Article 419 Currencies with constraints on the availability of liquid assets
1. EBA shall assess the availability for institutions of the liquid assets referred to in point (b) of Article 416(1) in the currencies that are relevant for institutions established in the Union. 2. Where the justified needs for liquid assets in light of the requirement in Article 412 are exceeding the availability of those liquid assets in a currency, one or more of the following derogations shall apply: (a) by way of derogation from point (f) of Article 417, the denomination of the liquid assets may be inconsistent with the distribution by currency of liquidity outflows after the deduction of inflows; (b) for currencies of a Member State or third countries, required liquid assets may be substituted by credit lines from the central bank of that Member State or third country, which are contractually irrevocably committed for the next 30 days and are fairly priced, independent of the amount currently drawn, provided that the competent authorities of that Member State or third country do the same and that Member State or third country has comparable reporting requirements in place. 3. The derogations applied in accordance with paragraph 2 shall be inversely proportional to the availability of the relevant assets. The justified needs of institutions shall be assessed taking into account their ability to reduce, by sound liquidity management, the need for those liquid assets and the holdings of those assets by other market participants. 4. EBA shall develop draft implementing technical standards listing the currencies which meet the conditions set out in this Article. EBA shall submit those draft implementing technical standards to the Commission by 31 March 2014. Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010. 5. EBA shall develop draft regulatory technical standards to specify the derogations referred to in paragraph 2 including the conditions of their application. EBA shall submit those draft regulatory technical standards to the Commission by 31 March 2014. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The Commission has today adopted a package of measures to deepen the Capital Markets Union together with the Communication "Completing Capital Markets Union by 2019 – time to accelerate delivery". The package includes this proposal, as well as a proposal for an enabling EU framework on covered bonds, a proposal to facilitate the cross-border distribution of investment funds, a proposal for an enabling framework on European crowdfunding service providers (ECSP) for business, as well as a proposal on the law applicable to the third-party effects of assignments of claims and a Communication on the applicable law to the proprietary effects of transactions in securities. Covered bonds are debt obligations issued by credit institutions and secured against a ringfenced pool of assets to which bondholders have direct recourse as preferred creditors. At the same time, bondholders remain entitled to claim against the issuing entity as ordinary creditors. This double claim against the cover pool and the issuer is referred to as the ‘dual recourse’ mechanism. Covered bonds are issued by credit institutions and are as such an important and efficient source of funding for European banks. They facilitate the financing of mortgage and public sector loans, thereby supporting lending more broadly. A significant advantage of covered bonds compared with other kinds of bank funding sources such as asset-backed securities is the fact that banks retain the risk on their balance sheets and investors have claims directly with the bank. Therefore, covered bonds allow banks to lend not only more, but also more safely. Not least for that reason, covered bonds fared well during the financial crisis compared with other funding instruments. They proved to be a reliable and stable funding source for European banks at a time when other funding channels were drying up. An enabling framework for covered bonds at EU level would enhance their use as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed, in order to help finance the real economy in line with the objectives of the Capital Markets Union (CMU). The enabling framework would also provide investors with a wider and safer range of investment opportunities and would help preserve financial stability. Member States will have to transpose these rules, ensuring that national covered bond frameworks comply with the principles-based requirements set out in this proposal. All covered bonds across Europe will therefore have to respect the minimum harmonisation requirements as set out in this proposal. Th e enabling framework for covered bonds is featured in the Commission Work Programme for 2018 1 . In the letter of intent following up his latest State of the Union speech, the President of the European Commission confirmed that an enabling framewor k for covered bonds should be launched or completed by end-2018 to ensure a deeper and fairer internal market. 2 The Commission confirmed this intention in the Mid-Term Review of the CMU Action Plan of June 2017 3 . The development of covered bonds across th e single market is uneven; they are very important in some Member States, less so in others. Furthermore, they are only partially addressed in Union law. While they benefit from preferential prudential and regulatory treatment in various respects in the li ght of the lower risks (e.g. banks investing in them do not have to set aside as much regulatory capital as when they invest in other assets), Union law does not comprehensively address what actually constitutes a covered bond. Rather, preferential treatme nts are granted to covered bonds as defined in Directive 2009/65/EC 4 . However, that definition was drafted with a specific purpose in mind – limiting what undertakings for collective investment in transferable securities (UCITS) could invest in – and is no t fit for the broader policy objectives of the CMU. A Union legislative framework on covered bonds should expand the capacity of credit institutions to provide financing to the real economy and contribute to the development of covered bonds across the Union, particularly in Member States where no market for them currently exists. The framework would also increase cross-border flows of capital and investment. It would thus contribute to the CMU and in particular to the further leveraging of credit institutions’ capacity to support the wider economy. In particular, it would ensure that banks have a broad range of safe and efficient funding tools at their disposal. The framework consists of a Directive and a Regulation – the two instruments should be seen as a single package. This proposed Regulation will mainly amend Article 129 of Regulation (EU) No 575/2013 (Capital Requirements Regulation (CRR)). The amendments build on the current prudential treatment but add requirements on minimum overcollateralisation and substitution assets. They would strengthen the requirements for covered bonds being granted preferential capital treatment. The proposed Directive will specify the core elements of covered bonds and provide a common definition as a consistent and sufficiently detailed point of reference for prudential regulation purposes, applicable across financial sectors. It will establish the structural features of the instrument, a covered bond specific public supervision, rules allowing use of the ‘European Covered Bonds’ label and competent authorities’ publication obligations in the field of covered bonds.
Revised version (Article 419 Currencies with constraints on the availability of liquid assets):
1. EBA shall assess the availability for institutions of the liquid assets referred to in point (b) of Article 416(1) in the currencies that are relevant for institutions established in the Union. 2. Where the justified needs for liquid assets in light of the requirement in Article 412 are exceeding the availability of those liquid assets in a currency, one or more of the following derogations shall apply: (a) by way of derogation from point (f) of Article 417, the denomination of the liquid assets may be inconsistent with the distribution by currency of liquidity outflows after the deduction of inflows; (b) for currencies of a Member State or third countries, required liquid assets may be substituted by credit lines from the central bank of that Member State or third country, which are contractually irrevocably committed for the next 30 days and are fairly priced, independent of the amount currently drawn, provided that the competent authorities of that Member State or third country do the same and that Member State or third country has comparable reporting requirements in place. 3. The derogations applied in accordance with paragraph 2 shall be inversely proportional to the availability of the relevant assets. The justified needs of institutions shall be assessed taking into account their ability to reduce, by sound liquidity management, the need for those liquid assets and the holdings of those assets by other market participants. 4. EBA shall develop draft implementing technical standards listing the currencies which meet the conditions set out in this Article. EBA shall submit those draft implementing technical standards to the Commission by 31 March 2014. Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010. 5. EBA shall develop draft regulatory technical standards to specify the derogations referred to in paragraph 2, including the conditions of their application. EBA shall submit those draft regulatory technical standards to the Commission by 28 December 2019. Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.
Article 420 Liquidity outflows
1. Pending the specification of a liquidity requirement in accordance with Article 460, liquidity outflows to be reported shall include: (a) the current amount outstanding for retail deposits as set out in Article 421; (b) the current amounts outstanding of other liabilities that come due, can be called for payout by the issuing institutions or by the provider of the funding or entail an implicit expectation of the provider of the funding that the institution would repay the liability during the next 30 days as set out in Article 422; (c) the additional outflows referred to in Article 423; (d) the maximum amount that can be drawn during the next 30 days from undrawn committed credit and liquidity facilities, as set out in Article 424; (e) the additional outflows identified in the assessment in accordance with paragraph 2. 2. Institutions shall regularly assess the likelihood and potential volume of liquidity outflows during the next 30 days as far as products or services are concerned, which are not captured in Articles 422, 423 and 424 and which they offer or sponsor or which potential purchasers would consider to be associated with them, including but not limited to liquidity outflows resulting from any contractual arrangements such as other off-balance sheet and contingent funding obligations, including, but not limited to committed funding facilities, un-drawn loans and advances to wholesale counterparties, mortgages that have been agreed but not yet drawn down, credit cards, overdrafts, planned outflows related to renewal or extension of new retail or wholesale loans, planned derivative payables and trade finance off-balance sheet related products, as referred to in Article 429 and in Annex I. These outflows shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario. For this assessment, institutions shall take particular account of material reputational damage that could result from not providing liquidity support to such products or services. Institutions shall report not less than annually to the competent authorities those products and services for which the likelihood and potential volume of the liquidity outflows referred to in the first subparagraph are material and the competent authorities shall determine the outflows to be assigned. The competent authorities may apply an outflow rate up to 5 % for trade finance off-balance sheet related products, as referred to in Article 429 and Annex I. The competent authorities shall at least annually report to EBA the types of products or services for which they have determined outflows on the basis of the reports from institutions. They shall in that report also explain the methodology applied to determine the outflows.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 64 8 /2012 1 (the European Market Infrastructure Regulation or “EMIR”) regulates derivatives transactions, including measures to limit their risks through clearing in central counterparties (CCPs). 2 CCPs take on the risks faced by the parties to a trade, becoming the buyer to every seller and the seller to every buyer. By doing so, they increase market transparency and efficiency and reduce the risks in financial markets, especially for derivatives . EMIR was adopted in the wake of the 2008/2009 financial crisis to promote financial stability and to make markets more transparent, more standardised, and thus safer. EMIR requires that derivatives transactions are reported to ensure market transparency for regulators and supervisors and that their risks are appropriately mitigated through central clearing at a CCP or by exchanging collateral, known as ‘margin’, in bilateral transactions. CCPs, and the risks they manage, have grown considerably since the adoption of EMIR. In 2017, the Commission published two legislative proposals amending EMIR, both of which were adopted by the co-legislators in 2019. EMIR REFIT 3 recalibrated some of the requirements under EMIR to ensure their proportionality, while ensuring financial stability. Acknowledging the emerging issues related to the increasing concentration of risks in CCPs, in particular third-country CCPs, EMIR 2.2 4 revised the supervisory framework and set out a process for assessing the systemic nature of third-country CCPs by the European Securities and Markets Authority (ESMA) in cooperation with the European Systemic Risk Board (ESRB) and the central banks of issue. EMIR is complemented by the CCP Recovery and Resolution Regulation 5 , adopted in 2020, 6 to prepare for the unlikely – though massively impactful - event that an EU CCP faces severe financial distress. 7 Whilst EMIR has established a robust framework for central clearing, certain areas of the current supervisory framework have proven overly complex. This limits EU CCPs’ ability to attract business both within the EU and internationally. The supervisory approval procedures for launching new clearing services and activities by EU CCPs, as well as changes in their risk models, are in many cases unnecessarily long and burdensome. The current rules are there to ensure the safety and soundness of EU CCPs, but this could be done in many ways and the existing processes have been challenged as too slow and, at times, disproportionate in light of the envisaged change. It should not take years for approving a new product, and changes to risk models need to be swift to reflect changing market and economic circumstances. Delays in approvals increase costs and reduce the attractiveness of EU CCPs, and consequently of the EU as a place to do business. The proposal aims at mitigating these obstacles in order to foster modern and competitive CCPs in the EU that can attract business. EMIR provides a comprehensive and robust prudential framework for CCPs and the newly adopted CCP Recovery and Resolution Regulation further strengthens the soundness of EU CCPs. This proposal aims for the EU to continue to base the evolution of its central clearing ecosystem on the strength of its rules and supervision. Robust and safe CCPs enhance the trust of the financial system and crucially support the liquidity of key markets. A safe, robust and resilient clearing ecosystem is a pre-condition for it to grow further. The EU central clearing ecosystem should enable EU firms to hedge their risks efficiently and safely, while at the same time safeguarding the wider financial stability. In this way, central clearing will support the EU economy. This proposal aims to put firms in a better position by being able to predict the liquidity needs associated with central clearing. A competitive and efficient EU clearing ecosystem will increase central clearing activities, but central clearing also entails risks by centralising transactions in a few CCPs being financially systemically important. Hence, those risks must be appropriately managed by CCPs and CCPs must continue to be thoroughly supervised both at the national and the wider EU level. Therefore, this proposal aims at ensuring a robust and joined-up supervision, building on the supervisory system the EU currently has in place. In addition, since 2017, concerns have been repeatedly expressed about the ongoing risks to the EU financial stability arising from the excessive concentration of clearing in some third-country CCPs, notably in a stress scenario. H igh-risk but low-probability events can happen, and the EU must be prepared to face them 8 . While EU CCPs have generally proven resilient, experience has shown that the EU clearing ecosystem can be made stronger, to the benefit of financial stability. However, open strategic autonomy also means that the EU needs to safeguard itself against the financial stability risks which can arise when EU market participants are excessively reliant on third-country entities, as this can be a source of vulnerabilit y . Therefore, this proposal aims at making the equivalence framework in EMIR more proportionate and to better tailor cooperation with foreign supervisors taking into account the risks posed by CCPs based in third countries – and without compromising on the need for third countries to have sound rules in place . It is also proposed that the equivalence procedure is made simpler when the risks involved in central clearing in a third country are particularly low. In addition, this proposal seeks to build up the EU’s central clearing capacity and thereby increase liquidity at EU CCPs with the aim to reduce the risks posed to the EU financial stability by excessive exposures to third-country CCPs. Therefore, this proposal requires all market participants subject to a clearing obligation, to hold active accounts at EU CCPs for clearing products that have been identified by ESMA as of substantial systemic importance for the EU financial stability. T his proposal is complemented by a proposal for a Directive introducing a limited number of changes to Directive 2013/36/EU 9 (Capital Requirements Directive or ‘CRD’), Directive (EU) 2019/2034 10 (Investment Firms Directive or ‘IFD’) and Directive 2009/65/EU 11 (Undertakings for Collective Investment in Transferable Securities Directive or ‘UCITS Directive’) as regards the treatment of concentration risk towards CCPs and the counterparty risk on centrally cleared derivative transactions. These amendments are necessary to ensure that the objectives of this EMIR review are achieved as well as to assure coherence. The two proposals should therefore be read in conjunction.
Revised version (Article 420 Liquidity outflows):
2. Institutions shall regularly assess the likelihood and potential volume of liquidity outflows during the next 30 days as far as products or services are concerned, which are not captured in Articles 422, 423 and 424 and which they offer or sponsor or which potential purchasers would consider to be associated with them, including but not limited to liquidity outflows resulting from any contractual arrangements such as other off-balance sheet and contingent funding obligations, including, but not limited to committed funding facilities, un-drawn loans and advances to wholesale counterparties, mortgages that have been agreed but not yet drawn down, credit cards, overdrafts, planned outflows related to renewal or extension of new retail or wholesale loans, planned derivative payables and trade finance off-balance sheet related products, as referred to in Article 429 and in Annex I. These outflows shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario. For this assessment, institutions shall take particular account of material reputational damage that could result from not providing liquidity support to such products or services. Institutions shall report not less than annually to the competent authorities those products and services for which the likelihood and potential volume of the liquidity outflows referred to in the first subparagraph are material and the competent authorities shall determine the outflows to be assigned. The competent authorities may apply an outflow rate up to 5 % for trade finance off-balance sheet related products, as referred to in Article 429 and Annex I. The competent authorities shall at least annually report to EBA the types of products or services for which they have determined outflows on the basis of the reports from institutions. They shall in that report also explain the methodology applied to determine the outflows.
