Rating Agency Developments

On November 2, 2016, DBRS published a report entitled Unified Interest Rate Model for European Securitisations. Report.

On November 1, 2016, DBRS published a report entitled Rating Portuguese Electricity Tariff Securitisations. Report.

On October 31, 2016, Fitch published its updated Insurance‑Linked Securities Methodology. Release.

European Financial Industry Developments

High Court Ruling on Brexit

On November 3, 2016, the UK High Court handed down a ruling^[1] preventing the UK government from triggering Article 50 TFEU—the EU legislation triggering the start of the administrative procedure for the UK's exit from the EU—without parliamentary approval.

Following the referendum on June 23, 2016, where the UK voted to leave the EU, Prime Minister Theresa May and the UK government announced that they would use the Crown's prerogative powers to trigger Article 50 as early as March 2017. The use of prerogative powers would allow the government to trigger Article 50 without the approval of the UK parliament. Claimants argued that the government's position had no basis in law, in particular under the UK's European Communities Act 1972, and that the government's position was contrary to fundamental constitutional principles of sovereignty of parliament.

Ruling in favor of the claimants, the High Court found that the government does not have the power under the Crown's prerogative to give notice pursuant to Article 50 for the UK to withdraw from the EU, meaning that any trigger of Article 50 requires parliament to vote on the matter. As a result, pending appeal, any decision to trigger Article 50 will require approval by MPs in the House of Commons, as well as approval by the House of Lords.

Following the ruling, the government has confirmed that it will seek to appeal the judgment to the UK Supreme Court. A hearing before the Supreme Court could take place as early as December.

The High Court ruling has important implications for the "Brexit" process. In particular, it gives the parliament an important role to play in the process. With a majority of MPs having voted against Brexit in the referendum, the outcome of a vote to trigger Article 50 cannot be certain. Having said that, MPs will not want to be seen as going against the will of the people, and outright opposition to the triggering of Article 50 seems unlikely. Instead, the practical effect is likely to be that the government will have to engage with and, at least to some extent, agree with parliament on the priorities of the UK's Brexit negotiation with the EU. This, in turn, may cause delay, increase uncertainty (as to timing and outcome) and will inevitably intensify the public debate about the UK's role outside the EU and the meaning of "Brexit."

The full judgment can be found here.

^[1] R(Miller and others) v Secretary of State for Exiting the EU [2016] EWHC 2768 (Admin)

EBA Report on Appropriate Reference Point for Target Level of Resolution Financing Arrangements Under BRRD

On October 31, 2016, the EBA published a report ("EBA-OP-2016-18") on the appropriate point for the target level for resolution financing arrangements. The EBA produced the report under Article 102(4) of the Bank Recovery and Resolution Directive ("BRRD") (2014/59/EU).

In the report, dated October 28, 2016, the EBA recommends changing the basis from covered deposits to a total liabilities‑based measure and, in particular, "total liabilities excluding own funds less covered deposits." Following a qualitative and quantitative assessment of various criteria, the EBA believes that this is the most appropriate target level basis for resolution financing arrangements. It considers this basis to be simple and transparent, and also consistent with the regulatory framework and calculation methodology for individual contributions. 

A further recommendation in the report is that if the European Commission issues a legislative proposal on amending the target level basis for national resolution financing arrangements, it should also consider adjusting:

• The percentage of the target level.
• The target level basis for the single resolution fund ("SRF").

The European Commission will consider the EBA's recommendations, and decide whether to submit a legislative proposal to amend the target level basis for resolution financing arrangements, by December 31, 2016.

European Commission Adopts Delegated Regulation on RTS on Additional Collateral Outflows

On October 31, 2016, the European Commission adopted a Delegated Regulation supplementing the Capital Requirements Regulation ("CRR") (Regulation 575/2013) in relation to regulatory technical standards ("RTS") for additional liquidity outflows corresponding to collateral needs that have resulted from the impact of an adverse market scenario on an institution's derivatives transactions (C(2016) 6867 final).

In March 2014, the EBA submitted a draft RTS to the European Commission. These proposed to take flows of collateral into account on a gross basis, contrary to the Basel Committee on Banking Supervision's ("BCBS") net approach. However, the assessment of the draft RTS was then delayed. The EBA submitted an amended draft RTS to the Commission for endorsement in May 2016. The method of calculation used in the RTS is founded on the historical look‑back approach developed by the BCBS.

The Council of the EU and the European Parliament must now consider the Delegated Regulation. If no objections are raised by either of them, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU ("OJ").

European Commission Establishes Expert Group on Sustainable Finance

On October 28, 2016, the European Commission published a decision creating a high-level expert group ("HLEG") on sustainable finance in the context of the capital markets union ("CMU").

The group is to have the following tasks:

• Submitting to the Commission a set of policy recommendations that set out the scale and dimensions of the challenges and opportunities that sustainable finance presents, and recommending a comprehensive program of reforms to the EU financial policy framework. The group is to explore operational steps that financial institutions and supervisors should take to protect the stability of the financial system from environmental, social and governance risks. The accompanying press release suggests that this policy road map is due to be completed by the end of 2017.
• Engaging in structured communication and advocacy towards interested parties about its work on sustainable finance.

Up to 20 senior experts will make up the group. They will commence work in January 2017. A call for applications for the selection of members of the group has been launched and will close on November 25, 2016.