Submission #36

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Insurance Europe

Question 1. What costs will the proposed collateral requirements create for small or medium-sized entities, particular types of counterparties and particular jurisdictions? Is it possible to quantify these costs? How could the costs be reduced without compromising the objective of sound risk management and keeping the proposal aligned with international standards?

As indicated in Section 1 of the response, the new requirements would create significant operational burden on companies as all contracts in the OTC environment would have to be re-negotiated. Operational burden will be increased by eg introduction of very prescriptive collateral diversification requirements and, potentially, by non-alignment of rules at international level.

These types of cost can be reduced if the final technical standards define high level principles allowing for a practical and workable implementation, avoiding prescriptive rules with unnecessary operational burden and costs.

More details on Insurance Europe’s position can be found in section 1 of the response.

Question 2. Are there particular aspects, for instance of an operational nature, that are not addressed in an appropriate manner? If yes, please provide the rationale for the concerns and potential solutions.

A descriptive approach to collateral diversification creates significant operational burden; (especially) in the case of small insurance companies, with limited exposure on derivatives, such requirements have no economic benefits.

More details on Insurance Europe’s position can be found in section 1 of the response.

Question 3. Does the proposal adequately address the risks and concerns of counterparties to derivatives in cover pools or should the requirements be further tightened? Are the requirements, such as the use of the CRR instead of a UCITS definition of covered bonds, necessary ones to address the risks adequately? Is the market-based solution as outlined in the cost-benefit analysis section, e.g. where a third party would post the collateral on behalf of the covered bond issuer/cover pool, an adequate and feasible alternative for covered bonds which do not meet the conditions mentioned in the proposed technical standards? No answer.

Question 4. In respect of the use of a counterparty IRB model, are the counterparties confident that they will be able to access sufficient information to ensure appropriate transparency and to allow them to demonstrate an adequate understanding to their supervisory authority?

Insurance Europe believes that any legislation aimed at encouraging development of internal rating based (IRB) models should take into account the nature, scale and complexity of users of credit ratings. No differentiation between IRB and external credit ratings should be made to define assets’ eligibility.

More details on Insurance Europe’s position can be found in section 1 of the response.

Question 5. How would the introduction of concentration limits impact the management of collateral (please provide if possible quantitative information)? Are there arguments for exempting specific securities from concentration limits and how could negative effects be mitigated? What are the pros and cons of exempting securities issued by the governments or central banks of the same jurisdiction? Should proportionality requirements be introduced, if yes, how should these be calibrated to prevent liquidation issues under stressed market conditions?

Concentration limits would create operational burden in practice. Insurers with large asset portfolios and derivatives activity already have collateral management rules in place for risk management purposes, while insurers with very limited derivatives activity do not have the need, nor the resources to assess collateral from a concentration point of view. While the introduction of thresholds might look like a suitable solution for addressing concentration risk, the calculation and monitoring of thresholds produces disproportionate additional work and burdens for insurers. Where the value of collateral is limited in absolute terms, the risk of collateral liquidity is inexistent and concentration limits are not needed.

More details on Insurance Europe’s position can be found in section 1 of the response.

Question 6. How will market participants be able to ensure the fulfilment of all the conditions for the reuse of initial margins as required in the BCBS-IOSCO framework? Can the respondents identify which companies in the EU would require reuse or re-hypothecation of collateral as an essential component of their business models? No answer.

Upload files ECO-INV-14-107 Insurance Europe response to ESAs consultation on RTS for OTC derivatives.pdf

Name of organisation Insurance Europe