Response to consultation on draft Guidelines on the delineation and reporting of available financial means of DGS
Go back
EFDI considers as appropriate the criteria for defining QAFM as displayed in sections 4.1 and 4.4 of the draft guidelines, account taken of the comments made in this paper to EBA’s other questions, and with the following reservation: keeping tracks of the origin of funds should just imply that DGSs are submitted to usual accounting rules and then keep the records of what has been borrowed and repaid.
No separation of banking accounts is needed to this end (section 4.1 (15)).
In addition, some members consider that the directive itself needs to be amended to provide a solid legal basis for these questions and that, based on such a clarification, the EBA Guidelines should focus on reporting issues.
- QAFM would then depend on the sequence in time for recoveries and repayments, meaning that two DGSs in the same financial situation (initial disbursement, borrowed resources,
recoveries and repayments) would not necessarily display the same level of QAFM;
- the allocation rate used after repayments from QAFM resources is not financially legitimate;
- If only used, it could not be applied just on a year-to-year basis.
- it meets all the requirements set for by the EBA Consultation Paper and is simpler than the EBA default solution, with no complex calculation;
- two DGSs in the same financial situation (initial disbursement, borrowed resources, recoveries and repayments) will then always display the same level of QAFM and QAFM will not depend on the hazard of sequences between recoveries and repayments;
- it is the only consistent option, with an allocation rate financially justified in all situations.
However, this requires a strict record, on one hand, of the levels of QAFM and Other AFM, but also as for their time spans, both on an infra-annual basis; and, on the other hand, of the performances of the corresponding investment on the same infra-annual basis. For instance, in case of a repayment occurring on 17 March of the year, the allocation of investment income may not be the same for the period from the beginning of the year till 16 March and for the period from 17 March till the end of the year.
Performances of investments are not necessarily available on the infra-annual time spans which would match with the time spans of QAFM and Other AFM. In addition, in case not all QAFM or Other AFM resources are invested, a repayment from one of those buckets may be allocated either from the invested part, or from the non-invested part, or from a mix of them, within the same bucket.
As a whole, such an approach looks excessively complex and demanding compared to the significance of investment incomes to be split that way (even in a context where interest rates would be higher than today) and EFDI suggests following a simpler approach where, as for administrative expenses, the treatment of investment income would not be specified.
ii/ In addition, the second rule proposed by the EBA that all investment losses are allocated to QAFM is not aligned with the one proposed for investment (positive) income: if positive income are split between QAFM and Other AFM, it seems irrational to attribute all of the losses stemming from investment income only to QAFM. The misalignment between the treatment of positive and negative income lacks a fundamental justification and does not offer any material practical benefits in terms of simplicity and straight forwardness (if the rule differs for positive income). Sticking with such a rule on losses should lead to allocate all positive income also to QAFM.
As a conclusion, it looks preferable to leave unspecified the treatment of both investment incomes and investment losses, except for the fact that they should be treated the same way by DGSs (to avoid that, for instance, incomes are allocated to QAFM and losses to Other AFM). This would also take account of the fact that investment income may also be used by DGSs to finance their operating expenses and, then, to limit the amount of administrative fees they raise.
The question of whether unclaimed repayments should be reported to the EBA or not is left at further discussions within the TFDGS.
Question 1: Do you agree with the proposals for the criteria that QAFM should fulfil, i.e. on the exclusion of borrowed resources, the exclusion of contributions from QAFM that contain an obligation to be repaid upon receiving recoveries and keeping track of the origin of funds, as outlined in section 4.1 and 4.4 of the guidelines?
The distinction proposed by the EBA between AFM and QAFM allows to reconcile the differing definitions of AFM stemming from Article 1(1)(12) of the DGSD on one hand, and from Article 10(1) on the other hand.EFDI considers as appropriate the criteria for defining QAFM as displayed in sections 4.1 and 4.4 of the draft guidelines, account taken of the comments made in this paper to EBA’s other questions, and with the following reservation: keeping tracks of the origin of funds should just imply that DGSs are submitted to usual accounting rules and then keep the records of what has been borrowed and repaid.
No separation of banking accounts is needed to this end (section 4.1 (15)).
In addition, some members consider that the directive itself needs to be amended to provide a solid legal basis for these questions and that, based on such a clarification, the EBA Guidelines should focus on reporting issues.
