Europe

Securitization Regulations 2018 Published

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On December 4, the Securitization Regulations 2018 (SI 2018/1288) were published on legislation.gov.uk, together with an explanatory memorandum. A link to the Securitization Regulations 2018 can be found here and a link to the explanatory memorandum can be found here.

The Regulations reflect the application of the Securitization Regulation ((EU) 2017/2402)) in the UK. The Securitization Regulation harmonizes and reforms existing rules on due diligence, risk retention, disclosure and credit-granting that will apply in a uniform way to all securitizations, securitizing entities and all types of EU regulated institutional investors. It also creates a new framework for simple, transparent and standardized long-term securitizations and asset-backed commercial paper programs.

Among other things, the Regulations designate the FCA and PRA as the competent authorities in relation to the Securitization Regulation and require the FCA to maintain and update a register of all persons it has authorized as third-party verification agents. They also amend the Financial Services and Markets Act 2000 (“FSMA“), and other UK legislation, to create the new supervisory, investigative and sanctioning powers required by the Securitization Regulation and ensure UK legislation is compatible with the Securitization Regulation.

The Regulations will come into force on January 1, 2019.

EFDI Guidance on DSGs’ Alternative Funding Policy

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On December 5, the European Forum of Deposit Insurers (“EFDI“) published a non-binding guidance paper (dated June 18, 2018) on deposit guarantee schemes’ (“DGSs“) alternative funding policy. The guidance paper can be found here.

Under Article 10(9) of the Deposit Guarantee Schemes Directive (2014/49/EU) (“DGSD“), DGSs are required to have in place adequate alternative funding arrangements to enable them to obtain short-term funding to meet their obligations. EFDI notes that, in practice, DGSs have only a few available options to enable them to implement this requirement: credit lines, bond issuances, repos, ex-post contributions and other private sources.

In the guidance paper, EFDI provides a set of recommendations for DGSs alternative funding arrangements on issues including:

  • The size of the alternative funding reserve.
  • The selection of alternative funding instruments.
  • Alternative funding instruments and ex-post contributions’ terms and parameters.
  • Concentration risks arising from counterparties.

ISDA Publishes Statement on Benchmark Fallbacks

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On November 27,the International Swaps and Derivatives Association (“ISDA“) published a statement of the preliminary results of its consultation on new benchmark fallbacks for derivatives contracts that reference certain interbank offered rates (“IBORs“).

The consultation suggests four options for calculating the applicable adjusted risk-free rates (“RFRs“), if fallbacks are triggered, and three options for calculating spread adjustments, as well as setting out which of the options the ISDA expects to proceed with and include in its standard definitions.

The information in the statement is subject to the final decision of the ISDA Benchmark Committee and only reflects its preliminary findings at this stage.

The full statement can be found here.

ECB Speech on Climate Change and Central Banking

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On November 27, the European Central Bank (“ECB“) published a speech by Yves Mersch, ECB executive board member, on climate change and central banking. Key points included:

  • Three principal sources of risk have been identified by the Financial Stability Board’s (“FSB“) taskforce on climate related financial disclosures, the European Systemic Risk Board and other bodies: (i) physical risk from exposure to climatic events; (ii) transition risk; and (iii) the undervaluation risk in new “green” financial products leading to price bubbles.
  • The physical risk falls mainly on insurers who need to ensure capital adequacy (the ECB is excluded from supervising insurance firms under the Treaty of the Functioning of the EU) but the banking sector may also be affected to the extent that climatic events affect the physical collateral underpinning lending, such risk is increased if banks have loan portfolios concentrated in particular geographic areas.
  • The ECB is not a regulator for financial markets or banks, so cannot vary the capital requirements of supervised banks to take into account their climate risks, or to encourage climate finance.
  • Climate risks have been identified in the ECB Banking Supervision’s risk assessment for 2019 and will be among the topics covered in the qualitative discussions held with banks on an individual basis.

