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.
ESMA: amendments on the clearing and derivative trading obligations related to the benchmark transition
The European Securities and Markets Authority (ESMA) published a final report on the clearing (CO) and derivative trading (DTO) obligations to accompany the benchmark transition on 1 February 2023, which is part of the transition away from the Euro OverNight Index Average (EONIA) and the London Interbank Offered Rate (LIBOR), primarily Risk-Free Rates such as €STR, SOFR, SONIA and TONA.
EONIA was the interest rate at which unsecured loans in euro were granted on the interbank market in the euro area from one target day to the next. LIBOR is a reference interest rate on all banking days under certain conditions, which is used as basis for calculating the lending rate. Due to manipulations during the LIBOR scandal, the British Financial Conduct Authority (FCA) announced in 2017 that it would replace LIBOR with other reference interest rates.
The report sets out proposed draft Regulatory Technical Standards (RTS) amending the scope of the CO and DTO for over-the-counter (OTC) interest rate derivatives (IRD) denominated in euro, British pound, Japanese yen, and U.S. dollar.
The proposals further include the introduction of:
- the Tokyo Overnight Average Rate Overnight Index Swaps (TONA OIS) (with maturities up to 30 years) class and extend the Secured Overnight Financing Rate Overnight Index Swaps (SOFR OIS) class (up to 50 years) for CO.
- certain Euro Short-Term Rate Overnight Index Swaps (€STR OIS) classes for DTO.
Securitization regulation: ensuring homogeneity of the underlying exposures of STS securitizations
The simple, transparent, and standardized (STS) requirements, which are part of the Securitisation Regulation have been extended for asset-backed commercial paper (ABCP) and non-ABCP securitization.
The final report draft Regulatory Technical Standards (RTS), published by the European Banking Authority (EBA) on 14 February 2023, amends the Delegated Commission Regulation (EU) 2019/1851 by extending the scope to on-balance-sheet securitizations considering the specificities of these securitizations.
The report introduces transitional provisions for those securitizations who have been notified as STS and whose securities were issued before its application date. This ensures that existing transactions will continue to remain STS compliant.
BRRD: Guidelines to resolution authorities on transparency of write-downs and conversion and bail-in exchange mechanic
EBA published a final report on Guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic on 13 February 2023.
The Bank Recovery and Resolution Directive (Directive 2014/59/EU1, BRRD) provides authorities with the powers to write-down and convert capital instruments and also sets out that member states shall ensure resolution authorities may apply the bail-in tool to achieve the resolution objectives.
To ensure that authorities’ approaches are credible and that institutions have the necessary information to prepare, authorities are asked to specify if they intend to make use of interim instruments and to set out a timeline of the bail-in process. This ensures that a minimum level of harmonized information on how authorities would effectively execute the write down and conversion of capital instruments and the use of the bail-in tool (“exchange mechanic”) is made public. Those authorities that have already published information are expected to check if that publication complies with these guidelines.
The document to be published by authorities will further include:
- a clear description of potential interim instrument
- further details for the timeline
- where available, indicative templates or the main features of the legal instruments to be used to formally implement bail-in.
A policy discussion about another transparency issue within the bail-in framework, namely on the holders of bail-inable securities (retail & bank challenge), is subject of SAFE White Paper No. 92.
European Supervisory Authorities (ESA):
European Securities and Markets Authority (ESMA):
European Banking Authority (EBA):
European Insurance and Occupational Pensions Authority (EIOPA):
Federal Financial Supervisory Authority (BaFin):
Dr. Jonas Schlegel is Co-Head of the SAFE Policy Center.