Article 421 Outflows on retail deposits
1. Institutions shall separately report the amount of retail deposits covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country, and multiply by at least 5 % where the deposit is either of the following: (a) part of an established relationship making withdrawal highly unlikely; (b) held in a transactional account, including accounts to which salaries are regularly credited. 2. Institutions shall multiply other retail deposits not referred to in paragraph 1 by at least 10 %. 3. Taking into account the behaviour of local depositors as advised by competent authorities, EBA shall issue guidelines by 1 January 2014 on the criteria to determine the conditions of application of paragraphs 1 and 2 in relation to the identification of retail deposits subject to different outflows and the definitions of those products for purposes of this Title. Those guidelines shall take account of the likelihood of these deposits to lead to outflows of liquidity during the next 30 days. These outflows shall be assessed under the assumption of a combined idiosyncratic and market-wide stress scenario. 4. Notwithstanding paragraphs 1 and 2, institutions shall multiply retail deposits that they have taken in third countries by a higher percentage than provided for in those paragraphs if such percentage is provided by comparable third country reporting requirements. 5. Institutions may exclude from the calculation of outflows certain clearly circumscribed categories of retail deposits as long as in each and every instance the institution rigorously applies the following for the whole category of those deposits, unless in individually justified circumstances of hardship for the depositor: (a) within 30 days, the depositor is not allowed to withdraw the deposit; or (b) for early withdrawals within 30 days, the depositor has to pay a penalty that includes the loss of interest between the date of withdrawal and the contractual maturity date plus a material penalty that does not have to exceed the interest due for the time elapsed between the date of deposit and the date of withdrawal.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 575/2013 1 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes together with Directive 2013/36/EU 2 (the Capital Requirements Directive or CRD) the prudential regulatory framework for credit institutions operating in the Union. The CRR and CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with the EU’s international partners, in pa rticular the Basel Committee on Banking Supervision (BCBS). The CRR has been subsequently amended to tackle remaining weaknesses in the prudential regulatory framework and to implement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. Amongst various subsequent changes, Regulation (EU) 2017/2395 3 has inserted in the CRR transitional arrangements for mitigating the impact on own funds from the introduction of the new accounting standard, the International Financial Reporting Standard – Financial Instruments (IFRS) 9. Regulation (EU) 2019/630 4 has introduced in the CRR a requirement for minimum loss coverage for non-performing exposures (the so-called prudential backstop). Furthermore, Reg ulation (EU) 2019/876 5 (CRR II) has added to the CRR some of the final elements of the international reforms (the finalised Basel III framework), which entail amongst others, a new definition of the leverage ratio and a leverage ratio buffer, which will pr event institutions from excessively increasing leverage. The latter Regulation has also introduced in the CRR more favourable prudential treatments of certain software assets, of certain pension- and salary-backed loans, as well as of loans to small and me dium sized enterprises (SMEs) and infrastructure projects. The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Due to the reforms undertaken in the aftermath of the 2008 financial crisis, credit institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector. In reaction to the new circumstances, competent authorities across the Union have provided temporary capital and operational relief to ensure favourable conditions for credit institutions to continue lending amid COVID-19. It is therefore important that capital is deployed where it is most needed and that the prudential framework interacts smoothly with the various measures that address the COVID-19 pandemic. The CRR offers ample leeway for banks to support public and private initiatives to promote contin ued lending in the context of the COVID-19 pandemic, while ensuring a prudent approach. The flexibility embedded in the CRR is described in the Commission Interpretative Communication of 28 April 2020 6 on the application of the accounting and prudential frameworks to facilitate bank lending in the Union amid COVID-19. Besides making full use of the flexibility allowed for in the existing framework, some limited changes to specific aspects of the CRR ar e necessary in order to maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. Moreover, at international level, the BCBS has agreed a one-year delay in t he deadline for implementing the final elements of the Basel III framework, of which some elements had been already incorporated in the CRR 7 , as well as a greater flexibility to the phase-in of the impact of the IFRS 9 on capital . These changes need to be reflected in the existing rules. First, it is necessary to adjust the transitional arrangements that allow credit institutions to alleviate the impact from expected credit-loss (ECL) provisioning under IFRS 9 on their own funds. This adjustment would allow credit institutions to better mitigate the impact of any potential increase in ECL provisioning caused by the deterioration in the credit quality of credit institutions’ exposures due to the economic consequences of the COVID-19 pandemic. Second, to account for the impact of COVID-19 related guarantees, the rules on the minimum loss coverage for non-performing exposures (NPEs) need to be adjusted to extend temporarily the treatment that is currently applicable to NPEs guaranteed or insured by export credit agencies to NPEs that would arise as a consequence of the COVID-19 pandemic and that are covered by the various guarantee schemes that were put in place by Member States. This would recognise the similar characteristics shared by export credit agencies guarantees and COVID-19 related guarantees. Third, the offsetting mechanism associated with the competent authority discretion to allow credit institutions to temporarily exclude exposures in the form of central bank reserves from the calculation of the leverage ratio needs to be modified. This would ensure that liquidity measures provided by central banks in a crisis context would be effectively channelled by credit institutions to the economy. Fourth, it is necessary to defer, in line with the decision of the BCBS, the application date of the new leverage ratio buffer requirement. This would free up credit institutions’ operational capacity and allow them to focus on the more immediate challenges associated with the COVID-19 pandemic. Fifth, the application dates of some of the capital benefits envisaged in the CRR but not yet applicable need to be anticipated, namely the provisions on the treatment of certain software assets, the provisions on certain loans backed by pensions or salaries, the revised supporting factor for small and medium-sized enterprises (SME) and the new supporting factor for infrastructure finance. Advancing the date of application of the two supporting factors, the preferential treatment of certain software assets, and the preferential treatment of certain loans backed by pensions or salaries would free up own funds of institutions, allowing them to boost much needed lending during the COVID-19 pandemic and its aftermath. These proposed changes will not fundamentally alter the prudential regulatory framework. They form part of the response of the Commission to address the emergency situation triggered by the COVID-19 pandemic. These adjustments to the prudential framework would facilitate collective efforts aimed at mitigating the impact of the pandemic and thus moving towards a fast recovery.
Revised version (Article 421 Outflows on retail deposits):
1. Institutions shall separately report the amount of retail deposits covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country, and multiply by at least 5 % where the deposit is either of the following: (a) part of an established relationship making withdrawal highly unlikely; (b) held in a transactional account, including accounts to which salaries are regularly credited. Institutions shall separately report the amount of retail deposits covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country, and multiply by at least 5 % where the deposit is either of the following: (a) part of an established relationship making withdrawal highly unlikely;
Article 422 Outflows on other liabilities
1. Institutions shall multiply liabilities resulting from the institution's own operating expenses by 0 %. 2. Institutions shall multiply liabilities resulting from secured lending and capital market-driven transactions as defined in point (3) of Article 192 by: (a) 0 % up to the value of the liquid assets in accordance with Article 418 if they are collateralised by assets that would qualify as liquid assets in accordance with Article 416; (b) 100 % over the value of the liquid assets in accordance with Article 418, if they are collateralized by assets that would qualify as liquid assets in accordance with Article 416; (c) 100 % if they are collateralized by assets that would not qualify as liquid assets in accordance with Article 416, with the exception of transactions covered by points (d) and (e) of this paragraph; (d) 25 % if they are collateralized by assets that would not qualify as liquid assets in accordance with Article 416 and the lender is the central government, a public sector entity of the Member State in which the credit institution has been authorised or has established a branch, or a multilateral development bank. Public sector entities that receive that treatment shall be limited to those that have a risk weight of 20 % or lower in accordance with Chapter 2, Title II of Part Three; (e) 0 % if the lender is a central bank. 3. Institutions shall multiply liabilities resulting from deposits that have to be maintained: (a) by the depositor in order to obtain clearing, custody or cash management or other comparable services from the institution; (b) in the context of common task sharing within an institutional protection scheme meeting the requirements of Article 113(7) or as a legal or statutory minimum deposit by another entity being a Member of the same institutional protection scheme; (c) by the depositor in the context of an established operational relationship other than that mentioned in point (a); (d) by the depositor to obtain cash clearing and central credit institution services and where the credit institution belongs to a network in accordance with legal or statutory provisions; by 5 % in the case of point (a) to the extent to which they are covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country and by 25 % otherwise. Deposits from credit institutions placed at central credit institutions that are considered as liquid assets in accordance with Article 416(1)(f) shall be multiplied by 100 % outflow rate. 4. Clearing, custody or cash management or other comparable services referred to in points (a) and (d) of paragraph 3 only covers such services to the extent that they are rendered in the context of an established relationship on which the depositor has substantial dependency. They shall not merely consist in correspondent banking or prime brokerage services and the institution shall have evidence that the client is unable to withdraw amounts legally due over a 30 day horizon without compromising its operational functioning. Pending a uniform definition of an established operational relationship as referred to in point (c) of paragraph 3, institutions shall themselves establish the criteria to identify an established operational relationship for which they have evidence that the client is unable to withdraw amounts legally due over a 30-day horizon without compromising their operational functioning and shall report these criteria to the competent authorities. Competent authorities may, in the absence of a uniform definition, provide general guidance that institutions shall follow in identifying deposits maintained by the depositor in a context of an established operational relationship. 5. Institutions shall multiply liabilities resulting from deposits by clients that are not financial customers to the extent they do not fall under paragraphs 3 and 4 by 40 % and shall multiply the amount of these liabilities covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent Deposit Guarantee Scheme in a third country by 20 %. 6. Institutions shall take outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II into account on a net basis across counterparties and shall multiply them by 100 % in the case of a net outflow. Net basis shall mean also net of collateral to be received that qualifies as liquid assets under Article 416. 7. Institutions shall separately report other liabilities that do not fall under paragraphs 1 to 5. 8. Competent authorities may grant the permission to apply a lower outflow percentage on a case-by-case basis, to the liabilities referred to in paragraph 7, when all of the following conditions are fulfilled: (a) the depositor is: (i) a parent or subsidiary institution of the institution or another subsidiary of the same parent institution; (ii) linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC; (iii) an institution falling within the same institutional protection scheme meeting the requirements of Article 113(7); (iv) the central institution or a member of a network compliant with Article 400 (2)(d); (a) the depositor is: (i) a parent or subsidiary institution of the institution or another subsidiary of the same parent institution; (ii) linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC; (iii) an institution falling within the same institutional protection scheme meeting the requirements of Article 113(7); (iv) the central institution or a member of a network compliant with Article 400 (2)(d); (b) there are reasons to expect a lower outflow over the next 30 days even under a combined idiosyncratic and market-wide stress scenario; (c) a corresponding symmetric or more conservative inflow is applied by the depositor by way of derogation from Article 425; (d) the institution and the depositor are established in the same Member State. 9. Competent authorities may waive the conditions set out in point (d) of paragraph 8 where point (b) of Article 20(1) is applied. In that case additional objective criteria as set out in the delegated act referred to in Article 460 have to be met. Where such lower outflow is permitted to be applied, the competent authorities shall inform EBA about the result of the process referred to in point (b) of Article 20(1). The fulfilment of the conditions for such lower outflows shall be regularly reviewed by the competent authorities. 10. EBA shall develop draft regulatory technical standards to further specify the additional objective criteria referred to in paragraph 9. EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The term 'commodity dealer' covers a wide spectrum of actors in energy and commodity markets: some trade exclusively in commodity derivative contracts and resemble investment firms in terms of functions and risks, whereas others trade commodity derivatives purely as an ancillary activity to commodities production. The requirements laid down in Regulation (EU) No 575/2013 (the 'Capital Requirements Regulation' or 'CRR') and in Directive 2013/36/EU (the 'Capital Requirements Directive' or 'CRD') apply to both credit institutions and investment firms. The prudential regime applicable to investment firms is derived from that imposed on credit institutions, adapted as a function of the investment services that they provide. Articles 493(1) and 498(1) of the CRR exempt commodity dealers ("investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field did not apply on 31 December 2006") from large exposures requirements and from own funds requirements respectively. Both exemptions expire on 31 December 2017. This 'sunset clause' was originally included in the CRR in order to allow time for regulators to determine a prudential regulation adapted to the risk profile of commodity dealers. 1 To this end, Articles 493(2) and 498(2) of the CRR mandate the Commission to prepare reports by the end of 2015. On the basis of those reports, the Commission may decide to submit proposals to amend the CRR. The Commission is also required to submit, within the same deadline, a report on an appropriate regime for the prudential supervision of investment firms in general. Here again, the report may be followed by a Commission proposal. Since the abovementioned reports are related, the Commission decided to undertake a single review (henceforth 'investment firms review') and prepare a single report on the above topics. This was deemed necessary in order to ensure the development of a coherent prudential framework for all types of investment firms. The work on the investment firms review is already underway: the Commission asked the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to provide technical advice on the matter. The advice is expected by the end of September 2015. The Commission will then use the advice to prepare its own report. Should the Commission decide to change the existing prudential framework for investment firms, the report will detail the next steps of the investment firms review and the broad outline of the changes the Commission is contemplating. The investment firms review is a complex project which will not be completed by the end of this year. It is therefore highly improbable that any legislation that may result from this review can be prepared, adopted and applied before the current exemptions expire (i.e. before the end of 2017). This has implications for commodity dealers: if no specific prudential framework that may result from the investment firm review would be in place by then, they would be subject to the full CRR/CRD requirements starting from 1 January 2018. There are two problems related to this scenario. First, commodity dealers would become subject to the full CRR/CRD requirements without a conscious (and informed) decision that such treatment is indeed the most appropriate one for them. Second, assuming that the investment firm review would result in a tailor-made prudential framework for commodity dealers, they would be deprived of a stable regulatory framework. They would move from the current treatment where they are exempted from large exposures and own funds requirements, to a temporary treatment comprising the full CRR/CRD requirements, and eventually to the aforementioned tailor-made framework within a very short period of time (one to two years). This is not a desirable outcome. To prevent that this situation arises it is therefore opportune to extend the existing exemptions laid down in the CRR. The extension should take into account the amount of time that will be necessary to conclude the investment firms review and to prepare, adopt and apply any legislation that may result from that review.
Revised version (Article 422 Outflows on other liabilities):
1. Institutions shall multiply liabilities resulting from the institution's own operating expenses by 0 %. 2. Institutions shall multiply liabilities resulting from secured lending and capital market-driven transactions as defined in point (3) of Article 192 by: (a) 0 % up to the value of the liquid assets in accordance with Article 418 if they are collateralised by assets that would qualify as liquid assets in accordance with Article 416; (b) 100 % over the value of the liquid assets in accordance with Article 418, if they are collateralized by assets that would qualify as liquid assets in accordance with Article 416; (c) 100 % if they are collateralized by assets that would not qualify as liquid assets in accordance with Article 416, with the exception of transactions covered by points (d) and (e) of this paragraph; (d) 25 % if they are collateralized by assets that would not qualify as liquid assets in accordance with Article 416 and the lender is the central government, a public sector entity of the Member State in which the credit institution has been authorised or has established a branch, or a multilateral development bank. Public sector entities that receive that treatment shall be limited to those that have a risk weight of 20 % or lower in accordance with Chapter 2, Title II of Part Three; (e) 0 % if the lender is a central bank. 3. Institutions shall multiply liabilities resulting from deposits that have to be maintained: (a) by the depositor in order to obtain clearing, custody or cash management or other comparable services from the institution; (b) in the context of common task sharing within an institutional protection scheme meeting the requirements of Article 113(7) or as a legal or statutory minimum deposit by another entity being a Member of the same institutional protection scheme; (c) by the depositor in the context of an established operational relationship other than that mentioned in point (a); (d) by the depositor to obtain cash clearing and central credit institution services and where the credit institution belongs to a network in accordance with legal or statutory provisions; by 5 % in the case of point (a) to the extent to which they are covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country and by 25 % otherwise. Deposits from credit institutions placed at central credit institutions that are considered as liquid assets in accordance with Article 416(1)(f) shall be multiplied by 100 % outflow rate. 4. Clearing, custody or cash management or other comparable services referred to in points (a) and (d) of paragraph 3 only covers such services to the extent that they are rendered in the context of an established relationship on which the depositor has substantial dependency. They shall not merely consist in correspondent banking or prime brokerage services and the institution shall have evidence that the client is unable to withdraw amounts legally due over a 30 day horizon without compromising its operational functioning. Pending a uniform definition of an established operational relationship as referred to in point (c) of paragraph 3, institutions shall themselves establish the criteria to identify an established operational relationship for which they have evidence that the client is unable to withdraw amounts legally due over a 30-day horizon without compromising their operational functioning and shall report these criteria to the competent authorities. Competent authorities may, in the absence of a uniform definition, provide general guidance that institutions shall follow in identifying deposits maintained by the depositor in a context of an established operational relationship. 5. Institutions shall multiply liabilities resulting from deposits by clients that are not financial customers to the extent they do not fall under paragraphs 3 and 4 by 40 % and shall multiply the amount of these liabilities covered by a Deposit Guarantee Scheme in accordance with Directive 94/19/EC or an equivalent Deposit Guarantee Scheme in a third country by 20 %. 6. Institutions shall take outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II into account on a net basis across counterparties and shall multiply them by 100 % in the case of a net outflow. Net basis shall mean also net of collateral to be received that qualifies as liquid assets under Article 416. 7. Institutions shall separately report other liabilities that do not fall under paragraphs 1 to 5. 8. Competent authorities may grant the permission to apply a lower outflow percentage on a case-by-case basis, to the liabilities referred to in paragraph 7, when all of the following conditions are fulfilled: (a) the depositor is: (i) a parent or subsidiary institution of the institution or another subsidiary of the same parent institution; (ii) linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC; (iii) an institution falling within the same institutional protection scheme meeting the requirements of Article 113(7); (iv) the central institution or a member of a network compliant with Article 400 (2)(d); (b) there are reasons to expect a lower outflow over the next 30 days even under a combined idiosyncratic and market-wide stress scenario; (c) a corresponding symmetric or more conservative inflow is applied by the depositor by way of derogation from Article 425; (d) the institution and the depositor are established in the same Member State. 9. Competent authorities may waive the conditions set out in point (d) of paragraph 8 where point (b) of Article 20(1) is applied. In that case additional objective criteria as set out in the delegated act referred to in Article 460 have to be met. Where such lower outflow is permitted to be applied, the competent authorities shall inform EBA about the result of the process referred to in point (b) of Article 20(1). The fulfilment of the conditions for such lower outflows shall be regularly reviewed by the competent authorities. 10. EBA shall develop draft regulatory technical standards to further specify the additional objective criteria referred to in paragraph 9. EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010.
