C 204/12
EN
Official Journal of the European Union
12.6.2023
2.1.5.
Estimation of liquidity needs The ECB finds it important that CCPs monitor their exposures to the most relevant Union currencies on a daily basis to better manage liquidity risk, as well as to provide their competent authorities with appropriate reporting per relevant Union currency.
The proposed regulation should reflect this so as to ensure that the largest payment obligations are assessed in aggregate for all currencies and separately for each of the most relevant Union currencies of the financial instruments cleared.
2.2.
Impact on prudential supervision of credit institutions
2.2.1.
Exemptions of intragroup transactions The proposed regulation introduces changes to the currently applicable framework exempting intragroup trades from requirements for clearing and margining (38) as well as from capital requirements for credit valuation adjustment risk (39).
The proposed changes encompass the framework for third-country equivalence assessments, which is a precondition for these exemptions.
In the case of EMIR, it is proposed to replace the current equivalence assessment framework with a simplified framework.
The exemptions should be subject to conditions ensuring that the safety and soundness of institutions, but also the stability of the financial system more broadly, are not compromised.
In this context, the ECB has a number of observations.
First, for the purpose of exempting intragroup transactions from the requirements of clearing and margining, it is inadequate to limit the prior assessment of the relevant third country’s framework to anti-money laundering and countering the financing of terrorism aspects only.
The ECB firmly believes that several other aspects, notably the equivalence of that third country’s regulatory and supervisory framework with the broader scope of EMIR, should be assessed before the exemptions are available to institutions.
The assessment should include, but not be limited to, key requirements on risk mitigation techniques for OTC trades, as already provided in the current EMIR framework (40).
The ECB supports a more comprehensive equivalence assessment because it provides assurance that counterparties located in third countries are subject to sound regulatory and supervisory frameworks and Union counterparties do not incur undue risks by entering into transactions with such counterparties.
According to the proposed regulation, the Commission may carry out a more comprehensive assessment of a third country’s framework, potentially including the aforementioned aspects.
However, such assessment should not be discretionary.
Rather, this assessment should be carried out and concluded in advance, before Union counterparties are able to benefit from the aforementioned exemptions.
Otherwise, Union counterparties bear significant risks from entering into, or maintaining, a large volume of intragroup transactions with counterparties that may not be subject to appropriate regulatory requirements and/or adequate supervision.
Consequently, the ECB considers that, instead of the proposed simplified framework, the currently applicable equivalence framework should be maintained.
Second, the proposal has a direct impact on the application of capital requirements for credit valuation adjustment risk as specified within Regulation (EU) No 575/2013.
Credit valuation adjustment is the risk of losses caused by changes in the credit spread of a derivatives transaction’s counterparty due to changes in its credit quality.
This adjustment arises when the Union counterparty enters into a derivatives transaction with another counterparty, including a counterparty within the same group.
One of the most common reasons why Union counterparties incur such intragroup risk exposure is to support back-to-back booking practices.
In the past (41), the ECB has highlighted that prudential risks can arise from certain booking practices within international groups, in particular back-to-back booking practices.
Irrespective of whether the intragroup transaction giving rise to credit valuation adjustment risk supports a back-to-back booking practice or not, the resulting credit valuation adjustment risk negatively impacts the Union counterparty’s risk profile.
Thus, Union counterparties must have adequate local arrangements and staff to properly manage such risk and hold regulatory capital to cover it, unless the relevant exemption under Regulation (EU) No 575/2013 (42) applies.
This exemption should only be available to Union counterparties provided that the equivalence assessment of the third country, where the other counterparty is established, covers all relevant prudential aspects of that third country’s rules and specifically targets credit valuation adjustment risk in a comprehensive manner.
Consequently, the ECB welcomes the introduction, in the (38) (39) (40) (41)
See Articles 4 and 11 of EMIR.
See Article 382(4) of Regulation (EU) No 575/2013.
See Article 11 of EMIR.
See ‘Supervisory expectations on booking models’, ECB, August 2018, available on the ECB’s Banking Supervision website at www. bankingsupervision.europa.eu.
(42) See Article 382(4), point (b), of Regulation (EU) No 575/2013.