Commission Delegated Regulation (EU) 2016/1401Show full title

Article 2 U.K. Comparison between the destruction in value that would arise from the close-out and the bail-in potential of derivative contracts

1. For the purpose of Article 49(4)(c) of Directive 2014/59/EU, the resolution authority shall compare the following:

(a) the amount of losses that would be borne by the derivative contracts in a bail-in, obtained by multiplying:

(i)

the share, within all equally ranked liabilities, of liabilities arising from the derivative contracts determined as part of the valuation under Article 36 of Directive 2014/59/EU and not falling within the exclusions from bail-in pursuant to Article 44(2) of that Directive; by

(ii)

the total losses expected to be borne by all liabilities ranking equally to derivatives, including the derivative liabilities stemming from the close-out;

with

(b) the destruction in value based on an assessment of the amount of the costs, expenses, or other impairment in value that is expected to be incurred as a result of the close-out of the derivative contracts, and obtained by calculating the sum of the following elements:

(i)

the risk of an increased counterparty close-out claim arising from re-hedging costs expected to be incurred by the counterparty, by taking into account the bid-offer, mid-to-bid or mid-to-offer spreads in line with Article 6(2)(b);

(ii)

the cost expected to be incurred by the institution under resolution in establishing any comparable derivative trades considered necessary in order to re-establish a hedge for any open exposure or in order to maintain an acceptable risk profile in line with the resolution strategy. The establishment of a comparable derivative trade may be achieved by taking into consideration initial margin requirements and prevailing bid-offer spreads;

(iii)

any reduction to franchise value arising from the close-out of derivative contracts, including any valuation impairment for other or underlying assets that are linked to the derivative contracts being closed out, and any impact on funding costs or income levels;

(iv)

any precautionary buffer against possible adverse implications from close-out, such as errors and disputes in respect of transactions or collateral exchange.

2. The comparison under paragraph 1 shall be made before a decision to close-out is taken, as part of the valuation to inform decisions about resolution actions required under Article 36 of Directive 2014/59/EU. Once a delegated act adopted by the Commission pursuant to Article 36(15) of that Directive enters into force, the comparison shall follow the requirements set out in that delegated act.