Article 423 Additional outflows
1. Collateral other than assets referred to in Article 416(1)(a), (b) and (c), which is posted by the institution for contracts listed in Annex II and credit derivatives, shall be subject to an additional outflow of 20 %. 2. Institutions shall notify to the competent authorities all contracts entered into the contractual conditions of which lead, within 30 days following a material deterioration of the credit quality of the institution, to liquidity outflows or additional collateral needs. If the competent authorities consider such contracts material in relation to the potential liquidity outflows of the institution, they shall require the institution to add an additional outflow for those contracts corresponding to the additional collateral needs resulting from a material deterioration in the credit quality of the institution such as a downgrade in its external credit assessment by three notches. The institution shall regularly review the extent of this material deterioration in light of what is relevant under the contracts it has entered into and shall notify the result of its review to the competent authorities. 3. The institution shall add an additional outflow corresponding to collateral needs that would result from the impact of an adverse market scenario on the institution's derivatives transactions, financing transactions and other contracts if material. EBA shall develop draft regulatory technical standards to determine the conditions of application in relation to the notion of materiality and methods for the measurement of this additional outflow. EBA shall submit those draft regulatory technical standards to the Commission by 31 March 2014. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the second subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 4. The institution shall add an additional outflow corresponding to the market value of securities or other assets sold short and to be delivered within the 30 days horizon unless the institution owns the securities to be delivered or has borrowed them at terms requiring their return only after the 30 day horizon and the securities do not form part of the institutions liquid assets. 5. The institution shall add an additional outflow corresponding to: (a) the excess collateral the institution holds that can be contractually called at any time by the counterparty; (b) collateral that is due to be returned to a counterparty; (c) collateral that corresponds to assets that would qualify as liquid assets for the purposes of Article 416 that can be substituted for assets corresponding to assets that would not qualify as liquid assets for the purposes of Article 416 without the consent of the institution. 6. Deposits received as collateral shall not be considered liabilities for the purposes of Article 422 but will be subject to the provisions of this Article where applicable.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 575/2013 1 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes together with Directive 2013/36/EU 2 (the Capital Requirements Directive or CRD) the prudential regulatory framework for credit institutions operating in the Union. The CRR and CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with the EU’s international partners, in pa rticular the Basel Committee on Banking Supervision (BCBS). The CRR has been subsequently amended to tackle remaining weaknesses in the prudential regulatory framework and to implement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. Amongst various subsequent changes, Regulation (EU) 2017/2395 3 has inserted in the CRR transitional arrangements for mitigating the impact on own funds from the introduction of the new accounting standard, the International Financial Reporting Standard – Financial Instruments (IFRS) 9. Regulation (EU) 2019/630 4 has introduced in the CRR a requirement for minimum loss coverage for non-performing exposures (the so-called prudential backstop). Furthermore, Reg ulation (EU) 2019/876 5 (CRR II) has added to the CRR some of the final elements of the international reforms (the finalised Basel III framework), which entail amongst others, a new definition of the leverage ratio and a leverage ratio buffer, which will pr event institutions from excessively increasing leverage. The latter Regulation has also introduced in the CRR more favourable prudential treatments of certain software assets, of certain pension- and salary-backed loans, as well as of loans to small and me dium sized enterprises (SMEs) and infrastructure projects. The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Due to the reforms undertaken in the aftermath of the 2008 financial crisis, credit institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector. In reaction to the new circumstances, competent authorities across the Union have provided temporary capital and operational relief to ensure favourable conditions for credit institutions to continue lending amid COVID-19. It is therefore important that capital is deployed where it is most needed and that the prudential framework interacts smoothly with the various measures that address the COVID-19 pandemic. The CRR offers ample leeway for banks to support public and private initiatives to promote contin ued lending in the context of the COVID-19 pandemic, while ensuring a prudent approach. The flexibility embedded in the CRR is described in the Commission Interpretative Communication of 28 April 2020 6 on the application of the accounting and prudential frameworks to facilitate bank lending in the Union amid COVID-19. Besides making full use of the flexibility allowed for in the existing framework, some limited changes to specific aspects of the CRR ar e necessary in order to maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. Moreover, at international level, the BCBS has agreed a one-year delay in t he deadline for implementing the final elements of the Basel III framework, of which some elements had been already incorporated in the CRR 7 , as well as a greater flexibility to the phase-in of the impact of the IFRS 9 on capital . These changes need to be reflected in the existing rules. First, it is necessary to adjust the transitional arrangements that allow credit institutions to alleviate the impact from expected credit-loss (ECL) provisioning under IFRS 9 on their own funds. This adjustment would allow credit institutions to better mitigate the impact of any potential increase in ECL provisioning caused by the deterioration in the credit quality of credit institutions’ exposures due to the economic consequences of the COVID-19 pandemic. Second, to account for the impact of COVID-19 related guarantees, the rules on the minimum loss coverage for non-performing exposures (NPEs) need to be adjusted to extend temporarily the treatment that is currently applicable to NPEs guaranteed or insured by export credit agencies to NPEs that would arise as a consequence of the COVID-19 pandemic and that are covered by the various guarantee schemes that were put in place by Member States. This would recognise the similar characteristics shared by export credit agencies guarantees and COVID-19 related guarantees. Third, the offsetting mechanism associated with the competent authority discretion to allow credit institutions to temporarily exclude exposures in the form of central bank reserves from the calculation of the leverage ratio needs to be modified. This would ensure that liquidity measures provided by central banks in a crisis context would be effectively channelled by credit institutions to the economy. Fourth, it is necessary to defer, in line with the decision of the BCBS, the application date of the new leverage ratio buffer requirement. This would free up credit institutions’ operational capacity and allow them to focus on the more immediate challenges associated with the COVID-19 pandemic. Fifth, the application dates of some of the capital benefits envisaged in the CRR but not yet applicable need to be anticipated, namely the provisions on the treatment of certain software assets, the provisions on certain loans backed by pensions or salaries, the revised supporting factor for small and medium-sized enterprises (SME) and the new supporting factor for infrastructure finance. Advancing the date of application of the two supporting factors, the preferential treatment of certain software assets, and the preferential treatment of certain loans backed by pensions or salaries would free up own funds of institutions, allowing them to boost much needed lending during the COVID-19 pandemic and its aftermath. These proposed changes will not fundamentally alter the prudential regulatory framework. They form part of the response of the Commission to address the emergency situation triggered by the COVID-19 pandemic. These adjustments to the prudential framework would facilitate collective efforts aimed at mitigating the impact of the pandemic and thus moving towards a fast recovery.
Revised version (Article 423 Additional outflows):
2. Institutions shall notify to the competent authorities all contracts entered into the contractual conditions of which lead, within 30 days following a material deterioration of the credit quality of the institution, to liquidity outflows or additional collateral needs. If the competent authorities consider such contracts material in relation to the potential liquidity outflows of the institution, they shall require the institution to add an additional outflow for those contracts corresponding to the additional collateral needs resulting from a material deterioration in the credit quality of the institution such as a downgrade in its external credit assessment by three notches. The institution shall regularly review the extent of this material deterioration in light of what is relevant under the contracts it has entered into and shall notify the result of its review to the competent authorities. 3. The institution shall add an additional outflow corresponding to collateral needs that would result from the impact of an adverse market scenario on the institution's derivatives transactions, financing transactions and other contracts if material. EBA shall develop draft regulatory technical standards to determine the conditions of application in relation to the notion of materiality and methods for the measurement of this additional outflow. EBA shall submit those draft regulatory technical standards to the Commission by 31 March 2014. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the second subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 4. The institution shall add an additional outflow corresponding to the market value of securities or other assets sold short and to be delivered within the 30 days horizon unless the institution owns the securities to be delivered or has borrowed them at terms requiring their return only after the 30 day horizon and the securities do not form part of the institutions liquid assets. The institution shall add an additional outflow corresponding to: (a) the excess collateral the institution holds that can be contractually called at any time by the counterparty; (b) collateral that is due to be returned to a counterparty; (c) collateral that corresponds to assets that would qualify as liquid assets for the purposes of Article 416 that can be substituted for assets corresponding to assets that would not qualify as liquid assets for the purposes of Article 416 without the consent of the institution. 6. Deposits received as collateral shall not be considered liabilities for the purposes of Article 422 but will be subject to the provisions of this Article where applicable.
Article 424 Outflows from credit and liquidity facilities
1. Institutions shall report outflows from committed credit facilities and committed liquidity facilities, which shall be determined as a percentage of the maximum amount that can be drawn within the next 30 days. This maximum amount that can be drawn may be assessed net of any liquidity requirement that would be mandated under Article 420(2) for the trade finance off-balance sheet items and net of the value in accordance with Article 418 of collateral to be provided if the institution can reuse the collateral and if the collateral is held in the form of liquid assets in accordance with Article 416. The collateral to be provided shall not be assets issued by the counterparty of the facility or one of its affiliated entities. If the necessary information is available to the institution, the maximum amount that can be drawn for credit and liquidity facilities shall be determined as the maximum amount that could be drawn given the counterparty's own obligations or given the pre-defined contractual drawdown schedule coming due over the next 30 days. 2. The maximum amount that can be drawn of undrawn committed credit facilities and undrawn committed liquidity facilities within the next 30 days shall be multiplied by 5 % if they qualify for the retail exposure class under the Standardised or IRB approaches for credit risk. 3. The maximum amount that can be drawn of undrawn committed credit facilities and undrawn committed liquidity facilities within the next 30 days shall be multiplied by 10 % where they meet the following conditions: (a) they do not qualify for the retail exposure class under the Standardised or IRB approaches for credit risk; (b) they have been provided to clients that are not financial customers; (c) they have not been provided for the purpose of replacing funding of the client in situations where he is unable to obtain its funding requirements in the financial markets. 4. The committed amount of a liquidity facility that has been provided to an SSPE for the purpose of enabling such an SSPE to purchase assets other than securities from clients that are not financial customers shall be multiplied by 10 % to the extent that it exceeds the amount of assets currently purchased from clients and where the maximum amount that can be drawn is contractually limited to the amount of assets currently purchased. 5. The institutions shall report the maximum amount that can be drawn of other undrawn committed credit facilities and undrawn committed liquidity facilities within the next 30 days. This applies in particular to the following: (a) liquidity facilities that the institution has granted to SSPEs other than those referred to in point (b) of paragraph 3; (b) arrangements under which the institution is required to buy or swap assets from an SSPE; (c) facilities extended to credit institutions; (d) facilities extended to financial institutions and investment firms. 6. By way of derogation from paragraph 5, institutions which have been set up and are sponsored by at least one Member State's central or regional government may apply the treatments set out in paragraphs 2 and 3 also to credit and liquidity facilities that are provided to institutions for the sole purpose of directly or indirectly funding promotional loans qualifying for the exposure classes referred to in those paragraphs. By way of derogation from point (g) of Article 425(2), where those promotional loans are extended via another institution as intermediary (pass through loans), a symmetric in and outflow may be applied by institutions. Those promotional loans shall be available only to persons who are not financial customers on a non-competitive, not for profit basis in order to promote public policy objectives of the Union and/or that Member State's central or regional government. It shall only be possible to draw on such facilities following the reasonably expected demand for a promotional loan and up to the amount of such demand linked to a subsequent reporting on the use of the funds disbursed.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 575/2013 1 of the European Parliament and of the Council, known as the Capital Requirements Regulation (hereinafter “the CRR”), establishes together with Directive 2013/36/EU 2 , known as the Capital Requirements Directive (hereinafter “the CRD”), the prudential regul atory framework for credit institutions operating in the Union. The CRR and the CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global stan dards agreed with the EU’s international partners, in particular the Basel Committee on Banking Supervision (BCBS). The CRR has been subsequently amended on several occasions to tackle remaining weaknesses in the prudential regulatory framework and to imp lement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. One set of amendments, contained in Regulation (EU) 2017/2401 3 , has implemented the revised securitisation framework adopted by the BCBS in December 2014 4 ("the revised Basel framework"). The revised Basel framework has been designed to reduce the complexity of the regulatory capital requirements applicable at the time, reflect better the risks of positions in a securitisation and allow institutions to determine capital requirements through own calculations and on the basis of the information available to institutions, thus reducing reliance on external ratings. In order to further promote the development of a high quality EU secur itisation market based on sound practices, Regulation (EU) 2017/2401 also included amendments aiming at providing for a more risk-sensitive regulatory treatment for simple, transparent and standardised (STS) securitisations in line with the standards on th e alternative capital treatment for “simple, transparent and comparable” securitisations published by the BCBS in July 2016 5 . The eligibility criteria for STS securitisations are laid down in Regulation (EU) 2017/2402 6 that also provides for a set of commo n requirements on risk retention, due diligence and disclosure for all financial services sectors. The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Thanks to the reforms undertaken in the aftermath of the 2008 financial crisis, institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector, including for the expected increase in the volume of non-performing loans due to the deep recession caused by the COVID-19 pandemic crisis. Securitisation can play an important role in enhancing the capacity of institutions to support the economic recovery, providing for an effective tool for funding and risk diversification for institutions. It is therefore essential in the context of the economic recovery post COVID-19 pandemic to reinforce that role and help institutions to be able to channel sufficient capital to the real economy. Building essentially on recent work carried out by the EBA, this result can be achieved through three targeted amendments aiming at increasing the overall risk-sensitivity of the EU securitisation framework that would make the recourse to the securitisation tool more economically viable for institutions whithin a prudential framework adequate to safeguard the EU financal stability. First, it is necessary to provide for a more risk-sensitiv e treatment for STS on-balance-sheet securitisation, in line with the EBA recommandation included in its “Report on STS framework for synthetic securitisation” 7 . Based on an extensive analysis of the on-balance-sheet synthetic securitisation market develop ments and trends in the EU, including data on the historical default and loss performance of the synthetic transactions, the report recommends the establishment of a cross-sectoral EU framework for STS on-balance-sheet securitisation that is limited to on- balance-sheet synthetic securitisation and is based on a common set of eligibility criteria. It also recommends a targeted differentiated prudential treatment for STS on-balance-sheet securitisation exposures, taking into account in particlar the reduced a gency and modelling risk compared to non-STS on-balance-sheet synthetic securitisation exposures. The alignment of the prudential treatment is also widely acknowledged as a necessary step to further encourage institutions to bear the costs incurred to comply with the STS criteria when structuring the securitisation transactions. Second, it is necessary to remove the existing regulatory constraints to the securitisation of non-performing exposures (NPEs) embedded in the current framework. As highlighted in the EBA Opinion 2019/13 on the regulatory treatment of NPE securitisations 8 , the current framework does not incorporate the specific features of NPE securitisation, thereby leading to excessive capital requirements for this category of exposures, particularly under the Securitisation Internal Ratings Based Approach (SEC-IRBA) and the Securitisation Standardised Approach (SEC-SA). The excessive conservativeness of the framework is due to the fact that it has been designed having exclusive regard to the specific risk drivers of performing loans. It is therefore proposed to amend the treatment of NPE securitisations by providing for a simple and sufficiently conservative approach based on a flat 100% risk weight applicable to the senior tranche of traditional NPE securitisations and on the application of a floor of 100% to the risk we ights of any other tranches of both traditional and on-balance-sheet synthetic NPE securitisations that remain subject to the general framework for the calcualtion of risk-weighted exposures. The proposed treatment is aligned with the main elements of the approach currently being finalised by the BCBS. Third, it is proposed to amend Article 249(3) which introduces an additional eligibility criterion for the recognition of unfunded credit protection for institutions applying the standardised approach to cal culate capital requirements for securitisation exposures. Specifically, it imposes a minimum credit rating requirement for almost all 9 types of providers of unfunded credit protection, including central governments. This provision appears to be inconsisten t with the general credit risk mitigation rules set out in the CRR , with the objectives of that Regulation, but also with the new international standards set by the revised Basel III framework imposing a minimum credit rating requirement only to a limited set of protection providers in case of securitisation exposures. This amendment will enhance the effectiveness of national public guarantee schemes assisting institutions’ strategies to securitise NPEs in the aftermath of the COVID-19 pandemic . These proposed changes, together with the proposed changes to Regulation (EU) 2017/2402, will enable institutions to maintain a high volume of lending to the economy in the coming months and therefore will provide an important contribution to the absorption of the impact of the shock of the COVID-19 crisis. As such, and compared to the current regulatory framework, the changes will reinforce the role of securitisation as a tool available to institutions to maintain and possibly even enhance their lending capacity in two ways: · by facilitating the recourse to this technique to offload NPEs that can be expected to grow in the aftermath of the crisis. By doing so, institutions will be able to better spread the risk to other financial actors and ultimately reduce regulator y capital constraints stemming from the impact of the high volume of NPEs, while maintaining high prudential standards; and · by implementing a more risk-sensitive treatment of the senior tranche held by the originator institution in case of STS on-balance-s heet securitisation. As pointed out by many stakeholders, the development of STS eligibility criteria would not be sufficient ' per se ' to achieve the objective of making the compliance with these criteria economically viable if the introduction of the new criteria is not accompanied with a more risk-sensitive prudential treatment in the area of capital requirements, better reflecting their specific features. The more risk-sensitive treatment for NPE securitisations and for the senior tranche of STS on-balance-sheet securitisations are set out in the present proposal, while the eligibility criteria for the latter type of securitisations, together with other cross-sectoral provisions, are contained in Regulation (EU) 2017/2402. 
