Practice notes on financial market | Avantage Reply Page 4

'Leverage' means the relative size of an institution's assets, offbalance sheet obligations and contingent obligations to pay or to deliver or to provide collateral, including obligations from received funding, made commitments, derivatives or repurchase agreements, but excluding obligations which can only be enforced during the liquidation of an institution, compared to that institution's own funds.

Risk & Compliance

Briefing Note

Securitisation at a crossroad? Major recast of the regulatory framework

In September 2015, the European Commission released the Securitisation Initiative. On one hand, it establishes a common framework for all regulated financial institutions in Europe and defines the concept of a simple, transparent and standardised, or STS, securitisation. On the other hand, it implements in Europe the Basel III securitisation framework – finalized by the Basel Committee in December 2014 – but with a twist as STS securitisations qualify for a preferential treatment in the form of reduced capital charges.

Risk & Compliance

Briefing Note

Shadow Banking Entity Exposure Limits: EBA Guidelines

The EBA published a consultation paper on shadow banking entity exposure limits on 19 March 2015. The EBA intends to finalise its guidelines by the end of 2015. It defines “shadow banking entities” as those that carry out credit intermediation activities (bank-like activities involving maturity transformation, liquidity transformation, leverage, credit risk transfer or similar activities) and are not defined excluded undertakings.

Practice note

Briefing Note

Fundamental Review of the Trading Book: Internal Models

The Basel Committee on Banking Supervision’s (“BCBS’s”) second full consultative document on the fundamental review of the trading book (“FRTB”) , supplemented by a third paper in December 2014 covering outstanding issues , sets out significant revisions to the market risk capital requirements framework. Key areas include moving from Value at Risk (“VaR”) to Expected Shortfall (“ES”), varying liquidity horizons, the trading book/banking book boundary, the treatment of credit, hedging and diversification, and the relationship between the internal models-based and standardised approaches. The FRTB document succeeded the Committee’s initial consultation from the previous year. Its proposed revisions are part of a broader reform agenda in response to the material weaknesses exposed in the financial crisis, and they incorporate the lessons learned from recent investigations into the variability of market Risk-Weighted Assets (“RWA”). This note reviews the FRTB changes to internal models-based market risk approaches – Expected Shortfall, confidence level, liquidity horizons, stressed ES, migration risk and backtesting -- assessing their implications for firms and capital requirements.

Practice note

Briefing Note

MiFID II: implications for Commodity Derivatives

Commodity dealers are subject to important changes under MiFID II regulation. This has far-reaching implications for both commodity trading market participants and for the market as a whole. Exemptions for commodity derivative dealers are being removed and more firms will be regulated under MiFID II, many for the first time. ESMA, the European supervisor and regulator, is empowered to enforce new position limits on market participants (read: forcibly close out positions) in exceptional circumstances. Trading firms will report their positions daily to the market operator, who will report positions daily to ESMA. ESMA will publicly disclose an overview of the positions held on contracts. The 3rd January 2017 implementation date of MiFID II may seem a long way off, but for the many firms who fall under the expanding scope of MiFID II, there is a great deal of work to do. Necessary plans need to be put in place now and there will be little regulatory sympathy for those who have not prepared.

IFRS9

Briefing Note

BCBS's view on the new impairment model under IFRS9

On 2 February 2015, the Basel Committee on Banking Supervision (“BCBS”) issued a Consultative Paper setting forth guidelines for a robust and consistent implementation of the new Expected Credit Loss (ECL) accounting framework across all jurisdictions. The guidance outlines supervisory expectations for ECL accounting in the form of 11 principles that are consistent with the applicable accounting standards established by the IASB and other standard setters. Comments from the industry are expected by 30 April 2015.

Practice note

Briefing Note

Interest Rate Risk in the Banking Book 2015 QIS

In June 2013, the European Banking Authority launched a consultation paper on amendments and additions to the earlier CEBS Guidelines on interest rate risk arising from non-trading activities (IRRBB) published in 2006. The main objectives of the proposed changes were to improve the management of IRRBB risks and to push for the convergence of supervisory practices under the Pillar 2 assessment process. Furthermore, this update will provide more detailed technical guidance for both institutions and supervisors on various aspects of the management and the assessment of interest rate risk in the banking book. The adjusted EBA guidelines first released in 2013 should have been published by the end of 2014. However, since then the Basel Task Force on Interest Rate (TFIR) has not yet reached consensus on draft Pillar1 versus Pillar2 guidelines. The momentum for IRRBB has slowed down somewhat, the Basel/EBA/FSB QIS exercise for it is now expected for the summer of 2015.

Practice note

Briefing Note

Fundamental Review of the Trading Book: Current Developments

The recent financial crisis revealed material weaknesses in the regulatory capital framework for trading activities. Capital allocated to absorb trading losses displayed high volatility. As an initial rapid response to the apparent undercapitalisation of market risk, the Basel Committee on Banking Supervision introduced a range of framework revisions in July 2009, including stressed calibrations and capital for credit risks. This package, often referred to as “Basel 2.5”, was believed to be a necessary but not fully sufficient update to the capital requirements.

This Briefing Note provides a summary of the key proposals. The Committee is expected to issue a third (and final) Consultative Document by early 2015.

Banking System Solidity

Briefing Note

Capital adequacy, cost of the risk and profitability: during a crisis, a real puzzle for Banks

Source: Avantage Reply Observatory
Following the burst of the real estate bubble on the US sub-prime lending market and following the bankruptcy of Lehman Brothers, the worst economic crisis since 80 years has now passed through, and in some cases overcome, different stages, both from a real and from a financial point of view. In such a context, the banking industry is still facing several and complex challenges.

Practice note

Briefing Note

Leverage Ratio: An Update on Regulatory Developments

On 5 March 2014, the European Banking Authority (“EBA”) issued a report, which provides a policy analysis of aligning the current CRR1 definition of the leverage ratio exposure measure to the aforementioned Basel III standard. Later that month, the European Commission hosted a Public Hearing discussing the Commission’s forthcoming Delegated Act amending the capital measure and the total exposure measure of the leverage ratio. This Briefing Note presents an overview of regulatory developments to date, highlighting areas that banks should carefully monitor to ensure they can address impending regulatory requirements in a timely fashion.

Practice note

Briefing Note

Proposed European Regulation on the Reporting and Transparency of Securities Financing Transactions

On 29 January 2014, the European Commission (“EC”) published the Proposal for a Regulation of the European Parliament and of the Council on reporting and transparency of Securities Financing Transactions (“SFTs”). The proposal has the objective of improving the transparency of SFT transactions, including securities lending and repos, and restricting rehypothecation practices.

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Briefing Notes