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Ashurst LLP

Question 1. What costs will the proposed collateral requirements create for small or medium-sized entities, particular types of counterparties and particular jurisdictions? Is it possible to quantify these costs? How could the costs be reduced without compromising the objective of sound risk management and keeping the proposal aligned with international standards?
We do not address costs specifically. Our response concentrates on legal issues.
Question 2. Are there particular aspects, for instance of an operational nature, that are not addressed in an appropriate manner? If yes, please provide the rationale for the concerns and potential solutions.
Our response letter sets out particular difficulties for non-EU vehicles, such as repackaging issuers - see paragraphs 2 and 3. We also highlight difficulties with concentration limites for certain equity finance transactions - see paragraphs 4 and 5 of the attached response.
Question 3. Does the proposal adequately address the risks and concerns of counterparties to derivatives in cover pools or should the requirements be further tightened? Are the requirements, such as the use of the CRR instead of a UCITS definition of covered bonds, necessary ones to address the risks adequately? Is the market-based solution as outlined in the cost-benefit analysis section, e.g. where a third party would post the collateral on behalf of the covered bond issuer/cover pool, an adequate and feasible alternative for covered bonds which do not meet the conditions mentioned in the proposed technical standards?
We do not address covered bond vehicles.
Question 4. In respect of the use of a counterparty IRB model, are the counterparties confident that they will be able to access sufficient information to ensure appropriate transparency and to allow them to demonstrate an adequate understanding to their supervisory authority?
We do not address the proposed standards on models - our attached response concentrates on legal issues.
Question 5. How would the introduction of concentration limits impact the management of collateral (please provide if possible quantitative information)? Are there arguments for exempting specific securities from concentration limits and how could negative effects be mitigated? What are the pros and cons of exempting securities issued by the governments or central banks of the same jurisdiction? Should proportionality requirements be introduced, if yes, how should these be calibrated to prevent liquidation issues under stressed market conditions?
Our response highlights the difficulties the proposed concentration limits raise for certain equity finance transactions. See paragraphs 4 and 5.
Question 6. How will market participants be able to ensure the fulfilment of all the conditions for the reuse of initial margins as required in the BCBS-IOSCO framework? Can the respondents identify which companies in the EU would require reuse or re-hypothecation of collateral as an essential component of their business models?
Our response concentrates on the legal issues surrounding re-use of margin. We highlight one particular example (equity finance transactions) but this is not exhaustive. The ability to re-use margin can be essential to structuring many bespoke financing arrangements.
Contact name
Anne Tanney