General provisions
1. Where determining the treatment of shareholders and creditors under normal insolvency proceedings, the valuation shall only be based on information about facts and circumstances which existed and could reasonably have been known at the resolution decision date which, had they been known by the valuer, would have affected the measurement of the assets and liabilities of the CCP on that date.
2. Where determining the actual treatment of shareholders and creditors in resolution, the valuer shall rely on available information concerning facts and circumstances existing as of the date or dates on which shareholders and creditors receive compensation (‘actual treatment date or dates’).
3. The reference date of the valuation shall be the resolution decision date which may differ from the actual treatment date.
Where the valuer deems the impact of any discounting of the proceeds to be negligible, the undiscounted proceeds at the date the resolution action is taken may be directly compared with the discounted amount of hypothetical proceeds that shareholders and creditors would have received if the CCP entered into normal insolvency proceedings at the resolution decision date.
Inventory of assets and claims
1. The valuer shall establish an inventory of all identifiable and contingent assets owned by the CCP.
That inventory shall include assets for which the existence of associated cash flows is demonstrated or can reasonably be expected.
2. The CCP shall make available to the valuer a list of all claims and contingent claims against the CCP.
That list shall categorise all claims and contingent claims according to their priority under normal insolvency proceedings. The valuer shall be allowed to enter into arrangements for specialist advice or expertise as regards the consistency of the ranking of claims with the applicable insolvency law.
3. The valuer shall separately identify encumbered assets and claims secured by those assets.
Steps of the valuation
When determining whether a difference in treatment as referred to in Article 61(2), point (c), of Regulation (EU) 2021/23 exists, the valuer shall assess the following:
(a)
the treatment that shareholders and creditors in respect of which resolution actions have been taken would have received had the CCP entered normal insolvency proceedings, following the full application of the applicable contractual obligations and other arrangements in its operating rules, at the resolution decision date, disregarding any provision of extraordinary public financial support;
(b)
the value of the restructured claims following the application of resolution powers and tools and the value of other proceeds received by shareholders and creditors as at the actual treatment date or dates, discounted back to the resolution decision date if deemed necessary to enable a fair comparison with the treatment referred to in point (a);
(c)
whether the treatment referred to in point (a) exceeds the treatment referred to in point (b) for each creditor in accordance with their order of priority under normal insolvency proceedings, as identified according to Article 20.
Determination of the treatment of shareholders and creditors under normal insolvency proceedings
1. The method for conducting the valuation pursuant to Article 21, point (a), shall consist in determining the discounted amount of expected cash flows under normal insolvency proceedings.
2. Expected cash flows shall be discounted at the rate or rates reflecting, as appropriate, the timing associated with such expected cash flows, prevailing circumstances as of the resolution decision date, risk-free interest rates, risk premiums for similar financial instruments issued by similar entities, market conditions or discount rates applied by potential purchasers and other relevant characteristics of the element or elements being valued.
3. The methodology set out in paragraph 2 for the calculation of the discount rate shall not be used where particular discount rates relevant for the valuation are specified in applicable insolvency law or practice.
4. The valuer shall take the following into account in the determination of the discounted amount of expected cash flows under normal insolvency proceedings:
(a)
applicable CCP operating rules, contractual arrangements, insolvency law and practice in the relevant jurisdiction which could influence the valuation;
(b)
reasonably foreseeable administration, transaction, maintenance, disposal and other costs which would have been incurred by an administrator or insolvency practitioner, as well as financing costs;
(c)
the information on recent insolvency cases of similar entities, where available and relevant;
(d)
an estimate of the direct replacement costs incurred by clearing members, calculated in accordance with Article 23.
5. For assets traded on an active market, the valuer shall use the observed price, except where specific circumstances hamper the marketability of the assets of the CCP.
