Response to consultation on draft RTS on criteria for the identification of shadow banking entities
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In our view, the mere fact that an entity is supervised should be sufficient to exclude this entity from the scope of shadow banking. On top of that, we consider that it is not the role of banks to assess whether an entity, as long as it is regulated, is indeed providing banking services or performing banking activities in accordance with its authorization. Such assessment would be complex to implement and would create a huge operational burden for banks.
We would like to request confirmation of our understanding that the criteria of Article 1 and Article 2 are to be read on a cumulative basis, i.e. meaning that if under Article 1 (type of counterparty) a client is confirmed "regulated" in accordance with any of the legal acts listed in Annex I, we can exclude this client from “shadow banking entities” without having to carry out an assessment in accordance with article 2 (type of activity)?
In addition, we regret the absence of a materiality threshold in the RTS. This is a main deviation from the guidelines on limits on exposures to shadow banking entities which offer the possibility to disregard immaterial exposures (i.e. <0.25% of eligible capital).
This choice is not neutral in term of data collection. As stated in the guidelines, “the number of exposures below this materiality threshold is very significant for most institutions: these exposures represent around 97% of the total number of exposures […]”. The EBA should be aware that banks have already designed their processes and IT systems in accordance with the guidelines (i.e. by taking into account this parameter). It would be a complicated task for banks to step back.
Furthermore, we believe that the definition of a materiality threshold is consistent with the large exposures framework. The large exposure framework ensures that banks’ large exposures to a single client or a group of connected clients is properly monitored and limited (article 387 of CRR). An exposure to a client or a group of connected clients being considered as “large” when its value equals or exceeds 10% of Tier 1 capital (article 392 of CRR). In our view, setting a threshold does not undermine EBA’s objective to mitigate any specific risk arising from shadow banking exposures, as “disregarded” exposures are immaterial and therefore not likely to create risks that would require special attention. That being said, we invite the EBA to stick to the guidelines and therefore introduce the materiality threshold of 0.25% in the RTS. Moreover, we would welcome the clarification in the draft RTS (and in the 2015 Guidelines if necessary) of the capital to be used in the calculation of the materiality threshold knowing that CRR2 Large Exposures framework has changed from Eligible capital to Tier 1 capital in the definition of a “Large exposure”.
More generally, the future of the existing Guidelines (GL) 2015/20 on limits on exposures to shadow banking entities is unclear. On the one hand, this consultation paper confirms their “continued relevance” and broader objective (e.g. setting limits). This indicates the existing GL 2015/20 may remain in force. On the other hand, a delegated act is of a higher legal value than guidelines and will duplicate the definitions of shadow banking entities, banking services and activities, with the definitions included in the GL. The EBA should confirm that the existing GL 2015/20 will be amended so as to remove the definitions of shadow banking entities and related concepts from its provisions, so that EU regulation has only one definition of shadow banking entities.
Finally, we suggest making minor changes to the draft RTS in order to avoid any misunderstanding.
At the end of Recital (1): (…) This Regulation determines that entities authorised and supervised in accordance with Union legal acts (“regulated framework”) should not be identified as shadow banking entities.
[Removal of “to the extent that these entities provide services or perform activities included in their authorisation.”]
Under Article 1, Criteria for identifying entities
[change in the ranking order of the first 3 paragraphs as followed (paragraph 2 then paragraph 3 and then paragraph 1, as with the numbering of the draft RTS)]
1. Any entity that is authorised and supervised in accordance with any of the legal acts referred to in Annex I shall not be identified as a shadow banking entity for the purposes of Article 394 paragraph 2 of Regulation (EU) No. 575/2013.
2. Any entity that is exempted or optionally excluded from Regulation (EU) No 575/2013, Directive 2013/36/EU, Regulation (EU) No 648/2012 and Directive 2009/138/EC shall not be identified as a shadow banking entity for the purposes of Article 394 paragraph 2 of Regulation (EU) No 575/2013.
3. Any entity established in the Union or in a third country that offers banking services or performs banking activities as set out in Article 2 and that is not excluded according to paragraphs 1 and 2 [numbering modified] shall be identified as a shadow banking entity for the purposes of Article 394 paragraph 2 of Regulation (EU) No 575/2013.
