The European Banking Authority (EBA) provided EU resolution authorities with a series of tools to carry out a swift and objective valuation of derivative liabilities, while minimising risks of breaching the principle that no creditor should be treated worse off than in liquidation. The approach applies a statutory valuation methodology based on the costs or gains that would be incurred by the counterparty in replacing the contract.
Derivative counterparties will be given the opportunity to provide evidence of commercially reasonable replacement trades within a certain deadline; if they do not exercise this option, then resolution authorities will apply a statutory methodology supported by observable market data or other relevant information.
Resolution authorities may establish the value of derivative liabilities as on the close-out date or as on the date when a price is available in the market. For centrally cleared derivatives, the final draft RTS take into account the applicable regulatory framework under the EU Market Infrastructure Regulation (EMIR) and provides for a process that relies in principle on the Central Counterparty (CCP) default and valuation processes.
When adopted by the Commission, these draft RTS will allow resolution authorities to conclude a potential resolution action including derivative liabilities on the basis of a reliable valuation in a short timeframe. In cases of particular urgency, resolution authorities may also apply resolution actions on the basis of provisional valuations.
Press release
Full RTS
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