CCPs

EBA Publishes Report on Leverage Ratio Requirements under Article 511 of the CRR

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On August 3, 2016, the European Banking Authority (EBA) published a report on the leverage ratio (LR) requirements under the Capital Requirements Regulation (CRR).

The EBA report recommends the introduction of a minimum LR requirement in the EU to mitigate the risk of excessive leverage, which is in line with the discussions held by the Group of Central Bank Governors and Heads of Supervision (GHOS) – the governing body of the Basel Committee on Banking Supervision (BCBS) – in January 2016.

The analysis suggests that the potential impact of introducing a LR requirement of 3 percent on the provision of financing by credit institutions would be relatively moderate, while, overall, it should lead to more stable credit institutions. Similarly, on the basis of econometric analysis, it has been estimated that risk taking should not be strongly affected. The EBA considers that the introduction of a 3 percent LR should lead to more stable credit institutions overall and the combined application of a risk-based ratio and a LR requirement will reduce the overall cyclicality of capital requirements.

The EBA also assessed the exposure of different categories of credit institutions to the risk of excessive leverage (REL) concluding that the results do not give a strong indication of differences in the degree of exposure to REL across different types of credit institutions. However, global systemically important institutions (GSIIs) show a higher exposure to REL and therefore a higher LR requirement may be warranted.

The report also flags that while the Basel LR standard fits well with the EU banking sector, the same cannot be said for all business models covered by other EU prudential regulations. For example, the EBA recommends that central counterparties (CCPs) and central securities depositaries (CSDs) be exempted. The report describes the characteristics of various specialized business models, such as public development banks, concluding that there is little room for differentiating the LR without opening the door to cases of circumvention of the basic principles of the LR. The report did not find evidence to exempt certain credit institutions from being subject to compliance with the LR minimum requirement of 3 percent on the basis of their limited size. However, the EBA will explore in more detail a reduced frequency and granularity of reporting requirements in the case of smaller credit institutions in future updates of the implementing technical standards (ITS) on LR reporting.

The Commission is required to submit a report on the impact and effectiveness of the LR, and potential legislative proposals, to the European Parliament and the Council of the EU by December 31, 2016.

ESMA Practical Guidance on its Recognition of Third Country CCPS

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European Securities and Markets Authority (“ESMA”) has published practical guidance on the recognition by it of third country central counterparties (CCPs) under EMIR (ESMA/2016/365). The guidance is dated March 17, 2016.

The guidance covers the following phases in the application process:

  • Communications with ESMA before submitting an application for recognition.
  • Timeframe for submission of an application.
  • Submission of an application, including format, number of copies and language.
  • ESMA’s acknowledgement of the receipt of an application.
  • Information on the calculation of deadlines set by ESMA.
  • Assessment of completeness, requests for additional information and notification of completeness.
  • ESMA’s examination of the application.
  • ESMA’s decision on the recognition application.
  • Publication on ESMA’s website.

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.

U.S. Commodity Futures Trading Commission and European Commission Announce Common Approach for Transatlantic CCPs

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On February 10, the U.S. Commodity Futures Trading Commission (the “CFTC”) and the European Commission announced a common approach relating to requirements for transatlantic central clearing parties (CCPs). The CFTC and the European Commission will work together to adopt (1) an equivalence decision that will allow US CCPs to continue to provide services in the EU whilst complying with CFTC requirements and (2) a determination of comparability that will allow EU CCPs to provide services to US clearing members whilst complying with EU requirements. These next steps will be put into place as soon as practicable.

ESMA and South African and Mexican Authorities to Cooperate Under EMIR on CCPs

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On 26 January 2016, ESMA announced that had entered into a memorandum of understanding (MoU) with each of the Mexican Comisión Nacional Bancaria y de Valores (CNBV) and the South African Financial Services Board (FSB) under the European Markets Infrastructure Regulation (EMIR).

EMIR provides for co-operation arrangements to be established by ESMA and non-EU authorities whose legal and supervisory framework for CCPs have been deemed equivalent to EMIR by the European Commission. The memoranda set out the terms on which the two authorities will cooperate and share information with ESMA regarding Central Counterparties (CCPs) which are authorised or recognized in Mexico or South Africa, and which have applied for EU recognition under EMIR. As well as establishing these arrangements, the MoUs provide ESMA with adequate tools to monitor the on-going compliance by the CCPs with the recognition conditions contained in EMIR. The MoU with FSB entered into force on 30 November 2015 and the MoU with the CNBV entered into force on 25 January 2016.  Press release. CNBV MoU. FSB MoU.

Basel Committee on Banking Supervision FAQs on Basel III Counterparty Credit Risk and Exposures to Central Counterparties

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On December 28, 2012, the Basel Committee on Banking Supervision published an updated version of its frequently asked questions on the Basel III rules relating to counterparty credit risk and exposures to central counterparties. The update includes new questions and answers on the rules text of Basel III relating to: 

  • Advanced credit valuation adjustment capital charge;
  • Eligible hedges; and
  • Treatment of incurred credit valuation adjustment.

In addition, a new section of questions and answers has been added to assist with the interpretation of the rules text on the capitalisation framework for bank exposures to CCPs.   

FSA Update on Derivatives Reform

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On June 26, the FSA published a speech by David Lawton, FSA Acting Director of Markets, on recent progress made on derivatives reform. Speech.

Mr. Lawton reports that much has been achieved over the past year as regards meeting the G20 commitments to improve counterparty risk management and transparency in the over-the-counter (OTC) derivatives markets. In particular, the international standard setting bodies continue to facilitate the advancement of reforms across jurisdictions and industry has made good progress to increase standardisation of contracts and use of central clearing.

However, four outstanding areas remain:

  • rules for bilateral collateralisation of uncleared trades.
  • ensuring Regulators have a full range of tools to deal with recovery and resolution of central counterparty clearing houses (CCPs). EU legislation in this area is expected sometime this year.
  • getting agreement on how requirements will apply cross-border. The FSA believes that it is desirable to achieve a global system of regulation of OTC derivatives based upon mutual recognition and substituted compliance where possible.
  • ensuring the readiness of firms, both financial and non-financial, not currently clearing OTC derivative trades. Firms will need to be ready to comply with EMIR from January 2013.