Given that the requirement to report the 10 largest exposures to shadow banking entities under the article 394(2) of CRR pertains to Large Exposure provisions, we request clarification that exposures to entities that are exempted from the Large Exposures requirements according to Article 400 of CRR should not be included in that reporting.
- Introduction of a materiality threshold in line with EBA guidelines;
- Make clear that banks shall not investigate whether an authorised and supervised entity is indeed providing services or performing activities that comply with its authorization.
Regarding groups of shadow banking entities, Art. 394(2) of the CRR states that […] “institutions shall report the following information to their competent authorities in relation to their 10 largest exposures to institutions on a consolidated basis, as well as their 10 largest exposures to shadow banking entities”. The CRR specifies the “10 largest exposures to institutions” as “on a consolidated basis”. That specification is omitted when mentioning the “10 largest exposures to shadow banking entities”. Furthermore, article 1 of the draft RTS defines what a shadow banking entity is, not what a group of connected shadow banking entities should be. Can one infer from those omissions that exposures to shadow banking entities should be primarily calculated on an individual basis?
Conversely, applying the concept of groups of connected clients to shadow banking entities would be fraught with difficulties. Most financial groups are mixed: they include regulated as well as unregulated entities. We believe that considering the whole group as a “shadow banking group” by contagion would not make economic sense. Example: several European G-SIBs sponsor securitization conduits. These securitization vehicles are typically consolidated under IFRS10, whilst not consolidated for prudential purposes. Reporting the whole exposure to the European G-SIB on a consolidated basis in the top 10 exposures to shadow banking entities would not make sense in our view. At best, banks could aggregate exposures to shadow banking entities within the same financial group.
Regarding money market funds, we share the view that the coronavirus crisis has been a challenging period for MMFs. During March 2020, a great number of MMFs faced significant liquidity issues, like many other economic sectors. Discussions are ongoing to review the adequacy of MMF regulation from a prudential and economic point of view. In light of this, the EBA unfortunately considers MMFs (either UCITS or AIF) as shadow banking entities as the robustness of the MMF regulation is questioned.
We disagree with this inclusion of MMFs in the shadow banking scope. MMF leverage and liquidity are under dedicated regulatory constraints that are the most stringent when compared to other non-SBE funds. The vast majority of MMFs are UCITS and in addition they bear the MMFR (Money Market Fund Regulation) specific layer of regulation.
This new framework, quite recent in its application (since January 2019 on the existing funds and delivering a quarterly reporting since the 1st quarter 2020), has introduced a wide range of new stringent rules and has demonstrated its efficiency during the unforeseeable exogenous global Covid-19 sanitary crisis. MMFs were quite resilient despite the crisis intensity, as a result we do not see why the COVID-19 crisis episode should have as a consequence the integration of MMFs as shadow banking entities
We agree that MMFs underwent a series of unprecedented shocks during the Covid-19 crisis due to the global dimension of this event that impacted both the real economy and financial markets. However, disruptions were also observed in other components of the markets which affected in return the MMFs. In the end, MMFs recovered quite rapidly in the aftermath of the crisis and impacts to MMFs investors were limited to a performance impact of few basis points.
Lastly, it would be premature to include MMFs in the scope of shadow banking entities in the current context of the ongoing discussions on MMF regulation. This position should be reassessed in light of the outcomes of current reviews which aim at identifying whether additional reforms are necessary to be adopted.
This inclusion would be in contradiction with the very spirit of regulators to capture unregulated entities (art. 394(2) of CRR2). In our view, the inclusion of these regulated structures (UCITS MMFs or AIF MMFS) in the definition of shadow banking entities is counter intuitive.
In addition, if the treatment proposed for MMF were maintained in the final draft RTS, we believe it would be necessary to include a clause in the RTS (either in recitals or in article 1) specifying that this situation is temporary and will be reassessed in light of the outcomes of the ongoing discussions on MMF regulation.
Furthermore, this would also raise the question of the articulation of this project with the technical standards in relation to the determination of the overall exposure to a client or a group of connected clients in transactions with underlying assets (cf. Commission delegated regulation (EU) n° 1187/2014 of 2 October 2014) . When a bank is able to look through a structure by identifying all obligators of underlying assets of a transaction, we consider indeed that neither the structure (where required, i.e. applicable when the structure actually constitutes an additional exposure - see above-mentioned regulation), nor the underlying assets should be considered as shadow banking entities, except if the underlying assets actually meet the criteria set out in the draft RTS. Clarifications would therefore be needed on the above.
