Council of EU Adopts Regulation Extending Exemptions for Commodity Dealers under CRR

On May 30, 2016, the Council of the EU published a press release confirming that it has adopted a Regulation amending the Capital Requirements Regulation (Regulation 575/2013) (CRR) to extend an exemption from certain requirements for commodity dealers.

The expiry date for the exemption of commodity dealers from large exposure requirements and from own funds requirements has been pushed back under the amending Regulation from December 31, 2017 to December 31, 2020.

The CRR requires the European Commission to prepare reports on the prudential supervision of commodity dealers and of investment firms in general. Since the review is still underway, it is likely that new legislation that may be required would only be adopted after the initial expiry date for the exemption. The purpose of the extension is therefore to provide commodity dealers with a stable regulatory environment in the meantime.

The European Parliament adopted the amending Regulation on May 11, 2016. It will enter into force 20 days after its publication in the Official Journal of the EU (OJ).

ECB Publishes Opinion on Proposed Regulation Extending Exemptions for Commodity Dealers under CRR

On March 4, the European Central Bank (“ECB”) published an opinion on the European Commission’s legislative proposal for a Regulation amending the Capital Requirements Regulation (CRR) to extend certain exemptions for commodity dealers. The opinion is a response to a request made by the Council of the European Union on January 12, 2016.

The ECB stated that it had not identified any concrete indications of systemic risk created by commodity dealers that would make it strictly necessary to remove the exemption for requirements concerning large exposures and own funds that apply at present. The EBA explained that given commodity dealers active in Europe are generally less leveraged and have more resilient capital structures than banks. However, the ECB regards a detailed impact analysis as a necessary step in terms of taking the most appropriate decision regarding the removal or the temporary extension of the exemption. In particular, consideration should be given to level playing-field issues relative to credit institutions which trade in commodities.

The ECB believes that the exemption should be of a temporary nature given the European Commission is expected to present a proposal for a comprehensive review of the prudential regulation of investment firms.  Opinion.

European Commission Publishes Secondary Implementing Decision on Third Country Equivalence for Purposes of Treatment of Exposures under CRR

A European Commission Implementing Decision on the lists of third countries considered equivalent for the purposes of the treatment of exposures under the Capital Requirements Regulation (“CRR“) has been published in the Official Journal of the EU on February 18.

Under the CRR, certain categories of exposures to entities located in third countries can benefit from more favourable prudential treatment if the Commission has determined that a third country’s prudential supervisory and regulatory requirements are at least equivalent to those applied in the EU for the purposes of the treatment of exposures under the CRR. The latest Implementing Decision adds Australia, Hong Kong, Indonesia, Japan and South Korea to the list of third countries.

The Implementing Decision will enter into force on March 9.

EBA Consults on Draft Guidelines on Implicit Support for Securitization Transactions

On January 20, the EBA published a consultation paper (EBA/CP/2016/01) on draft guidelines on implicit support for securitization transactions under Article 248(2) of the Capital Requirements Regulation (Regulation 575/2013) (“CRR”).

Examples of implicit support include the purchase of deteriorating credit risk exposures from the underlying pool, improving the quality of credit enhancements, the sale of discounted credit risk exposures into the pool of securitised credit risk exposures, the purchase of underlying exposures at above market price, ad hoc credit enhancements or an increase in the first loss position according to the deterioration of the underlying exposures. The provision of implicit support undermines the achievement of significant risk transfer, hence, under Article 248 of the CRR, there are restrictions on providing implicit support to securitisations. The draft guidelines recognise the fact that implicit support should not cover support that institutions are contractually obliged to provide. Such explicit support is assessed under guidelines EBA/GL/2014/05 on significant risk transfer.

Originator institutions and sponsor institutions which have failed to comply with the relevant requirements shall, at a minimum, must hold own funds against all of the securitised exposures as if they had not been securitised. Article 248(2) of the CRR sets out a mandate for the EBA to issue guidelines on what constitutes arm’s length conditions and when a transaction is not structured to provide support. A transaction is not considered to provide support if it is executed at arm’s length conditions and is taken into account in the assessment of significant risk transfer.

The draft guidelines include (i) the conditions to be satisfied in order to determine that a relevant transaction is not structured to provide support, depending on whether the relevant transaction is entered into by a sponsor institution or by an originator institution, (ii) an objective test for assessing whether a relevant transaction is entered into at arm’s length terms, (iii) clarifications regarding the notification requirements for relevant transactions and (iv) further guidance on how the conditions for assessing whether a transaction is structured to provide support, including the factors set out in points (a)-(e) of Article 248(1) CRR, should be assessed.

To ensure that the test is applied correctly, the assessment is to be made with due regard to the information available to each of the parties at the time when the transaction is entered into, and not to such information that is available at a later date.

The EBA will hold a public hearing on the draft guidelines on February 18, 2016.