|
|
ISDA and AFME consider that, whilst it is appreciated that it is not desirable for resolution authorities to be required to consider the particular valuation methodology in every derivatives contract on a case-by-case basis, it is important, as stated in the Consultation, to avoid “discrepancies with the insolvency counterfactual that could lead to breach the non-creditor-worse-off principle”. As such, we believe it is imperative that the valuation mechanism is aligned as closely as possible with the standard contractual close-out valuation mechanisms set out in market standard derivatives trading agreements such as the ISDA Master Agreements. A key concern relates to the assumption within the draft RTS that a counterparty would replace closed-out transactions. As discussed further below, this does not accord with market practice or align with the valuation provisions set out in the ISDA Master Agreements. In addition, fallbacks to mid-market prices are problematic and not market standard.
The organizations note that the derivatives liabilities most likely to be bailed-in are those liabilities which are not collateralised and are not required to be cleared via a central counterparty (CCP). Thus, non-financial counterparties who are not subject to collateral and clearing requirements (and not financial counterparties, who will be subject to collateral and clearing requirements) are those most likely to be affected by the potential bail-in of derivative liabilities. Counterparties of this type are likely to be ill-equipped to respond quickly to a forced close-out of derivatives transactions by executing replacement transactions (for example, a buy-side end user may have entered into a derivatives contract to hedge a specific financing but may not otherwise be in the general business of entering into derivative contracts).
The organizations feel strongly that in respect of derivatives transactions cleared via a CCP, the resolution authority or valuer should defer to CCP default procedures to calculate the relevant valuations without fallback to other valuation mechanisms.