Section 1 — General provisions applicable to valuations under Article 24 and Article 26(1) of Regulation (EU) 2021/23
General criteria
1. When performing the valuations referred to in Article 24 and Article 26(1) of Regulation (EU) 2021/23, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall consider circumstances affecting the expected cash flows of and discount rates applicable to a CCP’s assets and liabilities stemming from the failure of the CCP’s clearing members or non-default events.
The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall aim to fairly represent the CCP’s financial position in the context of the opportunities and risks it deals with.
2. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall disclose and justify the key assumptions used in the valuation.
Any significant deviation in the valuation from the assumptions or rules used by the CCP’s management in the preparation of financial statements and in the calculation of the CCP’s regulatory capital and capital requirements shall be supported by the best available information.
3. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall provide the best point estimate of the value of a given asset, liability, or combinations thereof.
Where appropriate, the results of the valuation shall also be provided in the form of value ranges.
4. Criteria laid down in this Regulation for the measurement of individual assets and liabilities of a CCP shall also apply to the measurement of portfolios or groups of assets or combined assets and liabilities, businesses, or the CCP considered as a whole, as the circumstances require.
5. The valuation shall subdivide creditors into classes according to their priority ranking under the applicable insolvency law, and shall include the following estimates:
(a)
the value of claims of each class under the applicable insolvency law and, where relevant and feasible, according to the contractual rights conferred on claimants;
(b)
the proceeds each class would receive if the CCP were wound up under normal insolvency proceedings.
When calculating the estimates pursuant to points (a) and (b), the valuer may follow the methodology set out in Article 22 of this Regulation.
6. Where appropriate and feasible, taking into account the timing and credibility of the valuation, the resolution authority may request several valuations. In that case, the resolution authority shall establish the criteria to determine how those valuations shall be used for the objectives set out in Article 24 of Regulation (EU) 2021/23.
Valuation date
The valuation date shall be one of the following dates:
(a)
a reference date as determined by the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, and set as close as possible before the expected date of a decision by the resolution authority to take resolution action in relation to the CCP in accordance with Article 71 of Regulation (EU) 2021/23 or to exercise the power to write down or convert instruments of ownership and debt instruments or other unsecured liabilities set out in Article 33 of that Regulation;
(b)
where a definitive valuation required by Article 26(2) of Regulation (EU) 2021/23 is conducted, the resolution decision date;
(c)
in relation to liabilities arising from contracts referred to in Article 29(1) of Regulation (EU) 2021/23, the date on which those contracts are terminated.
Sources of information
The valuation shall be based on any information which is available at the valuation date and deemed relevant by the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23. In addition to the CCP’s financial statements, valuation reports, related audit reports and regulatory reporting over a period ending as close as possible to the valuation date, that relevant information may include the following:
(a)
the updated financial statements and regulatory reporting prepared by the CCP as close as possible to the valuation date;
(b)
an explanation of the rules, key methodologies, assumptions and judgements used by the CCP to prepare the financial statements and regulatory reporting;
(c)
data contained in the records of the CCP;
(d)
relevant market data;
(e)
conclusions drawn by the valuer from discussions with management and auditors;
(f)
where available, supervisory assessments of the CCP’s financial condition, including information acquired pursuant to Article 18(1), point (h), of Regulation (EU) 2021/23;
(g)
industry-wide assessments of asset quality, where relevant to the CCP’s assets, as well as stress test results;
(h)
valuations of peers, adjusted where and as appropriate to capture the CCP’s specific circumstances;
(i)
historical information, adjusted where and as appropriate to eliminate factors that are no longer relevant, and to incorporate other factors that did not affect the historical information; or
(j)
trend analyses, adjusted where and as appropriate to reflect the CCP’s specific circumstances.
Impact of group arrangements
1. Where the CCP forms part of a group, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall take into account the impact of the existing contractual intra-group support arrangements on the value of the assets and liabilities where, on the basis of the circumstances, it is probable that those arrangements will be put into effect.
2. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall only take into account the impact of other formal or informal support arrangements within the group where, on the basis of the circumstances, it is probable that those arrangements will remain in place in the context of a group’s stressed financial condition or in resolution.
3. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall determine whether the resources of a CCP that is part of a group are available to meet the losses of other group entities.
Impact of interoperability arrangements
Where the CCP has entered into interoperability arrangements in accordance with Article 54 of Regulation (EU) No 648/2012, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall take into account the potential impact of such arrangements on the value of the assets and liabilities of the CCP.
Valuation report
The valuer shall prepare a valuation report for the resolution authority which shall include the following:
(a)
the information referred to in Article 25(4) of Regulation (EU) 2021/23, except in respect of provisional valuations as referred to in Article 26(1) of that Regulation;
(b)
the information referred to in Article 25(5) of Regulation (EU) 2021/23, except in respect of provisional valuations as referred to in Article 26(1) of that Regulation;
(c)
the valuation of the liabilities arising from contracts referred to in Article 29(1) of Regulation (EU) 2021/23;
(d)
a summary of the valuation including an explanation of best point estimate, value ranges and sources of valuation uncertainty;
(e)
an explanation of the key methodologies and assumptions used by the valuer when performing the valuation, together with an explanation of how sensitive the valuation is to the choices of those methodologies and assumptions, and, where feasible, an explanation of how those methodologies and assumptions differ from those used for other relevant valuations including where relevant any provisional resolution valuations;
(f)
any additional information which in the valuer’s opinion would assist the resolution authority or competent authority for the purposes of Article 24(1), (2) and (3) and Article 26(1), (2) and (3) of Regulation (EU) 2021/23.
Section 2 — Criteria for the carrying out of valuations for the purposes of Article 24(2) of Regulation (EU) 2021/23
General principles
1. The valuations carried out for the purposes referred to in Article 24(2) of Regulation (EU) 2021/23 shall be based on fair, prudent and realistic assumptions and shall seek to ensure that losses under the appropriate scenario are fully recognised.
Where such valuation is available, it shall inform the assessment of the competent authority or of the resolution authority, as appropriate when determining that a CCP is ‘failing or likely to fail’ as referred to in Article 22(1), point (a), of Regulation (EU) 2021/23.
Based on existing supervisory guidance or other generally recognised sources setting out criteria for the fair and realistic measurement of different types of assets and liabilities, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, may challenge the rules, assumptions, data, methodologies and judgements on which the CCP based the valuations that it used for the fulfilment of its financial reporting obligations or for the calculation of its regulatory capital or of its capital requirements and disregard them for the purposes of their valuation.
2. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall determine the most appropriate valuation methodologies, which may rely on the CCP’s internal models and rules where the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, deems it appropriate taking into account the nature of the CCP’s risk management framework and the quality of data and information available.
3. The valuations shall be consistent with the applicable accounting and prudential framework.
Areas requiring particular attention in the valuation
The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall particularly focus on areas subject to significant valuation uncertainty which have a significant impact on the overall valuation for the purpose of Article 24(2) of Regulation (EU 2021/23.
For the areas referred to in the first subparagraph, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall provide the results of the valuation in the form of best point estimates and, where appropriate, value ranges, as set out in Article 6(3). Those areas shall include:
(a)
contracts referred to in Article 29(1) of Regulation (EU) 2021/23;
(b)
loans, the expected cash flows of which depend on a counterparty’s ability, willingness or incentive to perform its obligations;
(c)
repossessed assets, the cash flows of which are affected by both the asset’s fair value at the time the CCP forecloses on the related security or lien, and the expected evolution of such value after foreclosure;
(d)
any other instruments measured at fair value where the determination of that fair value in accordance with accounting or prudential requirements applying to their marking to market or marking to model is no longer applicable or valid taking into account the circumstances;
(e)
goodwill and intangibles, where the impairment test may depend on subjective judgement, including as regards the reasonably attainable cash flow stream, discount rates, and the perimeter of cash-generating units;
(f)
legal disputes and regulatory actions, the expected cash flows of which may be subject to varying degrees of uncertainty relating to their amount or timing;
(g)
items including pension assets and liabilities and deferred tax items.
