Response to consultation on guidelines on disclosure of encumbered and unencumbered assets
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Where haircuts (in the form of over-collateralization) are applied to these transactions, the ICMA recognizes that this is a form of encumbrance. Accordingly, we would expect guidance for reporting net haircuts received as a form of encumbered assets. Similarly, the marginal contingent encumbrance arising out of SFT margining should also be reported. In this instance the ICMA would suggest some form of appropriate risk-weighting be applied to the underlying asset to represent this marginal contingent encumbrance.
The ICMA feels strongly that the reporting of asset encumbrance with respect to SFTs should not only be consistent with the legal form of the transactions, but equally it should not be reported in a way that could be misleading. If the EBA disagrees with the ICMA’s interpretation of asset encumbrance arising from SFTs, we would be grateful for an explanation of the basis for any other interpretation.
With respect to the non-disclosure of emergency liquidity assistance, it is appreciated that the integrity and confidentiality of such exercises by central banks must be preserved if ELA is to continue to be capable of being provided. Nevertheless, in the first instance we would question the motivation behind what might be regarded as instituting regulatory infrastructure to allow purposeful opacity. Additionally, there is a danger that such non-disclosure may render the overall disclosure incomplete and misleading and may distort the full picture for the investors in that firstly, it could lead to over statement of contingent funding capacity and availability of collateral, and secondly, certain numbers may not match with other sections of the accounts. Mindful of these considerations, further guidance on how to account for ELA across the accounts would be welcomed.
Stronger firms will generally have more diversified secured funding sources - including access to multiple central bank facilities – but the opacity surrounding non-disclosure of ELA could disadvantage any firm for whom a greater proportion of secured funding and encumbrance is from either market sources or by way of ELA. Additionally, although an investor is likely to be able to assess any potential ELA by checking prior year disclosures, this seems unnecessarily burdensome.
Should the disclosure information on encumbered and unencumbered assets, in particular on debt securities, be more granular and include information on, for example, sovereigns and covered bonds? Please explain how sensitive the disclosure of this information is.
Regarding disclosure information on encumbered assets, it is noted that repo is included as a form of encumbrance. The ICMA has previously highlighted potential unintended consequences of including repo (on a gross basis) as an encumbrance and has pressed for recognition of repo/reverse repo netting. The ICMA would like to restate its concerns about the EBA’s definition of asset encumbrance, and the danger of using a catch-all approach to reporting securities financing trades (SFTs). The ICMA fully supports the reporting of SFTs where legal title remains with the lender of the security (such as pledges) as encumbered. However, where legal title is passed to the borrower (as is the case with repurchase agreements transacted under the General Master Repurchase Agreement), the ICMA feels that the correct guidance should be to report these transactions as unencumbered assets and on a net basis.Where haircuts (in the form of over-collateralization) are applied to these transactions, the ICMA recognizes that this is a form of encumbrance. Accordingly, we would expect guidance for reporting net haircuts received as a form of encumbered assets. Similarly, the marginal contingent encumbrance arising out of SFT margining should also be reported. In this instance the ICMA would suggest some form of appropriate risk-weighting be applied to the underlying asset to represent this marginal contingent encumbrance.
The ICMA feels strongly that the reporting of asset encumbrance with respect to SFTs should not only be consistent with the legal form of the transactions, but equally it should not be reported in a way that could be misleading. If the EBA disagrees with the ICMA’s interpretation of asset encumbrance arising from SFTs, we would be grateful for an explanation of the basis for any other interpretation.
Should the disclosure information on encumbered and unencumbered assets also include information on the quality of these assets? What would be a suitable indicator of asset quality? Please explain how sensitive the disclosure of this information is.
No responseDo you think that the disclosure required in Template A could lead to detection of the level and evolution of assets of an institution encumbered with a central bank, given that the information should be disclosed based on median values (see paragraph 7 of Title II) and the lag for disclosure is 6 months (see paragraph 10 of Title II)?
No responseShould the disclosure of information relating to the ‘nominal amount of collateral received or own debt issued not available for encumbrance’ on unencumbered collateral be requested? Please explain the relevance of this information for market participants and the sensitivity of the disclosure of this information.
No responseDo you agree with the proposed granularity of Template B given that collateral swaps with central banks will not be disclosed? Please explain how sensitive the disclosure of this information is.
No responseDo you think that the information on the sources of encumbrance in Template C is too sensitive to be disclosed? Should this information be disclosed in Template D instead (as narrative information)? Please explain the relevance of this information for market participants and the sensitivity of the disclosure of this information.
No responseShould the information be disclosed as a point in time (e.g. as of 31 December 2014) instead of median values? Please explain why.
Information disclosed which is based on median values (of at least quarterly data of the reporting year) would introduce additional reporting requirements around the processes developed to support annual disclosures, and would affect the transparency of such processes and disclosures. Therefore, disclosure should be on a point-in-time basis for the immediately preceding period, which is consistent with annual reporting.Do you agree with the proposed list of disclosures under narrative information in Template D? Should the guidelines explicitly state that emergency liquidity assistance by central banks (ELA) should not be disclosed?
The opportunity to include narrative information relating to the impact of a business model on an encumbrance level, and the importance of encumbrance in an individual firm’s funding model, is welcomed. However, this may present a challenge without guidelines in terms of consistency of drafting and extent of narrative disclosure.With respect to the non-disclosure of emergency liquidity assistance, it is appreciated that the integrity and confidentiality of such exercises by central banks must be preserved if ELA is to continue to be capable of being provided. Nevertheless, in the first instance we would question the motivation behind what might be regarded as instituting regulatory infrastructure to allow purposeful opacity. Additionally, there is a danger that such non-disclosure may render the overall disclosure incomplete and misleading and may distort the full picture for the investors in that firstly, it could lead to over statement of contingent funding capacity and availability of collateral, and secondly, certain numbers may not match with other sections of the accounts. Mindful of these considerations, further guidance on how to account for ELA across the accounts would be welcomed.
Stronger firms will generally have more diversified secured funding sources - including access to multiple central bank facilities – but the opacity surrounding non-disclosure of ELA could disadvantage any firm for whom a greater proportion of secured funding and encumbrance is from either market sources or by way of ELA. Additionally, although an investor is likely to be able to assess any potential ELA by checking prior year disclosures, this seems unnecessarily burdensome.
Do you agree that the disclosures should be published no later than six months after the publication of the financial statements? Do you consider a time lag of no more than six months sufficient to ensure that the information disclosed will not adversely impact the financial stability of markets and institutions?
We consider that disclosures should follow the usual annual reporting period with no time lag, which is consistent with rest of the liquidity disclosures.Upload files
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