Capital Requirements Derivative – what can you expect at ETRC?

January 18, 2017



Almost four years on from CRD IV/CRR being finalised, the EU’s banking sector now faces a revised Capital Requirements Directive and Capital Requirements Regulation (CRD V and CRR II), and a host of other legislative amendments, in a 500+ page package published late in 2016.


What impacts will this have on your activities? Mark Armstrong, EMEA Head of Listed Head of CIB Legal European Regulatory & Advisory from BNP Paribas, will be tackling the subject head on at ETRC this March 8 in London.


Ahead of his presentation there, we got the chance to ask him a few direct questions regarding to CRD IV/V as well as notional pooling.


Please tell us briefly about your background in regulation and compliance – what can participants of today learn from you?


I’m currently head of the European Regulatory and Advisory team for BNP Paribas in London and I’ve been doing this since right after the financial crisis – just after Lehman’s collapsed. My role effectively is to analyse and assist the business with understanding the impacts of all financial and banking regulations which impacts their business model in EMEA. My team is in London but I also coordinate with my colleagues in New York and Asia to understand the impacts of the global regulatory agenda to, once again, know the impacts on our business model on the corporate and institutional and banking side.


Although we are involved in the legal function, we get involved in all aspects of the regulatory agenda from analysing initial legislative proposals which come from the European Commission right through to assisting the bank in the implementation of those regulatory reforms – this can be anything ranging from EMIR to MiFID II and MiFIR as well as the fundamental review of the training group and some of the new regulatory capital reforms which came into place in 2014 phasing in in the next 4 to 5 years.

“In particular, I want to look at some of the new changes from CRD V – specifically the CRR2 package which is the next iteration of the capital requirements directive.”

At ETRC you will be updating us on CRD – can you please give us an overview of what you’ll be covering?


I thought it would be interesting to split what I’m going to talk about into 2 different sections.


The first section will be to look at the CRD IV changes which were brought in in 2014 and how they might potentially impact the transactions that European banks trade with commodity derivative dealers and participants in the commodities market. In particular, I want to look at some of the new changes from CRD V – specifically the CRR2 package which is the next iteration of the capital requirements directive. We had a proposal which was published by the European Commission in November 2016 and that’s going to have quite a significant impact on not only banks and investment firms that are subject to these requirements but also potentially to pricing and transactional services banks supply to participants to the commodities market.


So, to sum up, I’ll be covering the fundamental review of the trading book, the revised counterparty credit risk framework, some of the revisions in relation to bank exposures to CCP, some of the liquidity changes being ushered in under CRD IV and CRD V, the liquidity coverage ratio and the leverage ratio.


That’s the first part of the presentation. The second part will look at the proposals for a new prudential regime for investment firms which will also specifically look at a new prudential framework for commodity dealers and derivative firms. As everyone knows, under the current CRD IV framework there’s a certain exemption for commodity dealers, which is due to expire in 2020.


The European Commission was charged with during a review of the existing prudential regime for investment firms including specialist commodity dealers and in November the European Banking Authority launched a consultation in response to the European Commission’s request to look at how a new prudential regime for investment firms and commodity dealers could potentially be designed and structured. In December, as part of the data collection exercise which will input into the European Commission’s design of that new prudential framework, the European Banking Authority launched a data collection exercise which was specifically addressed to commodity derivative firms with the express purpose of inputting into the calibration of the new prudential regime for investment firms.

“[I] will look at the proposals for a new prudential regime for investment firms which will also specifically look at a new prudential framework for commodity dealers and derivative firms.”

Could you talk to us a bit about notional pooling?


Notional pooling is a cash management technique/instrument which banks offer to corporate clients whereby a single cash pool balance is calculated virtually by adding credit and debit balances of the clients participating account and that is effectively used for balance and interest compensation. CRD IV CRR effectively it limits what’s called on-balance sheet netting with respect to notional cash pooling as that has an adverse impact on banks in terms of the leverage ratio and the liquidity and coverage ratio.


Under CRD IV/CRR, netting is only permitting in certain conditions, which are set out in what’s called the credit risk mitigation framework and is generally not permitted for leverage ratio purposes. But when we look at leverage ratio framework (which is currently in the CRR) a bank is not permitted to use on balance sheet netting for the calculation of its total exposure measure because effectively there is a prohibition which says loans should not be netted with deposits. That prohibition in the CRR is consistent with the Basel III leverage framework. Similarly with regards to the liquidity coverage ratio (LCR) the European Banking Authority provided guidance in 2013 which indicated that the netting with cash pooling agreements for other liquidity inflows is not explicitly provided for liquidity reporting purposes.


This is all set to change under the Commission proposals. In November, the European Commission proposed a package of revisions to the existing CRR to implement the Basel IV revisions to the Basel capital framework and the net stable of funding ratio. That proposal includes clarifications relating to the treatment of notional cash pooling under the Basel leverage framework and I think part of my talk will be taking the audience through the potential impact of those leverage ratio revisions and the net stable funding ratio requirements as well as the revised CRR II proposal specifically in relation to notional pooling.


See more:


The consequence of a shift from bank regulation to trading regulation

"MIFID II - Overwhelming regulatory wave that would lead to a domino effect of changes in the energy market"


An Academic’s point of view on regulations of the energy market





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