Capital Requirements Regulation (Regulation 575/2013) (CRR)

European Commission Publishes Communication on Equivalence Policy With Non-EU Countries

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On July 29, the European Commission published a communication (and annex) on equivalence in the area of financial services. The Commission highlights recent improvements to the design of EU equivalence regimes and notes that significant changes have been introduced to the equivalence regimes in a number of legislative amendments relating to the proposed:

  • Omnibus Regulation relating to the powers, governance and funding of the European Supervisory Authorities (ESAs) – where the role of each ESA in monitoring equivalent third countries is strengthened;
  • Regulation amending the European Market Infrastructure Regulation (EMIR) supervisory regime for EU and third-country central counterparties (CCPs) (EMIR 2.2) – where a more risk-sensitive and proportionate approach for third-country regimes is being introduced; and
  • Investment Firms Directive (IFD) – where new assessment criteria, safeguards and reporting obligations for third-country firms are being created.

In relation to making equivalence assessments, the Commission emphasizes that decisions are not taken in isolation and proportionality is very important, and it notes that the Commission is concerned about identifying risks to the EU financial system.

The communication also summarizes equivalence decisions adopted since January 2018 and sets out its priorities for 2019 and 2020, including:

  • continuing work on equivalence assessments, especially relating to the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds;
  • repealing existing decisions where the third-country framework no longer delivers the necessary outcomes (for example, under the CRA Regulation);
  • focusing on high-impact areas and third countries (EMIR (Regulation 64/2012) is specifically mentioned);
  • areas where there is an impending review or expiration of an equivalence deadline (the Capital Requirements Regulation (575/2013) is specifically mentioned); and
  • examining market segments that are undergoing dynamic or structural changes (the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) is specifically mentioned).
  • The communication included the communication itself, an annex and a press release.

Council of EU Presidency Compromise Proposal on Proposed Regulation Amending CCR

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The Council of the EU has published the final Presidency compromise proposal on the proposed Regulation amending the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) as regards the transitional period for mitigating the impact on its own funds of the introduction of International Financial Reporting Standard 9 (“IFRS 9“) and the large exposures treatment of certain public sector exposures denominated in nondomestic currencies of member states.

The European Parliament issued a resolution for the adoption of IFRS 9 in September 2016, and in November 2016 the European Commission, as part of its legislative proposals to revise the CRR and the CRD IV Directive (2013/36/EU), suggested transitional arrangements to mitigate the effect of the introduction of IFRS 9 on Common Equity Tier 1 capital resulting from the impairment requirements of IFRS 9. The EBA published an opinion on transitional arrangements and credit risk adjustments due to the introduction of IFRS 9 in March 2017.

European Commission and U.S. CFTC Agree Common Approach on Requirements for Transatlantic CCPs

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On February 10, the European Commission published a statement setting out details of the common approach it has agreed with the U.S. Commodity Futures Trading Commission (CFTC) on requirements for transatlantic central counterparties (CCPs).

The statement explains that the agreement reached will ensure that EU CCPs will be able to do business in the U.S. more easily, and that U.S. CCPs can continue to provide services to EU companies. To implement the agreement:

  • The Commission intends to shortly propose for adoption an equivalence decision under the European Market Infrastructure Regulation (“EMIR”) with respect to CFTC requirements for U.S. CCPs. This will allow the European Securities and Markets Authority (“ESMA”) to recognize U.S. CCPs wanting to serve EU markets as soon as practicable. Once recognized, a U.S. CCP may continue to provide services in the EU while complying primarily with CFTC requirements. It will also become a qualifying CCP for the purposes of the Capital Requirements Regulation (Regulation 575/2013) (CRR), which will lower costs for EU banks and their subsidiaries.
  • The CFTC will propose a determination of comparability with respect to EU requirements. This will permit EU CCPs to provide services to U.S. clearing members and clients while complying primarily with certain corresponding EU requirements. The CFTC will also streamline the registration process for EU CCPs wishing to register with it.
  • The Commission will shortly propose the adoption of an equivalence decision to determine that U.S. trading venues are equivalent to regulated markets in the EU. This will provide a level playing field between EU and U.S. trading venues for the purposes of the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).
  • The steps needed to implement the agreement will be put in place as soon as practicable, and the Commission will work with the CFTC to ensure that the changes are implemented in a co-ordinated manner. The Commission will also work with the CFTC to monitor the impacts resulting from the changes, and assess whether any further actions are necessary to ensure financial stability or prevent regulatory arbitrage.

Commenting on the agreement in a separate statement, ESMA advises that, once the Commission’s equivalence decision on the U.S. regime is adopted under EMIR, it will “rapidly” resume the recognition process of specific CFTC-supervised U.S. CCPs that had applied to it to be recognized in the EU. Although EMIR gives ESMA up to 180 working days to conclude the recognition process, ESMA intends to do everything it can to shorten the period, and will proceed with recognition as soon as the U.S. applicant CCPs meet the conditions contained in the equivalence decision. Given the June 21, 2016 deadline for the start of the EMIR clearing obligation in the EU, ESMA understands that U.S. CCPs will have a strong interest in becoming fully compliant with EU equivalence conditions, which should help to shorten the period.