More specifically, we question the relevance of the “origination” criterion as many AIF funds, in France or in other member states, are authorised, under specific and stringent conditions specified in national laws, to originate loans. Considering as shadow banking entities AIF funds that have been authorized under national laws to grant loans is far too disproportionate in our opinion. We invite the EBA to reconsider the scope of this exception.
However, in order to avoid any interpretation issue and difference in treatment across banks, a single source / single list of third countries applying the Core Basel Principles will be necessary. We would therefore highly welcome a “golden source” reference to be published by regulators, which would be more practical in use for the interest to avoid potential differences in interpretations by institutions for the determination of “equivalence”.
However, for an efficient application of the proposed rule, we believe that the EBA should provide and maintain a list of equivalence decisions for each of the EU legal acts referred to in Annex I so as to enable banks to classify their various non-EU counterparties in an accurate and consistent way.
Also, we believe that the logic adopted for banks, based on Basel core principles for effective banking supervision, should be extended to insurers on the basis of Insurance Core Principles (ICP) for effective supervision of the International Association of Insurance Supervisors (IAIS).
Finally, we would like to raise the issue of third-country CCPs, which we believe are not intended to be classified as shadow banking entities. Whereas CRR equivalence in granted until 28 June 2022 for such CCPs which have applied for a Qualified CCP (QCCP) status, the situation is very unclear as to the treatment as a QCCP thereafter and it will depend on future formal equivalence decisions by ESMA. Therefore, we believe that specific rules should be defined to ensure a relevant and consistent treatment for such CCPs.
Question 1: Do you agree with the conditions of Article 1 paragraph 2 for identifying an entity as a non-shadow banking entity? Please provide reasons if you do not agree with any of the conditions or have comments with regard to any of them.
Paragraph 2 of article 1 provides that an entity that is authorized and supervised in accordance with any of the Union legal acts (see Annex 1) should fall outside of the scope of shadow banking for large exposure reporting purposes. We fully agree with this proposal. However, a clarification is necessary in relation to the articulation of all the conditions set out in article 1, especially those set out in paragraphs 1 and 2. Are they inclusive conditions?In our view, the mere fact that an entity is supervised should be sufficient to exclude this entity from the scope of shadow banking. On top of that, we consider that it is not the role of banks to assess whether an entity, as long as it is regulated, is indeed providing banking services or performing banking activities in accordance with its authorization. Such assessment would be complex to implement and would create a huge operational burden for banks.
We would like to request confirmation of our understanding that the criteria of Article 1 and Article 2 are to be read on a cumulative basis, i.e. meaning that if under Article 1 (type of counterparty) a client is confirmed "regulated" in accordance with any of the legal acts listed in Annex I, we can exclude this client from “shadow banking entities” without having to carry out an assessment in accordance with article 2 (type of activity)?
In addition, we regret the absence of a materiality threshold in the RTS. This is a main deviation from the guidelines on limits on exposures to shadow banking entities which offer the possibility to disregard immaterial exposures (i.e. <0.25% of eligible capital).
This choice is not neutral in term of data collection. As stated in the guidelines, “the number of exposures below this materiality threshold is very significant for most institutions: these exposures represent around 97% of the total number of exposures […]”. The EBA should be aware that banks have already designed their processes and IT systems in accordance with the guidelines (i.e. by taking into account this parameter). It would be a complicated task for banks to step back.
Furthermore, we believe that the definition of a materiality threshold is consistent with the large exposures framework. The large exposure framework ensures that banks’ large exposures to a single client or a group of connected clients is properly monitored and limited (article 387 of CRR). An exposure to a client or a group of connected clients being considered as “large” when its value equals or exceeds 10% of Tier 1 capital (article 392 of CRR). In our view, setting a threshold does not undermine EBA’s objective to mitigate any specific risk arising from shadow banking exposures, as “disregarded” exposures are immaterial and therefore not likely to create risks that would require special attention. That being said, we invite the EBA to stick to the guidelines and therefore introduce the materiality threshold of 0.25% in the RTS. Moreover, we would welcome the clarification in the draft RTS (and in the 2015 Guidelines if necessary) of the capital to be used in the calculation of the materiality threshold knowing that CRR2 Large Exposures framework has changed from Eligible capital to Tier 1 capital in the definition of a “Large exposure”.