 

Third European Commission Progress Report on Reducing NPLs in EU

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On November 28, the European Commission published a communication setting out its third progress report (COM(2018) 766 final) in reducing non-performing loans (“NPLs“) and further risk reduction in the banking union.

There is an overall trend of improvement, with NPLs declining to an average of 3.4% which is approaching pre-crisis levels, due to action taken by member states and market players. However, there are high NPL ratios still in some member states.

The Commission has delivered all elements of the Council’s July 2017 NPLs action plan. However, it needs to be fully implemented by all actors in order to address the challenge of high NPLs, both in terms of reducing existing stocks to sustainable levels and preventing future accumulation. In particular, the Commission calls on the European Parliament and the Council of the EU to swiftly agree on the banking risk reduction package and all the elements of the legislative proposals to tackle NPLs.

A staff working document (SWD(2018) 472 final) was produced at the Council’s request and following collaboration with the European Central Bank (“ECB“) and the European Banking Association (“EBA“). The document, which is stated to not represent the views of the Commission, the ECB or the EBA, consider the set-up of an EU NPL electronic marketplace platform where banks and investors could trade NPLs to help stimulate development of the secondary market.

European Commission Calls on European Parliament and the Council of the EU to Accelerate Work on Completing CMU

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On November 28, the European Commission published a communication (COM(2018) 767 final) on the capital markets union (“CMU“). The Commission outlined that the CMU is a key priority for a number of reasons:

  • completing the CMU is essential to make member state economies more resilient and to safeguard financial stability;
  • the CMU will offer more choice to consumers allowing them to buy cheaper and better investment products;
  • the CMU will enable financial service providers to scale-up by offering their services in other member states.

Since 2015, only three of the Commission’s original proposals contributing to the CMU have been adopted and 10 of 13 proposals are under discussion by EU legislators, including proposals on the pan-EU personal pension product and an EU covered bonds framework. The Commission calls on the European Parliament and Council of the EU to accelerate the remaining proposals before the May 2019 Parliament elections.

The full communication can be found here. The annex was published separately alongside an FAQs document.

New Rules on European Crowdfunding

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European Parliament’s Economic and Monetary Affairs Committee (“ECON“) published a press release announcing that it has voted to adopt a draft report on the European Commission’s legislative proposal for a Regulation on European crowdfunding service providers (“ECSPs“) (2018/0048 (COD)). READ MORE →

EBA Revises Recommendation on Equivalence of Confidentiality Regimes of Non-EU Authorities

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On November 8, the European Banking Authority (“EBA“) published a final report on recommendations on the equivalence of confidentiality regimes (EBA/REC/2018/03).

In the report, the EBA makes amendments to its recommendation on the equivalence of confidentiality regimes (EBA/REC/2015/01), which was originally published in April 2015. The purpose of the recommendation is to provide guidance for competent authorities on the equivalence of the confidentiality regime applicable to a particular third-country supervisory authority, whose participation in a given college is to be determined under Article 116(6) of the CRD IV Directive (2013/36/EU).

The EBA has added the following third-country authorities to the recommendation, following assessments of the professional secrecy and confidentiality frameworks under which they operate:

  1. The Abu Dhabi Global Market (“ADGM“) Financial Services Regulation Authority;
  2. The Republic of South Kora Financial Supervisory Service;
  3. The National Bank of Moldova;
  4. The Hong Kong Securities and Futures Commission (“SFC“).

The final report does not state the application date of the recommendations made in it.

ESMA Publishes Statement on No-Deal Brexit Contingency Plans of CRAs and Trade Repositories

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ESMA published a statement on the contingency plans of credit rating agencies (“CRAs“) and trade repositories (“TRs“) in the context of Brexit (ESMA80-187-149) on November 9.

ESMA has published the statement to raise market participants’ awareness of the readiness of CRAs and TRs for the possibility of there being a no-deal Brexit. ESMA states that entities using services provided by CRAs and TRs need to consider the scenario of a no-deal Brexit and the consequences of TRs and CRAs established in the UK losing their EU registration when the UK leaves the EU. READ MORE →