PRA consultation paper published on eligibility requirements for guarantee CRM - February 2018 - Allen & Overy
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
PRA consultation paper published on eligibility requirements for guarantee CRM February 2018 allenovery.com
2 PRA consultation paper published on eligibility requirements for guarantee CRM | February 2018 3
Introduction and background
On Friday 16 February 2018, the PRA published a consultation paper1 on the eligibility The consultation paper guidance relates to the While the PRA have previously indicated5 that they
requirements for guarantees as CRM under the are considering responses to an earlier occasional
of guarantees as unfunded credit risk mitigation (CRM). The consultation paper contains
Standardised Approach and Foundation Internal consultation paper6 proposing (among other things)
some significant points for UK-regulated banks and CRR investment firms that make use Ratings Based Approach (the Chapter 4 Requirements).3 to clarify the prudential treatment of collateralised
of unfunded CRM2. It will also be relevant to unfunded CRM providers to those entities, The – separate – requirements of the Advanced guarantees, this subject is not addressed in the
wherever located and whether or not subject to the CRR themselves. The proposed Internal Ratings Based (AIRB) Approach4 are not current consultation paper.
affected. However, we note that, for a variety of reasons
guidance in the consultation paper on the substantive and geographic scope of Article (large exposures requirements, double default rules,
Neither does the consultation paper address the question
as to whether the PRA’s April 2017 update to its
194(1) legal opinions is likely to be of interest to all such entities in terms of cost and absence of approved models for a particular obligor
CRM Supervisory Statement7 implies a requirement
process. The proposed quantitative guidance on ‘timeliness’ for protection payments, or guarantor, underlying exposures that are securitisation
for resolution robustness of unfunded credit protection
positions), AIRB institutions often, in fact, seek to
while relevant to all, is likely to be of particular interest in markets where longer payment satisfy the Chapter 4 Requirements.
arrangements (as there is no bail-in protection for
periods typically apply (without an initial payment and subsequent true-up structure), unfunded CRM in resolution regimes including in the
No grandfathering provisions are envisaged in the BRRD and UK domestic bail-in safeguards).
eg to providers and recipients of insurance/insurance-like CRM and unfunded CRM consultation paper in relation to existing arrangements.
provided by public sector bodies such as multilateral development banks (MDBs). The consultation paper guidance is expressed to relate
The consultation paper’s proposed guidance on exclusions from guarantee cover, to ‘guarantees’. However, certain of the CRR provisions
while relevant to all, is likely to be of particular interest to providers and recipients addressed (‘timeliness’ of protection payments,
of insurance/insurance-like CRM. the requirement for protection to be ‘incontrovertible’,
the substantive and geographic scope of Article 194(1)
legal opinions) apply both to guarantees and credit
derivatives. It is unclear whether the consultation paper
guidance in this respect should be read as affecting
both types of unfunded CRM.
01_https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2018/cp618.pdf?la=en&hash=FDC3C115AE5B423A37BAA104C02D476F8
EF12057#932_20180216032039
02_Although the consultation paper has been issued by the PRA and not the FCA, FCA-regulated investment firms within the CRR ‘investment firm’ definition are (like PRA-regulated investment
firms) required to calculate (amongst other things) capital requirements for credit risk in accordance with the CRR. They are therefore subject to the CRR eligibility requirements under discussion
and it would appear prudent for them to be aware of the PRA’s position. Firms not falling within the CRR ‘investment firm’ definition, but subject to the BIPRU chapter of the FCA Handbook,
may also be interested in the consultation given the similarity of the provisions of BIPRU 5.7.6 and 5.7.11 to the CRR eligibility requirements under discussion.
03_Under Part Three, Title II, Chapter 4 CRR
04_Under Part Three, Title II, Chapter 3 CRR
05_See http://www.bankofengland.co.uk/pra/Documents/publications/ps/2017/ps1917.pdf at 1.5
06_http://www.bankofengland.co.uk/pra/Documents/publications/cp/2017/cp217.pdf CP 2/17
07_Regarding the impact on netting agreements under the Chapter 4 Requirements, of inadequate bail-in protection protections (where a requirement for resolution robustness is justified
by reference to Article 194(1) CRR, a provision that applies to both funded and unfunded CRM, rather than by reference to the CRR’s explicit requirement for funded CRM to be
insolvency robust (see e.g. Art 194(4) CRR)). See SS 17/13, as updated April 2017: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2017/
ss1713update.pdf?la=en&hash=04EB5937CD84A753A205BF3494BDCEC1152C5044
© Allen & Overy LLP 2018 This document is for general guidance only and does not constitute definitive advice. allenovery.com4 PRA consultation paper published on eligibility requirements for guarantee CRM | February 2018 5
Consultation paper highlights
This briefing highlights certain key points to note with respect to the consultation paper.
We encourage interested clients to contact us with any questions.
