CDS capital charge voted down

A 'hair-raising' capital charge for credit default swaps (CDSs) in Europe that are not centrally cleared was voted down by a European Parliament committee last month. The Economic and Monetary Affairs Committee met on March 9 to vote on a number of proposed revisions to the European Union's capital requirements directive (CRD).

Among them was a proposal made by French Socialist MEP Pervenche Beres, which would have limited any regulatory capital benefits of CDSs to those cleared via a central counterparty in the EU.

"There were some hair-raising figures as to how that was going to affect regulatory capital requirements," an industry source told Risk. Although it would be difficult to calculate the exact amount of extra capital banks would have been forced to hold, the figures would have been "in the billions", the source estimated.

Although the proposal was ultimately voted down, the committee gave approval to a raft of other measures first mooted by the European Commission (EC) in October. This includes a specific call for regulation of CDSs and the setting up of a central clearing facility to be supervised by the EU. The committee wants legislative proposals for both to be in place by the end of 2009.

Elsewhere, the committee gave a green light to various changes to the CRD, which would be implemented by the EU's member states from the beginning of 2011. Largely in line with EC proposals, the committee approved a proposal that securitisation originators should retain at least 5% of the total value of any exposures securitised. Alternatively, originators can give an "explicit and unconditional" warranty, amounting to confirmation of an economic interest in the securitisation.

The committee also approved proposed limits on the amount of exposure financial institutions can have to a given client or group of clients. If the legislation comes into force, these exposures would have to be under EUR150 million or below 25% of their own funds. Under the proposals, institutions would have to report to supervisors on large exposures to other firms - a process the committee will try to formalise in co-operation with the Committee of European Banking Supervisors.

In response to a belief that national authorities may not be able to handle cross-border crises, the legislation would establish pan-European colleges of supervisors to deal with international financial institutions. However, the committee believes this should only be a "temporary step" until a stronger role for an EU supervisory system is established. This could take the form of a European system of banking supervisors, similar to the existing Eurosystem group of central banks, it said.

The committee added it supported moves by the EC to boost efforts to deal with liquidity risk. Whether amendments to the CRD become law hinges on approval by the European Parliament and the Council of Europe. The European Parliament will vote on the proposals during the week of April 20.

Mark Pengelly.

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