Capital Requirements Regulation
EU Regulation 575/2013/ (EUR Lex) on prudential requirements for credit institutions and investment firms ("CRR") may be found on the World Wide Internet at this location.
The overarching goal of CRR is to strengthen the resilience of the EU banking sector so it would be better placed to absorb economic shocks while ensuring that banks continue to finance economic activity and growth.
Netting, Transactions and Stock Lending
The amount of regulatory capital that has to be held is expressed as a percentage of the “total risk exposure amount” (Art. 92(2) of CRR). 92(2) Institutions shall calculate their capital ratios as follows:
- (a) the Common Equity Tier 1 capital ratio is the Common Equity Tier 1 capital of the institution expressed as a percentage of the total risk exposure amount;
- (b) the Tier 1 capital ratio is the Tier 1 capital of the institution expressed as a percentage of the total risk exposure amount;
- (c) the total capital ratio is the own funds of the institution expressed as a percentage of the total risk exposure amount.
The total risk exposure amount includes the counterparty risk associated with securities lending transactions in the trading book (Art. 92(3)(f) of CRR).
- Under the standardised approach, the regulatory capital charge is determined by risk weighting the “exposure value” of the item in question (Art. 113 of CRR).
- The exposure value of a securities lending transaction is determined in accordance with Chapter 4 or Chapter 6 of Part 3, Title II (Art. 111(2) of CRR). The firm can choose which Chapter to apply (Art. 271(2) of CRR):
- Under Chapter 4, the cash received under a securities lending transaction is to be treated as collateral (Art. 193(4) of CRR).
- Under Chapter 6, the exposure value can be determined by using an internal model, assuming that the firm has regulatory approval for the use of such a model (Art. 273(2) of CRR) or by one of the methods set out in that Chapter.
- Although not expressly stated in relation to stock loans, these apply certain methodologies to particular “contracts” or “transactions”.
- A securities lending transaction is, both legally and economically a single transaction and is treated as such under CRR (see, for example, Art. 92(3)(f)).
- Where the conditions referred to in Art. 206 of CRR are satisfied, netting arrangements are recognised.
- However, if those conditions are not satisfied, the exposure is calculated without giving effect to any close-out netting agreement that may exists, i.e. each transaction is treated individually.
- This is to be expected because netting arrangements are only recognised if they are legally enforceable. If they are not, the counterparties may have a gross exposure to each other due to the fact that an insolvency official may be able to “cherry pick” between individual transactions, i.e. disclaim unprofitable transactions while enforcing profitable ones.
- It would be very unusual for an insolvency official to be able to cherry pick individual rights and obligations within a single transaction. I am not aware of any jurisdiction in which this is possible and certainly it is not possible under English law.
Length
There are 486 Articles. Or possibly more: the Article cuts off in mid-sentence, as if the poor Eurocrat scribe who was charged writing it down suddenly died of a broken heart, lost the will to live, walked out in a fit of pique, or possibly just went for Moules Frites at lunch one day, and thought the better of ever coming back.
They say he's happier now. He lives on a small island near Cyprus, has a little wooden boat painted blue and each day he fishes on a painted ocean under the azure skies for what he needs, and no more.