Question 2: Do you agree with the proposed approach to allocate recoveries to QAFM and other AFM, as outlined in section 4.2 of the guidelines?
The “default approach” proposed by the EBA in section 4.2 of the draft guidelines is based on an allocation of flows of recoveries. As outlined by EFDI in its Research and Position Paper on the delineation of QAFM, this method cannot provide for an adequate regulatory ratio as:- QAFM would then depend on the sequence in time for recoveries and repayments, meaning that two DGSs in the same financial situation (initial disbursement, borrowed resources,
recoveries and repayments) would not necessarily display the same level of QAFM;
- the allocation rate used after repayments from QAFM resources is not financially legitimate;
- If only used, it could not be applied just on a year-to-year basis.
Question 3: In your view, is the alternative approach or any other approach to allocating recoveries better, with particular focus on the method’s a) suitability to respect the principles of QAFM set out in section 4.1 and 4.4 of the guidelines, b) and simplicity of application?
EFDI considers that the allocation proposed under Option 4 of Section 5 of the Consultation Paper, based on an allocation of stocks of recoveries and repayments since inception, is the only correct way to delineate QAFM as:- it meets all the requirements set for by the EBA Consultation Paper and is simpler than the EBA default solution, with no complex calculation;
- two DGSs in the same financial situation (initial disbursement, borrowed resources, recoveries and repayments) will then always display the same level of QAFM and QAFM will not depend on the hazard of sequences between recoveries and repayments;
- it is the only consistent option, with an allocation rate financially justified in all situations.
Question 4: Do you agree with the proposal that the treatment of administrative fees relative to QAFM does not need to be specified?
EFDI shares the views expressed in the Consultation Paper as for the treatment of administrative fees relative to QAFM.Question 5: Do you agree with the treatment of investment income relative to QAFM as proposed in section 4.3 of the guidelines?
i/ The treatment of investment income proposed by the EBA (a split between QAFM and Other AFM along their share in the initial investment) looks financially correct.However, this requires a strict record, on one hand, of the levels of QAFM and Other AFM, but also as for their time spans, both on an infra-annual basis; and, on the other hand, of the performances of the corresponding investment on the same infra-annual basis. For instance, in case of a repayment occurring on 17 March of the year, the allocation of investment income may not be the same for the period from the beginning of the year till 16 March and for the period from 17 March till the end of the year.
Performances of investments are not necessarily available on the infra-annual time spans which would match with the time spans of QAFM and Other AFM. In addition, in case not all QAFM or Other AFM resources are invested, a repayment from one of those buckets may be allocated either from the invested part, or from the non-invested part, or from a mix of them, within the same bucket.
As a whole, such an approach looks excessively complex and demanding compared to the significance of investment incomes to be split that way (even in a context where interest rates would be higher than today) and EFDI suggests following a simpler approach where, as for administrative expenses, the treatment of investment income would not be specified.
ii/ In addition, the second rule proposed by the EBA that all investment losses are allocated to QAFM is not aligned with the one proposed for investment (positive) income: if positive income are split between QAFM and Other AFM, it seems irrational to attribute all of the losses stemming from investment income only to QAFM. The misalignment between the treatment of positive and negative income lacks a fundamental justification and does not offer any material practical benefits in terms of simplicity and straight forwardness (if the rule differs for positive income). Sticking with such a rule on losses should lead to allocate all positive income also to QAFM.
As a conclusion, it looks preferable to leave unspecified the treatment of both investment incomes and investment losses, except for the fact that they should be treated the same way by DGSs (to avoid that, for instance, incomes are allocated to QAFM and losses to Other AFM). This would also take account of the fact that investment income may also be used by DGSs to finance their operating expenses and, then, to limit the amount of administrative fees they raise.
Question 6: Do you agree with the proposed treatment of unclaimed repayments with regard to AFM?
EFDI agrees that the guidelines do not specify the treatment of unclaimed repayments relative to QAFM.Question 7: Do you agree with the proposed reporting of a) outstanding liabilities that have been incurred for the purpose of a DGS intervention, b) alternative financing arrangements and c) unclaimed repayments to the EBA and the publication of this information by the EBA as presented in section 4.4 of the guidelines?
EFDI agrees with the proposed reporting of DGS data (AFM, QAFM, Other AFM, outstanding loans, covered deposits, alternative financing arrangements) to the EBA.The question of whether unclaimed repayments should be reported to the EBA or not is left at further discussions within the TFDGS.