More generally, the future of the existing Guidelines (GL) 2015/20 on limits on exposures to shadow banking entities is unclear. On the one hand, this consultation paper confirms their “continued relevance” and broader objective (e.g. setting limits). This indicates the existing GL 2015/20 may remain in force. On the other hand, a delegated act is of a higher legal value than guidelines and will duplicate the definitions of shadow banking entities, banking services and activities, with the definitions included in the GL. The EBA should confirm that the existing GL 2015/20 will be amended so as to remove the definitions of shadow banking entities and related concepts from its provisions, so that EU regulation has only one definition of shadow banking entities.
Finally, we suggest making minor changes to the draft RTS in order to avoid any misunderstanding.
At the end of Recital (1): (…) This Regulation determines that entities authorised and supervised in accordance with Union legal acts (“regulated framework”) should not be identified as shadow banking entities.
[Removal of “to the extent that these entities provide services or perform activities included in their authorisation.”]
Under Article 1, Criteria for identifying entities
[change in the ranking order of the first 3 paragraphs as followed (paragraph 2 then paragraph 3 and then paragraph 1, as with the numbering of the draft RTS)]
1. Any entity that is authorised and supervised in accordance with any of the legal acts referred to in Annex I shall not be identified as a shadow banking entity for the purposes of Article 394 paragraph 2 of Regulation (EU) No. 575/2013.
2. Any entity that is exempted or optionally excluded from Regulation (EU) No 575/2013, Directive 2013/36/EU, Regulation (EU) No 648/2012 and Directive 2009/138/EC shall not be identified as a shadow banking entity for the purposes of Article 394 paragraph 2 of Regulation (EU) No 575/2013.
3. Any entity established in the Union or in a third country that offers banking services or performs banking activities as set out in Article 2 and that is not excluded according to paragraphs 1 and 2 [numbering modified] shall be identified as a shadow banking entity for the purposes of Article 394 paragraph 2 of Regulation (EU) No 575/2013.
Question 2: Have you got any comments regarding the list of entities that, being exempted or optionally excluded from those four legal acts in Annex I, should not be considered as shadow banking entities?
We support that the draft RTS excludes from the definition of shadow banking entities for Large Exposure reporting the entities that are exempted or optionally excluded from the application of CRR, CRD, Solvency II, in line with the approach taken in EBA Guidelines. We also support the exclusion from that definition of entities exempted from EMIR due to their nature (supranational, public sector entities) and request clarification that those entities which are only subject to reporting requirements as per article 1(5) of EMIR (MDBs, PSEs, the European Financial Stability Facility and the European Stability Mechanism) fall in those exemption cases.Given that the requirement to report the 10 largest exposures to shadow banking entities under the article 394(2) of CRR pertains to Large Exposure provisions, we request clarification that exposures to entities that are exempted from the Large Exposures requirements according to Article 400 of CRR should not be included in that reporting.
Question 3: Conversely, what are your views concerning other entities exempted or optionally excluded from the other legal acts in Annex I and that would be identified as shadow banking entities? Please provide reasons in case you view that any of those entities should fall under the exemption in Article 1 paragraph 3 and therefore not be treated as shadow banking entities.
[left blank]Question 4: Have you got any other comments with regard to the content of Article 1 of the draft RTS? In your view, is it clear and easy to implement for the purposes of the reporting obligation of Article 394(2) of Regulation (EU) No 575/2013?
The current version of article 1 is difficult to implement (see question 1). We suggest minor amendments to ease its implementation and thus limit the operational burden on banks:- Introduction of a materiality threshold in line with EBA guidelines;
- Make clear that banks shall not investigate whether an authorised and supervised entity is indeed providing services or performing activities that comply with its authorization.
Regarding groups of shadow banking entities, Art. 394(2) of the CRR states that […] “institutions shall report the following information to their competent authorities in relation to their 10 largest exposures to institutions on a consolidated basis, as well as their 10 largest exposures to shadow banking entities”. The CRR specifies the “10 largest exposures to institutions” as “on a consolidated basis”. That specification is omitted when mentioning the “10 largest exposures to shadow banking entities”. Furthermore, article 1 of the draft RTS defines what a shadow banking entity is, not what a group of connected shadow banking entities should be. Can one infer from those omissions that exposures to shadow banking entities should be primarily calculated on an individual basis?
