On December 17, 2015, the EBA published final draft RTS on the valuation of derivatives for the purpose of bailing in derivative liabilities. Under the BRRD, a resolution authority may bail-in relevant derivative liabilities provided that the authority complies with certain conditions including exercising the bail-in power only upon or after closing out the derivatives and ensuring that derivatives subject to a netting agreement are bailed-in on a net basis following the terms of the netting agreement. Before exercising the bail-in power, a resolution authority is required to ensure that an independent valuation of the assets and liabilities of a firm is carried out. For derivative liabilities, the valuation will determine a value of those derivative liabilities at the moment of exercise of the resolution power. The EBA’s final draft RTS provide a methodology for resolution authorities to follow when comparing the destruction in value that would arise from the close-out with the losses that those derivatives would incur in a bail-in, principles for determining the point in time at which the value of a derivative should be established and measures for establishing the value of classes of derivatives. The EBA has submitted the final draft RTS to the European Commission for endorsement. Member states are required to implement the bail-in tool by January 1, 2016.
The final draft RTS is available at: http://www.eba.europa.eu/documents/10180/1312572/EBA-RTS-2015- 11+RTS+on+the+valuation+of+derivatives.pdf.