ISLA announces concerns about moratorium powers under BRRD
23 October 2017 London
Image: Shutterstock
Changes to moratorium powers under the Bank Recovery and Resolution Directive (BRRD) could seriously reduce the availability of securities for lending in the market, warns the International Securities Lending Association (ISLA).
In an open letter to the European Commission, ISLA CEO Andy Dyson spelled how changes to moratorium powers under the BRRD could “severely reduce levels of liquidity for markets across Europe”.
The letter comes in response to the European Commission’s proposal to amend the BRRD by introducing moratorium powers which aim to harmonise the use of moratoria tools used by resolution authorities across EU member states.
The proposed amendment was first revealed on 23 November 2016.
According to Dyson, the main implications are the lengthy durations of suspension.
He explained: “Moratoria have the effect of suspending payment and delivery obligations for up to a maximum of five working days.”
“It is currently unclear whether the in-resolution power could be utilised on multiple consecutive occasions thereby making the maximum period of suspension uncertain.”
Dyson suggested that this uncertainty could lead to a disproportionate shift of risk to pension funds, as well as regulated investment funds, private funds and other investors for whom asset managers serve as fiduciaries.
Another concern was the departure from the Financial Stability Board’s (FSB) key attributes.
“The proposed moratorium powers are inconsistent with the key attributes,” Dyson commented.
“The addition of multiple moratorium periods which might be used consecutively goes beyond the intended limitations of the FSB principles and poses a risk to the financial stability which the resolution seeks to maintain.”
The letter also touched upon the adverse impact on regulatory netting that the moratorium powers under the BRRD could bring.
“Lengthy and uncertain periods in which termination rights related to payment and delivery failures are suspended may undermine the recognition of netting for regulatory capital purposes in some jurisdictions.”
It added: “A need for increased regulatory capital, may have significant adverse effects on the functioning of the securities lending market.”
ISLA is one of the primary market bodies consulting with regulators to tackle market issues, such as moratorium powers.
In an open letter to the European Commission, ISLA CEO Andy Dyson spelled how changes to moratorium powers under the BRRD could “severely reduce levels of liquidity for markets across Europe”.
The letter comes in response to the European Commission’s proposal to amend the BRRD by introducing moratorium powers which aim to harmonise the use of moratoria tools used by resolution authorities across EU member states.
The proposed amendment was first revealed on 23 November 2016.
According to Dyson, the main implications are the lengthy durations of suspension.
He explained: “Moratoria have the effect of suspending payment and delivery obligations for up to a maximum of five working days.”
“It is currently unclear whether the in-resolution power could be utilised on multiple consecutive occasions thereby making the maximum period of suspension uncertain.”
Dyson suggested that this uncertainty could lead to a disproportionate shift of risk to pension funds, as well as regulated investment funds, private funds and other investors for whom asset managers serve as fiduciaries.
Another concern was the departure from the Financial Stability Board’s (FSB) key attributes.
“The proposed moratorium powers are inconsistent with the key attributes,” Dyson commented.
“The addition of multiple moratorium periods which might be used consecutively goes beyond the intended limitations of the FSB principles and poses a risk to the financial stability which the resolution seeks to maintain.”
The letter also touched upon the adverse impact on regulatory netting that the moratorium powers under the BRRD could bring.
“Lengthy and uncertain periods in which termination rights related to payment and delivery failures are suspended may undermine the recognition of netting for regulatory capital purposes in some jurisdictions.”
It added: “A need for increased regulatory capital, may have significant adverse effects on the functioning of the securities lending market.”
ISLA is one of the primary market bodies consulting with regulators to tackle market issues, such as moratorium powers.
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