European Central Bank (“ECB”)

EBA Publishes Formula for Calculating MCD Benchmark Rate

The EBA has published its final report setting out the formula that creditors will be required to use when calculating the benchmark rate under Annex II to the Mortgage Credit Directive (2014/17/EU).

Under certain circumstances the Mortgage Credit Directive requires creditors to use a benchmark rate specified by the EBA for the illustrative examples in the European Standardized Information Sheet (ESIS) for variable rate mortgages (specifically, the annual percentage rate of charge (APRC) and the maximum installment amount). This is intended to help consumers compare the characteristics of credit products.

Instead of publishing a specific pan-European rate the EBA has produced a formula for calculating the appropriate rate which takes into account national circumstances. The EBA formula includes an underlying rate specific to each member state (that is, the European Central Bank (ECB) rate for Eurozone countries and the national central bank rate for non-Eurozone countries). This means that each member state will have a bespoke EBA benchmark rate that will remain up to date over time. The EBA rate will only apply where no national rate has been set.

The decision will be translated into the official EU languages, and will be published on the EBA website and in the Official Journal of the European Union (OJ). The EBA formula will apply 20 days after its publication in the OJ, but can be used by creditors before this date.

EBA Outlines Upcoming Initiatives for the Regulation of Retail Payments

The European Banking Authority (“EBA”) has announced details of its plans to harmonize regulatory and supervisory practices to ensure secure, easy and efficient payment services across the EU. The Payment Services Directive (PSD2) is expected to mandate improved operational and security requirements for payment services, in close cooperation between the EBA and the European Central Bank (ECB) through the Forum for the Security of Retail Payments which the ECB and the EBA chair jointly. As the security requirements under PSD2 are not expected to come into force until 2018/9, the final Guidelines issued by the EBA in December 2014 (applicable as of August 1, 2015) will apply until such time.

European Court Rules in Favor of the UK in ECB Dispute Over the Relocation of Clearing Houses

After a three year dispute over the place of the City of London in Europe’s single market, the EU General Court has ruled that the European Central Bank (“ECB”) lacked the legal powers to enforce a ban on clearing and settlement of euro-denominated deals in the UK. The ECB’s 2011 policy required all clearing houses that handle more than €5 billion euros per day per product category to move inside the Eurozone, claiming this would make it easier to oversee the clearing and settlement activities of such organizations. Though never implemented in practice, the policy was challenged by the UK on grounds that it went against the single market.

For the UK an unsuccessful challenge would have forced the London Stock Exchange’s LCH. Clearnet clearing house, which clears about €250 billion euro-denominated instruments every day, and ICE Clear Europe, the world’s largest processor of credit default swaps, to shift large portions of their euro-denominated operations to continental Europe, resulting in the loss of London’s financial center’s influence to the Eurozone and further ammunition for anti-EU campaigners in the lead up to the May national elections.

The General Court found that the ECB policy went beyond oversight to regulating market infrastructure companies – a power the ECB does not have as its competence is limited to payment systems under Article 127 (2) of the Treaty on the Functioning of the European Union. The Court did not address the question of whether the ECB policy had discriminated against UK operators or undermined the fundamental freedoms on which the EU single market is based. These issues could be further considered in the event of an appeal by the ECB to the Court of Justice of the European Union, or a proposal to grant the ECB the necessary authority through EU legislation.

ECB Publishes Eurosystem Oversight Report

On February 27, 2015, the European Central Bank (“ECB“) published its 2014 Eurosystem oversight report, the third such report, reviewing the oversight that the Eurosystem has performed in the period from 2011 to mid-2014.  The Eurosystem is the monetary authority of the Eurozone and consists of the European Central Bank and the central banks of each of the Eurozone member states.

The oversight report focuses on the Eurosystem’s oversight of financial market infrastructures, including payment systems, securities and derivatives clearing and settlement systems and trade repositories.

The oversight report also discusses future work priorities. The future work priorities state that the oversight priorities of the Eurosystem will still be driven by the implementation measures of the regulatory reform process and the need to avoid the emergence of systemic risks in the Eurozone. The Eurosystem will also conduct assessments of the design and operation of T2S, the securities settlement platform operated by the Eurosystem that is set to go live in June 2015. Finally the Eurosystem will continue to conduct regular analyses of correspondent banking activities and is currently reviewing its assessment guides for credit cards, direct debits and credit transfers.  Report.