Revised version (Article 424 Outflows from credit and liquidity facilities):
1. Institutions shall report outflows from committed credit facilities and committed liquidity facilities, which shall be determined as a percentage of the maximum amount that can be drawn within the next 30 days. This maximum amount that can be drawn may be assessed net of any liquidity requirement that would be mandated under Article 420(2) for the trade finance off-balance sheet items and net of the value in accordance with Article 418 of collateral to be provided if the institution can reuse the collateral and if the collateral is held in the form of liquid assets in accordance with Article 416. The collateral to be provided shall not be assets issued by the counterparty of the facility or one of its affiliated entities. If the necessary information is available to the institution, the maximum amount that can be drawn for credit and liquidity facilities shall be determined as the maximum amount that could be drawn given the counterparty's own obligations or given the pre-defined contractual drawdown schedule coming due over the next 30 days. 2. The maximum amount that can be drawn of undrawn committed credit facilities and undrawn committed liquidity facilities within the next 30 days shall be multiplied by 5 % if they qualify for the retail exposure class under the Standardised or IRB approaches for credit risk. The maximum amount that can be drawn of undrawn committed credit facilities and undrawn committed liquidity facilities within the next 30 days shall be multiplied by 10 % where they meet the following conditions: (a) they do not qualify for the retail exposure class under the Standardised or IRB approaches for credit risk; (b) they have been provided to clients that are not financial customers; (c) they have not been provided for the purpose of replacing funding of the client in situations where he is unable to obtain its funding requirements in the financial markets. 4. The committed amount of a liquidity facility that has been provided to an SSPE for the purpose of enabling that SSPE to purchase assets, other than securities, from clients that are not financial customers shall be multiplied by 10 %, provided that the committed amount exceeds the amount of assets currently purchased from clients and that the maximum amount that can be drawn is contractually limited to the amount of assets currently purchased. The institutions shall report the maximum amount that can be drawn of other undrawn committed credit facilities and undrawn committed liquidity facilities within the next 30 days. This applies in particular to the following: (a) liquidity facilities that the institution has granted to SSPEs other than those referred to in point (b) of paragraph 3; (b) arrangements under which the institution is required to buy or swap assets from an SSPE; (c) facilities extended to credit institutions; (d) facilities extended to financial institutions and investment firms. 6. By way of derogation from paragraph 5, institutions which have been set up and are sponsored by at least one Member State's central or regional government may apply the treatments set out in paragraphs 2 and 3 also to credit and liquidity facilities that are provided to institutions for the sole purpose of directly or indirectly funding promotional loans qualifying for the exposure classes referred to in those paragraphs. By way of derogation from point (g) of Article 425(2), where those promotional loans are extended via another institution as intermediary (pass through loans), a symmetric in and outflow may be applied by institutions. Those promotional loans shall be available only to persons who are not financial customers on a non-competitive, not for profit basis in order to promote public policy objectives of the Union and/or that Member State's central or regional government. It shall only be possible to draw on such facilities following the reasonably expected demand for a promotional loan and up to the amount of such demand linked to a subsequent reporting on the use of the funds disbursed.
Article 425 Inflows
1. Institutions shall report their liquidity inflows. Capped liquidity inflows shall be the liquidity inflows limited to 75 % of liquidity outflows. Institutions may exempt liquidity inflows from deposits placed with other institutions and qualifying for the treatments set out in Article 113(6) or (7) from this limit. Institutions may exempt liquidity inflows from monies due from borrowers and bond investors related to mortgage lending funded by bonds eligible for the treatment set out in Article 129(4), (5) or (6) or by bonds as referred to in Article 52(4) of Directive 2009/65/EC from this limit. Institutions may exempt inflows from promotional loans that the institutions have passed through. Subject to the prior approval of the competent authority responsible for supervision on an individual basis, the institution may fully or partially exempt inflows where the provider is a parent or a subsidiary institution of the institution or another subsidiary of the same parent institution or linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC. 2. The liquidity inflows shall be measured over the next 30 days. They shall comprise only contractual inflows from exposures that are not past due and for which the institution has no reason to expect non-performance within the 30-day time horizon. Liquidity inflows shall be reported in full with the following inflows reported separately: (a) monies due from customers that are not financial customers for the purposes of principal payment shall be reduced by 50 % of their value or by the contractual commitments to those customers to extend funding, whichever is higher. This does not apply to monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 that are collateralised by liquid assets in accordance with Article 416 as referred to in point (d) of this paragraph. By way of derogation from the first subparagraph of this point, institutions that have received a commitment referred to in Article 424(6) in order for them to disburse a promotional loan to a final recipient may take an inflow into account up to the amount of the outflow they apply to the corresponding commitment to extend those promotional loans; (a) monies due from customers that are not financial customers for the purposes of principal payment shall be reduced by 50 % of their value or by the contractual commitments to those customers to extend funding, whichever is higher. This does not apply to monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 that are collateralised by liquid assets in accordance with Article 416 as referred to in point (d) of this paragraph. By way of derogation from the first subparagraph of this point, institutions that have received a commitment referred to in Article 424(6) in order for them to disburse a promotional loan to a final recipient may take an inflow into account up to the amount of the outflow they apply to the corresponding commitment to extend those promotional loans; (b) monies due from trade financing transactions referred to in point (b) of the second subparagraph of Article 162(3) with a residual maturity of up to 30 days, shall be taken into account in full as inflows; (c) assets with an undefined contractual end date shall be taken into account with a 20 % inflow provided that the contract allows the bank to withdraw and request payment within 30 days; (d) monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 if they are collateralised by liquid assets as referred to in Article 416(1), shall not be taken into account up to the value net of haircuts of the liquid assets and shall be taken into account in full for the remaining monies due; (e) monies due that the institution owing those monies treats in accordance with Article 422(3) and (4), shall be multiplied by a corresponding symmetrical inflow; (f) monies due from positions in major index equity instruments provided that there is no double counting with liquid assets; (g) any undrawn credit or liquidity facilities and any other commitments received shall not be taken into account. 3. Outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II shall be reflected on a net basis across counterparties and shall be multiplied by 100 % in the event of a net inflow. Net basis shall mean also net of collateral to be received that qualifies as liquid assets under Article 416. 4. By way of derogation from point (g) of paragraph 2, competent authorities may grant the permission to apply a higher inflow on a case by case basis for credit and liquidity facilities when all of the following conditions are fulfilled: (a) there are reasons to expect a higher inflow even under a combined market and idiosyncratic stress of the provider; (b) the counterparty is a parent or subsidiary institution of the institution or another subsidiary of the same parent institution or linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC or a member of the same institutional protection scheme referred to in Article 113(7) of this Regulation or the central institution or a member of a network that is subject to the waiver referred to in Article 10 of this Regulation; (c) a corresponding symmetric or more conservative outflow is applied by the counterparty by way of derogation from Articles 422, 423 and 424; (d) the institution and the counterparty are established in the same Member State. 5. Competent authorities may waive the condition set out in point (d) of paragraph 4 where Article 20(1)(b) is applied. In that case additional objective criteria as set out in the delegated act referred to in Article 460 have to be met. Where such higher inflow is permitted to be applied, the competent authorities shall inform EBA about the result of the process referred to in Article 20(1)(b). Fulfilment of the conditions for such higher inflows shall be regularly reviewed by the competent authorities. 6. EBA shall develop draft regulatory technical standards to further specify the additional objective criteria referred to in paragraph 5. EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 7. Institutions shall not report inflows from any of the liquid assets reported in accordance with Article 416 other than payments due on the assets that are not reflected in the market value of the asset. 8. Institutions shall not report inflows from any new obligations entered into. 9. Institutions shall take liquidity inflows which are to be received in third countries where there are transfer restrictions or which are denominated in non-convertible currencies into account only to the extent that they correspond to outflows respectively in the third country or currency in question.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The term 'commodity dealer' covers a wide spectrum of actors in energy and commodity markets: some trade exclusively in commodity derivative contracts and resemble investment firms in terms of functions and risks, whereas others trade commodity derivatives purely as an ancillary activity to commodities production. The requirements laid down in Regulation (EU) No 575/2013 (the 'Capital Requirements Regulation' or 'CRR') and in Directive 2013/36/EU (the 'Capital Requirements Directive' or 'CRD') apply to both credit institutions and investment firms. The prudential regime applicable to investment firms is derived from that imposed on credit institutions, adapted as a function of the investment services that they provide. Articles 493(1) and 498(1) of the CRR exempt commodity dealers ("investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field did not apply on 31 December 2006") from large exposures requirements and from own funds requirements respectively. Both exemptions expire on 31 December 2017. This 'sunset clause' was originally included in the CRR in order to allow time for regulators to determine a prudential regulation adapted to the risk profile of commodity dealers. 1 To this end, Articles 493(2) and 498(2) of the CRR mandate the Commission to prepare reports by the end of 2015. On the basis of those reports, the Commission may decide to submit proposals to amend the CRR. The Commission is also required to submit, within the same deadline, a report on an appropriate regime for the prudential supervision of investment firms in general. Here again, the report may be followed by a Commission proposal. Since the abovementioned reports are related, the Commission decided to undertake a single review (henceforth 'investment firms review') and prepare a single report on the above topics. This was deemed necessary in order to ensure the development of a coherent prudential framework for all types of investment firms. The work on the investment firms review is already underway: the Commission asked the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to provide technical advice on the matter. The advice is expected by the end of September 2015. The Commission will then use the advice to prepare its own report. Should the Commission decide to change the existing prudential framework for investment firms, the report will detail the next steps of the investment firms review and the broad outline of the changes the Commission is contemplating. The investment firms review is a complex project which will not be completed by the end of this year. It is therefore highly improbable that any legislation that may result from this review can be prepared, adopted and applied before the current exemptions expire (i.e. before the end of 2017). This has implications for commodity dealers: if no specific prudential framework that may result from the investment firm review would be in place by then, they would be subject to the full CRR/CRD requirements starting from 1 January 2018. There are two problems related to this scenario. First, commodity dealers would become subject to the full CRR/CRD requirements without a conscious (and informed) decision that such treatment is indeed the most appropriate one for them. Second, assuming that the investment firm review would result in a tailor-made prudential framework for commodity dealers, they would be deprived of a stable regulatory framework. They would move from the current treatment where they are exempted from large exposures and own funds requirements, to a temporary treatment comprising the full CRR/CRD requirements, and eventually to the aforementioned tailor-made framework within a very short period of time (one to two years). This is not a desirable outcome. To prevent that this situation arises it is therefore opportune to extend the existing exemptions laid down in the CRR. The extension should take into account the amount of time that will be necessary to conclude the investment firms review and to prepare, adopt and apply any legislation that may result from that review.
Revised version (Article 425 Inflows):
1. Institutions shall report their liquidity inflows. Capped liquidity inflows shall be the liquidity inflows limited to 75 % of liquidity outflows. Institutions may exempt liquidity inflows from deposits placed with other institutions and qualifying for the treatments set out in Article 113(6) or (7) from this limit. Institutions may exempt liquidity inflows from monies due from borrowers and bond investors related to mortgage lending funded by bonds eligible for the treatment set out in Article 129(4), (5) or (6) or by bonds as referred to in Article 52(4) of Directive 2009/65/EC from this limit. Institutions may exempt inflows from promotional loans that the institutions have passed through. Subject to the prior approval of the competent authority responsible for supervision on an individual basis, the institution may fully or partially exempt inflows where the provider is a parent or a subsidiary institution of the institution or another subsidiary of the same parent institution or linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC. 2. The liquidity inflows shall be measured over the next 30 days. They shall comprise only contractual inflows from exposures that are not past due and for which the institution has no reason to expect non-performance within the 30-day time horizon. Liquidity inflows shall be reported in full with the following inflows reported separately: (a) monies due from customers that are not financial customers for the purposes of principal payment shall be reduced by 50 % of their value or by the contractual commitments to those customers to extend funding, whichever is higher. This does not apply to monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 that are collateralised by liquid assets in accordance with Article 416 as referred to in point (d) of this paragraph. By way of derogation from the first subparagraph of this point, institutions that have received a commitment referred to in Article 424(6) in order for them to disburse a promotional loan to a final recipient may take an inflow into account up to the amount of the outflow they apply to the corresponding commitment to extend those promotional loans; (b) monies due from trade financing transactions referred to in point (b) of the second subparagraph of Article 162(3) with a residual maturity of up to 30 days, shall be taken into account in full as inflows; (c) assets with an undefined contractual end date shall be taken into account with a 20 % inflow provided that the contract allows the bank to withdraw and request payment within 30 days; (d) monies due from secured lending and capital market-driven transactions as defined in point (3) of Article 192 if they are collateralised by liquid assets as referred to in Article 416(1), shall not be taken into account up to the value net of haircuts of the liquid assets and shall be taken into account in full for the remaining monies due; (e) monies due that the institution owing those monies treats in accordance with Article 422(3) and (4), shall be multiplied by a corresponding symmetrical inflow; (f) monies due from positions in major index equity instruments provided that there is no double counting with liquid assets; (g) any undrawn credit or liquidity facilities and any other commitments received shall not be taken into account. 3. Outflows and inflows expected over the 30 day horizon from the contracts listed in Annex II shall be reflected on a net basis across counterparties and shall be multiplied by 100 % in the event of a net inflow. Net basis shall mean also net of collateral to be received that qualifies as liquid assets under Article 416. 4. By way of derogation from point (g) of paragraph 2, competent authorities may grant the permission to apply a higher inflow on a case by case basis for credit and liquidity facilities when all of the following conditions are fulfilled: (a) there are reasons to expect a higher inflow even under a combined market and idiosyncratic stress of the provider; (b) the counterparty is a parent or subsidiary institution of the institution or another subsidiary of the same parent institution or linked to the institution by a relationship within the meaning of Article 12(1) of Directive 83/349/EEC or a member of the same institutional protection scheme referred to in Article 113(7) of this Regulation or the central institution or a member of a network that is subject to the waiver referred to in Article 10 of this Regulation; (c) a corresponding symmetric or more conservative outflow is applied by the counterparty by way of derogation from Articles 422, 423 and 424; (d) the institution and the counterparty are established in the same Member State. 5. Competent authorities may waive the condition set out in point (d) of paragraph 4 where Article 20(1)(b) is applied. In that case additional objective criteria as set out in the delegated act referred to in Article 460 have to be met. Where such higher inflow is permitted to be applied, the competent authorities shall inform EBA about the result of the process referred to in Article 20(1)(b). Fulfilment of the conditions for such higher inflows shall be regularly reviewed by the competent authorities. 6. EBA shall develop draft regulatory technical standards to further specify the additional objective criteria referred to in paragraph 5. EBA shall submit those draft regulatory technical standards to the Commission by 1 January 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 7. Institutions shall not report inflows from any of the liquid assets reported in accordance with Article 416 other than payments due on the assets that are not reflected in the market value of the asset. 8. Institutions shall not report inflows from any new obligations entered into. 9. Institutions shall take liquidity inflows which are to be received in third countries where there are transfer restrictions or which are denominated in non-convertible currencies into account only to the extent that they correspond to outflows respectively in the third country or currency in question.