Guidance on the substantive and geographic The PRA also expand on their understanding of the Quantitative guidance on ‘timeliness’ Presumably, the PRA do mean both types of
scope of Article 194(1) legal opinions requirement that legal opinions cover ‘all relevant (‘days ... not weeks or months’, save in securitisation-related CRM and have in mind the
jurisdictions’. The PRA indicate that ‘relevant jurisdictions’ guidance on timeliness in the EBA’s 2015 Report on
(opinions to cover ‘eligibility criteria’ as relation to residential mortgage exposures
include the governing law of the protection, and the Synthetic Securitisation (reiterated in their recent
well as enforceability, and the potential protection provider’s jurisdiction of incorporation, but and securitisation positions): Discussion Paper on Significant Risk Transfer in
expansion of ‘relevant jurisdictions’ ‘could well include other jurisdictions where enforcement action may be The consultation paper proposes quantitative guidance Securitisation11). In relation to timeliness in the context
for which opinion cover must be provided): taken’. Presumably, the PRA have in mind jurisdictions such (previously lacking in the CRR and related EBA Q&A) of synthetic securitisations, the EBA indicate that an
as branch jurisdiction, where the protection provider acts on the requirement for ‘timeliness’ in protection payments. interim credit protection payment within a year following
Article 194(1) CRR imposes a requirement for
through a branch, and the jurisdiction of a protection The PRA indicate that (save as indicated below) they reporting of a credit event “is a desirable feature from the
‘independent, written and reasoned’ legal opinions
provider’s material assets if this is different from its regard the concept of timeliness as requiring a pay-out perspective of the originator’s capital position”, given that the
confirming that a guarantee is ‘legally effective and
jurisdiction of incorporation/branch (eg where the ‘without delay’ and within ‘days ... not weeks or months’. full work-out of the losses can be a lengthy process
enforceable’ in all relevant jurisdictions. There is no
protection provider is a securitisation special purpose This is at odds with market practice; in particular, in the (the EBA indicate that credit protection payments should
requirement in the CRR, or related EBA Q&A guidance,
entity). Hopefully (although further clarity in this respect context of insurance/insurance-like CRM and unfunded be calculated on the basis of the actual work-out of losses
for opinion comfort in respect of the CRR eligibility criteria
would be welcome), the PRA do not expect additional CRM provided by multilateral development banks, in accordance with the originator’s ordinary work-out
themselves (a large number of which relate to matters of
opinion cover in respect of a jurisdiction that may be where payment periods can be longer (without involving and recovery policy).
fact rather than matters of law). In practice, firms typically
associated with the underlying exposure(s), or protection initial payment and subsequent true-up structure).
look to standard transaction enforceability opinions to The PRA, further, indicate that they read certain words,
purchaser, but where it is open to the protection purchaser By way of exception, the PRA indicate that guarantees in
satisfy the Article 194(1) opinion requirement. Legal advice occurring in Article 215(1)(a) CRR, into Article 213(1)(c)
to take action against the guarantor in another jurisdiction respect of residential mortgage exposures continue to
may or may not be taken in relation to satisfaction of the (3) CRR. In effect, this means that guarantees benefitting
covered by an opinion (eg its jurisdiction of incorporation), benefit from their statutory 24-month maximum payment
CRR eligibility criteria and, if taken, may or may not from the somewhat relaxed requirements around pay-out
or expect the jurisdiction of any collateral provided in period.8 The PRA indicate that mutual guarantee schemes
take the form of a legal opinion. However, in the quantum under Article 215(2) (ie guarantees provided in
respect of the guarantee to be covered unless the collateral and public sector bodies will continue to be able to make
consultation paper, the PRA indicate that they expect the context of mutual guarantee schemes, or provided/
is (subject to the PRA’s pending guidance on the subject) timely9 provisional payments.10 It would be helpful, in this
the ‘eligibility criteria’ for a guarantee to be covered by counter-guaranteed by public sector bodies benefitting
itself recognised as funded CRM in respect of the guarantee context, to clarify that the PRA do not mean to preclude
‘independent legal opinion’. This is a potentially from the possibility of provisional payments based on
and subject to a separate legal opinion requirement. other protection providers from making timely initial
significant development in terms of cost and process. robust estimates/pay-outs otherwise satisfactory to
payments, with subsequent adjustments to reflect the regulators) are nevertheless subject to a requirement for
actual outcome of workout processes (as is fairly common the protection purchaser to be able to pursue the
market practice and in line with guarantor subrogation guarantor without first pursuing the underlying obligor
rights as a matter of English law). Helpfully, the PRA (it is already clear from EBA Q&A that such payments
expressly dis-apply the proposed guidance on timeliness remain subject to a timeliness requirement).
in the context of securitisation positions. It is somewhat
unclear whether the PRA are referring to CRM written
on existing securitisation positions, to CRM written on
non-securitisation exposures that itself constitutes a
securitisation (ie synthetic securitisations), or both.
