At the end of each month, the SAFE Regulatory Radar highlights a selection of important news and developments on financial regulation at the national and EU level.
Counterparty credit and market risk: New guidelines and standards for risk management
On 11 December 2024, the Basel Committee on Banking Supervision issued its Guidelines for counterparty credit risk management which replace its 1999 Sound Practices for Banks' Interactions with Highly Leveraged Institutions. The final version of the Guidelines takes into account feedback from the public consultation launched in April 2024.
The Guidelines address industry weaknesses in the management of counterparty credit risk, notably regarding banks with high-risk exposures to counterparties (e.g., non-banking financial intermediaries (NBFI). Such shortcomings in the management practices concern the due diligence, conducted both at the onboarding and on an ongoing basis, credit risk mitigation practices (e.g., margining), risk management practices related to potential future exposure and stress testing, and the governance and senior management oversight of counterparty credit risk.
These guidelines address persistent industry weaknesses, emphasizing:
- Comprehensive Due Diligence: Banks should perform thorough evaluations of counterparties during onboarding and maintain ongoing assessments to fully understand associated risks.
- Credit Risk Mitigation Strategies: Institutions are encouraged to develop robust strategies, including effective contractual terms and risk-sensitive margining, to manage counterparty exposures.
- Measurement and Control: Banks are encouraged to us a variety of complementary metrics to measure, control, and limit CCR effectively.
- Governance Framework: Establishing a strong governance structure is essential to oversee CCR management, ensuring informed decision-making and risk oversight.
The Guidelines are broadly applicable but are particularly beneficial for managing high-risk exposures to counterparties, including NBFIs. The Guidelines are designed to be applied in a proportionate manner depending on the size, complexity and materiality of the risk profile of the financial institution.
As part of the implementation of the EU banking package in the area of market risk, the European Banking Authority (EBA) has published its final draft Regulatory Technical Standards (RTS) on 6 December 2024. They specify long and short positions under the derogations for market and counterparty risks.
The Capital Requirements Regulation (CRR III) framework provides some derogations for the calculation of capital requirements for market and counterparty credit risks concerning inter alia the size of the business. In this regard, CRR III now specifies that the size of the business shall be equal to the absolute value of the aggregated long position, summed with the absolute value of the aggregated short position. In addition, EBA’s RTS provides methodology for identifying the main risk driver of a position and for the determination of whether a transaction represents a long or short position.This is done on the basis of the sensitivities defined under the market risk standardized approach or add-ons defined under the standardized approach for counterparty credit risk. A position is considered as long or short depending on how movements in its main risk driver affect the market value. The more detailed methodology provided EBA ensures that derogations are applied appropriately, maintaining financial stability while accommodating the diverse nature of financial institutions.
MiCAR: Guidelines on standardized test for the classification of crypto-assets and Report on Tokenised Deposits
On 10 December 2024, the European Supervisory Authorities (ESAs) - comprising EBA, EIOPA and ESMA - issued joint Guidelines to standardize the classification of crypto-assets under Article 97 of the Markets in Crypto-Assets Regulation (MiCAR).
By streamlining and harmonizing the regulatory classification of crypto-assets under MiCAR, the Guidelines aim to ensure consistent application across the EU Member States, reducing regulatory arbitrage, enhanced investor protection and facilitation of supervisory oversight.
Key components of the Guidelines:
- Standardized Test for Classification: A unified methodology to determine whether a crypto-asset qualifies as an Asset-Referenced Token (ART), Electronic Money Token (EMT), or another category under MiCAR.
- Templates for Explanations and Legal Opinions:
- For ARTs: Issuers must provide a legal opinion accompanying the white paper, clarifying the token's classification and confirming it is neither an EMT nor excluded from MiCAR's scope.
- For Other Crypto-Assets: An explanation must accompany the white paper, detailing why the asset is not classified as an EMT, ART, or excluded from MiCA.
The Guidelines are set to apply three months after their publication in all official EU languages, aligning with MiCAR's broader implementation timeline.
On 12 December 2024, EBA published a Report on Tokenised Deposits. The report assesses the potential benefits and challenges of tokenized deposits, while encouraging the convergence in the classification of tokenized deposits in contrast with electronic money tokens issued by credit institutions under MiCAR.
The report recognizes that the tokenization of deposits using distributed ledger technology instead of traditional ledgers does not alter their regulatory classification as deposits. The report highlights growing interest among credit institutions.
Potential benefits include programmability and automation, while challenges involve consumer protection, operational risks, and compliance with anti-money laundering frameworks.
CMU: Harmonization on certain aspects of insolvency law
On 29 November 2024, the Council of the EU settled on its position on key aspects of the Commission’s Proposal for a Directive harmonizing certain aspects of insolvency law across Member States. The proposed Directive aims to enhance the development of the Capital Markets Union as divergence of insolvency regimes have long been considered as an obstacle for cross-boarder investments. The proposal intends to ensure the capacity of creditors to recover the maximum value from the liquidated company, improve the efficiency of insolvency procedures, and increase the predictability and fair distribution of recovered value among creditors.
The core elements of the partial general approach adopted by the Council focus on:
- avoidance actions to protect the insolvency estate against illegitimate removal of assets,
- the tracing of assets in a national centralized bank account register by the designated national courts or authorities to improve the access of insolvency practitioners,
- the alignment of national rules concerning the duty of a director to file for insolvency proceedings,
- enhanced transparency of national insolvency proceedings.
The Council's position will serve as the basis for negotiations with the European Parliament to finalize the Directive.
Updates:
- On 12 December 2024, Regulation (EU) 2024/3005 of the European Parliament and of the Council of 27 November 2024 on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, and amending Regulations (EU) 2019/2088, and (EU) 2023/2859 (Text with EEA relevance) was published on the Official Journal of the EU. Details were featured in the SAFE’s Regulatory Radar in November.
Public consultations
|
Pietro Chiarelli is Financial Policy Analyst at the SAFE Policy Center.