Article 426 Updating Future liquidity requirements
Following, the adoption by the Commission of a delegated act to specify the liquidity requirement in accordance with Article 460, EBA may develop draft implementing technical standards to specify the conditions set out in Article 421(1), Article 422, with the exception of paragraphs 8, 9 and 10 of that Article, and Article 424 to take account of standards agreed internationally. Power is conferred on the Commission to adopt the implementing technical standards referred to in the first paragraph in accordance with Article 15 of Regulation (EU) No 1093/2010.
Article 427 Items providing stable funding
1. Institutions shall report to the competent authorities, in accordance with the reporting requirements set out in Article 415(1) and the uniform reporting formats referred to in Article 415(3), the following items and their components in order to allow an assessment of the availability of stable funding: (a) the following own funds, after deductions have been applied, where appropriate: (i) tier 1 capital instruments; (ii) tier 2 capital instruments; (iii) other preferred shares and capital instruments in excess of Tier 2 allowable amount having an effective maturity of one year or greater; (a) the following own funds, after deductions have been applied, where appropriate: (i) tier 1 capital instruments; (ii) tier 2 capital instruments; (iii) other preferred shares and capital instruments in excess of Tier 2 allowable amount having an effective maturity of one year or greater; (b) the following liabilities not included in point (a): (i) retail deposits that qualify for the treatment set out in Article 421(1); (ii) retail deposits that qualify for the treatment set out in Article 421(2); (iii) deposits that qualify for the treatment set out in Article 422 (3) and (4); (iv) of the deposits referred to in point (iii), those that are subject to a deposit guarantee scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country deposit guarantees within the terms of Article 421(1); (v) of the deposits referred to in point (iii), those that fall under point (b) of Article 422(3); (vi) of the deposits referred to in point (iii), those that fall under point (d) of Article 422(3); (vii) amounts deposited not falling under point (i), (ii) or (iii) if they are not deposited by financial customers; (viii) all funding obtained from financial customers; (ix) separately for amounts falling under points (vii) and (viii) respectively, funding from secured lending and capital market-driven transactions as defined in point (3) of Article 192: — collateralised by assets that would qualify as liquid assets in accordance with Article 416; — collateralised by any other assets; (x) liabilities resulting from securities issued qualifying for the treatment set out in Article 129(4) or (5) or as referred to in Article 52(4) of Directive 2009/65/EC; (xi) the following other liabilities resulting from securities issued that do not fall under point (a): — liabilities resulting from securities issued with an effective maturity of one year or greater; — liabilities resulting from securities issued with an effective maturity of less than one year; (xii) any other liabilities. (b) the following liabilities not included in point (a): (i) retail deposits that qualify for the treatment set out in Article 421(1); (ii) retail deposits that qualify for the treatment set out in Article 421(2); (iii) deposits that qualify for the treatment set out in Article 422 (3) and (4); (iv) of the deposits referred to in point (iii), those that are subject to a deposit guarantee scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country deposit guarantees within the terms of Article 421(1); (v) of the deposits referred to in point (iii), those that fall under point (b) of Article 422(3); (vi) of the deposits referred to in point (iii), those that fall under point (d) of Article 422(3); (vii) amounts deposited not falling under point (i), (ii) or (iii) if they are not deposited by financial customers; (viii) all funding obtained from financial customers; (ix) separately for amounts falling under points (vii) and (viii) respectively, funding from secured lending and capital market-driven transactions as defined in point (3) of Article 192: — collateralised by assets that would qualify as liquid assets in accordance with Article 416; — collateralised by any other assets; (ix) separately for amounts falling under points (vii) and (viii) respectively, funding from secured lending and capital market-driven transactions as defined in point (3) of Article 192: — collateralised by assets that would qualify as liquid assets in accordance with Article 416; — collateralised by any other assets; (x) liabilities resulting from securities issued qualifying for the treatment set out in Article 129(4) or (5) or as referred to in Article 52(4) of Directive 2009/65/EC; (xi) the following other liabilities resulting from securities issued that do not fall under point (a): — liabilities resulting from securities issued with an effective maturity of one year or greater; — liabilities resulting from securities issued with an effective maturity of less than one year; (xi) the following other liabilities resulting from securities issued that do not fall under point (a): — liabilities resulting from securities issued with an effective maturity of one year or greater; — liabilities resulting from securities issued with an effective maturity of less than one year; (xii) any other liabilities. 2. Where applicable, all items shall be presented in the following five buckets according to the closest of their maturity date and the earliest date at which they can contractually be called: (a) within three months; (b) between three and six months; (c) between six and nine months; (d) between nine and 12 months; (e) after 12 months.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The term 'commodity dealer' covers a wide spectrum of actors in energy and commodity markets: some trade exclusively in commodity derivative contracts and resemble investment firms in terms of functions and risks, whereas others trade commodity derivatives purely as an ancillary activity to commodities production. The requirements laid down in Regulation (EU) No 575/2013 (the 'Capital Requirements Regulation' or 'CRR') and in Directive 2013/36/EU (the 'Capital Requirements Directive' or 'CRD') apply to both credit institutions and investment firms. The prudential regime applicable to investment firms is derived from that imposed on credit institutions, adapted as a function of the investment services that they provide. Articles 493(1) and 498(1) of the CRR exempt commodity dealers ("investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field did not apply on 31 December 2006") from large exposures requirements and from own funds requirements respectively. Both exemptions expire on 31 December 2017. This 'sunset clause' was originally included in the CRR in order to allow time for regulators to determine a prudential regulation adapted to the risk profile of commodity dealers. 1 To this end, Articles 493(2) and 498(2) of the CRR mandate the Commission to prepare reports by the end of 2015. On the basis of those reports, the Commission may decide to submit proposals to amend the CRR. The Commission is also required to submit, within the same deadline, a report on an appropriate regime for the prudential supervision of investment firms in general. Here again, the report may be followed by a Commission proposal. Since the abovementioned reports are related, the Commission decided to undertake a single review (henceforth 'investment firms review') and prepare a single report on the above topics. This was deemed necessary in order to ensure the development of a coherent prudential framework for all types of investment firms. The work on the investment firms review is already underway: the Commission asked the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to provide technical advice on the matter. The advice is expected by the end of September 2015. The Commission will then use the advice to prepare its own report. Should the Commission decide to change the existing prudential framework for investment firms, the report will detail the next steps of the investment firms review and the broad outline of the changes the Commission is contemplating. The investment firms review is a complex project which will not be completed by the end of this year. It is therefore highly improbable that any legislation that may result from this review can be prepared, adopted and applied before the current exemptions expire (i.e. before the end of 2017). This has implications for commodity dealers: if no specific prudential framework that may result from the investment firm review would be in place by then, they would be subject to the full CRR/CRD requirements starting from 1 January 2018. There are two problems related to this scenario. First, commodity dealers would become subject to the full CRR/CRD requirements without a conscious (and informed) decision that such treatment is indeed the most appropriate one for them. Second, assuming that the investment firm review would result in a tailor-made prudential framework for commodity dealers, they would be deprived of a stable regulatory framework. They would move from the current treatment where they are exempted from large exposures and own funds requirements, to a temporary treatment comprising the full CRR/CRD requirements, and eventually to the aforementioned tailor-made framework within a very short period of time (one to two years). This is not a desirable outcome. To prevent that this situation arises it is therefore opportune to extend the existing exemptions laid down in the CRR. The extension should take into account the amount of time that will be necessary to conclude the investment firms review and to prepare, adopt and apply any legislation that may result from that review.
Revised version (Article 427 Items providing stable funding):
1. Institutions shall report to the competent authorities, in accordance with the reporting requirements set out in Article 415(1) and the uniform reporting formats referred to in Article 415(3), the following items and their components in order to allow an assessment of the availability of stable funding: (a) the following own funds, after deductions have been applied, where appropriate: (i) tier 1 capital instruments; (ii) tier 2 capital instruments; (iii) other preferred shares and capital instruments in excess of Tier 2 allowable amount having an effective maturity of one year or greater; (b) the following liabilities not included in point (a): (i) retail deposits that qualify for the treatment set out in Article 421(1); (ii) retail deposits that qualify for the treatment set out in Article 421(2); (iii) deposits that qualify for the treatment set out in Article 422 (3) and (4); (iv) of the deposits referred to in point (iii), those that are subject to a deposit guarantee scheme in accordance with Directive 94/19/EC or an equivalent deposit guarantee scheme in a third country deposit guarantees within the terms of Article 421(1); (v) of the deposits referred to in point (iii), those that fall under point (b) of Article 422(3); (vi) of the deposits referred to in point (iii), those that fall under point (d) of Article 422(3); (vii) amounts deposited not falling under point (i), (ii) or (iii) if they are not deposited by financial customers; (viii) all funding obtained from financial customers; (ix) separately for amounts falling under points (vii) and (viii) respectively, funding from secured lending and capital market-driven transactions as defined in point (3) of Article 192: — collateralised by assets that would qualify as liquid assets in accordance with Article 416; — collateralised by any other assets; (x) liabilities resulting from securities issued qualifying for the treatment set out in Article 129(4) or (5) or as referred to in Article 52(4) of Directive 2009/65/EC; (xi) the following other liabilities resulting from securities issued that do not fall under point (a): — liabilities resulting from securities issued with an effective maturity of one year or greater; — liabilities resulting from securities issued with an effective maturity of less than one year; (xii) any other liabilities. 2. Where applicable, all items shall be presented in the following five buckets according to the closest of their maturity date and the earliest date at which they can contractually be called: (a) within three months; (b) between three and six months; (c) between six and nine months; (d) between nine and 12 months; (e) after 12 months.
Article 428 Items requiring stable funding
1. Unless deducted from own funds, the following items shall be reported to competent authorities separately in order to allow an assessment of the needs for stable funding: (a) the assets that would qualify as liquid assets in accordance with Article 416, broken down by asset type; (b) the following securities and money market instruments not included in point (a): (i) assets qualifying for credit step 1 under Article 122; (ii) assets qualifying for credit step 2 under Article 122; (iii) other assets; (b) the following securities and money market instruments not included in point (a): (i) assets qualifying for credit step 1 under Article 122; (ii) assets qualifying for credit step 2 under Article 122; (iii) other assets; (c) equity securities of non-financial entities listed on a major index in a recognised exchange; (d) other equity securities; (e) gold; (f) other precious metals; (g) non-renewable loans and receivables, and separately those non-renewable loans and receivables for which borrowers are: (i) natural persons other than commercial sole proprietors and partnerships; (ii) SMEs that qualify for the retail exposure class under the Standardised or IRB approaches for credit risk or to a company which is eligible for the treatment set out in Article 153(4) and where the aggregate deposit placed by that client or group of connected clients is less than EUR 1 million; (iii) sovereigns, central banks and public sector entities; (iv) clients not referred to in points (i) and (ii) other than financial customers; (v) clients not referred to in points (i), (ii) and (iii) that are financial customers, and thereof separately those that are credit institutions and other financial customers; (g) non-renewable loans and receivables, and separately those non-renewable loans and receivables for which borrowers are: (i) natural persons other than commercial sole proprietors and partnerships; (ii) SMEs that qualify for the retail exposure class under the Standardised or IRB approaches for credit risk or to a company which is eligible for the treatment set out in Article 153(4) and where the aggregate deposit placed by that client or group of connected clients is less than EUR 1 million; (iii) sovereigns, central banks and public sector entities; (iv) clients not referred to in points (i) and (ii) other than financial customers; (v) clients not referred to in points (i), (ii) and (iii) that are financial customers, and thereof separately those that are credit institutions and other financial customers; (h) non-renewable loans and receivables referred to in point (g), and thereof separately those that are: (i) collateralised by commercial immovable property (CRE); (ii) collateralised by residential property (RRE); (iii) match funded (pass-through) via bonds eligible for the treatment set out in Article 129(4) or (5) or via bonds as referred to in Article 52(4) of Directive 2009/65/EC; (h) non-renewable loans and receivables referred to in point (g), and thereof separately those that are: (i) collateralised by commercial immovable property (CRE); (ii) collateralised by residential property (RRE); (iii) match funded (pass-through) via bonds eligible for the treatment set out in Article 129(4) or (5) or via bonds as referred to in Article 52(4) of Directive 2009/65/EC; (i) derivatives receivables; (j) any other assets; (k) undrawn committed credit facilities that qualify as ‘medium risk’ or ‘medium/low risk’ under Annex I. 2. Where applicable, all items shall be presented in the five buckets described in Article 427(2).
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The term 'commodity dealer' covers a wide spectrum of actors in energy and commodity markets: some trade exclusively in commodity derivative contracts and resemble investment firms in terms of functions and risks, whereas others trade commodity derivatives purely as an ancillary activity to commodities production. The requirements laid down in Regulation (EU) No 575/2013 (the 'Capital Requirements Regulation' or 'CRR') and in Directive 2013/36/EU (the 'Capital Requirements Directive' or 'CRD') apply to both credit institutions and investment firms. The prudential regime applicable to investment firms is derived from that imposed on credit institutions, adapted as a function of the investment services that they provide. Articles 493(1) and 498(1) of the CRR exempt commodity dealers ("investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field did not apply on 31 December 2006") from large exposures requirements and from own funds requirements respectively. Both exemptions expire on 31 December 2017. This 'sunset clause' was originally included in the CRR in order to allow time for regulators to determine a prudential regulation adapted to the risk profile of commodity dealers. 1 To this end, Articles 493(2) and 498(2) of the CRR mandate the Commission to prepare reports by the end of 2015. On the basis of those reports, the Commission may decide to submit proposals to amend the CRR. The Commission is also required to submit, within the same deadline, a report on an appropriate regime for the prudential supervision of investment firms in general. Here again, the report may be followed by a Commission proposal. Since the abovementioned reports are related, the Commission decided to undertake a single review (henceforth 'investment firms review') and prepare a single report on the above topics. This was deemed necessary in order to ensure the development of a coherent prudential framework for all types of investment firms. The work on the investment firms review is already underway: the Commission asked the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to provide technical advice on the matter. The advice is expected by the end of September 2015. The Commission will then use the advice to prepare its own report. Should the Commission decide to change the existing prudential framework for investment firms, the report will detail the next steps of the investment firms review and the broad outline of the changes the Commission is contemplating. The investment firms review is a complex project which will not be completed by the end of this year. It is therefore highly improbable that any legislation that may result from this review can be prepared, adopted and applied before the current exemptions expire (i.e. before the end of 2017). This has implications for commodity dealers: if no specific prudential framework that may result from the investment firm review would be in place by then, they would be subject to the full CRR/CRD requirements starting from 1 January 2018. There are two problems related to this scenario. First, commodity dealers would become subject to the full CRR/CRD requirements without a conscious (and informed) decision that such treatment is indeed the most appropriate one for them. Second, assuming that the investment firm review would result in a tailor-made prudential framework for commodity dealers, they would be deprived of a stable regulatory framework. They would move from the current treatment where they are exempted from large exposures and own funds requirements, to a temporary treatment comprising the full CRR/CRD requirements, and eventually to the aforementioned tailor-made framework within a very short period of time (one to two years). This is not a desirable outcome. To prevent that this situation arises it is therefore opportune to extend the existing exemptions laid down in the CRR. The extension should take into account the amount of time that will be necessary to conclude the investment firms review and to prepare, adopt and apply any legislation that may result from that review.
