Approaching a win on CRD IV/CRR?

October 21, 2012

Very interesting developments in the long-running saga of the Basel III implementation within the EU – our old friends CRD IV and CRR. The EACT and many corporates have been arguing that it is illogical and unhelpful to allow CRD IV/CRR to override economically the value of the corporate exemption under EMIR. The issue is specifically over the application of CVA, which in layman terms means how much additional margin is charged on uncleared bilateral OTC derivative contracts, to allow for the higher capital requirements proposed under Basel III and CRD IV/CRR.

When we started to argue that the EU should modify its implementation of Basel III we received essentially the same response that we had faced when we first started lobbying on the derivative regulations. That amounted to a polite (or on occasions, slightly less than polite) suggestion that we take our ball and go away and play elsewhere, as we were wasting our own and everyone else’s time. Naïvely or not we and others have persevered on both issues.

From the outset our argument on CRD IV/CRR has been that there should be a read-across exemption from CVA for EMIR exempt contracts – the economic effect of which would be to make it no more disadvantageous to benefit from the exemption. The first success was to obtain the support of ECON within the European Parliament. Since then the work on the proposals more or less disappeared into the mire that is officially described as ‘trialogue’; the latter is a process that often seems either extremely high-minded and democratic but sometimes looks to outsiders as crude nationalistic horse-trading at European level.

What I have been hearing in the last couple of days is that under the Cypriot presidency we are making real progress to obtain the read-across exemption for which we have been arguing. This is extremely good news for the real economy, even if there is a sting in the tail. That sting arises because the current proposal by Cyprus is to define the exemption in terms of whether or not the underlying transactions qualify for hedge accounting. In other words, the corporate would not be able to rely on the wider (and more sensible) approach under EMIR; that approach uses the test of whether a transaction is “objectively measurable as reducing risk”.

This is somewhat frustrating to see hedge accounting being brought back onto the table. On EMIR we had to argue early in the process that hedge accounting should not be the necessary condition for an exemption. Quite simply, this would be a nonsense for two reasons: firstly, there are sound risk mitigation reasons why on occasion companies will not be able to use hedge accounting; and secondly, it is inappropriate to base a regulation on transitory accounting standards.

On the assumption that what I have been hearing is indeed correct – and all the signs suggest that it is – we in the EACT will now vigorously pursue a campaign to confirm the read-across exemption and, most importantly, to explain why it is vital to remove the hedge accounting test.

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One Response to “Approaching a win on CRD IV/CRR?”


  1. […] European Association of Corporate Treasurers (EACT) is at the forefront of lobbying efforts to bring in line the CVA charge application with […]


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