The European Banking Authority (EBA) launched today a public consultation on its draft Regulatory Technical Standards (RTS) defining the valuation of derivative liabilities for the purpose of bail-in in resolution. These standards have been developed within the framework of the Bank Recovery and Resolution Directive (BRRD) which sets procedures for the recovery and resolution of credit institutions across the EU. The draft RTS provide EU resolution authorities with a methodology for the valuation of derivative liabilities of credit institutions placed under resolution and ensure that the discipline brought in by the new bail-in tool can effectively be extended to these liabilities too. The consultation will run until 13 August 2015.
The draft RTS provide resolution authorities with a series of tools to carry out a swift and objective valuation of derivative liabilities while avoiding discrepancies with the insolvency counterfactual which could lead to breach the non-creditor-worse-off principle. The approach applies a statutory valuation methodology based on the costs or gains that would be incurred by the counterparty in replacing the contract. Derivative counterparties will be given the opportunity to provide evidence of commercially reasonable replacement trades and to determine the close-out amount within a certain deadline; if no feedback is received, then resolution authorities will apply their valuation based on mid-market prices and bid-offer spreads.
The EBA standards also specify that resolution authorities should establish the value of derivative liabilities at the date of close-out or when a price is available in the market for the contract or the underlying assets, which allows for a final valuation within a matter of days with maximum accuracy. As early terminations of derivatives may bring specific additional costs, the RTS further specify the circumstances in which resolution authorities might exempt contracts from close-out and bail-in where the application of the bail-in tool is likely to bring destruction in value exceeding the bail-in potential of the corresponding liabilities.
The standards take into account the specific regulatory framework applicable to centrally cleared derivatives, for which the European Market Infrastructure Regulation (EMIR) has introduced rules and procedures for valuing derivatives in resolution. In very exceptional circumstances, resolution authorities will impose their own valuation where central counterparties (CCPs) do not deliver a close-out amount or do not apply default procedures within an agreed deadline.
The framework proposed in the EBA standards will allow resolution authorities and independent evaluators to effectively conduct a reliable valuation in a short timeframe. In cases of particular emergency constraints, resolution authorities will also be able, under certain conditions, to apply resolution actions on the basis of preliminary valuations and even before pricing is available in the market.
Comments can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 13 August 2015.
A public hearing will take place at the EBA premises on 2 July 2015 from 14:00 to 17:00 UK time. All contributions received will be published following the close of the consultation, unless requested otherwise.
These draft RTS have been developed according to paragraph 5 of Article 49 of Directive 2014/59/EU (BRRD), which mandates the EBA to develop draft Regulatory Technical Standards (RTS) specifying methodologies and principles on the valuation of liabilities arising from derivatives.
- Alternative Investment Management Association / Managed Funds Association
- Association of German Banks
- Deutsche Bank
- European Association of CCP Clearing Houses (EACH)
- ISDA International Swaps & Derivatives Association