EBA欧洲银行-EBA-response-to-Consultation-Paper-28EBA-CP-2015-10292013-August-2015_10页_282kb

EBA Banking Stakeholder Group Summary on EBA/CP/2015/10 Consultation Paper

Core Content

The EBA Banking Stakeholder Group (BSG) has provided detailed comments on the Draft Regulatory Technical Standards (RTS) related to the valuation of derivatives under Article 49(4) of the Bank Recovery and Resolution Directive (BRRD). The purpose of the consultation is to establish procedures for valuing derivatives during a bank resolution, enabling resolution authorities to make informed decisions on write-downs or conversions of liabilities.

The BSG supports the initiative and outlines several key points for consideration in the final RTS.

Main Points of the BSG Comments

1. OTC Derivatives Valuation

• The BSG highlights the challenge of valuing Over-the-Counter (OTC) derivatives, especially in illiquid or narrow markets.
• They recommend that the EBA provide guidance on valuation techniques, including a hierarchy of variables for use in estimations.
• In such scenarios, the valuer should use internal models if a market exists, and be supported with clear rules to ensure fair and consistent valuation.

2. Relationship Between Resolution Authority and Independent Valuer

• The BSG notes that the valuer's role is not limited to a one-time report but involves continuous engagement with the resolution authority.
• This dynamic relationship may reduce the valuer's independence, which is a necessary trade-off for efficiency in the resolution process.
• The BSG emphasizes the need for clear communication and updating valuations as required by the resolution authority.

3. Litigation Risks and No-Creditor-Worse-Off Principle

• The BSG acknowledges the potential for litigation due to the subjectivity of valuations and the difficulty in assessing some counterparties' claims.
• They stress the importance of providing resolution authorities with tools to make and justify decisions, including comparing potential value loss with obtainable amounts.
• The no-creditor-worse-off principle is supported, and the valuation principle aligns with it by focusing on the expected loss to the counterparty.

Replies to Key Questions

Question 1: Definitions of "commercially reasonable replacement trades" and "unpaid amounts"

• The BSG agrees with the definitions but suggests clarifying the exclusion of interest and compensation from "unpaid amounts".
• They believe that requiring two different offers from dealers could make the determination of "commercially reasonable" more practical.

Question 2: Deadline for Counterparties

• The BSG does not support setting deadlines for counterparties unless they are Central Counterparties (CCPs).
• For non-CCP counterparties, flexibility is essential, as they may not have established valuation procedures.

Question 3: Valuation Principle and No-Creditor-Worse-Off Principle

• The BSG supports the principle of using expected loss from early settlement.
• They recommend clarifying the treatment of collateral, especially in cases of excess collateral.

Question 4: Priority of Replacement Trades

• The BSG agrees that commercially reasonable replacement trades should have priority.
• They suggest that market prices should be used as a fallback if no replacement trades are available.

Question 5: Close-Out Amount Calculation

• The BSG supports the method in Article 5.2 but highlights the need to consider alternative valuation techniques when market prices are unavailable.
• They propose a hierarchy of valuation sources (observable market variables first, then unobservable variables) to ensure objectivity.
• Funding and capital charges should also be considered as part of the replacement cost.

Question 6: Adjustments to Bid-Ask Spread

• The BSG corrects the reference to Article 5(2)(c) instead of 6(4)(c).
• They support the use of bid-offer spread adjustments in the presence of market prices, and simulated spreads in the absence of market data.

Question 7: Treatment of CCPs

• The BSG agrees with the treatment of CCPs in the RTS and believes it is compatible with swift and efficient valuation.
• They also agree that the treatment does not conflict with a sound risk-management framework.

Question 8: "Commercially Reasonable" Date

• The BSG supports the definition of the "commercially reasonable" date in Article 7.1.
• They note that market volatility after the close-out date is an effect, not the cause, of the resolution and should not be included in valuation.

Question 9: Early Determination

• The BSG supports the early provisional valuation as a tool for swift resolution decisions.
• They emphasize the importance of communication between the valuer and resolution authority to ensure timeliness and accuracy.

Question 10: Waiting for Market Prices

• The BSG does not support waiting for market prices before applying the bail-in tool.
• They argue that such a requirement would unduly constrain the resolution authority, especially in non-existent or illiquid markets.

Question 11: Early Determination for CCP Claims

• The BSG supports the early determination for CCP claims.
• They believe that independent valuer assessments can provide valid information to challenge CCP valuations.

Question 12: Adjustment of Bail-In Treatment for CCPs

• The BSG supports the existing process where resolution authorities may adjust bail-in treatment if CCP valuations are inconsistent.
• They believe Article 74 of the BRRD provides sufficient safeguards for CCPs.

Question 13: Terms of Comparison

• The BSG finds the guidance in Paragraph 2 of the Article sufficiently clear, particularly point (a), but notes issues with point (b).

Question 14: Drivers of Value Destruction

• The BSG agrees with the main drivers described in the RTS.
• However, they highlight that points (iii) and (iv) are subjective and difficult to measure.
• The BSG warns that provisional valuations may lead to decisions based on insufficient information.

Question 15: Precautionary Buffer

• The BSG supports the precautionary buffer as a tool for assessing the consequences of close-out.
• They suggest more guidance on the concepts and scenarios the buffer covers and how to measure the costs of adverse events.

Question 16: Franchise Value Destruction

• The BSG acknowledges the importance of franchise value in the resolution process.
• However, they argue that quantifying the loss is difficult and subjective, and may lead to disputes.
• They recommend clear cause-effect relationships between drivers of value destruction and the amount of loss.

Conclusion

The BSG emphasizes the need for clarity, objectivity, and flexibility in the valuation process for derivatives during bank resolution. They support the alignment with market practice, the no-creditor-worse-off principle, and the provisional valuation approach, while also suggesting improvements in definitions, valuation methods, and communication to enhance the efficiency and fairness of the resolution process.