In April 2019, the EU parliament passed the EU’s ‘Banking Package’ whose implementation consists of significant amendments in the Capital Requirements Regulation (CRR II), the Capital Requirements Directive (CRD V), the Bank Recovery and Resolution Directive (BRRD II) and the Single Resolution Mechanism (SRMR II). Financial institutions subject to CRR II will apply the revised regulation on 28 June 2021.
For German credit institutions and investment firms WM Datenservice has updated the reporting template – latest by Q4 2020, information on attestation and transparency needs to be reported in the new template. Without an independent attestation and transparent disclosure, a capital charge of 1,250% will be applied from 28 June 2021 onwards.
The amendments to CRR II also have implications on banks’ required capital calculation of equity investments in funds. In particular:
- The amended Article 132 offers banks the possibility to calculate their risk-weighted exposure of fund investments by applying the look-through approach (LTA) or the mandate-based approach (MBA). These approaches are materially more exact than the fallback approach, which applies a general risk weight of 1,250% to the total risk position in the fund.
- Both the LTA and the MBA require detailed information about the specific fund’s investments (at minimum about the fund’s mandate) which might not be easily accessible to the investing bank. Therefore, Article 132 allows banks to instruct third parties (e.g. fund management companies) to calculate the risk-weighted exposure of investments in collective investment funds.
- For banks to refer to the risk-weighted exposure calculated by third parties applying either LTA or MBA, Article 132 requires the correctness of the calculation to be confirmed by an external auditor. Should a bank fail to access such confirmation, their equity investments in funds must be risk-weighted by 1,250% (i.e. are subject to the fallback approach).
- In case such confirmation can be obtained, banks should further clarify whether they can access the look-through calculations carried out by the third party in an unrestricted manner. If such access is not provided for, the applicable risk weight must be multiplied by a factor of 1.2.
What does this mean to Fund Managers and their clients?
CRR regulated credit institutions and investment firms’ capital requirements for investments in funds will substantially increase starting from June 2021 without an independent attestation on the look-through calculations (“CRR Bescheinigung”). If such an attestation is available, investors’ capital requirements may be penalised in case they do not have any access to the detailed look-through calculations. Overall, this change in regulation may incline CRR regulated fund investors to re-evaluate the economics of their current investment positions.
WM Datenservice Reporting: How is ‘disclosure’ and ‘attestation’ communicated to German CRR regulated fund investors?
In collaboration with BVI, WM Datenservice upgraded the existing CRR disclosure template (table GJ1) on risk weight and foreign currency reporting. By means of a new codification system, the new template flags whether asset managers opt into disclosing look-through calculations and whether an attestation on the calculations’ correctness could be provided by an external auditor. While the selected code modality will trigger capital implications only from June 2021 onwards, asset managers have been requested to already report their approach on ‘disclosure’ and ‘attestation’ starting from 1 October 2020.
Without third party attestation, funds’ capital charges are increased to 1,250%.
Without providing transparency on data and CRR calculation methodology to end-investors, a penalty of 1.2 times risk weight is applied.