13 May 2015

EBA consults on the valuation of derivatives in resolution

The draft RTS provide resolution authorities with a series of tools to carry out a swift and objective valuation of derivative liabilities while avoiding discrepancies with the insolvency counterfactual which could lead to breach the non-creditor-worse-off principle. The approach applies a statutory valuation methodology based on the costs or gains that would be incurred by the counterparty in replacing the contract. Derivative counterparties will be given the opportunity to provide evidence of commercially reasonable replacement trades and to determine the close-out amount within a certain deadline; if no feedback is received, then resolution authorities will apply their valuation based on mid-market prices and bid-offer spreads.

The EBA standards also specify that resolution authorities should establish the value of derivative liabilities at the date of close-out or when a price is available in the market for the contract or the underlying assets, which allows for a final valuation within a matter of days with maximum accuracy. As early terminations of derivatives may bring specific additional costs, the RTS further specify the circumstances in which resolution authorities might exempt contracts from close-out and bail-in where the application of the bail-in tool is likely to bring destruction in value exceeding the bail-in potential of the corresponding liabilities.

The standards take into account the specific regulatory framework applicable to centrally cleared derivatives, for which the European Market Infrastructure Regulation (EMIR) has introduced rules and procedures for valuing derivatives in resolution. In very exceptional circumstances, resolution authorities will impose their own valuation where central counterparties (CCPs) do not deliver a close-out amount or do not apply default procedures within an agreed deadline.

The framework proposed in the EBA standards will allow resolution authorities and independent evaluators to effectively conduct a reliable valuation in a short timeframe. In cases of particular emergency constraints, resolution authorities will also be able, under certain conditions, to apply resolution actions on the basis of preliminary valuations and even before pricing is available in the market.

Comments can be sent to the EBA by 13 August 2015. A public hearing will take place at the EBA premises on 2 July 2015 from 14:00 to 17:00 UK time.

Press release

Consultation paper

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