SME“) growth markets.
  • A draft Delegated Regulation amending Delegated Regulation (EU) 2017/565 (the Commission Delegated Regulation) as regards certain registration conditions to promote the use of SME growth markets.

The MiFID II Directive (2014/65/EU) created a new type of trading venue, the SME growth market, as a sub-group of multilateral trading facilities (“MTFs“), to facilitate access to capital for SMEs and the further development of specialist markets to cater for the needs of SME issuers. However, the current definition of SMEs is not suitable for companies issuing bonds. In addition, SME growth market debt-only issuers have to produce a semi-annual financial report. This is a more stringent requirement than the one applying to issuers of bonds to professional investors on regulated markets.

Addressing these specific issues, the Commission’s proposals include measures that will make it easier for trading venues specialised in bond issuance to register as SME growth markets. This will be done by formulating a new definition of debt-only issuers; being those that issue less than EUR 50 million of bonds over a 12-month period.

The proposals also give more flexibility for SME growth market operators on whether or not to impose the obligation to produce semi-annual reports on SME debt-only issuers.

Other proposals include an exemption for privately-placed bonds from the ‘market sounding regime’ (subject to conditions). Market sounding is where information is given prior to the announcement of a transaction to gauge the interest of potential investors.

EBA Finalizes 2018 EU-Wide Stress Test Timeline


On October 30, 2017, the EBA published a press release on the 2018 EU-wide stress test timeline.

The EBA intends to follow the following timetable:

  • November 2017. The EBA to publish the final methodology.
  • End of 2017. The EBA to circulate final templates and guidance to participating banks by this date.
  • January 2018. Launch of the 2018 EU-wide stress test. The EBA will publish the macroeconomic scenario at the time of the launch.
  • Early June 2018. First submission of results to the EBA.
  • Mid-July 2018. Second submission of results to the EBA.
  • Late October 2018. Final submission of results to the EBA.
  • November 2, 2018. The EBA to publish results of the stress test.

The EBA has decided to extend the overall timeline for the stress test to take into account the challenges that the implementation of IFRS 9 poses regarding the availability of starting point data in early 2018.

European Commission Inception Impact Assessment on Legislative Proposal for EU Framework on Crowdfunding


On October 30, 2017, the European Commission published an inception impact assessment for a legislative proposal for an EU framework on crowd and peer-to-peer finance.

In the impact assessment, the Commission sets out information on a potential initiative relating to crowdfunding. The aim of the initiative is to create a framework that will encourage cross-border activity relating to crowdfunding platforms and to provide platforms with a proportionate and effective risk management framework. The Commission is concerned that, to date, crowdfunding activities have been confined to national markets with very little cross-border activity. It is also concerned about the perceived lack of reliability of crowdfunding and peer-to-peer platforms, with the biggest perceived risks being loan defaults, business failures, fraudulent activities and the collapse of platforms because of malpractice.

The Commission sets out three potential options for an EU framework on crowdfunding:

  • A self-regulatory approach with minimum EU standards. Under this option, the Commission would map best practices and local regulatory regimes with the aim of recommending a set of non-binding minimum standards and industry best practices.
  • A comprehensive EU framework. Under this option, the framework would consist of a specific crowdfunding license under the passporting framework, allowing platforms to operate across the single market. Crowdfunding platforms would be subject to proportionate governance and transparency requirements. The Commission envisages that crowdfunding platforms would be subject to a similar regulatory regime as regulated trading venues or payment institutions. The framework might be established through stand-alone legislation or through amendments to existing financial services legislation.
  • A stand-alone opt-in EU framework. Under this option, the Commission would create an EU framework for crowdfunding platforms that platforms wishing to conduct cross-border activity could opt into, with other platforms subject to national law. This framework would also involve a passport and governance and transparency requirements.

If the Commission decides that no EU framework is needed, it envisages that it will maintain regular dialogue with the European Supervisory Authorities (ESAs), member states and the crowdfunding sector to promote convergence and the sharing of best practices.

The Commission indicates that the next steps for this initiative will take place in the first quarter of 2018.