Factors affecting the valuation
1. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall take into account general factors that may affect the key assumptions on which the values of assets and liabilities in the areas referred to in Article 13 are based, including the following factors:
(a)
the economic and industry circumstances affecting the CCP, including default events, or non-default events and relevant market developments;
(b)
the CCP’s business model and changes in its strategy;
(c)
the CCP’s asset selection criteria;
(d)
circumstances and practices that are likely to lead to payment shocks;
(e)
circumstances affecting capital requirements;
(f)
the impact of the CCP’s financial structure on the capacity of the CCP to retain assets and contracts for the expected holding period and the CCP’s ability to generate predictable cash flows;
(g)
the CCP’s operating rules and loss allocation;
(h)
general or CCP-specific liquidity or funding concerns.
2. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall clearly separate any material unrealised gains identified in the valuation process, to the extent that those gains have not been recognised in the valuation and shall provide appropriate information in the valuation report of the exceptional circumstances that have led to those gains.
Section 3 — Criteria for the carrying out of valuations for the purposes of Article 24(3) and Article 26(1), second subparagraph, of Regulation (EU) 2021/23
General principles
1. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall assess the impact on the valuation of each resolution action that the resolution authority is likely to adopt to inform the decisions referred to in Article 24(3) of Regulation (EU) 2021/23.
Without prejudice to the valuer’s independence, the resolution authority may consult with the valuer in order to identify the range of resolution actions being considered by that authority, including actions contained in the resolution plan or, if different, any proposed resolution scheme.
2. The valuer in consultation with the resolution authority or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23 shall, where appropriate, present separate valuations that reflect the impact of a sufficiently diverse range of resolution actions.
3. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall ensure that, when the resolution tools are applied or when the power to write down or convert instruments of ownership and debt instruments or other unsecured liabilities referred to in Article 32 of Regulation (EU) 2021/23 is exercised, any losses on the assets of the CCP are fully recognised under scenarios that are relevant to the range of resolution actions being considered.
4. Where the values in the valuation performed by the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, diverge significantly from the values presented by the CCP in its financial statements, the valuer, or the resolution authority when conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall use the assumptions of their own valuation to inform the adjustments to the assumptions and the accounting policies necessary for the preparation of the updated balance sheet as required under Article 25(4), point (a), of Regulation (EU) 2021/23, in a way consistent with the applicable accounting framework.
The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall specify the amount of losses that they have identified but which cannot be recognised in the updated balance sheet, describe the reasons underlying the determination of such losses and provide the likelihood and time horizon of their occurrence.
5. Where instruments of ownership and debt instruments or other unsecured liabilities are converted to equity, the valuation shall provide an estimate of the post-conversion equity value of the new shares transferred or issued as consideration to holders of converted capital instruments or other creditors. That estimate shall form the basis for the determination of the conversion rate or rates pursuant to Article 33(7), point (b), of Regulation (EU) 2021/23.
Selection of the measurement basis
1. When selecting the most appropriate measurement basis or bases, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall take into account the range of resolution actions assessed in accordance with Article 15(1).
2. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall determine, on the basis of fair, prudent and realistic assumptions, the cash flows that the CCP can expect from its existing assets and liabilities following the adoption of the resolution action or actions identified and discount them at an appropriate rate determined in accordance with paragraph 6.
3. Cash flows shall be determined at the appropriate level of aggregation.
4. Where the resolution actions referred to in Article 15(1) require assets and liabilities to be retained by a CCP that continues to be a going concern entity, the valuer shall use the hold value as the appropriate measurement basis.
The hold value may, if considered fair, prudent and realistic by the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, anticipate a normalisation of market conditions.
The hold value shall not be used as the measurement basis where assets are transferred to a bridge CCP pursuant to Article 42 of Regulation (EU) 2021/23, or where a sale of business tool pursuant to Article 40 of that Regulation is used.
5. Where the resolution actions referred to in Article 15(1) envisage the sale of assets, the expected cash flows shall correspond to the disposal values referred to in Article 17(5) envisaged for the expected disposal horizon.