EBA Publishes Reports, Guidelines and Draft RTS in Relation to the CRR

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The European Banking Authority (“EBA”) has published the following documents in connection with the Capital Requirements Regulation (Regulation 575/2013) (“CRR”):

  1. Final guidelines on limits on exposures to shadow banking entities that carry out banking activities outside a regulated framework under Article 395. The guidelines introduce an approach that will allow EU institutions to set limits for their exposures to shadow banking entities as part of their internal processes. They are informed by a report on the exposures of a sample of EU institutions to shadow banking entities and the impact of setting limits. The guidelines will apply from 1 January 2017. Together with the report, they will assist the European Commission in its work on its upcoming report on the appropriateness and impact of imposing limits on exposures to shadow banking entities;
  2. A consultation paper on draft regulatory technical standards (“RTS”) specifying the assessment methodology on the use of internal models for market risk, under Article 363(4)(c) of the CRR;
  3. A legislative proposal to extend certain exemptions for commodity dealers (COM(2015) 648);
  4. A report on the impact assessment and calibration of the net stable funding ratio (“NSFR”) required under the CRR. The EBA recommends the introduction of an NSFR in the EU to ensure an appropriate stable funding structure relating to the degree of asset illiquidity, as the way of properly mitigating funding risk in banks.

Meanwhile, the text of the European Commission Implementing Regulation ((EU) 2015/2344) laying down implementing technical standards with regard to currencies with constraints on the availability of liquid assets in accordance with the CRR was published in the Official Journal of the EU.

Legislative Proposal for an EU Framework for Simple, Transparent and Standardized Securitization

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On September 30, 2015 the European Commission (EC) published a legislative proposal for an EU framework for simple, transparent and standardized securitization. It has also published a legislative proposal for a regulation amending the Capital Requirements Regulation (Regulation 575/2013) (CRR) which deletes certain articles and extensively revises the capital requirements for securitizations.

The proposed Securitization Regulation is based on what has been put in place in the EU to address the risks in complex and risky securitizations but is intended to help differentiate simple, transparent and standardized products and apply a more risk-sensitive prudential framework.

The purpose of the CRR Amendment Regulation is to revise the EU regime relating to capital changes for credit institutions and investment firms originating, sponsoring or investing in securitization instruments, to provide for a more risk-sensitive regulatory treatment for simple, transparent and standardized securitizations.

The proposals are part of the Capital Markets Union action plan adopted by the EC on September 30, 2015.

European Commission Call For Advice From EBA on Net Stable Funding Requirements and Leverage Ratio

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On August 19, 2015, the European Banking Authority (EBA) published a call for advice (dated 26 June 2015) it has received from the European Commission on the EBA’s reports on net stable funding requirements (NSFR) and leverage ratio (LR) required under the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The purpose of these reports is to assist the Commission in its own work preparing reports on the NSFR and the LR, and potentially legislative proposals, for the European Parliament and the Council of the EU.

In the call for advice, the Commission seeks the EBA’s technical advice on specific issues relating to:

  • Proportionality. The Commission asks the EBA to consider simplified LR and NSFR reporting requirements and different NSFR calibrations for certain firms.
  • Scope of application. The Commission asks the EBA to consider whether certain types of credit institution should be fully excluded from the LR and NSFR.
  • Impact of the NSFR on certain markets and activities. The Commission asks the EBA to examine the impact of the NSFR on issues including bank lending, the volume and liquidity of financial markets and business models.

European Commission Extends Transitional Period for Capital Requirements for Banks’ Exposures to CCPs

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On June 4, 2015, the European Commission published the provisional text of the Implementing Regulation it has adopted to extend the transitional period for capital requirements for EU banking groups’ exposures to central counterparties (CCPs) under the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The current transitional period, which was introduced by an earlier Implementing Regulation, expires on June 15, 2015. The new Implementing Regulation will extend the transitional period by six months to December 15, 2015.

In an accompanying press release, the Commission explains that capital charges for exposures to CCPs are higher if the CCP is not authorized or recognized under EMIR (that is, for a CCP not considered as “qualifying”). Since the authorization and recognition processes take time, the CRR provides a transitional period during which the higher capital requirements will not be applied, to ensure a level playing field. As the authorization and recognition processes for existing CCPs serving EU markets will not be fully completed by June 15, 2015, the Commission has extended the transitional phase to December 15, 2015.

Delegated Regulation on RTS for Specification of Margin Periods of Risk Published in Official Journal

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On April 16, 2015, the Commission Delegated Regulation (Regulation 2015/585) on regulatory technical standards (RTS) on the margin periods of risk (being the time period from the last exchange of collateral covering a netting set of transactions with a defaulting counterparty until that counterparty is closed out and the resulting market risk is re-hedged) used for the treatment of clearing members’ exposures to clients under the Capital Requirements Regulation (Regulation 575/2013) (CRR) (dated April 15, 2015), was published in the Official Journal of the EU (OJ).