Revised version (Article 428 Items requiring stable funding):
1. Unless deducted from own funds, the following items shall be reported to competent authorities separately in order to allow an assessment of the needs for stable funding: (a) the assets that would qualify as liquid assets in accordance with Article 416, broken down by asset type; (b) the following securities and money market instruments not included in point (a): (i) assets qualifying for credit step 1 under Article 122; (ii) assets qualifying for credit step 2 under Article 122; (iii) other assets; (c) equity securities of non-financial entities listed on a major index in a recognised exchange; (d) other equity securities; (e) gold; (f) other precious metals; (g) non-renewable loans and receivables, and separately those non-renewable loans and receivables for which borrowers are: (i) natural persons other than commercial sole proprietors and partnerships; (ii) SMEs that qualify for the retail exposure class under the Standardised or IRB approaches for credit risk or to a company which is eligible for the treatment set out in Article 153(4) and where the aggregate deposit placed by that client or group of connected clients is less than EUR 1 million; (iii) sovereigns, central banks and public sector entities; (iv) clients not referred to in points (i) and (ii) other than financial customers; (v) clients not referred to in points (i), (ii) and (iii) that are financial customers, and thereof separately those that are credit institutions and other financial customers; (h) non-renewable loans and receivables referred to in point (g), and thereof separately those that are: (i) collateralised by commercial immovable property (CRE); (ii) collateralised by residential property (RRE); (iii) match funded (pass-through) via bonds eligible for the treatment set out in Article 129(4) or (5) or via bonds as referred to in Article 52(4) of Directive 2009/65/EC; (i) derivatives receivables; (j) any other assets; (k) undrawn committed credit facilities that qualify as ‘medium risk’ or ‘medium/low risk’ under Annex I. 2. Where applicable, all items shall be presented in the five buckets described in Article 427(2).
Article 429 Calculation of the leverage ratio
1. Institutions shall calculate their leverage ratio in accordance with the methodology set out in paragraphs 2 to 13. 2. The leverage ratio shall be calculated as an institution's capital measure divided by that institution's total exposure measure and shall be expressed as a percentage. Institutions shall calculate the leverage ratio at the reporting reference date. 3. For the purposes of paragraph 2, the capital measure shall be the Tier 1 capital. 4. The total exposure measure shall be the sum of the exposure values of: (a) assets referred to in paragraph 5 unless they are deducted when determining the capital measure referred to in paragraph 3; (b) derivatives referred to in paragraph 9; (c) add-ons for counterparty credit risk of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet referred to in Article 429b; (d) off-balance sheet items referred to in paragraph 10. 5. Institutions shall determine the exposure value of assets, excluding contracts listed in Annex II and credit derivatives, in accordance with the following principles: (a) the exposure values of assets means exposure values in accordance with the first sentence of Article 111(1); (b) physical or financial collateral, guarantees or credit risk mitigation purchased shall not be used to reduce exposure values of assets; (c) loans shall not be netted with deposits; (d) repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions shall not be netted. 6. Institutions may deduct from the exposure measure set out in paragraph 4 of this Article the amounts deducted from Common equity Tier 1 capital in accordance with Article 36(1)(d). 7. Competent authorities may permit an institution not to include in the exposure measure exposures that can benefit from the treatment laid down in Article 113(6). Competent authorities may grant that permission only where all the conditions set out in points (a) to (e) of Article 113(6) are met and where they have given the approval laid down in Article 113(6). 8. By way of derogation from point (d) of paragraph 5, institutions may determine the exposure value of cash receivables and cash payables of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions with the same counterparty on a net basis only if all the following conditions are met: (a) the transactions have the same explicit final settlement date; (b) the right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in all the following situations: (i) in the normal course of business; (ii) in the event of default, insolvency and bankruptcy; (b) the right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in all the following situations: (i) in the normal course of business; (ii) in the event of default, insolvency and bankruptcy; (c) the counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement. For the purposes of point (c) of the first subparagraph, a settlement mechanism results in the functional equivalent of net settlement if, on the settlement date, the net result of the cash flows of the transactions under that mechanism is equal to the single net amount under net settlement. 9. Institutions shall determine the exposure value of contracts listed in Annex II and of credit derivatives including those that are off-balance sheet, in accordance with Article 429a. 10. Institutions shall determine the exposure value of off-balance-sheet items, excluding contracts listed in Annex II, credit derivatives, repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, in accordance with Article 111(1). However, institutions shall not reduce the nominal value of those items by specific credit risk adjustments. In accordance with Article 166(9), where a commitment refers to the extension of another commitment, the lower of the two conversion factors associated with the individual commitment shall be used. The exposure value of low risk off- balance sheet items referred to in Article 111(1)(d) shall be subject to a floor equal to 10 % of their nominal value. 11. An institution that is a clearing member of a QCCP may exclude from the calculation of the exposure measure trade exposures of the following items, provided that those trade exposures are cleared with that QCCP and meet, at the same time, the conditions laid down in Article 306(1)(c): (a) contracts listed in Annex II; (b) credit derivatives; (c) repurchase transactions; (d) securities or commodities lending or borrowing transactions; (e) long settlement transactions; (f) margin lending transactions. 12. Where an institution that is a clearing member of a QCCP guarantees to the QCCP the performance of a client that enters directly into derivative transactions with the QCCP, it shall include in the exposure measure the exposure resulting from the guarantee as a derivative exposure to the client in accordance with Article 429a. 13. Where national generally accepted accounting principles recognise fiduciary assets on balance sheet, in accordance with Article 10 of Directive 86/635/EEC, those assets may be excluded from the leverage ratio total exposure measure provided that they meet the criteria for non-recognition set out in International Accounting Standard (IAS) 39, as applicable under Regulation (EC) No 1606/2002, and, where applicable, the criteria for non-consolidation set out in International Financial Reporting Standard (IFRS) 10, as applicable under Regulation (EC) No 1606/2002. 14. Competent authorities may permit an institution to exclude from the exposure measure exposures that meet all of the following conditions: (a) they are exposures to a public sector entity; (b) they are treated in accordance with Article 116(4); (c) they arise from deposits that the institution is legally obliged to transfer to the public sector entity referred to in point (a) for the purposes of funding general interest investments.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The term 'commodity dealer' covers a wide spectrum of actors in energy and commodity markets: some trade exclusively in commodity derivative contracts and resemble investment firms in terms of functions and risks, whereas others trade commodity derivatives purely as an ancillary activity to commodities production. The requirements laid down in Regulation (EU) No 575/2013 (the 'Capital Requirements Regulation' or 'CRR') and in Directive 2013/36/EU (the 'Capital Requirements Directive' or 'CRD') apply to both credit institutions and investment firms. The prudential regime applicable to investment firms is derived from that imposed on credit institutions, adapted as a function of the investment services that they provide. Articles 493(1) and 498(1) of the CRR exempt commodity dealers ("investment firms whose main business consists exclusively of the provision of investment services or activities in relation to the financial instruments set out in points 5, 6, 7, 9 and 10 of Section C of Annex I to Directive 2004/39/EC and to whom Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field did not apply on 31 December 2006") from large exposures requirements and from own funds requirements respectively. Both exemptions expire on 31 December 2017. This 'sunset clause' was originally included in the CRR in order to allow time for regulators to determine a prudential regulation adapted to the risk profile of commodity dealers. 1 To this end, Articles 493(2) and 498(2) of the CRR mandate the Commission to prepare reports by the end of 2015. On the basis of those reports, the Commission may decide to submit proposals to amend the CRR. The Commission is also required to submit, within the same deadline, a report on an appropriate regime for the prudential supervision of investment firms in general. Here again, the report may be followed by a Commission proposal. Since the abovementioned reports are related, the Commission decided to undertake a single review (henceforth 'investment firms review') and prepare a single report on the above topics. This was deemed necessary in order to ensure the development of a coherent prudential framework for all types of investment firms. The work on the investment firms review is already underway: the Commission asked the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to provide technical advice on the matter. The advice is expected by the end of September 2015. The Commission will then use the advice to prepare its own report. Should the Commission decide to change the existing prudential framework for investment firms, the report will detail the next steps of the investment firms review and the broad outline of the changes the Commission is contemplating. The investment firms review is a complex project which will not be completed by the end of this year. It is therefore highly improbable that any legislation that may result from this review can be prepared, adopted and applied before the current exemptions expire (i.e. before the end of 2017). This has implications for commodity dealers: if no specific prudential framework that may result from the investment firm review would be in place by then, they would be subject to the full CRR/CRD requirements starting from 1 January 2018. There are two problems related to this scenario. First, commodity dealers would become subject to the full CRR/CRD requirements without a conscious (and informed) decision that such treatment is indeed the most appropriate one for them. Second, assuming that the investment firm review would result in a tailor-made prudential framework for commodity dealers, they would be deprived of a stable regulatory framework. They would move from the current treatment where they are exempted from large exposures and own funds requirements, to a temporary treatment comprising the full CRR/CRD requirements, and eventually to the aforementioned tailor-made framework within a very short period of time (one to two years). This is not a desirable outcome. To prevent that this situation arises it is therefore opportune to extend the existing exemptions laid down in the CRR. The extension should take into account the amount of time that will be necessary to conclude the investment firms review and to prepare, adopt and apply any legislation that may result from that review.
Revised version (Article 429 Calculation of the leverage ratio):
1. Institutions shall calculate their leverage ratio in accordance with the methodology set out in paragraphs 2 to 13. 2. The leverage ratio shall be calculated as an institution's capital measure divided by that institution's total exposure measure and shall be expressed as a percentage. Institutions shall calculate the leverage ratio at the reporting reference date. 3. For the purposes of paragraph 2, the capital measure shall be the Tier 1 capital. 4. The total exposure measure shall be the sum of the exposure values of: (a) assets referred to in paragraph 5 unless they are deducted when determining the capital measure referred to in paragraph 3; (b) derivatives referred to in paragraph 9; (c) add-ons for counterparty credit risk of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet referred to in Article 429b; (d) off-balance sheet items referred to in paragraph 10. 5. Institutions shall determine the exposure value of assets, excluding contracts listed in Annex II and credit derivatives, in accordance with the following principles: (a) the exposure values of assets means exposure values in accordance with the first sentence of Article 111(1); (b) physical or financial collateral, guarantees or credit risk mitigation purchased shall not be used to reduce exposure values of assets; (c) loans shall not be netted with deposits; (d) repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions shall not be netted. 6. Institutions may deduct from the exposure measure set out in paragraph 4 of this Article the amounts deducted from Common equity Tier 1 capital in accordance with Article 36(1)(d). 7. Competent authorities may permit an institution not to include in the exposure measure exposures that can benefit from the treatment laid down in Article 113(6). Competent authorities may grant that permission only where all the conditions set out in points (a) to (e) of Article 113(6) are met and where they have given the approval laid down in Article 113(6). 8. By way of derogation from point (d) of paragraph 5, institutions may determine the exposure value of cash receivables and cash payables of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions with the same counterparty on a net basis only if all the following conditions are met: (a) the transactions have the same explicit final settlement date; (b) the right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in all the following situations: (i) in the normal course of business; (ii) in the event of default, insolvency and bankruptcy; (c) the counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement. For the purposes of point (c) of the first subparagraph, a settlement mechanism results in the functional equivalent of net settlement if, on the settlement date, the net result of the cash flows of the transactions under that mechanism is equal to the single net amount under net settlement. 9. Institutions shall determine the exposure value of contracts listed in Annex II and of credit derivatives including those that are off-balance sheet, in accordance with Article 429a. 10. Institutions shall determine the exposure value of off-balance-sheet items, excluding contracts listed in Annex II, credit derivatives, repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions, in accordance with Article 111(1). However, institutions shall not reduce the nominal value of those items by specific credit risk adjustments. In accordance with Article 166(9), where a commitment refers to the extension of another commitment, the lower of the two conversion factors associated with the individual commitment shall be used. The exposure value of low risk off- balance sheet items referred to in Article 111(1)(d) shall be subject to a floor equal to 10 % of their nominal value. 11. An institution that is a clearing member of a QCCP may exclude from the calculation of the exposure measure trade exposures of the following items, provided that those trade exposures are cleared with that QCCP and meet, at the same time, the conditions laid down in Article 306(1)(c): (a) contracts listed in Annex II; (b) credit derivatives; (c) repurchase transactions; (d) securities or commodities lending or borrowing transactions; (e) long settlement transactions; (f) margin lending transactions. 12. Where an institution that is a clearing member of a QCCP guarantees to the QCCP the performance of a client that enters directly into derivative transactions with the QCCP, it shall include in the exposure measure the exposure resulting from the guarantee as a derivative exposure to the client in accordance with Article 429a. 13. Where national generally accepted accounting principles recognise fiduciary assets on balance sheet, in accordance with Article 10 of Directive 86/635/EEC, those assets may be excluded from the leverage ratio total exposure measure provided that they meet the criteria for non-recognition set out in International Accounting Standard (IAS) 39, as applicable under Regulation (EC) No 1606/2002, and, where applicable, the criteria for non-consolidation set out in International Financial Reporting Standard (IFRS) 10, as applicable under Regulation (EC) No 1606/2002. 14. Competent authorities may permit an institution to exclude from the exposure measure exposures that meet all of the following conditions: (a) they are exposures to a public sector entity; (b) they are treated in accordance with Article 116(4); (c) they arise from deposits that the institution is legally obliged to transfer to the public sector entity referred to in point (a) for the purposes of funding general interest investments.
