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    EC Regulation on CCR Mitigation for Covered Bonds and Securitizations

    March 27, 2020

    EC published the Delegated Regulation 2020/447 with regard to regulatory technical standards on the specification of criteria for establishing the arrangements to adequately mitigate counterparty credit risk, or CCR, associated with covered bonds and securitizations. Regulation 2020/447 supplements European Market Infrastructure Regulation or EMIR (648/2012) with regard to these regulatory standards and amends Delegated Regulations 2015/2205 and 2016/1178. Regulations 2015/2205 and 2016/1178 also supplement EMIR with regard to regulatory technical standards on clearing obligation. Regulation 2020/447 shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

    Article 1 of Regulation 2020/447 specifies that arrangements under covered bonds shall be considered to adequately mitigate counterparty credit risk, where over-the-counter (OTC) derivative contracts concluded by covered bond entities in connection with covered bonds comply with all of the following criteria:

    • Those contracts are registered or recorded in the cover pool of the covered bond in accordance with national legislation on covered bonds
    • Those contracts are not terminated in case of resolution or insolvency of the covered bond issuer or the cover pool
    • The counterparty to the OTC derivative contract concluded with covered bond issuers or with cover pools for covered bonds ranks at least pari passu with the covered bond holders, except where the counterparty to the OTC derivative contract concluded with covered bond issuers or with cover pools for covered bonds is the defaulting or the affected party, or waives the pari passu rank
    • The covered bond is subject to a regulatory collateralization requirement of at least 102%

    In addition, Article 2 of Regulation 2020/447 specifies that arrangements under securitizations shall be considered to adequately mitigate counterparty credit risk where OTC derivative contracts concluded by securitization special purpose entities in connection with securitizations satisfy all of the following criteria:

    • The counterparty to the OTC derivative concluded with the securitization special purpose entity in connection with the securitization ranks at least pari passu with the holders of the most senior securitization tranche except where the counterparty to the OTC derivative concluded with the securitization special purpose entity in connection to the securitization is the defaulting or the affected party
    • The securitization special purpose entity in connection with the securitization with which the OTC derivatives contract is associated is subject, on an ongoing basis, to a level of credit enhancement of the most senior securitization note of at least 2% of the outstanding notes

    Regulations 2015/2205 and 2016/1178 already contain a number of conditions under which OTC derivative contracts concluded by a covered bond entity in connection with a covered bond can be excluded from the clearing obligation. There is a degree of substitutability between OTC derivative contracts concluded by covered bond entities in connection with covered bonds and OTC derivative contracts concluded by securitization special purpose entities in connection with securitizations. To avoid potential distortion or arbitrage, their treatment toward the clearing obligation should be consistent. Therefore, Delegated Regulation 2015/2205 and 2016/1178 are being amended accordingly. Article 1(2) of Delegated Regulations 2015/2205 and 2016/1178 have been deleted. Regulation 2020/447 is based on the draft regulatory technical standards submitted to EC by EBA, EIOPA, and ESMA.

     

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    Effective Date: April 16, 2020

    Keywords: Europe, EU, Banking, Securities, Counterparty Credit Risk, OTC Derivatives, Covered Bonds, Regulatory Technical Standards, EMIR, Securitization, Clearing Obligation, Regulation 2020/447, EC

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