08_Article 215(1)(a) CRR
09_We assume that the PRA do not intend to indicate (contrary to Article 213(1)(c)(3) and CRR EBA Q&A guidance (see http://www.eba.europa.eu/single-rule-book-qa/-/qna/view/
publicId/2014_803; http://www.eba.europa.eu/single-rule-book-qa/-/qna/view/publicId/2015_2306) that timeliness is not required at all in relation to such provisional payments
10_Article 215(2) CRR
11_https://www.eba.europa.eu/documents/10180/1963391/Discussion+Paper+on+the+Significant+Risk+Transfer+in+Securitisation+%28EBA-DP-2017-03%29.pdf
© Allen & Overy LLP 2018 This document is for general guidance only and does not constitute definitive advice. allenovery.com6 PRA consultation paper published on eligibility requirements for guarantee CRM | February 2018 7
Next steps
Guidance on exclusions from guarantee Guidance on the requirement for protection The consultation closes on Wednesday 16 May 2018. The PRA invite feedback
cover (exclusions are possible only in respect to be ‘incontrovertible’: on the proposals (to be sent to consultation paper6_18@bankofengland.co.uk)
of a ‘quantifiable portion of the exposure’ The PRA indicate that they interpret the CRR – in particular, in relation to the nature of firms’ existing guarantee arrangements
that relates to a particular ‘type of payment’ requirement for credit protection to be ‘incontrovertible’ for CRM, the impact of the proposals on firms’ existing CRM practices, and any
such as principal, interest, margin payments, – a term somewhat opaque to the English-speaking reader
other issues arising as a result of the proposals.
fees and charges): – as requiring ‘the wording of a guarantee [to] be clear and
unambiguous’, leaving ‘no practical scope for the guarantor to Given the absence of grandfathering, clients will need to consider the impact
The CRR permits institutions to exclude ‘certain types dispute, contest, and challenge or otherwise seek to be released from,
of payment’ from the cover of a guarantee, and to adjust or reduce, their liability’. The PRA indicate that they expect of the proposed guidance as regards their existing unfunded CRM, as well as
the value of the guarantee to reflect that ‘limited coverage’. firms to consider the terms of the guarantee itself, the in relation to future protection.
This has sometimes been used as the basis for arguments remedies available under the law that apply to that
to the effect that exclusions in insurance/insurance-like guarantee, and whether there are scenarios in which the
contracts (nuclear carve-outs etc) are not incompatible guarantor could in practice successfully seek to reduce or
with guarantee analysis. The PRA’s proposed interpretation be released from liability under the guarantee.
would prevent this: the exclusion must, they indicate,
be not merely a ‘quantifiable portion of the exposure’ Use of Pillar 2:
Key contacts
but also relate to a ‘type of payment’, which the PRA
The PRA reiterate the potential for use of additional
interprets as meaning ‘different sums the obligor may be required
capital requirements under Pillar 2 to address residual
to pay to the firm under the contract, such as the principal, interest,
risks in guarantees that are not covered by the
margin payments, fees and charges’).
Pillar 1 eligibility requirements.
Etay Katz Nick Bradbury Damian Carolan Kate Sumpter
Partner Partner Partner Partner
Tel +44 20 3088 3823 Tel +44 20 3088 3279 Tel +44 20 3088 2495 Tel +44 203 088 2054
etay.katz@allenovery.com nick.bradbury@allenovery.com damian.carolan@allenovery.com kate.sumpter@allenovery.com
Jo Goulbourne Ranero Kirsty Taylor
Consultant Senior PSL
Tel +44 77 7590 4055 Tel +44 20 3088 3246
jo.goulbourne-ranero@allenovery.com kirsty.taylor@allenovery.com
© Allen & Overy LLP 2018 This document is for general guidance only and does not constitute definitive advice. allenovery.comFOR MORE INFORMATION, PLEASE CONTACT: London Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom Tel +44 20 3088 0000 Fax +44 20 3088 0088 GLOBAL PRESENCE Allen & Overy is an international legal practice with approximately 5,400 people, including some 554 partners, working in 44 offices worldwide. Allen & Overy LLP or an affiliated undertaking has an office in each of: Abu Dhabi Bucharest (associated office) Ho Chi Minh City Moscow Seoul Amsterdam Budapest Hong Kong Munich Shanghai Antwerp Casablanca Istanbul New York Singapore Bangkok Doha Jakarta (associated office) Paris Sydney Barcelona Dubai Johannesburg Perth Tokyo Beijing Düsseldorf London Prague Warsaw Belfast Frankfurt Luxembourg Riyadh (cooperation office) Washington, D.C. Bratislava Hamburg Madrid Rome Yangon Brussels Hanoi Milan São Paulo Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings. © Allen & Overy LLP 2018 | CS1802_CDD-50531_ADD-73447 allenovery.com
You can also read
