PRA on Modification by Consent of Definition of Capital Rules in CRR 2

By Regulatory News

June 10, 2019

Basel III

PRA announced its decision to offer a modification by consent of the Rules 7.1 and 7.5 of the Definition of Capital Part of the PRA Rulebook. This is because of the amendments introduced by the recently published revised Capital Requirements Regulation (CRR II) in the Official Journal of the European Union, which includes certain requirements that enter into force from June 27, 2019. The changes under discussion relate to the classification of common equity tier 1 (CET1) instruments.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

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Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

Following amendments to CRR Article 26(3), firms may classify as CET1 instruments the subsequent issuances of a form of CET1 instruments for which they have already received the competent authority’s permission, where both of the following conditions are met:

The provisions governing those subsequent issuances are substantially the same as the provisions governing those issuances for which the firms have already received permission.
Firms have notified those subsequent issuances to the competent authorities sufficiently in advance of their classification as CET1 instruments.

In light of the change to CRR Article 26(3), PRA recognizes that Rules 7.1 and 7.5 of the Definition of Capital Part of the PRA Rulebook no longer achieve the purpose for which they were made. Therefore, it has been decided to offer a modification by consent. PRA intends to consult in due course on amending Chapter 7 of the Definition of Capital Part of the PRA Rulebook and any expectations it has from firms on the application of CRR Article 26(3). A firm wishing to take up this modification by consent should contact the Authorizations Division with a request for the modification. PRA will confirm in writing whether the request has been granted and will publish the approved modification direction on the Financial Services Register.

Furthermore, CRR II introduces new requirements for UK global systemically important banks (G-SIBs) and UK material subsidiaries of non-EU G-SIBs in respect of own funds and eligible liabilities: some of these requirements will enter into force on June 27, 2019, while other aspects will apply in later years. BoE, in its capacity as the resolution authority, intends to communicate directly with affected firms in due course regarding these new own funds and eligible liabilities requirements. The BoE Statement of Policy on the approach to setting a minimum requirement for own funds and eligible liabilities (MREL) should be read in compliance with the new CRR II requirements for those firms that are affected by the requirements. As previously communicated, BoE is also committed to, before the end of 2020, reviewing the calibration of MREL and the final compliance date, prior to setting end-state MRELs. In doing so, BoE will have regard to any intervening changes in the UK regulatory framework as well as firms’ experience in issuing liabilities to meet their interim MRELs.

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Keywords: Europe, EU, UK, Banking, CRR 2, CET 1, Definition of Capital, MREL, G-SIB, PRA, BoE

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PRA on Modification by Consent of Definition of Capital Rules in CRR 2

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