Frequently asked questions on the notification process for the recognition of netting agreements
Objective and scope of notification
Objective of the notification process
What is the objective of the notification process?
The objective of the notification process is to provide the ECB with unified information on credit institutions’ compliance with Articles 295 to 297 of Regulation (EU) No 575/2013 of the European Parliament and of the Council and thus facilitate the ECB’s task in the recognition of bilateral netting agreements as risk-reducing.
Does the notification process introduce any new substantive requirements in addition to those under Articles 295 to 297 of Regulation (EU) No 575/2013?
No, the notification process does not intend to introduce any new substantive requirements in addition to those under Articles 295 to 297 of Regulation (EU) No 575/2013.
Must credit institutions notify the ECB if they no longer wish to treat a particular type of netting agreement or counterparty as risk-reducing?
No, notification is not required in such cases.
How does the notification process interplay with any currently applicable national notification processes for significant credit institutions?
The notification process replaces national notification practices for the recognition of netting agreements applicable to significant credit institutions but does not affect notification requirements stemming from national law.
New types of agreements subject to notification
How should credit institutions treat existing types of netting agreements?
Credit institutions do not need to notify the ECB of netting agreements of a type that is already recognised as risk-reducing before the date of the first application of the notification process.
If a credit institution enters into a new netting agreement of a type it already treats as risk-reducing with a particular type of counterparty in a particular jurisdiction, does it need to notify the ECB?
No new notification is needed with regard to newly concluded netting agreements which are of a type of netting agreement already treated as risk-reducing with the particular type of counterparty in the particular jurisdiction.
Consolidation
Does the notification process apply only to agreements concluded by the credit institution itself or also to agreements concluded by its subsidiaries and affiliates?
The notification process applies to all new types of netting agreements which are to be used as risk reducing at all levels of consolidation applicable to the significant credit institutions in accordance with Regulation (EU) No 575/2013. It is sufficient that the significant credit institution at the highest level of consolidation for which the ECB conducts supervision notifies the ECB for all applicable levels of consolidation. For the avoidance of doubt, netting agreements entered into by entities not subject to the supervision of the ECB which do not fall within the scope of consolidation for which the ECB conducts supervision do not need to be notified.
Triggers for notification
What triggers the need for a credit institution to notify the ECB?
The need to notify the ECB is triggered by a credit institution’s intention to treat as risk-reducing pursuant to Articles 295 to 298 of Regulation (EU) No 575/2013 new types of contractual netting agreements and/or already recognised types of netting agreements with new types of counterparties in the same jurisdiction or in new jurisdictions (after the date of application of the notification process). When the requirements under Articles 296 and 297 of Regulation (EU) No 575/2013 are met and the notification has been made, the credit institution may treat that type of netting agreement or counterparty as risk-reducing.
Means of notification
What is the purpose of the cover letter of the notification?
The cover letter should be sent by the credit institution to the ECB to confirm that it complies with the requirements set out in Articles 296 and 297 of Regulation (EU) No 575/2013. Such letter is not to be read as an opinion of the credit institution confirming that the types of netting agreements notified are enforceable.
Who needs to sign the cover letter?
Credit institutions may follow their internal mandate policy. The notification process does not specify a particular signatory for the cover letter.
Is there a prescribed method of delivery for the notification?
There is no prescribed method of delivery. The cover letter with the notification may, for example, be sent via e-mail to the JST.
Explanation of certain terms used
Meaning of the “type” of counterparty
Why do credit institutions need to notify the ECB when they intend to treat as risk- reducing an already recognised type of netting agreement with a new type of counterparty?
The information on the type of the counterparty is necessary to ensure that the credit institution confirms that the legal opinion concerning the law applicable to the counterparty covers the type of counterparty with which the netting agreement is to be recognised as risk-reducing for the first time.
Is there a specific taxonomy of the “types” of counterparties that credit institutions need to notify to the ECB?
There is no prescribed taxonomy for identification of the “types” of counterparties for the purpose of notification. Footnote 7 of the template letter only provides examples of general types of counterparties for notification. If the credit institution has its own taxonomy, it may use such taxonomy in its notification. The taxonomy should be adequate to satisfy the purpose explained in the answer to the previous question.
Meaning of the “type” of agreement
What is meant by a “type” of netting agreement?
The “type” of netting agreement refers to a template netting agreement used by a credit institution with one or more counterparties. This template can be developed by banking or industry associations (such as the European Banking Federation, International Swaps and Derivatives Association, International Capital Market Association and Futures Industry Association, etc.) or by the credit institution itself.
For the avoidance of doubt, the term “type” does not need to specify whether the agreement falls within the definition of Article 295(a) or (b) of Regulation (EU) No 575/2013. However, credit institutions need to indicate whether the agreement is a cross-product agreement as specified in Article 295(c) of Regulation (EU) No 575/2013.
Does the credit institution need to notify each signed netting agreement?
No. Netting agreements of a type which are already treated by the credit institution as risk-reducing (either before applicability of the notification process or which have already been notified under the new notification process) for the type of counterparty in the particular jurisdiction may be concluded with new counterparties of the same type and in the same jurisdiction without notification.
Would a change in the governing law of an already recognised type of netting agreement cause that type of netting agreement to be considered a new type of netting agreement?
A change in the governing law of an already recognised type of netting agreement would cause that type of netting agreement to be treated as a new type of netting agreement and would trigger the notification.
Are CCP Rules and Regulations a type of netting agreement and, if so, how should they be notified?
The clearing membership agreement together with the relevant netting provisions contained in the CCP’s Rules and Regulations are a type of netting agreement that should be notified if the credit institution intends to treat them as risk reducing in accordance with Article 298 of Regulation (EU) No 575/2013.
Meaning of “core netting provision” and “material changes to the core netting provisions of the agreement”
Why do credit institutions need to notify the ECB when they make material changes to the core netting provisions of an already recognised type of netting agreement (footnote 3 of the template letter)?
The information on material changes to the core netting provisions (the contractual clauses which have been identified as the core of the contractual netting provisions – see examples in footnote 3 of the template letter) of already recognised types of netting agreements is necessary to ensure that the material changes to already recognised types of netting agreements are properly covered by the legal opinions as required under Article 296(2)(b) of Regulation (EU) No 575/2013.
What should be considered a material change to the core netting provisions of an already recognised type of netting agreement? Who can determine whether such change is material?
Changes to the core netting provisions of an already recognised type of netting agreement are material if, in the view of the credit institution (which does not necessarily need to be based on external legal opinions), such changes would affect the conclusions in netting opinions and would require the commissioning of a new or updated legal opinion. It is for the credit institution’s internal functions (e.g. risk management function, legal and/or compliance function, as the case may be) to determine whether the changes are material according to their processes.
For the avoidance of doubt, changes to the core netting provisions which in the view of the credit institution are non-material or recommended by the opinion or covered by the opinion and consequently do not require the commissioning of a new or updated legal opinion under Article 296(2)(b) of Regulation (EU) No 575/2013 do not need to be notified to the ECB.
How are material changes to core netting provisions to be notified?
Material changes to core netting provisions should be notified as if the netting agreement with such material changes was a new type of netting agreement. The notification should therefore specify all relevant opinions, including the opinion obtained in relation to any such material changes to a certain type of master agreement.