EIOPA Final Report on First Set of Technical Advice on Solvency II Delegated Regulation

On October 31, 2017, EIOPA published a document containing the first set of advice to the European Commission on specific items in the Solvency II Delegated Regulation ((EU) 2015/35) (EIOPAA-BoS-17/280).

The advice covers the following areas:

  • Simplified calculations of capital requirements in the Solvency Capital Requirement (“SCR“) standard formula.
  • Reducing reliance on external credit ratings in the calculation of the SCR.
  • Exposures guaranteed and exposures to regional governments and local authorities (“RGLA“).
  • Risk-mitigation techniques.
  • Undertaking specific parameters.
  • Look-through for investment related undertakings.
  • Loss-absorbing capacity of deferred taxes (“LAC DT“). The advice contains factual information only; this issue will be addressed further in EIOPA’s second set of advice to the Commission.

EIOPA published a consultation paper on the advice in July 2017 (EIOPA-CP-17/004), which followed on from a discussion paper published in December 2016 (EIOPA-CP-16/008). EIOPA has also published a final report that contains details of the feedback that it received on EIOPA-CP-16/008 and EIOPA-CP-17/004, as well as the final text of the advice and a summary of comments received to EIOPA-CP-17/004.

EIOPA is providing its advice in two sets. It will send the second set of advice to the Commission by the end of February 2018. EIOPA issued a call for evidence relating to this second tranche of advice in April 2017. This will address issues such as policy proposals on LAC DT to increase supervisory convergence, risk margin, catastrophe risks, non-life and life underwriting risks, non-proportional reinsurance covers, unrated debt and unlisted equity and own funds. EIOPA plans to consult on these issues before the end of 2017.

Capital Markets Union: Commission proposals to reform European financial supervision regime


European Commission published proposals to reform the EU’s supervisory structure, including to extend ESMA’s role and powers in respect of prospectuses and market abuse on 20 September 2017. This represents the first concrete step towards the creation of a single European capital markets supervisor.

It is proposed (amongst other things) that the Prospectus Regulation be amended so as to task ESMA, rather than national competent authorities, with approving:

  • Prospectuses for certain wholesale non-equity securities.
  • Prospectuses relating to asset-backed securities.
  • Prospectuses that are drawn up by property companies, mineral companies, scientific research-based companies or shipping companies.
  • Prospectuses drawn up by non-EU country issuers.

Where it is responsible for approving a prospectus, ESMA would also control related advertisements.

This proposal is intended to create a level playing field for issuers, to speed up approvals, to enhance supervision in the EU and to prevent forum-shopping.

ESMA  would also be given a greater role in coordinating market abuse investigations. This could extend to recommending that competent authorities initiate investigations and to facilitating the exchange of information relevant for those investigations, where ESMA has reasonable grounds to suspect that activity with significant cross-border effects is taking place that threatens the orderly functioning and integrity of financial markets or financial stability in the EU. ESMA would maintain a data storage facility to collect from, and disseminate between, competent authorities, all relevant information.  

The Commission invites the European Parliament and the Council to discuss and agree its proposals as a high priority, in order to ensure their entry into force before the end of the current legislative term in 2019.




ISDA Launches SIMM 2.0 for Calculating Uncleared Swaps Initial Margin


On September 7, 2017, ISDA launched a new version of its standard initial margin model (SIMM), ISDA SIMM Version 2.0, which includes a full recalibration of risk factors as well as:

  • New risk factors for three product types:
    • equity volatility indices;
    • quanto credit default swaps, which are credit default swaps (CDS) in which the swap payments are in different currencies; and
    • municipal swaps.
  • Clarification of certain definitions.
  • Enhancements to calculations capturing vega margin and commodity indices.

SIMM provides a methodology for the calculation of initial margin (IM) for uncleared swaps that complies with margin requirements for non-centrally cleared derivatives in the US, European Union (EU), and Japan.

ISDA periodically reassesses and recalibrates SIMM risk factors in order to meet regulatory standards and market conditions. SIMM 2.0 reflects requests from US prudential regulators for these modifications. The changes will be effective on December 4, 2017.