Conversely, applying the concept of groups of connected clients to shadow banking entities would be fraught with difficulties. Most financial groups are mixed: they include regulated as well as unregulated entities. We believe that considering the whole group as a “shadow banking group” by contagion would not make economic sense. Example: several European G-SIBs sponsor securitization conduits. These securitization vehicles are typically consolidated under IFRS10, whilst not consolidated for prudential purposes. Reporting the whole exposure to the European G-SIB on a consolidated basis in the top 10 exposures to shadow banking entities would not make sense in our view. At best, banks could aggregate exposures to shadow banking entities within the same financial group.
Question 5: In general, what are your views on the treatment of funds in these draft RTS? Do you agree with the approach adopted in these draft RTS, that follows the approach in the EBA Guidelines on limits on exposures to shadow banking entities, or alternatively should it be extended to capture those funds as shadow banking entities?
The EBA considers that regulated funds (either UCITS or AIF) should fall outside of the scope of shadow banking, with two exceptions for money markets funds and certain AIF funds. In general, we support the view that regulated funds should not be considered as shadow banking entities (SBE), which is in line with art. 394(2) of CRR2. (cf. “shadow banking entities which carry out banking activities outside the regulated framework […]”.)Regarding money market funds, we share the view that the coronavirus crisis has been a challenging period for MMFs. During March 2020, a great number of MMFs faced significant liquidity issues, like many other economic sectors. Discussions are ongoing to review the adequacy of MMF regulation from a prudential and economic point of view. In light of this, the EBA unfortunately considers MMFs (either UCITS or AIF) as shadow banking entities as the robustness of the MMF regulation is questioned.
We disagree with this inclusion of MMFs in the shadow banking scope. MMF leverage and liquidity are under dedicated regulatory constraints that are the most stringent when compared to other non-SBE funds. The vast majority of MMFs are UCITS and in addition they bear the MMFR (Money Market Fund Regulation) specific layer of regulation.
This new framework, quite recent in its application (since January 2019 on the existing funds and delivering a quarterly reporting since the 1st quarter 2020), has introduced a wide range of new stringent rules and has demonstrated its efficiency during the unforeseeable exogenous global Covid-19 sanitary crisis. MMFs were quite resilient despite the crisis intensity, as a result we do not see why the COVID-19 crisis episode should have as a consequence the integration of MMFs as shadow banking entities
We agree that MMFs underwent a series of unprecedented shocks during the Covid-19 crisis due to the global dimension of this event that impacted both the real economy and financial markets. However, disruptions were also observed in other components of the markets which affected in return the MMFs. In the end, MMFs recovered quite rapidly in the aftermath of the crisis and impacts to MMFs investors were limited to a performance impact of few basis points.
Lastly, it would be premature to include MMFs in the scope of shadow banking entities in the current context of the ongoing discussions on MMF regulation. This position should be reassessed in light of the outcomes of current reviews which aim at identifying whether additional reforms are necessary to be adopted.
Question 6: What would be the advantages and disadvantages of taking a broader approach with respect to the scope of funds included as shadow banking entities?
We believe that taking a broader approach to the scope of funds considered as shadow banking could lead to a non-meaningful and counter-intuitive outcome as it would lead to recognise as shadow banking entities funds that would not fit in that definition and with the spirit of the 2015 Guidelines. We do not support this approach as we already have misgivings about the proposed scope of funds considered as shadow banking entities (see our response to questions 5, 7 and 8).Question 7: What are your views with regard to the consideration of money market funds as shadow banking entities?
Despite recent events (see question 5), we consider that the MMFs should not be included in the scope of shadow banking entities. In our view, MMFs are highly regulated (as UCITS or AIF) and the risks associated with MMFs are adequately addressed by the MMFR.This inclusion would be in contradiction with the very spirit of regulators to capture unregulated entities (art. 394(2) of CRR2). In our view, the inclusion of these regulated structures (UCITS MMFs or AIF MMFS) in the definition of shadow banking entities is counter intuitive.
