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    ESMA Issues Updates on Bank ECL Disclosures and Benchmark Transition

    December 16, 2021

    The European Securities and Markets Authority (ESMA) released a statement on the implementation of the changes to the clearing obligation and derivative trading obligation, in light of the benchmark transition. The statement clarifies the situation in which the proposed draft regulatory technical standards on the clearing obligation and derivative trading obligation will not enter into force in time for the transition to alternative benchmarks of EONIA or LIBOR- based OTC derivative contracts by the end of 2021. ESMA encourages national competent authorities to take a risk-based approach to their supervisory tasks and not to prioritize their supervisory actions in relation to the clearing obligation and derivative trading obligation for certain interest rate derivative classes from January 03, 2022. ESMA also published a report on the application of the IFRS 7 Financial Instruments Disclosures (IFRS 7) and IFRS 9 Financial Instruments (impairment requirements) requirements regarding expected credit losses (ECL) of banks.

    The report gives an overview of the level of compliance of banks with the existing ECL-related requirements of IFRS 7 and IFRS 9, with the primary focus on relevance and comparability of disclosures. The overview builds on a desktop review of the 2020 financial statements of a sample of 44 European banks from 21 jurisdictions. ESMA has identified room for improvement in the level of compliance, comparability, and transparency in the application of the relevant IFRS requirements. The report provides recommendations to issuers on how to improve the application of the relevant requirements. Issuers, their auditors, and audit committees are expected to consider the findings of the report when preparing and auditing the financial statements. The recommendations to issuers relate to the following areas:

    • General aspects of the ECL-disclosures
    • Assessment of significant increase in credit risk
    • Forward-looking information
    • Explanation of changes in loss allowances
    • Transparency of disclosures on credit risk exposures
    • ECL sensitivity disclosures

    ESMA expects enforcers will take or have already taken appropriate enforcement actions whenever material misstatements are identified. ESMA and enforcers will monitor the progress of those actions. ESMA intends to leverage on the results of this study in its response to the International Accounting Standards Board’s request for information related to the post-implementation review of impairment requirements of IFRS 9, which is expected in 2022.

     

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    Keywords: Europe, EU, Banking, Insurance, Securities, LIBOR, Benchmarks Regulation, Interest Rate Benchmarks, Benchmark Reforms, Clearing Obligation, Trading Obligation, Derivatives, IFRS 7, IFRS 9, Financial Instruments, Disclosures, ECL, Credit Risk, ESMA

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