For assets not traded on an active market the valuer shall consider the following factors when determining the amount and timing of expected cash flows:
(a)
prices observed on active markets where similar assets are traded;
(b)
prices observed in normal insolvency proceedings or in otherwise distressed transactions involving assets of a similar nature and condition;
(c)
prices observed in transactions involving the sale of business or the transfer to a bridge CCP in a resolution context relating to similar entities;
(d)
the likelihood of an asset generating net cash inflows under normal insolvency proceedings;
(e)
expected market conditions within a given disposal period, including market depth and the ability of the market to exchange the relevant volume of assets within that period; and
(f)
the length of a given disposal period that reflects the implications of the applicable insolvency law.
6. The valuer shall consider whether the financial condition of the CCP would have affected the expected cash flows, including through restrictions on the administrator’s ability to negotiate terms with potential purchasers.
7. Where possible, and subject to any applicable provision of the relevant insolvency framework, the cash flows shall reflect the contractual, statutory, or other legal rights of creditors or normal insolvency practices.
8. The hypothetical proceeds resulting from the valuation shall be allocated to shareholders and creditors in accordance with their order of priority under the applicable insolvency law, as identified in Article 20.
Direct replacement costs incurred by the clearing members under normal insolvency proceedings
1. When calculating the costs referred to in Article 22(4), point (d), the valuer shall take into account a commercially reasonable estimate of the direct replacement costs incurred by clearing members to reopen, within an appropriate period, comparable net positions in the market, as set out in Article 61(3), first subparagraph, point (c), of Regulation (EU) 2021/23.
2. The valuer shall consider the following costs for clearing members:
(a)
the hypothetical credit exposures of the clearing members to the CCP at the time of reopening the comparable net positions, had those positions remained open at the CCP until that date;
(b)
any liquidity and concentration costs incurred by clearing members when reopening the comparable net positions;
(c)
any material unavoidable operating costs incurred by clearing members in relation to the new connections or transactions between clearing members and any counterparty or CCP, including membership, trading, clearing, payment, settlement and custody fees;
(d)
any additional material funding cost stemming from the difference in applicable margin requirements and default fund contributions and associated with the reopening of net positions with any counterparty or CCP.
Determination of the actual treatment of shareholders and creditors in resolution
1. The valuer shall identify all claims outstanding after the write-down or conversion of capital instruments and the application of any resolution actions and shall assign those claims to the legal and natural persons who were the CCP’s shareholders and creditors at the resolution decision date.
The valuer shall determine the actual treatment of the legal and natural persons who were the CCP’s shareholders and creditors at the resolution decision date in accordance with paragraphs 2, 3 and 4, except where those persons receive cash compensation as a result of the resolution.
2. Where the legal and natural persons who were the CCP’s shareholders and creditors at the resolution decision date receive equity compensation as a result of the resolution, the valuer shall determine their actual treatment by providing an estimate of the overall value of the shares transferred or issued as consideration to the holders of the capital instruments, debt instruments or other unsecured liabilities that have been converted. That estimate may be based on an assessed market price resulting from generally accepted valuation methodologies.
3. Where the legal and natural persons who were the CCP’s shareholders and creditors at the resolution decision date receive debt compensation as a result of the resolution, the valuer shall determine the actual treatment by taking into account the changes in contractual cash flows that result from the write-down or conversion, the application of other resolution actions and the relevant discount rate calculated in accordance with the methodology set out in Article 22(2) of this Regulation.
4. For any outstanding claim, the valuer may take into account, where available and together with the factors described in paragraphs 2 and 3, prices observed in active markets for the same or similar instruments issued by the CCP under resolution or other similar entities.
5. The valuer shall also consider the actual direct replacement costs incurred by clearing members and listed in Article 23(2) when comparing the actual treatment of shareholders and creditors in resolution with the valuation for the application of the ‘no creditor worse off’ principle.
Valuation report
The valuer shall prepare a valuation report for the resolution authority which shall include the following elements:
(a)
a summary of the valuation, including a presentation of valuation ranges and sources of valuation uncertainty;
(b)
an explanation of the key methodologies and assumptions adopted and of how sensitive the valuation is to these choices;
(c)
an explanation, where feasible, of why the valuation differs from other relevant valuations, including the resolution valuations conducted in accordance with Regulation (EU) 2021/23 or other prudential or accounting valuations.
Entry into force
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union .
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