In addition, if the treatment proposed for MMF were maintained in the final draft RTS, we believe it would be necessary to include a clause in the RTS (either in recitals or in article 1) specifying that this situation is temporary and will be reassessed in light of the outcomes of the ongoing discussions on MMF regulation.
Furthermore, this would also raise the question of the articulation of this project with the technical standards in relation to the determination of the overall exposure to a client or a group of connected clients in transactions with underlying assets (cf. Commission delegated regulation (EU) n° 1187/2014 of 2 October 2014) . When a bank is able to look through a structure by identifying all obligators of underlying assets of a transaction, we consider indeed that neither the structure (where required, i.e. applicable when the structure actually constitutes an additional exposure - see above-mentioned regulation), nor the underlying assets should be considered as shadow banking entities, except if the underlying assets actually meet the criteria set out in the draft RTS. Clarifications would therefore be needed on the above.
Question 8: Do you face any difficulties identifying whether an alternative investment fund (AIF) should be considered as a shadow banking entity?
Clarifications is needed about the two criteria set out in article 1 (5) c) “not effectively prevented from originating exposures in the ordinary course of its business or from purchasing third-party exposures for its own account”. These criteria are too wide and ambiguous. For both situations, practical examples are welcomed (for example., what type of originations is targeted?).More specifically, we question the relevance of the “origination” criterion as many AIF funds, in France or in other member states, are authorised, under specific and stringent conditions specified in national laws, to originate loans. Considering as shadow banking entities AIF funds that have been authorized under national laws to grant loans is far too disproportionate in our opinion. We invite the EBA to reconsider the scope of this exception.
Question 9: Have you got any specific comments with regard to AIFs and in particular, with points (b) and (c) of Article 1 paragraph 5?
The reporting of the top 10 exposures to shadow banking entities is required quarterly; but in practice, data on leverage (in relation to alternative funds) is often only updated through annual reviews (and occasionally for certain ad hoc requests). We wonder it would not be more practical to use a static criterion, such as in a declaration of an investment strategy that involves leverage instead of the exact level of leverage achieved.Question 10: Do you agree with the description of banking services and activities as included in Article 2 of the draft RTS? Have you got any specific comments regarding any of the points included?
The two points in Article 2 seem to be equivocal in the sense that they are not mutually exclusive: paragraph (b) covers the activities of paragraph (a) but paragraph (b) does not appear to be an exact definition. This may lead to a risk that potentially “everything” could fall within the scope.Question 11: Do you agree with the possibility granted under paragraph 1 of Article 3 to prevent the identification of a bank in a third country as a shadow banking entity in the absence of an equivalence decision under Article 391 of the CRR?
We support the approach followed in the draft RTS that banks shall not be identified as shadow banking entities when authorised and supervised by a supervisory authority that applies banking regulation and supervision based on the latest Basel core principles for effective banking supervision.However, in order to avoid any interpretation issue and difference in treatment across banks, a single source / single list of third countries applying the Core Basel Principles will be necessary. We would therefore highly welcome a “golden source” reference to be published by regulators, which would be more practical in use for the interest to avoid potential differences in interpretations by institutions for the determination of “equivalence”.
Question 12: Have you got any comments regarding the approach set out in paragraph 2 of Article 3 for other entities established in third countries to prevent their identification as shadow banking entities?
We support the approach set out in paragraph 2 of Article 3 whereby non-bank entities shall not be identified as shadow banking entities when subject to a regulatory regime which is recognised by the EU as equivalent to the one applied in the EU for such entities.However, for an efficient application of the proposed rule, we believe that the EBA should provide and maintain a list of equivalence decisions for each of the EU legal acts referred to in Annex I so as to enable banks to classify their various non-EU counterparties in an accurate and consistent way.
Also, we believe that the logic adopted for banks, based on Basel core principles for effective banking supervision, should be extended to insurers on the basis of Insurance Core Principles (ICP) for effective supervision of the International Association of Insurance Supervisors (IAIS).
Finally, we would like to raise the issue of third-country CCPs, which we believe are not intended to be classified as shadow banking entities. Whereas CRR equivalence in granted until 28 June 2022 for such CCPs which have applied for a Qualified CCP (QCCP) status, the situation is very unclear as to the treatment as a QCCP thereafter and it will depend on future formal equivalence decisions by ESMA. Therefore, we believe that specific rules should be defined to ensure a relevant and consistent treatment for such CCPs.