EU directives and their impact on netting
| DOI | https://doi.org/10.1108/eb024922 |
| Date | 01 February 1997 |
| Pages | 154-162 |
| Published date | 01 February 1997 |
| Author | Paolo Clarotti |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 5 Number 2
EU directives and their impact on netting
DG XV — European Commission, Rue de la Loi 200,
B-1049
Brussels, Belgium;
tel:
( + 32-2) 295.18.64; fax: ( + 32-2) 295.65.00.
Paolo Clarotti
Received: 16th January, 1997
Paolo Clarotti is Head of the Banking and
Financial Establishments Division of the
European Commission. He has published
numerous articles on banking and finan-
cial matters in a wide range of magazines
and reviews.
ABSTRACT
Nobody disputes the risk-reducing effect of net-
ting agreements in over-the-counter (OTC)
derivative
contracts.
There is an evident interest
for banking supervisors to promote such agree-
ments, in order to improve the soundness of
banks.
The European Union (EU) has started to
recognise
this in its Solvency Ratio Directive of
December 1989, limiting it to certain contracts
of netting by novation. But, the Basle Commit-
tee
consider
that all netting
agreements
by nova-
tion and close out netting should be
recognised
as risk reducing. The European Commission
has followed this advice and proposed two
direc-
tives, one of which was adopted in March
1996, in order to align European regulation
with the
Basle
guidelines.
However, the European Commission has
gone still further and, in May 1996, proposed
a directive which will also make most of the
netting agreements enforceable in the case of
failure of one of the parties.
As the above texts address mostly bilateral
netting, with the
emergence
of multilateral net-
ting, both the European Commission and the
Basle supervisors have decided to try to apply
to such agreements the rules on bilateral netting
with some adaptations, through interpretation
notes.
Only the experience of
the
coming years will
show if
legislation
is
needed
for the prudential
recognition
of multilateral netting.
'NETTING' DIRECTIVE
The first example of the recognition of
netting in EU prudential regulation is the
Solvency Ratio Directive (89/647/EEC),
where Annex II provides for recognition
for some contracts netted by novation. But
this limited recognition has been widened,
and will be further extended. The most
important piece of legislation in this respect
is the so-called netting directive of 21st
March, 1996 which entered into force on
1st July, 1996 (96/10/EC).
In fact, as the Basle Committee had
issued a decision on the supervisory recog-
nition of netting, which intends to recog-
nise bilateral close-out netting in the
context of the calculation of the capital
requirement for some over-the-counter
(OTC) derivatives, on 27th April, 1994 the
Commission adopted a proposal of direc-
tive in order to reach the same objective.
This proposal was approved in 1996 by the
European Parliament and the European
Council of Ministers.
The aim of this directive is to modify
Annex II of the Solvency Ratio Directive.
Annex II deals with the treatment of off-
balance-sheet items concerning interest and
foreign-exchange rates. The intention is to
Journal of Financial Regulations
and Compliance. Vol. 5, No. 2.
1997, pp. 154-162
© Henry Stewart Publications.
1358-1988
Page 154
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