Council of the EU Publishes Notes on Proposed Regulation and Directive for Supervision Investment Firms


On January 4, the Council of the EU published the following notes from the Council Presidency to its Permanent Representatives Committee (“COREPER“) relating to the European Commission’s proposed Regulation and Directive establishing a new framework for prudential requirements for investment firms:

  • A note (5022/19) setting out the Presidency compromise proposal on the proposed Directive on the prudential supervision of investment firms and amending the CRD IV Directive (2013/36/EU) and the MiFID II Directive (2014/65/EU) (2017/0364 (COD)) (the proposed Investment Firms Directive (“IFD“)).
  • A note (5021/19) setting out the Presidency compromise proposal on the proposed Regulation on the prudential requirements of investment firms and amending the Capital Requirements Regulation (Regulation 575/2013) (“CRR“), the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“) and the EBA Regulation (Regulation 1093/2010) (2017/0358 (COD)) (the proposed Investment Firms Regulation).

The previous compromise proposals were published in October 2018. The notes do not explain the changes that have been made in the latest revised versions. However, it appears that new text is marked in underlined bold and deletions are indicated in strikethrough.

ECB Publishes Letter on Variable Remuneration Policies of Credit Institutions


On January 10, the European Central Bank (“ECB“) published a letter (SSM/2019/010) (dated January 9, 2019) from Andrea Enria, ECB Supervisory Board Chair, on the variable remuneration policies of credit institutions in the single supervisory mechanism (“SSM“).

The letter states that the ECB pays close attention to the dividend and remuneration policies of the financial institutions under its supervision. In particular, the ECB will focus on any impact that these policies may have on the maintenance of a sound capital base. READ MORE

OJ Publishes Ninth Implementing Regulation Extending Transitional Periods Related To Own Fund Requirements for CCP Exposures


Commission Implementing Regulation ((EU) 2018/815) on the extension of the transitional periods related to own funds requirements for exposures to central counterparties (“CCPs“), set out in the Capital Requirements Regulation (Regulation 575/2013) (“CRR“) and the European Market Infrastructure Regulation (“EMIR“) (Regulation 648/2012) has been published in the Official Journal of the EU (“OJ“).

Commission Implementing Regulation ((EU) 2017/2241) was published in the OJ on June 4, 2018. It is available here. The Implementing Regulation will enter into force on June 7, 2018.

BRRD and CRR Legislation come into Force

Following publication in the Official Journal of the EU on December 27, 2017, Directive (EU) 2017/2399 and Regulation (EU) 2017/2395, amending the Bank Recovery and Resolution Directive (“BRRD“) and the Capital Requirements Regulation (“CRR“) respectively, came into force on 28 December 2017.

The directive amending the BRRD relates to the ranking of debt following an insolvency whereas the CRR amendment is focused on the necessary transitional arrangements for mitigating the introduction of IFRS 9. The BRRD Directive must be brought into force by the EU Member States by December 29, 2018, whereas the CRR amendment became applicable to EU Member States on January 1, 2018.

European Commission Adopts Delegated Regulation on RTS on Additional Collateral Outflows


On October 31, 2016, the European Commission adopted a Delegated Regulation supplementing the Capital Requirements Regulation (“CRR“) (Regulation 575/2013) in relation to regulatory technical standards (“RTS“) for additional liquidity outflows corresponding to collateral needs that have resulted from the impact of an adverse market scenario on an institution’s derivatives transactions (C(2016) 6867 final).

In March 2014, the EBA submitted a draft RTS to the European Commission. These proposed to take flows of collateral into account on a gross basis, contrary to the Basel Committee on Banking Supervision’s (“BCBS“) net approach. However, the assessment of the draft RTS was then delayed. The EBA submitted an amended draft RTS to the Commission for endorsement in May 2016. The method of calculation used in the RTS is founded on the historical look‑back approach developed by the BCBS.

The Council of the EU and the European Parliament must now consider the Delegated Regulation. If no objections are raised by either of them, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU (“OJ“).

EBA Provides Final RTS and Guidelines on the Definition of Default under CRR

On September 28, 2016, the European Banking Authority (“EBA“) published final reports on the documents relating to the definition of default under Article 178 of the Capital Requirements Regulation (Regulation 575/2013) (“CRR“):

  • Guidelines on the application of the definition of default under Article 178 (EBA/GL/2016/07) – the guidelines clarify all aspects related to the application of the definition of default, which is used for the purpose of both the internal ratings based approach (IRB approach) and for the standardized approach. The guidelines apply from January 1, 2021, although the EBA is encouraging firms to implement relevant changes in their internal procedures and IT systems before that date.
  • Draft regulatory technical standards (RTS) on the materiality threshold for credit obligations past due under Article 178 (EBA/RTS/2016/06) – Article 178 specifies that a default shall be considered to have occurred when an obligor has past more than 90 days on any material credit obligation to the firm, the parent undertaking or any of its subsidiaries. The draft RTS, which were mandated by Article 178(6) of the CRR, specify the conditions according to which a competent authority should set the materiality threshold for credit obligations that are past due.

The EBA has also published a report setting out the results of a qualitative and quantitative impact study (“QIS“) that assessed the impact on the regulatory capital requirements of selected policy options to harmonize the definition of default. The EBA states that the results of the QIS are the basis for the impact assessment carried out on the guidelines and the draft RTS.

The EBA consulted on these draft RTS and guidelines in October 2014 and September 2015 respectively (see Legal updates, EBA consults on draft RTS on materiality threshold of credit obligation past due and EBA consults on draft guidelines on application of default definition under CRR). According to an EBA press release, they form part of the EBA’s broader regulatory review of the internal ratings based (IRB) approach announced in February 2016.


Implementation Regulation Specifying Main Indices and Recognized Exchanges under CRR Published in OJ

On September 14, 2016, Commission Implementing Regulation (EU) 2016/1646 laying down implementing technical standards with regard to main indices and recognized exchanges in accordance with the Capital Requirements Regulation (Regulation 575/2013), was published in the Official Journal of the EU (OJ). The Implementing Regulation will enter into force on October 4, 2016.

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

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.

EBA Final Draft RTS on Assessment Methodology for Internal Ratings-Based Approach

The European Banking Authority (EBA) has published final draft regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the internal ratings-based (IRB) approach in accordance with Articles 144(2), 173(3) and 180(3)(b) of the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The final draft RTS provide a mapping of the minimum IRB requirements as laid down in Chapter 3, Title II, Part Three of the CRR, into fourteen chapters. Each chapter starts with a brief description of the assessment criteria to be used by competent authorities relating to verification requests and of the methods to be used by competent authorities in this context.  Under the IRB approach, institutions determine their own funds requirements for credit risk, taking into account their own estimates of risk parameters.  Competent authorities may, under the CRR, permit institutions to use the IRB approach, provided that the relevant conditions set out in the CRR are met.

The draft RTS are available here and will now be submitted to the European Commission for endorsement.