Article 429a Exposure value of derivatives
1. Institutions shall determine the exposure value of contracts listed in Annex II and of credit derivatives, including those that are off-balance sheet, in accordance with the method set out in Article 274. Institutions shall apply Article 299(2)(a) for the determination of the potential future credit exposure for credit derivatives. When determining the potential future credit exposure of credit derivatives, institutions shall apply the principles laid down in Article 299(2)(a) to all their credit derivatives, not only those assigned to the trading book. In determining the exposure value, institutions may take into account the effects of contracts for novation and other netting agreements in accordance with Article 295. Cross-product netting shall not apply. However, institutions may net within the product category referred to in point (25)(c) of Article 272 and credit derivatives when they are subject to a contractual cross-product netting agreement referred to in Article 295(c). 2. Where the provision of collateral related to derivatives contracts reduces the amount of assets under the applicable accounting framework, institutions shall reverse that reduction. 3. For the purposes of paragraph 1, institutions may deduct variation margin received in cash from the counterparty from the current replacement cost portion of the exposure value in so far as under the applicable accounting framework the variation margin has not already been recognised as a reduction of the exposure value and when all the following conditions are met: (a) for trades not cleared through a QCCP, the cash received by the recipient counterparty is not segregated; (b) the variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions; (c) the variation margin received in cash is in the same currency as the currency of settlement of the derivative contract; (d) the variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty; (e) the derivative contract and the variation margin between the institution and the counterparty to that contract are covered by a single netting agreement that the institution may treat as risk-reducing in accordance with Article 295. For the purposes of point (c) of the first subparagraph, where the derivative contract is subject to a qualifying master netting agreement, the currency of settlement means any currency of settlement specified in the derivative contract, the governing qualifying master netting agreement or the credit support annex to the qualifying master netting agreement. Where under the applicable accounting framework an institution recognises the variation margin paid in cash to the counterparty as a receivable asset, it may exclude that asset from the exposure measure provided that the conditions in points (a) to (e) are met. 4. For the purposes of paragraph 3 the following shall apply: (a) the deduction of variation margin received shall be limited to the positive current replacement cost portion of the exposure value; (b) an institution shall not use variation margin received in cash to reduce the potential future credit exposure amount, including for the purposes of Article 298(1)(c)(ii); 5. In addition to the treatment laid down in paragraph 1, for written credit derivatives institutions shall include in the exposure value the effective notional amounts referenced by the written credit derivatives reduced by any negative fair value changes that have been incorporated in Tier 1 capital with respect to the written credit derivative. The resulting exposure value may be further reduced by the effective notional amount of a purchased credit derivative on the same reference name provided that all the following conditions are met: (a) for single name credit derivatives, the credit derivatives purchased must be on a reference name which ranks pari passu with or is junior to the underlying reference obligation of the written credit derivative and a credit event on the senior reference asset would result in a credit event on the subordinated asset; (b) where an institution purchases protection on a pool of reference names, the purchased protection may offset sold protection on a pool of reference names only if the pool of reference entities and the level of subordination in both transactions are identical; (c) the remaining maturity of the credit derivative purchased is equal to or greater than the remaining maturity of the written credit derivative; (d) in determining the additional exposure value for written credit derivatives, the notional amount of the purchased credit derivative is reduced by any positive fair value change that has been incorporated in Tier 1 capital with respect to the credit derivative purchased; (e) for tranched products, the credit derivative purchased as protection is on a reference obligation which ranks equal to the underlying reference obligation of the written credit derivative. Where the notional amount of a written credit derivative is not reduced by the notional amount of a purchased credit derivative, institutions may deduct the individual potential future exposure of that written credit derivative from the total potential future exposure determined according to paragraph 1 of this Article in conjunction with Article 274(2) or Article 299(2)(a) as applicable. In case that the potential future credit exposure shall be determined in conjunction with Article 298(1)(c)(ii), PCE gross may be reduced by the individual potential future exposure of written credit derivatives with no adjustment made to the NGR. 6. Institutions shall not reduce the written credit derivative effective notional amount where they buy credit protection through a total return swap and record the net payments received as net income, but do not record any offsetting deterioration in the value of the written credit derivative reflected in Tier 1 capital. 7. In case of purchased credit derivatives on a pool of reference entities, institutions may recognise a reduction according to paragraph 5 on written credit derivatives on individual reference names only if the protection purchased is economically equivalent to buying protection separately on each of the individual names in the pool. If an institution purchases a credit derivative on a pool of reference names, it may only recognise a reduction on a pool of written credit derivatives when the pool of reference entities and the level of subordination in both transactions are identical. 8. By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 275 to determine the exposure value of contracts listed in points 1 and 2 of Annex II only where they also use that method for determining the exposure value of those contracts for the purposes of meeting the own funds requirements set out in Article 92. When institutions apply the method set out in Article 275, they shall not reduce the exposure measure by the amount of variation margin received in cash.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 575/2013 1 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes together with Directive 2013/36/EU 2 (the Capital Requirements Directive or CRD) the prudential regulatory framework for credit institutions operating in the Union. The CRR and CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with the EU’s international partners, in pa rticular the Basel Committee on Banking Supervision (BCBS). The CRR has been subsequently amended to tackle remaining weaknesses in the prudential regulatory framework and to implement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. Amongst various subsequent changes, Regulation (EU) 2017/2395 3 has inserted in the CRR transitional arrangements for mitigating the impact on own funds from the introduction of the new accounting standard, the International Financial Reporting Standard – Financial Instruments (IFRS) 9. Regulation (EU) 2019/630 4 has introduced in the CRR a requirement for minimum loss coverage for non-performing exposures (the so-called prudential backstop). Furthermore, Reg ulation (EU) 2019/876 5 (CRR II) has added to the CRR some of the final elements of the international reforms (the finalised Basel III framework), which entail amongst others, a new definition of the leverage ratio and a leverage ratio buffer, which will pr event institutions from excessively increasing leverage. The latter Regulation has also introduced in the CRR more favourable prudential treatments of certain software assets, of certain pension- and salary-backed loans, as well as of loans to small and me dium sized enterprises (SMEs) and infrastructure projects. The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Due to the reforms undertaken in the aftermath of the 2008 financial crisis, credit institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector. In reaction to the new circumstances, competent authorities across the Union have provided temporary capital and operational relief to ensure favourable conditions for credit institutions to continue lending amid COVID-19. It is therefore important that capital is deployed where it is most needed and that the prudential framework interacts smoothly with the various measures that address the COVID-19 pandemic. The CRR offers ample leeway for banks to support public and private initiatives to promote contin ued lending in the context of the COVID-19 pandemic, while ensuring a prudent approach. The flexibility embedded in the CRR is described in the Commission Interpretative Communication of 28 April 2020 6 on the application of the accounting and prudential frameworks to facilitate bank lending in the Union amid COVID-19. Besides making full use of the flexibility allowed for in the existing framework, some limited changes to specific aspects of the CRR ar e necessary in order to maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. Moreover, at international level, the BCBS has agreed a one-year delay in t he deadline for implementing the final elements of the Basel III framework, of which some elements had been already incorporated in the CRR 7 , as well as a greater flexibility to the phase-in of the impact of the IFRS 9 on capital . These changes need to be reflected in the existing rules. First, it is necessary to adjust the transitional arrangements that allow credit institutions to alleviate the impact from expected credit-loss (ECL) provisioning under IFRS 9 on their own funds. This adjustment would allow credit institutions to better mitigate the impact of any potential increase in ECL provisioning caused by the deterioration in the credit quality of credit institutions’ exposures due to the economic consequences of the COVID-19 pandemic. Second, to account for the impact of COVID-19 related guarantees, the rules on the minimum loss coverage for non-performing exposures (NPEs) need to be adjusted to extend temporarily the treatment that is currently applicable to NPEs guaranteed or insured by export credit agencies to NPEs that would arise as a consequence of the COVID-19 pandemic and that are covered by the various guarantee schemes that were put in place by Member States. This would recognise the similar characteristics shared by export credit agencies guarantees and COVID-19 related guarantees. Third, the offsetting mechanism associated with the competent authority discretion to allow credit institutions to temporarily exclude exposures in the form of central bank reserves from the calculation of the leverage ratio needs to be modified. This would ensure that liquidity measures provided by central banks in a crisis context would be effectively channelled by credit institutions to the economy. Fourth, it is necessary to defer, in line with the decision of the BCBS, the application date of the new leverage ratio buffer requirement. This would free up credit institutions’ operational capacity and allow them to focus on the more immediate challenges associated with the COVID-19 pandemic. Fifth, the application dates of some of the capital benefits envisaged in the CRR but not yet applicable need to be anticipated, namely the provisions on the treatment of certain software assets, the provisions on certain loans backed by pensions or salaries, the revised supporting factor for small and medium-sized enterprises (SME) and the new supporting factor for infrastructure finance. Advancing the date of application of the two supporting factors, the preferential treatment of certain software assets, and the preferential treatment of certain loans backed by pensions or salaries would free up own funds of institutions, allowing them to boost much needed lending during the COVID-19 pandemic and its aftermath. These proposed changes will not fundamentally alter the prudential regulatory framework. They form part of the response of the Commission to address the emergency situation triggered by the COVID-19 pandemic. These adjustments to the prudential framework would facilitate collective efforts aimed at mitigating the impact of the pandemic and thus moving towards a fast recovery.
Revised version (Article 429a Exposure value of derivatives):
1. Institutions shall determine the exposure value of contracts listed in Annex II and of credit derivatives, including those that are off-balance sheet, in accordance with the method set out in Article 274. Institutions shall apply Article 299(2)(a) for the determination of the potential future credit exposure for credit derivatives. When determining the potential future credit exposure of credit derivatives, institutions shall apply the principles laid down in Article 299(2)(a) to all their credit derivatives, not only those assigned to the trading book. 2. Where the provision of collateral related to derivatives contracts reduces the amount of assets under the applicable accounting framework, institutions shall reverse that reduction. For the purposes of paragraph 1, institutions may deduct variation margin received in cash from the counterparty from the current replacement cost portion of the exposure value in so far as under the applicable accounting framework the variation margin has not already been recognised as a reduction of the exposure value and when all the following conditions are met: (a) for trades not cleared through a QCCP, the cash received by the recipient counterparty is not segregated; (b) the variation margin is calculated and exchanged on a daily basis based on mark-to-market valuation of derivatives positions; (c) the variation margin received in cash is in the same currency as the currency of settlement of the derivative contract; (d) the variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty; (e) the derivative contract and the variation margin between the institution and the counterparty to that contract are covered by a single netting agreement that the institution may treat as risk-reducing in accordance with Article 295. For the purposes of point (c) of the first subparagraph, where the derivative contract is subject to a qualifying master netting agreement, the currency of settlement means any currency of settlement specified in the derivative contract, the governing qualifying master netting agreement or the credit support annex to the qualifying master netting agreement. Where under the applicable accounting framework an institution recognises the variation margin paid in cash to the counterparty as a receivable asset, it may exclude that asset from the exposure measure provided that the conditions in points (a) to (e) are met. For the purposes of paragraph 3 the following shall apply: (a) the deduction of variation margin received shall be limited to the positive current replacement cost portion of the exposure value; In addition to the treatment laid down in paragraph 1, for written credit derivatives institutions shall include in the exposure value the effective notional amounts referenced by the written credit derivatives reduced by any negative fair value changes that have been incorporated in Tier 1 capital with respect to the written credit derivative. The resulting exposure value may be further reduced by the effective notional amount of a purchased credit derivative on the same reference name provided that all the following conditions are met: (a) for single name credit derivatives, the credit derivatives purchased must be on a reference name which ranks pari passu with or is junior to the underlying reference obligation of the written credit derivative and a credit event on the senior reference asset would result in a credit event on the subordinated asset; (b) where an institution purchases protection on a pool of reference names, the purchased protection may offset sold protection on a pool of reference names only if the pool of reference entities and the level of subordination in both transactions are identical; (c) the remaining maturity of the credit derivative purchased is equal to or greater than the remaining maturity of the written credit derivative; (d) in determining the additional exposure value for written credit derivatives, the notional amount of the purchased credit derivative is reduced by any positive fair value change that has been incorporated in Tier 1 capital with respect to the credit derivative purchased; (e) for tranched products, the credit derivative purchased as protection is on a reference obligation which ranks equal to the underlying reference obligation of the written credit derivative. Where the notional amount of a written credit derivative is not reduced by the notional amount of a purchased credit derivative, institutions may deduct the individual potential future exposure of that written credit derivative from the total potential future exposure determined according to paragraph 1 of this Article in conjunction with Article 274(2) or Article 299(2)(a) as applicable. In case that the potential future credit exposure shall be determined in conjunction with Article 298(1)(c)(ii), PCE gross may be reduced by the individual potential future exposure of written credit derivatives with no adjustment made to the NGR. 6. Institutions shall not reduce the written credit derivative effective notional amount where they buy credit protection through a total return swap and record the net payments received as net income, but do not record any offsetting deterioration in the value of the written credit derivative reflected in Tier 1 capital. 7. In case of purchased credit derivatives on a pool of reference entities, institutions may recognise a reduction according to paragraph 5 on written credit derivatives on individual reference names only if the protection purchased is economically equivalent to buying protection separately on each of the individual names in the pool. If an institution purchases a credit derivative on a pool of reference names, it may only recognise a reduction on a pool of written credit derivatives when the pool of reference entities and the level of subordination in both transactions are identical. 8. By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 275 to determine the exposure value of contracts listed in points 1 and 2 of Annex II only where they also use that method for determining the exposure value of those contracts for the purposes of meeting the own funds requirements set out in Article 92. When institutions apply the method set out in Article 275, they shall not reduce the exposure measure by the amount of variation margin received in cash.
Article 429b Counterparty credit risk add-on for repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions
1. In addition to the exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet in accordance with Article 429(5), institutions shall include in the exposure measure an add-on for counterparty credit risk determined in accordance to paragraph 2 or 3 of this Article, as applicable. 2. For the purposes of paragraph 1, for transactions with a counterparty which are not subject to a master netting agreement that meets the conditions laid down in Article 206 the add-on (E i *)shall be determined on a transaction-by-transaction basis in accordance with the following formula: where: E i is the fair value of securities or cash lent to the counterparty under transaction i; C i is the fair value of cash or securities received from the counterparty under transaction i. 3. For the purposes of paragraph 1, for transactions with a counterparty that are subject to a master netting agreement that meets the conditions laid down in Article 206, the add-on for those transactions (E i *) shall be determined on an agreement-by-agreement basis in accordance with the following formula: E i is the fair value of securities or cash lent to the counterparty for the transactions subject to master netting agreement i; C i is the fair value of cash or securities received from the counterparty subject to master netting agreement i. 4. By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 222, subject to a 20 % floor for the applicable risk weight, to determine the add on for repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet. Institutions may use this method only where they also use it for determining the exposure value of those transactions for the purpose of meeting the own funds requirements as set out in Article 92. 5. Where sale accounting is achieved for a repurchase transaction under its applicable accounting framework, the institution shall reverse all sales-related accounting entries. 6. Where an institution acts as an agent between two parties in repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet, the following apply: (a) where the institution provides an indemnity or guarantee to a customer or counterparty limited to any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided it shall only include in the exposure measure the add-on determined in accordance with paragraph 2 or 3, as applicable; (b) where the institution does not provide an indemnity or guarantee to any of the involved parties, the transaction shall not be included in the exposure measure; (c) where the institution is economically exposed to the underlying security or cash in the transaction beyond the exposure covered by the add-on, it shall include also in the exposure measure an exposure equal to the full amount of the security or cash.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 575/2013 1 of the European Parliament and of the Council (the Capital Requirements Regulation or CRR) establishes together with Directive 2013/36/EU 2 (the Capital Requirements Directive or CRD) the prudential regulatory framework for credit institutions operating in the Union. The CRR and CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global standards agreed with the EU’s international partners, in pa rticular the Basel Committee on Banking Supervision (BCBS). The CRR has been subsequently amended to tackle remaining weaknesses in the prudential regulatory framework and to implement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. Amongst various subsequent changes, Regulation (EU) 2017/2395 3 has inserted in the CRR transitional arrangements for mitigating the impact on own funds from the introduction of the new accounting standard, the International Financial Reporting Standard – Financial Instruments (IFRS) 9. Regulation (EU) 2019/630 4 has introduced in the CRR a requirement for minimum loss coverage for non-performing exposures (the so-called prudential backstop). Furthermore, Reg ulation (EU) 2019/876 5 (CRR II) has added to the CRR some of the final elements of the international reforms (the finalised Basel III framework), which entail amongst others, a new definition of the leverage ratio and a leverage ratio buffer, which will pr event institutions from excessively increasing leverage. The latter Regulation has also introduced in the CRR more favourable prudential treatments of certain software assets, of certain pension- and salary-backed loans, as well as of loans to small and me dium sized enterprises (SMEs) and infrastructure projects. The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Due to the reforms undertaken in the aftermath of the 2008 financial crisis, credit institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector. In reaction to the new circumstances, competent authorities across the Union have provided temporary capital and operational relief to ensure favourable conditions for credit institutions to continue lending amid COVID-19. It is therefore important that capital is deployed where it is most needed and that the prudential framework interacts smoothly with the various measures that address the COVID-19 pandemic. The CRR offers ample leeway for banks to support public and private initiatives to promote contin ued lending in the context of the COVID-19 pandemic, while ensuring a prudent approach. The flexibility embedded in the CRR is described in the Commission Interpretative Communication of 28 April 2020 6 on the application of the accounting and prudential frameworks to facilitate bank lending in the Union amid COVID-19. Besides making full use of the flexibility allowed for in the existing framework, some limited changes to specific aspects of the CRR ar e necessary in order to maximise the capacity of credit institutions to lend and to absorb losses related to the COVID-19 pandemic, while still ensuring their continued resilience. Moreover, at international level, the BCBS has agreed a one-year delay in t he deadline for implementing the final elements of the Basel III framework, of which some elements had been already incorporated in the CRR 7 , as well as a greater flexibility to the phase-in of the impact of the IFRS 9 on capital . These changes need to be reflected in the existing rules. First, it is necessary to adjust the transitional arrangements that allow credit institutions to alleviate the impact from expected credit-loss (ECL) provisioning under IFRS 9 on their own funds. This adjustment would allow credit institutions to better mitigate the impact of any potential increase in ECL provisioning caused by the deterioration in the credit quality of credit institutions’ exposures due to the economic consequences of the COVID-19 pandemic. Second, to account for the impact of COVID-19 related guarantees, the rules on the minimum loss coverage for non-performing exposures (NPEs) need to be adjusted to extend temporarily the treatment that is currently applicable to NPEs guaranteed or insured by export credit agencies to NPEs that would arise as a consequence of the COVID-19 pandemic and that are covered by the various guarantee schemes that were put in place by Member States. This would recognise the similar characteristics shared by export credit agencies guarantees and COVID-19 related guarantees. Third, the offsetting mechanism associated with the competent authority discretion to allow credit institutions to temporarily exclude exposures in the form of central bank reserves from the calculation of the leverage ratio needs to be modified. This would ensure that liquidity measures provided by central banks in a crisis context would be effectively channelled by credit institutions to the economy. Fourth, it is necessary to defer, in line with the decision of the BCBS, the application date of the new leverage ratio buffer requirement. This would free up credit institutions’ operational capacity and allow them to focus on the more immediate challenges associated with the COVID-19 pandemic. Fifth, the application dates of some of the capital benefits envisaged in the CRR but not yet applicable need to be anticipated, namely the provisions on the treatment of certain software assets, the provisions on certain loans backed by pensions or salaries, the revised supporting factor for small and medium-sized enterprises (SME) and the new supporting factor for infrastructure finance. Advancing the date of application of the two supporting factors, the preferential treatment of certain software assets, and the preferential treatment of certain loans backed by pensions or salaries would free up own funds of institutions, allowing them to boost much needed lending during the COVID-19 pandemic and its aftermath. These proposed changes will not fundamentally alter the prudential regulatory framework. They form part of the response of the Commission to address the emergency situation triggered by the COVID-19 pandemic. These adjustments to the prudential framework would facilitate collective efforts aimed at mitigating the impact of the pandemic and thus moving towards a fast recovery.
