Response to consultation on Guidelines on the application of the definition of default
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In relation to the factoring contracts where the risks and benefits related with the ceded receivables are not fully transferred to the factor and the factor recognizes in the balance sheet only the factoring account with the client, the proposed text of the Guidelines is not sufficiently clear:
“Such an account may be treated similarly to an overdraft where a client breaches the advised limit once the account is in debit, i.e. from when the advances paid for the receivables exceed the percentage agreed between the factor and the client.”
The first part of above-mentioned text states that a factoring account may be treated similarly to an overdraft where a client breaches the advised limit once the account is in debit; this could mean that the days past due should commence once the client has breached an advised limit. The second part seems to state that the factoring account is in debit when the advances paid for the receivables exceed the percentage agreed between the factor and the client.
In our opinion, it is not clear whether the past due criterion should take into account both the conditions,
i. the advances paid for the receivables exceed the percentage agreed between the factor and the client, and
ii. the same advances exceed the advised limit,
or whether it is sufficient that one of the two conditions occurs.
Concerning the factoring contracts where the risks and benefits related with the ceded receivables are fully transferred to the factor and the factor recognizes direct exposures to the debtors of the client, we agree with the proposed treatment.
However, in order to classify a single receivable as past due, we suggest to specify that the reference date should not be the maturity date of the receivable but the maturity date contracted with the assignor or the DSO (Days of Sales Outstanding) plus any increase, which is the date used for determining the sale price of the assigned receivables.
Moreover, in case of delays due to supply dispute, the past due continuity should be interrupted until dispute resolution: in the case of unfavorable dispute result for the debtor, the days past due will be related to the exposures original dates, as by contract.
Finally, for both factoring types with or without recourse, it will be likely to maintain the specific rules as for Public Administrations Counterparties, thus considering “expired” exposures, from the moment that are presumed completed all administrative procedures of verification and clearance by law and whereas the past due continuity as to be interrupted when the debtor has made a payment for at least one expired and/or overdrawn position, within no more than 90 days.
However, we believe that a relevant threshold of 1% is too low to classify an exposure as defaulted.
As a consequence, we propose to discard this proposal also because a 3 months period of observation is not sufficient to avoid frequent debtor status transitions, generating an excessive number of default recognitions of the debtor with a slower recoup to fewer in bonis status, that are conditioned to judgmental evaluations from the Credit Institution.
For the above reasons, we believe that where there are conditions to classify a joint obligation as defaulted, the Credit Institution should evaluate separately the economic status of each individual, in order to assess the defaulted status for the joint account as a whole.
1. Do you agree with the proposed definition of technical defaults? Do you believe that other situations should be included in this definition? If yes, please provide detailed proposals on how to address further possible situations.
We agree with the proposed definition of technical defaults.2. Do you consider the requirements on the treatment of factoring arrangements as appropriate and sufficiently clear? If not, please provide proposals for additional clarifications.
We would welcome further clarification on the application of days past due date criterion to the two types of factoring arrangements.In relation to the factoring contracts where the risks and benefits related with the ceded receivables are not fully transferred to the factor and the factor recognizes in the balance sheet only the factoring account with the client, the proposed text of the Guidelines is not sufficiently clear:
“Such an account may be treated similarly to an overdraft where a client breaches the advised limit once the account is in debit, i.e. from when the advances paid for the receivables exceed the percentage agreed between the factor and the client.”
The first part of above-mentioned text states that a factoring account may be treated similarly to an overdraft where a client breaches the advised limit once the account is in debit; this could mean that the days past due should commence once the client has breached an advised limit. The second part seems to state that the factoring account is in debit when the advances paid for the receivables exceed the percentage agreed between the factor and the client.
In our opinion, it is not clear whether the past due criterion should take into account both the conditions,
i. the advances paid for the receivables exceed the percentage agreed between the factor and the client, and
ii. the same advances exceed the advised limit,
or whether it is sufficient that one of the two conditions occurs.
Concerning the factoring contracts where the risks and benefits related with the ceded receivables are fully transferred to the factor and the factor recognizes direct exposures to the debtors of the client, we agree with the proposed treatment.
However, in order to classify a single receivable as past due, we suggest to specify that the reference date should not be the maturity date of the receivable but the maturity date contracted with the assignor or the DSO (Days of Sales Outstanding) plus any increase, which is the date used for determining the sale price of the assigned receivables.
Moreover, in case of delays due to supply dispute, the past due continuity should be interrupted until dispute resolution: in the case of unfavorable dispute result for the debtor, the days past due will be related to the exposures original dates, as by contract.
Finally, for both factoring types with or without recourse, it will be likely to maintain the specific rules as for Public Administrations Counterparties, thus considering “expired” exposures, from the moment that are presumed completed all administrative procedures of verification and clearance by law and whereas the past due continuity as to be interrupted when the debtor has made a payment for at least one expired and/or overdrawn position, within no more than 90 days.
3. Do you agree with the approach proposed for the treatment of specific credit risk adjustments?
We agree with the proposal and we underline the importance of having the implementation of the new default definition not before the go live of IFRS 9 accounting principle.4. Do you consider the proposed treatment of the sale of credit obligations appropriate for the purpose of identification of default?
We agree with the proposed treatment for the sale of credit obligations as highlighted by IFRS 9.5. Do you agree that expected cash flows before and after distressed restructuring should be discounted with the customer’s original effective interest rate or would you prefer to use the effective interest rate applicable at the moment before signing the restructuring arrangement? Do you consider the specification of the interest rate used for discounting of cash flows sufficiently clear?
We agree EBA preference to use original effective rate (before restructuring), to fine tune the treatment provided by the accounting principles in scope of the impairment test.However, we believe that a relevant threshold of 1% is too low to classify an exposure as defaulted.
6. Do you agree that the purchase or origination of a financial asset at a material discount should be treated as an indication of unlikeliness to pay?
We agree with the proposed treatment.7. What probation periods before the return from default to non-defaulted status would you consider appropriate for different exposure classes and for distressed restructuring and all other indications of default?
We disagree with EBA proposal to introduce a probation period from default to non-defaulted status, as in our opinion it will determine, in opposition to IFSR 9 Accounting Principle, an asymmetric treatment in the recognition of the debtor status transition. As a matter of fact, the exposure will be quicker to transit to a default status than to return to in bonis.As a consequence, we propose to discard this proposal also because a 3 months period of observation is not sufficient to avoid frequent debtor status transitions, generating an excessive number of default recognitions of the debtor with a slower recoup to fewer in bonis status, that are conditioned to judgmental evaluations from the Credit Institution.
8. Do you agree with the proposed approach as regards the level of application of the definition of default for retail exposures?
We agree with the proposed approach.9. Do you consider that where the obligor is defaulted on a significant part of its exposures this indicates the unlikeliness to pay of the remaining credit obligations of this obligor?
NA10. Do you agree with the approach proposed for the application of materiality threshold to joint credit obligations?
If a joint obligation towards an institution defaults, the individuals taking part in the joint obligations (and their individual obligations, respectively) should not be automatically considered as defaulted. This mechanism is even more problematic when applied to joint obligations consisting of a large number of individuals in which case considering all the individuals involved in the joint obligation automatically as defaulted may not be economically justified at all.For the above reasons, we believe that where there are conditions to classify a joint obligation as defaulted, the Credit Institution should evaluate separately the economic status of each individual, in order to assess the defaulted status for the joint account as a whole.