New obligations around credit risk mitigation

New obligations around credit risk mitigation

What do banks need to know about the requirement to obtain a legal opinion when establishing credit protection arrangements? Hannah Fearn, an associate in the trade and export finance team in the London office of Sullivan & Worcester, explains the requirement and the recently-launched industry standard legal opinion.

Original news

BAFT and ITFA legal opinion to help banks’ regulatory compliance

A joint industry standard legal opinion for banks to use in satisfying new regulatory requirements in the EU has been announced by the Bankers Association for Finance and Trade (BAFT) and the International Trade and Forfaiting Association (ITFA). The joint legal opinion aims to allow BAFT and ITFA’s member institutions to reduce the cost and complexity for banks subject to EU rules, and to make it easier to do business under the English law version of the BAFT Master Participation Agreement (MPA).

What has fuelled the creation of this industry standard legal opinion?

When calculating capital requirements, institutions can take into account eligible forms of credit risk mitigation to reduce the amount of capital they are required to hold for a particular exposure. To be an eligible form of credit risk mitigation, a credit protection arrangement must meet the applicable criteria set out in the Capital Requirements Regulation (EU) 575/2013 (CRR).

Under CRR, art 194.1, an institution must be able to provide, upon request of the competent authority, the most recent version of the independent, written and reasoned legal opinion(s) that it used to establish whether its credit protection arrangements are legally effective and enforceable in all relevant jurisdictions.

ITFA, working together with BAFT, instructed Sullivan & Worcester to provide an industry standard legal opinion on the enforceability of the BAFT English law MPA for the purposes of CRR, art 194.1 to help facilitate this process for banks.

How will the new regulatory requirements in the EU affect credit risk mitigants?

The requirement that a credit risk mitigation technique must satisfy certain criteria before it can be taken into account in the calculation of risk-weighted exposure is not new for Basel III. In fact, the applicable requirements are broadly similar to the requirements under the equivalent legislation under the Basel II regime.

However, the requirement to obtain a legal opinion under CRR, art 194.1 is new and this requirement came as somewhat of a surprise to the industry. It potentially adds an extra layer of complexity and cost for banks entering into credit protection arrangements.

What is the scope of the legal opinio

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About the author:

Neeta has been working as a paralegal in Banking and Insolvency for the past 4 and a half years.

She started her legal career at Allen & Overy in 2008 in the midst of the global financial crisis and the collapse of Lehmans where she gained most of her experience.

Neeta also did a short stint in litigation at the Revenue and Customs Prosecutions Office. Neeta graduated with a 2:1 honours degree from University of London, Queen Mary College and went on to obtain a distinction from the College of Law in the Legal Practice Course. She moved to Lexis®PSL in April 2013.