Revised version (Article 429b Counterparty credit risk add-on for repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions):
1. In addition to the exposure value of repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet in accordance with Article 429(5), institutions shall include in the exposure measure an add-on for counterparty credit risk determined in accordance to paragraph 2 or 3 of this Article, as applicable. 2. For the purposes of paragraph 1, for transactions with a counterparty which are not subject to a master netting agreement that meets the conditions laid down in Article 206 the add-on (E i *)shall be determined on a transaction-by-transaction basis in accordance with the following formula: where: E i is the fair value of securities or cash lent to the counterparty under transaction i; C i is the fair value of cash or securities received from the counterparty under transaction i. For the purposes of paragraph 1, for transactions with a counterparty which are not subject to a master netting agreement that meets the conditions laid down in Article 206 the add-on (E i *)shall be determined on a transaction-by-transaction basis in accordance with the following formula: where: E i is the fair value of securities or cash lent to the counterparty under transaction i; C i is the fair value of cash or securities received from the counterparty under transaction i. 3. For the purposes of paragraph 1, for transactions with a counterparty that are subject to a master netting agreement that meets the conditions laid down in Article 206, the add-on for those transactions (E i *) shall be determined on an agreement-by-agreement basis in accordance with the following formula: where: E i is the fair value of securities or cash lent to the counterparty for the transactions subject to master netting agreement i; C i is the fair value of cash or securities received from the counterparty subject to master netting agreement i. For the purposes of paragraph 1, for transactions with a counterparty that are subject to a master netting agreement that meets the conditions laid down in Article 206, the add-on for those transactions (E i *) shall be determined on an agreement-by-agreement basis in accordance with the following formula: E i is the fair value of securities or cash lent to the counterparty for the transactions subject to master netting agreement i; C i is the fair value of cash or securities received from the counterparty subject to master netting agreement i. 4. By way of derogation from paragraph 1 of this Article, institutions may use the method set out in Article 222, subject to a 20 % floor for the applicable risk weight, to determine the add on for repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet. Institutions may use this method only where they also use it for determining the exposure value of those transactions for the purpose of meeting the own funds requirements as set out in Article 92. 5. Where sale accounting is achieved for a repurchase transaction under its applicable accounting framework, the institution shall reverse all sales-related accounting entries. 6. Where an institution acts as an agent between two parties in repurchase transactions, securities or commodities lending or borrowing transactions, long settlement transactions and margin lending transactions including those that are off-balance sheet, the following apply: (a) where the institution provides an indemnity or guarantee to a customer or counterparty limited to any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided it shall only include in the exposure measure the add-on determined in accordance with paragraph 2 or 3, as applicable; (b) where the institution does not provide an indemnity or guarantee to any of the involved parties, the transaction shall not be included in the exposure measure; (c) where the institution is economically exposed to the underlying security or cash in the transaction beyond the exposure covered by the add-on, it shall include also in the exposure measure an exposure equal to the full amount of the security or cash.
Article 430 Reporting requirement
1. Institutions shall submit to the competent authorities all necessary information on the leverage ratio and its components in accordance with Article 429. Competent authorities shall take into account this information when undertaking the supervisory review referred to in Article 97 of Directive 2013/36/EU. Institutions shall also submit to the competent authorities the information required for the purposes of the preparation of the reports referred to in Article 511. Competent authorities shall submit the information received from institutions to EBA upon its request to facilitate the review referred to in Article 511. 2. EBA shall develop draft implementing technical standards to determine the uniform reporting template, the instructions on how to use such template, the frequencies and dates of reporting and the IT solutions, for the purposes of the reporting requirement laid down in paragraph 1. EBA shall submit those draft implementing technical standards to the Commission by 28 July 2013. Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal The Commission has today adopted a package of measures to deepen the Capital Markets Union together with the Communication "Completing Capital Markets Union by 2019 – time to accelerate delivery". The package includes this proposal, as well as a proposal for an enabling EU framework on covered bonds, a proposal to facilitate the cross-border distribution of investment funds, a proposal for an enabling framework on European crowdfunding service providers (ECSP) for business, as well as a proposal on the law applicable to the third-party effects of assignments of claims and a Communication on the applicable law to the proprietary effects of transactions in securities. Covered bonds are debt obligations issued by credit institutions and secured against a ringfenced pool of assets to which bondholders have direct recourse as preferred creditors. At the same time, bondholders remain entitled to claim against the issuing entity as ordinary creditors. This double claim against the cover pool and the issuer is referred to as the ‘dual recourse’ mechanism. Covered bonds are issued by credit institutions and are as such an important and efficient source of funding for European banks. They facilitate the financing of mortgage and public sector loans, thereby supporting lending more broadly. A significant advantage of covered bonds compared with other kinds of bank funding sources such as asset-backed securities is the fact that banks retain the risk on their balance sheets and investors have claims directly with the bank. Therefore, covered bonds allow banks to lend not only more, but also more safely. Not least for that reason, covered bonds fared well during the financial crisis compared with other funding instruments. They proved to be a reliable and stable funding source for European banks at a time when other funding channels were drying up. An enabling framework for covered bonds at EU level would enhance their use as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed, in order to help finance the real economy in line with the objectives of the Capital Markets Union (CMU). The enabling framework would also provide investors with a wider and safer range of investment opportunities and would help preserve financial stability. Member States will have to transpose these rules, ensuring that national covered bond frameworks comply with the principles-based requirements set out in this proposal. All covered bonds across Europe will therefore have to respect the minimum harmonisation requirements as set out in this proposal. Th e enabling framework for covered bonds is featured in the Commission Work Programme for 2018 1 . In the letter of intent following up his latest State of the Union speech, the President of the European Commission confirmed that an enabling framewor k for covered bonds should be launched or completed by end-2018 to ensure a deeper and fairer internal market. 2 The Commission confirmed this intention in the Mid-Term Review of the CMU Action Plan of June 2017 3 . The development of covered bonds across th e single market is uneven; they are very important in some Member States, less so in others. Furthermore, they are only partially addressed in Union law. While they benefit from preferential prudential and regulatory treatment in various respects in the li ght of the lower risks (e.g. banks investing in them do not have to set aside as much regulatory capital as when they invest in other assets), Union law does not comprehensively address what actually constitutes a covered bond. Rather, preferential treatme nts are granted to covered bonds as defined in Directive 2009/65/EC 4 . However, that definition was drafted with a specific purpose in mind – limiting what undertakings for collective investment in transferable securities (UCITS) could invest in – and is no t fit for the broader policy objectives of the CMU. A Union legislative framework on covered bonds should expand the capacity of credit institutions to provide financing to the real economy and contribute to the development of covered bonds across the Union, particularly in Member States where no market for them currently exists. The framework would also increase cross-border flows of capital and investment. It would thus contribute to the CMU and in particular to the further leveraging of credit institutions’ capacity to support the wider economy. In particular, it would ensure that banks have a broad range of safe and efficient funding tools at their disposal. The framework consists of a Directive and a Regulation – the two instruments should be seen as a single package. This proposed Regulation will mainly amend Article 129 of Regulation (EU) No 575/2013 (Capital Requirements Regulation (CRR)). The amendments build on the current prudential treatment but add requirements on minimum overcollateralisation and substitution assets. They would strengthen the requirements for covered bonds being granted preferential capital treatment. The proposed Directive will specify the core elements of covered bonds and provide a common definition as a consistent and sufficiently detailed point of reference for prudential regulation purposes, applicable across financial sectors. It will establish the structural features of the instrument, a covered bond specific public supervision, rules allowing use of the ‘European Covered Bonds’ label and competent authorities’ publication obligations in the field of covered bonds.
Article 431 Scope of disclosure requirements
1. Institutions shall publicly disclose the information laid down in Title II, subject to the provisions laid down in Article 432. 2. Permission granted by the competent authorities under Part Three for the instruments and methodologies referred to in Title III shall be subject to the public disclosure by institutions of the information laid down therein. 3. Institutions shall adopt a formal policy to comply with the disclosure requirements laid down in this Part, and have policies for assessing the appropriateness of their disclosures, including their verification and frequency. Institutions shall also have policies for assessing whether their disclosures convey their risk profile comprehensively to market participants. Where those disclosures do not convey the risk profile comprehensively to market participants, institutions shall publicly disclose the information necessary in addition to that required in accordance with paragraph 1. However, they shall only be required to disclose information which is material and not proprietary or confidential in accordance with Article 432. 4. Institutions shall, if requested, explain their rating decisions to SMEs and other corporate applicants for loans, providing an explanation in writing when asked. The administrative costs of the explanation shall be proportionate to the size of the loan.
Amendment rationale: CONTEXT OF THE PROPOSAL Reasons for and objectives of the proposal Regulation (EU) No 575/2013 1 of the European Parliament and of the Council, known as the Capital Requirements Regulation (hereinafter “the CRR”), establishes together with Directive 2013/36/EU 2 , known as the Capital Requirements Directive (hereinafter “the CRD”), the prudential regul atory framework for credit institutions operating in the Union. The CRR and the CRD were adopted in the aftermath of the 2008-2009 financial crisis to enhance the resilience of institutions operating in the EU financial sector, largely based on global stan dards agreed with the EU’s international partners, in particular the Basel Committee on Banking Supervision (BCBS). The CRR has been subsequently amended on several occasions to tackle remaining weaknesses in the prudential regulatory framework and to imp lement some outstanding elements of the global financial services reform that are essential to ensure institutions' resilience. One set of amendments, contained in Regulation (EU) 2017/2401 3 , has implemented the revised securitisation framework adopted by the BCBS in December 2014 4 ("the revised Basel framework"). The revised Basel framework has been designed to reduce the complexity of the regulatory capital requirements applicable at the time, reflect better the risks of positions in a securitisation and allow institutions to determine capital requirements through own calculations and on the basis of the information available to institutions, thus reducing reliance on external ratings. In order to further promote the development of a high quality EU secur itisation market based on sound practices, Regulation (EU) 2017/2401 also included amendments aiming at providing for a more risk-sensitive regulatory treatment for simple, transparent and standardised (STS) securitisations in line with the standards on th e alternative capital treatment for “simple, transparent and comparable” securitisations published by the BCBS in July 2016 5 . The eligibility criteria for STS securitisations are laid down in Regulation (EU) 2017/2402 6 that also provides for a set of commo n requirements on risk retention, due diligence and disclosure for all financial services sectors. The severe economic shock caused by the COVID-19 pandemic and the exceptional containment measures are having a far-reaching impact on the economy. Businesses are facing disruption in supply chains, temporary closures and reduced demand, while households are confronted with unemployment and a fall in income. Public authorities at Union and Member State levels have taken decisive actions to support households and solvent undertakings to withstand this severe but temporary slowdown in economic activity and the liquidity shortages that it will cause. Thanks to the reforms undertaken in the aftermath of the 2008 financial crisis, institutions are today well capitalised and much more resilient than they were in 2008. This enables them to play a key role in managing the economic shock that stems from the COVID-19 pandemic. Nevertheless, uncertainty related to the pace of recovery of economic activity will inevitably have an impact on the banking sector, including for the expected increase in the volume of non-performing loans due to the deep recession caused by the COVID-19 pandemic crisis. Securitisation can play an important role in enhancing the capacity of institutions to support the economic recovery, providing for an effective tool for funding and risk diversification for institutions. It is therefore essential in the context of the economic recovery post COVID-19 pandemic to reinforce that role and help institutions to be able to channel sufficient capital to the real economy. Building essentially on recent work carried out by the EBA, this result can be achieved through three targeted amendments aiming at increasing the overall risk-sensitivity of the EU securitisation framework that would make the recourse to the securitisation tool more economically viable for institutions whithin a prudential framework adequate to safeguard the EU financal stability. First, it is necessary to provide for a more risk-sensitiv e treatment for STS on-balance-sheet securitisation, in line with the EBA recommandation included in its “Report on STS framework for synthetic securitisation” 7 . Based on an extensive analysis of the on-balance-sheet synthetic securitisation market develop ments and trends in the EU, including data on the historical default and loss performance of the synthetic transactions, the report recommends the establishment of a cross-sectoral EU framework for STS on-balance-sheet securitisation that is limited to on- balance-sheet synthetic securitisation and is based on a common set of eligibility criteria. It also recommends a targeted differentiated prudential treatment for STS on-balance-sheet securitisation exposures, taking into account in particlar the reduced a gency and modelling risk compared to non-STS on-balance-sheet synthetic securitisation exposures. The alignment of the prudential treatment is also widely acknowledged as a necessary step to further encourage institutions to bear the costs incurred to comply with the STS criteria when structuring the securitisation transactions. Second, it is necessary to remove the existing regulatory constraints to the securitisation of non-performing exposures (NPEs) embedded in the current framework. As highlighted in the EBA Opinion 2019/13 on the regulatory treatment of NPE securitisations 8 , the current framework does not incorporate the specific features of NPE securitisation, thereby leading to excessive capital requirements for this category of exposures, particularly under the Securitisation Internal Ratings Based Approach (SEC-IRBA) and the Securitisation Standardised Approach (SEC-SA). The excessive conservativeness of the framework is due to the fact that it has been designed having exclusive regard to the specific risk drivers of performing loans. It is therefore proposed to amend the treatment of NPE securitisations by providing for a simple and sufficiently conservative approach based on a flat 100% risk weight applicable to the senior tranche of traditional NPE securitisations and on the application of a floor of 100% to the risk we ights of any other tranches of both traditional and on-balance-sheet synthetic NPE securitisations that remain subject to the general framework for the calcualtion of risk-weighted exposures. The proposed treatment is aligned with the main elements of the approach currently being finalised by the BCBS. Third, it is proposed to amend Article 249(3) which introduces an additional eligibility criterion for the recognition of unfunded credit protection for institutions applying the standardised approach to cal culate capital requirements for securitisation exposures. Specifically, it imposes a minimum credit rating requirement for almost all 9 types of providers of unfunded credit protection, including central governments. This provision appears to be inconsisten t with the general credit risk mitigation rules set out in the CRR , with the objectives of that Regulation, but also with the new international standards set by the revised Basel III framework imposing a minimum credit rating requirement only to a limited set of protection providers in case of securitisation exposures. This amendment will enhance the effectiveness of national public guarantee schemes assisting institutions’ strategies to securitise NPEs in the aftermath of the COVID-19 pandemic . These proposed changes, together with the proposed changes to Regulation (EU) 2017/2402, will enable institutions to maintain a high volume of lending to the economy in the coming months and therefore will provide an important contribution to the absorption of the impact of the shock of the COVID-19 crisis. As such, and compared to the current regulatory framework, the changes will reinforce the role of securitisation as a tool available to institutions to maintain and possibly even enhance their lending capacity in two ways: · by facilitating the recourse to this technique to offload NPEs that can be expected to grow in the aftermath of the crisis. By doing so, institutions will be able to better spread the risk to other financial actors and ultimately reduce regulator y capital constraints stemming from the impact of the high volume of NPEs, while maintaining high prudential standards; and · by implementing a more risk-sensitive treatment of the senior tranche held by the originator institution in case of STS on-balance-s heet securitisation. As pointed out by many stakeholders, the development of STS eligibility criteria would not be sufficient ' per se ' to achieve the objective of making the compliance with these criteria economically viable if the introduction of the new criteria is not accompanied with a more risk-sensitive prudential treatment in the area of capital requirements, better reflecting their specific features. The more risk-sensitive treatment for NPE securitisations and for the senior tranche of STS on-balance-sheet securitisations are set out in the present proposal, while the eligibility criteria for the latter type of securitisations, together with other cross-sectoral provisions, are contained in Regulation (EU) 2017/2402.