6. The discount rates shall be determined having regard to the timing of cash flows, to the risk profile, financing costs and market conditions appropriate to the asset or liability being measured, to the disposal strategy considered and to the financial position of the CCP after resolution.
Specific factors relating to the estimation and discounting of expected cash flows
1. When estimating cash flows, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall apply their expert judgement in determining key characteristics of the assets or liabilities being measured.
The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall also apply their expert judgement in determining how the continuation, potential renewal or refinancing, run-off or disposal of those assets or liabilities, as envisaged in the resolution action referred to in Article 15(1) affect those cash flows.
2. Where the resolution action referred to in Article 15(1) envisages a CCP holding an asset, maintaining a liability, or continuing a business, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, may take into account the following factors potentially affecting future cash flows:
(a)
changes in assumptions or expectations, as compared to those prevailing as of the valuation date, consistent with long-term historical trends and considered over a reasonable time horizon, consistent with the holding period envisaged for the assets or with the period envisaged for the recovery of the CCP;
(b)
additional or alternative valuation bases or methodologies that are considered appropriate by the valuer and consistent with this Regulation, including in the context of assessing the post-conversion equity value of shares.
3. As regards groups of assets and liabilities or businesses envisaged to be run off, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall take into account workout costs and benefits.
4. Where the situation of a CCP prevents it from holding an asset or continuing a business, or where a sale is otherwise considered necessary by the resolution authority to achieve the resolution objectives, the expected cash flows shall be valued at the disposal values expected within a given disposal period.
5. The disposal value shall be determined by the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, on the basis of the cash flows, net of disposal costs and net of the expected value of any guarantees given, that the CCP can reasonably expect in the prevailing market conditions through an orderly sale or transfer of assets or liabilities.
Where appropriate, having regard to the actions to be taken under the resolution scheme, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, may determine the disposal value by applying a discount for a potential accelerated sale to the observable market price of that sale or transfer.
When determining the disposal value of assets which do not have a liquid market, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall consider observable prices on markets where similar assets are traded or model calculations using observable market parameters, with discounts for illiquidity reflected, as appropriate.
6. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall consider the following factors that might affect disposal values and disposal periods:
(a)
the disposal values and disposal periods observed in similar transactions, appropriately adjusted to take into account differences in the business model and in the financial structure of the parties to those transactions;
(b)
the advantages or disadvantages of a particular transaction that are specific to the parties involved or to a subset of market participants;
(c)
the particular attributes of an asset or business that may only be relevant to a specific potential purchaser, or to a subset of market participants;
(d)
the likely impact of expected sales on the CCP’s franchise value.
7. When assessing the value of businesses for purposes of the use of the sale of business or of the bridge CCP tool, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, may take into account reasonable expectations of the franchise value. Such expectations of the franchise value shall include those resulting from a renewal of assets, from a refinancing of an open portfolio, or from a continuation or resumption of business in the context of the resolution actions.
8. A valuer, or a resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, that assesses that there is no realistic prospect for the disposal of an asset or business, shall not be required to determine the disposal value but shall estimate the related cash flows on the basis of the relevant prospects for continuation or run-off.
The first subparagraph shall not apply to the sale of business tool.
9. As regards parts of a group of assets or of a business that are likely to be liquidated under normal insolvency proceedings, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, may consider the disposal values and disposal periods observed in auctions involving assets of a similar nature and condition.
When determining the expected cash flows, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall take into account illiquidity, the absence of reliable inputs for the determination of disposal values, and the resulting need to rely on valuation methodologies based on unobservable inputs.
Methodology for calculating and including a buffer for additional losses
1. The valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall include in the valuation a buffer that reflects facts and circumstances supporting the existence of additional losses of uncertain amount or timing.
The assumptions supporting the calculation of the buffer shall be sufficiently explained and substantiated by the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23.
2. When determining the amount of the buffer, the valuer, or the resolution authority where conducting a provisional valuation pursuant to Article 26(1) of Regulation (EU) 2021/23, shall identify factors that could affect expected cash flows as a result of resolution actions likely to be adopted.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
