QA2021-6 - Insolvency ranking - derivatives

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Feb 01, 2024
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Resolution Reporting Subject Matter Guidance
Guidance Documents Insolvency-ranking
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QA2021-6

Question


The matter refers to the insolvency rank of derivatives, namely those whose counterparty is under netting agreement and CSA (Credit Support Annex). Unless you have a different opinion, following an internal assessment, we concluded that only the derivative exposures totally covered by CSA collateral should be ranked 20 (Claims that benefit from an in rem guarantee (up to the amount of the value of the guarantee)), according to ranking in Portugal (attached, pages 57 to 62). The remaining part would be ranked as common claims (rank 9). While looking for your validation on this understanding, we would like to understand if this does not pose any constraints for reporting purposes at LDR, since, in sheet T07.00 (Derivatives), we would need to split, for the same operation, whenever applicable, the component ranked 20 and the other with rank 9.


Response


Regarding the question presented below concerning the insolvency ranking of derivatives, and assuming that netting is possible, either because of the terms of the agreement that meet the requirements under EU Directive 2002/47/EC (implemented in Portugal through Decree-Law 105/2004) or under the applicable legal regime for insolvency (in the case of Portugal, article 99 of the Código da Insolvência e da Recuperação de Empresas), we do agree with your interpretation, according to which derivatives that are subject to netting agreements and CSAs should be ranked 20 under the Portuguese insolvency ranking (claims that benefit from an in rem guarantee), while the remaining part should be ranked 9 (common claims). In terms of LDR guidance rules we do not see any obstacle with the split of a derivative instrument in relation to its insolvency ranking. For the purposes of table T07.00, derivatives have to be reported by netting set, which implies that only the liability side should be reported. Then, all the remaining rules from SRB’s guidance should be applied (e.g., reconciliation with the counterparty classes from the liability structure in T01.00; identification of insolvency ranking; identification of net mark-to-market value, collateral positions and early termination amount estimations, etc.). The reporting entity just needs to ensure that, even with the split of the instrument, SRB’s guidance rules are not breached. Nonetheless, we would like to recall that this is an IRT interpretation and not a formal feedback from SRB’s Q&A tool so, please keep in mind that some adjustments may be needed in light of the SRB’s experts feedback that are devoted to reporting issues.