SPAIN Law and Practice Contributed by: Jaime de la Torre and Jaime Juan Rodríguez, Cuatrecasas
4.7 Use of Derivatives Hedging
In general terms, the CRDV package establishes the following two main requirements. • The liquidity coverage requirement (LCR) assesses if the number of high-quality liquid assets (HQLA) owned by banks is sufficient to cover the liquidity needs over a stress period. In this regard, there are three tiers of HQLA (Level 1, Level 2A and 2B), and securitisations can only be eligible as Level 2B when the fol - lowing requirements are fulfilled: (a) the securitisation qualifies as STS; and (b) an external credit quality assessment has been conducted by an External Credit Assessment Institution meeting some requirements. • The net stable funding requirement (NSFR) has the main purpose of ensuring that banks do not suffer from a short-term funding crisis, by establishing the holding of a minimum level of stable funding. In this regard, in the securitisation context, an originator bank is required to establish a certain level of stable funding in relation to the assets held. In addi - tion, a bank that invests in a securitisation will be required to establish a certain amount of stable funding in relation to the securitisation that it is holding. The legal framework for insurance companies is contained in Law 20/2015 and Royal Decree 1060/2015, regarding the regulation, supervision and solvency of insurance and reinsurance enti - ties. The requirements in relation to other regulated financial entities (eg, alternative investments fund managers) are established in Law 22/2014, regulating venture capital entities, other closed- ended collective investment entities and man - agement companies of closed-ended collective investment entities.
Derivatives continue to be a common tool to hedge possible risks for SPEs, mainly interest rate risk, which is hedged by means of swaps and caps. The CNMV is the Spanish supervising body for the derivatives market, as well as the principal regulator of the entities operating in such mar - ket. When the relevant entity is a credit institu - tion, the Bank of Spain may also have certain supervisory or control functions. In any case, the relevant regulation on deriva - tives is as follows: • Spanish regulation – with regards to the use of derivatives as hedge instruments, Law 5/2015 (Article 35) lays out that management companies shall submit the annual report to the CNMV for each of the SPEs they man - age (as described in 4.4 Periodic Reporting ), which must include, inter alia, the total com - mitments arising from the derivatives in place (if any); and • European regulation – the Securitisation Reg - ulation (Article 21) sets forth that SPEs shall not enter into derivative contracts except for the purpose of hedging interest rate or cur - rency risk, and that such derivatives shall be underwritten and documented according to common market standards. Synthetic Securitisation In addition to employing derivatives instruments as hedging, in synthetic securitisation transac - tions a financial derivative instrument is used for risk transfer. Said synthetic securitisation transactions are permitted under both Span - ish and European regulations (Law 5/2015 and the Securitisation Regulation), as outlined in 5.1
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