EBA Asset Encumbrance Rules Add to the Data Headache

Introduction

On 30 October 2013, the European Banking Authority (EBA) published final implementing technical standards (ITS) on asset encumbrance reporting under Article 100 of the Capital Requirements Regulation (CRR).  The purpose of the ITS is to:

  • create a standardised measure of asset encumbrance across institutions and in doing so provide authorities with insight into reliance on secured funding and the extent of structural subordination of unsecured creditors and depositors;
  • allow supervisors to assess the ability of institutions to withstand funding stress; and
  • facilitate a broad assessment of the amounts of assets available in a resolution situation.

The ITS take the form of an EU regulation and consist of three parts:

  • a legal text that details elements such as the frequency of reporting;
  • reporting templates and associated instructions; and
  • a data point model and validation rules, detailing technical specifications and required formats.

The Meaning of “Asset Encumbrance”

“Asset encumbrance” is defined by reference to economic substance rather than legal concepts (such as title transfer).  Despite this, the definition of “asset encumbrance” requires firms to have a detailed understanding of underlying contractual provisions such as CSA Thresholds.  Broadly, an asset is to be treated as “encumbered” if it has been pledged or if it is subject to any form of arrangement to secure, collateralise or credit enhance any transaction from which it cannot be freely withdrawn.  Detailed templates to assist reporting are provided.  These cover a wide array of encumbrance arrangements, including:

 

l secured financing transactions (e.g. repo) l derivative collateral arrangements
l financial guarantees l collateral placed at CCPs
l central bank facilities l securitisations
l covered bond issuances    

Reporting Frequency and Smaller Institution Exemption

As detailed in the table below, smaller institutions will not be required to complete all reporting templates.  The definition of a ‘smaller institution’ is consistent with the threshold used to distinguish systemically important financial institutions for the purposes of the Single Supervisory Mechanism, and includes those firms:

  • that have total assets (calculated both individually and on a consolidated basis) of less than EUR 30 billion; and
  • with an asset encumbrance level[1] below 15%.

 

Part

Description

Template

Applies to Small Firm?

Reporting Start Date

Reporting Frequency

A

Encumbrance Overview AE-ASS: Assets of the reporting institution

Yes

30 June 2014

Quarterly

 

  AE-COL: Collateral received by the reporting institution

Yes

30 June 2014

Quarterly

 

  AE-NPL: Own covered bonds and ABS issued and not yet pledged

Yes

30 June 2014

Quarterly

 

  AE-SOU: Sources of encumbrance

Yes

30 June 2014

Quarterly

B

Maturity Data AE-MAT: Maturity data

No

30 June 2014

Quarterly

C

Contingent Encumbrance AE-CONT: Contingent encumbrance

No

31 Dec 2014

Annually

D

Covered Bonds AE-CB: Covered bonds issuance

Yes*

30 June 2014

Quarterly

E

Advanced Data AD-ADV-1: Advanced template for assets of the reporting institution

No

31 Dec 2014

Semi-annually

 

  AD-ADV-2: Advanced template for collateral received by the reporting institution

No

31 Dec 2014

Semi-annually

* only required for those firms which have issued covered bonds

Specific Issues for Larger Firms

Contingent Asset Encumbrance

Contingent asset encumbrance requires firms to calculate levels of additional asset encumbrance (net of the impact of the institution’s hedging transactions) that would occur in the event of a:

  • 30% decrease in the fair value of encumbered assets, taking into account:
    • existing levels of overcollateralisation; and
    • the requirements of underlying contracts; and
  • 10% depreciation in “significant currencies”,[2] taking into account the additional assets that would become encumbered due to legal, regulatory or contractual provisions that could be triggered as a result.

More scenarios may be included in the future, with specific reference being made to a reduction in the credit rating assigned either to the entity pledging the assets or to the assets being pledged.

Advanced Data

Advanced reporting requires firms to complete a matrix of information on encumbered assets, split by reference to (i) assets received and posted, (ii) source of encumbrance and (iii) collateral type.  Sources of encumbrance include:

l central bank funding i.e. transactions with a central bank counterparty; l exchange traded derivatives

 

l OTC derivatives l repos with non-central bank counterparties
l collateral deposits (other than repos with non-central bank counterparties) l covered bonds
l asset backed securities (ABS) l debt securities other than covered bonds and ABS
l other sources of encumbrance    

Collateral types include:

 

l on demand loans l equity instruments
l debt securities: l loans (other than on demand loans):
  l covered bonds issued by:   l central bank and government loans
    l affiliates   l financial corporation loans
    l non-affiliates   l non-financial corporation loans:
  l ABS issued by:     l mortgage loans
    l affiliates     l non-mortgage loans
    l non-affiliates   l household loans
  l bonds issued by:     l mortgage loans
    l governments     l non-mortgage loans
    l non-governments: l other assets
      l financial corporations    
      l non-financial corporations    

Conclusion

Although granular in its demands, in reality, asset encumbrance reporting ‘merely’ requires firms to provide a different view of the same basic information they have been handling for some time.  In one sense, asset encumbrance is merely the flip side of the coin which is asset segregation.  Certainly, significant overlap exists between asset encumbrance reporting and other regulatory requirements such as liquidity reporting and CVA requirements under Basel III, resolution planning, Dodd-Frank, EMIR and the BCBS/IOSCO margin requirements for non-centrally cleared derivatives.  However, it is the framing and the selection of existing data that is the root cause of the problem.  In reality, simply changing the view of data forces many firms back to the drawing board.

Data management is fast becoming the new competitive frontier within the banking industry.  Ultimately, the winners will be the banks with the most agile data architecture, capable of allying and enriching both structured and unstructured data and able to serve a specific view of that information to selected recipients.  In that context, asset encumbrance reporting represents nothing more than another challenge in data management. The technology already exists to effectively meet this challenge – banks just need to embrace it or lose out.

November 2013

Copyright © Derivatives Risk Solutions LLP 2013

Email: drs@drsllp.com  
Web: www.drsllp.com  
Blogs: www.recoveryandresolutionplans.wordpress.com

www.regulatoryreform.wordpress.com



[1] Measured as (Total encumbered assets + Total collateral received re-used)/(Total assets + Total collateral received)

[2] A currency in which the institution has aggregate liabilities equal to or greater than 5% of its total liabilities