Market updates and sector developments

The EBA has published its roadmap on the so-called Banking Package, which implements the final Basel 3 reforms in the EU. The roadmap aims to strengthen the prudential framework, as well as ensure an international level playing field. It also seeks to provide clarity on how it will develop the mandates implementing the legislation and finalise the most significant components ahead of the application date, on 1 January 2025. 

Additionally, with the objective of supporting the green transition, the Banking Package includes new rules requiring banks to systematically identify, disclose and manage risks arising from ESG factors as part of their risk management. Furthermore, it provides stronger enforcement tools for supervisors overseeing EU banks.

The EBA roadmap confirms that the development of regulatory products will follow their legal deadlines, most of which will be consulted on and finalised within the two to three years after the entry into force of CRR3 and CRD6. Indeed, the first batch of regulatory products have simultaneously been published for consultation. These include two draft implementing technical standards (ITS) amending Pillar 3 disclosures and supervisory reporting requirements, a discussion paper on the Pillar 3 data hub, an amended draft regulatory technical standards (RTS) on the standardised approach for counterparty credit risk and an amended RTS on the treatment of FX and commodity risk in the banking book, the profit and loss attribution test and the risk factor modellability assessment.

The consultations on the draft ITS amending Pillar 3 disclosures and supervisory reporting requirements run until 14 March 2024. In line with the Roadmap, the EBA will follow a two-step sequential approach to amend both the Pillar 3 disclosures and supervisory reporting ITS – prioritising, in step 1, those changes necessary to implement and monitor Basel 3 requirements in the EU. Later in 2024, as part of step 2, the authority will develop reporting and disclosure requirements that are not directly linked to Basel 3 implementation, together with those requirements with an extended implementation timeline. 

In particular, the draft ITS seek to implement the changes related to the output floor, credit risk - including immovable property (IP) losses - capital valuation adjustment (CVA), market risk and leverage ratio. The amendments related to the new operational risk are not covered by these consultation papers but will be consulted on together with some policy products at the beginning of 2024. 

A public hearing on the draft ITS will take place on 23 January 2024. Following the consultation period, the two draft ITS will be finalised, with the expectation that they will be submitted to the European Commission by June 2023.

In other news…

BBB rolls out ABL scheme
The British Business Bank has launched an asset-based lending variant of the Recovery Loan Scheme, with the aim of broadening the support available for small businesses in the UK to access finance while making use of a broad range of business assets. The bank’s guarantee and wholesale division worked closely with UK Finance and asset-based lenders to develop this variant.

Asset-based lending will allow lenders to provide loans secured by assets, such as inventory, accounts receivable, equipment or other property owned by the borrower. Recovery Loan Scheme asset-based lending will be delivered by established asset-based lenders and the British Business Bank welcomes asset-based lenders to consider applying for accreditation.

Investor survey ‘broadly positive’
Responses to KBRA’s fourth European securitisation investor survey reveal a broadly positive picture for the industry, with market participants indicating that spreads are poised to improve in the next six months and issuance is likely to increase. However, one-third still believe that market volatility and negative moves are possible in the near term.

In fact, KBRA reports that investor expectations are the most positive since its first survey in June 2022, with most respondents anticipating a tightening bias in European securitisation markets. This is especially true for investors in CLOs, ABS and RMBS.

Meanwhile, a large pipeline of new issue transactions are anticipated in the New Year, with most investors predicting an improvement on current levels.

The UK remains the region of greatest concern for credit performance. However, some of the focus has moved to other regions, with general pan-European concerns increasing significantly from the prior survey.

ISDA launches DC review
ISDA has launched a review of the structure and governance of the credit derivatives determinations committees (DCs), appointing Linklaters to conduct an independent assessment and recommend any changes to maintain the integrity of the DCs in changing economic and market conditions. Once complete, a report will be published on ISDA’s website and opened to a market-wide consultation to determine which of the potential changes have broad support from market participants and other stakeholders. ISDA will then work with members to develop specific implementing changes that will be recommended to the DCs for action.

The process for developing the report will involve interviews with market participants and other stakeholders, such as regulators and academics, to determine what steps might be taken to improve the functioning of the DCs. The review will begin in December 2023, with the market-wide consultation expected later in 2024.

The DCs have been in operation for nearly 15 years with the same fundamental structure put in place in 2009, but the number of firms willing to serve on the DCs has declined steadily in recent years, according to ISDA. “While there is no minimum number of DC members and the DCs function effectively and can continue to do so, we think now is the appropriate time to consider whether potential changes could be made to maintain a robust, centralised and transparent mechanism for the determination and settlement of credit events, which is vital for the central clearing of credit default swaps,” comments Scott O’Malia, ISDA’s chief executive.