German Parliament adopts Brexit Transitional Act

The German Parliament (“Bundestag”) adopted by a large majority the so-called Brexit Transitional Act (“Brexit-Übergangsgesetz”) submitted by the Federal Government on January 17, 2019, which will make provision for the agreed two-year transitional period following the UK's planned EU exit at the end of March. The Bill set forth, among other things, provisions in federal law referring to membership in the European Union Community which should continue to include the United Kingdom during the two-year transitional period. Representatives from different parties have criticized that the law will only apply from the day the planned withdrawal agreement between the UK and the EU comes into effect, which may therefore never be the case in a no-deal Brexit scenario. Due to the decision of the British Parliament on January 15, 2019 to vote against Prime Minister Theresa May's Brexit deal, negotiated with the European Union, it is currently more likely that the UK will leave the EU on March 29 without a negotiated deal, and thus that the Brexit Transitional Act might not come into effect.

ISDA publishes German Bank CDS Protocol

The International Swaps and Derivatives Association (ISDA) announced the launch of the ISDA 2019 German Bank CDS Protocol, designed to reflect changes being made to credit default swaps (CDS) on German bank reference entities on February 7, 2019.

Historically, senior German bank unsecured debt did not distinguish between non-preferred and preferred senior debt. Under a change in section 46f of the German Banking Act due to the German Law on “the exercise of options in the EU Prospectus Regulation and on the adaptation of other financial market laws” of 10 July 2018 implementing the Directive (EU) 2017/2399 of December 2017 (Gesetz zur Ausübung von Optionen der EU-Prospektverordnung und zur Anpassung weiterer Finanzmarktgesetze), banks are able to issue two types of senior unsecured debt obligations: senior preferred and senior non-preferred. This is similar to the position in other EU countries, for example equivalent French law for French banks. 

As a result, CDS contracts referencing senior non-preferred debt of a German bank will be documented using the “European senior non-preferred financial corporate” transaction type. The ISDA 2019 German Bank CDS Protocol allows parties to update certain existing transactions on German bank reference entities to apply the European senior non-preferred financial corporate transaction type, maintaining fungibility between legacy and new transactions.

EU Council authorizes banking package

The EU Council endorsed the final compromise texts of the proposed legislative measures comprising the EU Commission’s banking package, which consists of a (i) proposed Regulation to amend the Capital Requirements Regulation (CRR 2), (ii) proposed Directive to amend the Capital Requirements Directive (CRD 5), (iii) proposed Directive to amend the Bank Recovery and Resolution Directive (BRRD 2) and, (iv) a proposed Regulation to amend the Single Resolution Mechanism Regulation (SRMR 2).

The key changes of these measures aim to reduce risk and make the framework for regulating and supervising banks more efficient.

The Rules agreed include more risk-sensitive requirements, in particular in the areas of market risk, counterparty credit risk, and for exposures to Central Counterparties (CCPs); implementing methodologies that are able to reflect more accurately the actual risks to which banks are exposed; a binding Leverage Ratio (LR) to prevent institutions from excessive leverage; and a binding Net Stable Funding Ratio (NSFR) to address excessive reliance on short-term wholesale funding and reduce long-term funding risk. Also included is a requirement for Global Systemically Important Institutions (G-SIIs) to hold minimum levels of capital and other instruments which bear losses in resolution. This requirement, known as total loss-absorbing capacity, will be integrated into the existing Minimum Requirement for Own Funds and Eligible Liabilities (MREL) system, which is applicable to all banks, and will strengthen the EU’s ability to resolve failing G-SIIs while protecting financial stability.

In particular, specific measures to improve banks’ lending capacity are proposed to enhance lending to fund infrastructure projects and make CRD/CRR rules more proportionate for smaller, less complex institutions where some of the current disclosure, reporting and complex trading book-related requirements appear not to be justified by prudential considerations.

Following a legal revision, the EU Parliament and EU Council will be called on to adopt the proposed measures at first reading.

Investment statistics for the year 2018

The German Investment Fund Association BVI issued its updated funds raising report on February 13, 2019. 

“Even though it was a weak year for the stock markets, the fund industry developed positively during 2018. Investment funds attracted EUR 119 billion net in fresh capital. With the exception of the two record years of 2015 and 2017, new business is hovering at the previous years' level," said Tobias C. Pross, President of the German Investment Funds Association BVI, at the Association's annual media conference. At just under EUR 3 trillion in assets under management, the fund industry is still at a record high. Of this volume, EUR 1.6 trillion is invested in special funds, while retail funds account for EUR 974 billion, discretionary mandates account for EUR 352 billion and closed-ended funds make up EUR 9 billion. Since the end of 2008, total assets have almost doubled.

Within the open-ended investment fund segment, special funds remain the stable pillar of sales, recording inflows to the tune of EUR 94.7 billion during 2018. This was their third-best sales year. After retail funds started the year, as usual, with a strong first quarter (EUR 12.4 billion in inflows), turbulent stock markets curbed further inflows, particularly into equity funds. In contrast, balanced funds and property funds held their own during 2018 and achieved new business at the level of 2017. On balance, open-ended retail funds raised EUR 21.8 billion in new money.

Read: The statistic