COVID-19: Financial Services Round-Up for 20 – 26 April 2020

Capital Markets

The Association for Financial Markets in Europe (“AFME”) has published a report on the initial impact of COVID-19 on European capital markets (here).  According to the report, European capital markets have continued to operate well following the outbreak of COVID-19, with liquidity ranging from good to mixed, depending on the sector.

Capital Requirements Regulation – Fundamental Review of the Trading Book (FRTB)

The FRTB reporting requirements in the EU, and in particular those on the FRTB standardised approach (“FRTB-SA”) were scheduled to apply from Q1 2021. The EBA now intends to submit its implementing technical standards (ITS) with a start date for FRTB-SA reporting in Q3 2021, meaning that the first reference date will be set at 30 September 2021. See the EBA’s statement (here).

Capital Requirements Regulation – Market Risk

The EBA has issued a statement (here), which, among other things deals with the increase in the Value-At-Risk (VaR) risk metrics and multiplication factors under the Internal Model Approach.  In the statement, the EBA outlines ways in which the Capital Requirements Regulation currently allows some flexibility to mitigate these issues. The EBA also states that while institutions should carry on the annual review on the choice of the stressed VaR observation period, this review could be postponed to the end of 2020 and should not constitute a supervisory priority at the moment.

COVID-19 Resources

EIOPA has launched a new COVID-19 webpage on its website (here).  It covers supervisory measures; guidance for the insurance sector; guidance for the occupational pensions sector; other measures; deadline extensions; and adjustment of EIOPA's staff work and offices.

The LMA has published a webinar on COVID-19 and its effects on the European CLO market (here).  The webinar focuses on the effects of corporate downgrades on underlying sub-investment grade debt on European CLOs as well as the importance of the reporting requirements under the Securitisation Regulation in a volatile market.

Credit Unions

On 23 April 2020, the Minister for Finance and Public Expenditure and Reform issued a press release on further engagement with the credit union sector to discuss the COVID-19 situation (here).

As part of ongoing stakeholder engagement, the Credit Union Advisory Committee has agreed to report to the Minister for Finance by 30 June 2020 on the implications of COVID-19 on the sector, the role credit unions could play in the economic recovery and challenges and opportunities for the sector.  This will incorporate the implications of COVID-19 and any relevant recommendations.  The Advisory Committee has engaged with representative bodies for their input.

On 23 April 2020, the Central Bank of Ireland (CBI) published its response to a letter from the Irish League of Credit Unions to Governor Makhlouf, dated 26 March 2020, in relation to the implications of COVID-19 for credit unions (here).

OTC Derivatives – Margin Requirements

The EBA published a statement (here), which among other things covers the postponement of the final two implementation phases of the margin requirements for non-centrally cleared derivatives. 

By way of background, on 3 April 2020, the BCBS/IOSCO announced its intention to allow a deferral of the final two implementation phases of the margin requirements for non-centrally cleared derivatives, in order to provide banks with increased operational capacity to respond to the COVID-19 crisis.  This framework is implemented in the EU through the joint European Supervisory Authorities RTS on risk mitigation techniques for OTC derivatives not cleared by a central counterparty (the “RTS”).

According to the statement, the EBA is working closely with ESMA and EIOPA to implement the necessary changes in the RTS. These changes will postpone by one year the requirement to implement initial margins for counterparties above €50 billion (phase 5 - due to start Sept 2020) and for counterparties above €8 billion (phase 6 – due to start Sept 2021).

Prudent Valuation Framework

The EBA published draft RTS on prudent valuation under Article 105(14) of the Capital Requirements Regulation (here) and a statement outlining its proposal to mitigate the increase in aggregated amounts of additional valuation adjustments (“AVAs”) under the prudential valuation framework (here). 

Delegated Regulation 2016/101 currently allows institutions to follow two approaches for the calculation of AVAs: a core approach and a simplified approach.  The EBA is proposing to amend the Delegated Regulation to increase the aggregation factor applicable to the core approach from 50% to 66%.

The EBA states that the draft RTS should be adopted by the Commission and published in the EU’s Official Journal as quickly as possible in order to allow, to the extent possible, for the application of the revised Delegated Regulation for the 30 June 2020 COREP reporting. The entry into force of the amendment will, however, depend on whether the amendments can be published in the OJ before 30 June 2020.

Supervisory Measures

On 22 April 2020, the EBA published a statement on additional supervisory measures in the COVID-19 pandemic (here), setting out the EBA’s expectation and guidance regarding flexibility in supervisory approaches relating to the following:

• Supervisory Review and Evaluation Process (SREP).  The EBA recognises a need for a pragmatic and effective SREP, specific for the 2020 exercise.  As a result, the 2020 SREP may not embrace a thorough and comprehensive assessment of all risks and vulnerabilities of institutions. For some SREP elements, considered not directly affected by COVID-19 or where no new relevant information is available, the previously assigned supervisory assessment could be maintained.
• Recovery planning.  Recovery plans should be reviewed and updated to allow for timely and effective implementation, if necessary.  Competent authorities should monitor that recovery plans are updated regularly.  In light of the specific COVID-19 stress, institutions should enhance their focus on understanding which recovery options are necessary and available under the current stressed conditions and adjust this analysis if the situation changes.  Certain operational reliefs for institutions should also be made available.
• Digital operational resilience.  Institutions should ensure business continuity, adequate information and communication technology (ICT) capacity and security risk management as well preventing cybercriminal activities and cyber disruption.  The EBA’s guidelines on ICT and security risk management should be applied for this purpose.
• Securitisation.  The EBA provides clarification on the application of general payment moratoria implemented or proposed by EU member states and industry bodies in the context of securitisations.

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The McCann FitzGerald website has a dedicated COVID-19 section containing FAQs, briefings and guidance on a range of legal and business issues that may need to be addressed (here).