Response to public hearing on the Consultation paper on the RTS on IMMV
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Furthermore and in context of threshold setting for applicable model validation process (standard vs. simplified) we are not convinced that the AANA calculated at group level is best aligned with the proportionate approach which drives ESAs considerations and taking into account the heterogeneity of counterparties subject to IM requirements. This is because the AANA calculated at consolidated group level catches up so called medium-small institutions affiliated in the group of large sophisticated major investment banks.
The group level AANA approach is adequate where EMIR regulation addresses matters of systemic risk prevention (i.e. requirement to exchange VM and IM) but not for the model approach validation process which is based on sophistication and experience with model validation. In this regard one should look to size of the derivative portfolio at concerned entity level and not to that from the whole parent group. In other words insurance companies, small/medium sized banks or investment companies being part of a financial group crossing the 750 billion AANA threshold on a consolidated level should benefit from simplified validation process where they remain taken individually under the threshold.
We request also the exclusion of the hedging transactions regarding the FX forwards and FX swaps from the clearing thresholds calculation for the UCITS and the AIFs. This exclusion could be justified by several reasons:
- The investment funds which represent more than 75% if eligible counterparties use OTC derivatives for hedging purpose mostly;
- FX represent a large part of asset classes used in order to hedge their investment classes denominated in different currencies;
- As the shares of funds can be subscribed by the public, we consider that these hedging transactions are intended to protect individuals against currency risk.
At last, we ask the exclusion on these FX transactions from the calculation of the AANA as this type of transactions is not eligible to VM nor IM exchange. We remind that the operational set up to implement IM is very burdensome for investment funds and that their exclusion from Phase 6 will be very welcomed.
Q1: What are the stakeholders’ views regarding the split between standard and simplified validation processes?
A split between standard and simplified validation processes is highly desirable. This split is justified and should be supported to take into consideration the differences between the types of counterparties: the most exposed counterparties on one hand and the small and medium sized ones on the other. Nonetheless, we ask the counterparties using the SIMM model to derogate from this process when this use has been already approved. In the same vein, we request all phase 5 and 6 non-brokers to be exempted from both internal back-testing and internal governance process (respectively article 14 and 18 of the Commission Delegated Regulation 2016/2251). At last, we consider that the provisions of the Article 11(15) of EMIR regarding the initial and ongoing validation of risk-management procedures, that IM models, should not apply to the users of the SIMM model as this model has been already reviewed and approved by NCAs. This check of compliance should be sufficient to fulfill the EMIR requirements.Q2: What are the stakeholders’ views regarding the Euro 750 bn threshold selected?
As long as we are below the 750 bn threshold, we would like to benefit from a lighter validation process, as well a phase-il approach: 2 years for phase 5 stakeholders, 3 years for phase 6 stakeholders.Furthermore and in context of threshold setting for applicable model validation process (standard vs. simplified) we are not convinced that the AANA calculated at group level is best aligned with the proportionate approach which drives ESAs considerations and taking into account the heterogeneity of counterparties subject to IM requirements. This is because the AANA calculated at consolidated group level catches up so called medium-small institutions affiliated in the group of large sophisticated major investment banks.
The group level AANA approach is adequate where EMIR regulation addresses matters of systemic risk prevention (i.e. requirement to exchange VM and IM) but not for the model approach validation process which is based on sophistication and experience with model validation. In this regard one should look to size of the derivative portfolio at concerned entity level and not to that from the whole parent group. In other words insurance companies, small/medium sized banks or investment companies being part of a financial group crossing the 750 billion AANA threshold on a consolidated level should benefit from simplified validation process where they remain taken individually under the threshold.
Q3: What are the stakeholders’ views regarding Article 2, Par 2, and the 50 Euro bn. threshold selected to allow the switch from simplified to standardised validation processes?
We are not in favour with the wording of the current provision as it lacks of clarity. The criteria of “complexity and interlinkages of the counterparty activity in OTC derivatives” must be specified to avoid any confusion of its understanding. Moreover, and in any case, this requirement should not be relevant as long as the SIMM model is used.Q34: What are the stakeholders’ views regarding the scope of the documentation requirements in Articles 27 and 28 for the simplified assessment?
From a buy-side perspective the documentation requirements under Article 27 and 28 seem still too burdensome and not efficient in light of the vast number of funds or sub-funds qualifying as counterparties under EMIR and for which the same process has to be undertaken. ESA’s should define specific rules helping national regulators and the asset management industry to comply on the basis of an efficient standardized “one-size fits for all” documentation procedures.Q37: What are the stakeholders’ views regarding the transitional and final provisions in general? Are there aspects that should further be considered?
The type of counterparties and the specificities of the asset classes underlying OTC derivatives should be detailed.We request also the exclusion of the hedging transactions regarding the FX forwards and FX swaps from the clearing thresholds calculation for the UCITS and the AIFs. This exclusion could be justified by several reasons:
- The investment funds which represent more than 75% if eligible counterparties use OTC derivatives for hedging purpose mostly;
- FX represent a large part of asset classes used in order to hedge their investment classes denominated in different currencies;
- As the shares of funds can be subscribed by the public, we consider that these hedging transactions are intended to protect individuals against currency risk.
At last, we ask the exclusion on these FX transactions from the calculation of the AANA as this type of transactions is not eligible to VM nor IM exchange. We remind that the operational set up to implement IM is very burdensome for investment funds and that their exclusion from Phase 6 will be very welcomed.