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A Q&A client briefing on the Capital Requirements Regulation, Article 194 Legal Opinions in Denmark
The Capital Requirements Regulation[1] (the CRR) requires that credit institutions and investment firms satisfy certain requirements in relation to capital, liquidity and leverage including requirements to hold capital against exposure to credit risk originating from e.g. their lending activities.
Credit risk can be reduced by applying certain credit risk mitigation techniques such as requiring collateral or third party guarantees to secure repayment of any loans or advances made by the relevant institution or by entering into credit derivatives which protect the relevant institution from certain credit events. If the credit risk mitigation is deemed to be effective, i.e. if it meets certain eligibility criteria in the CRR, the credit risk will be reduced which in turn will also reduce the otherwise applicable capital requirement.
One of the criteria for recognising credit risk mitigation is the presence of a reasoned legal opinion which confirms that the credit protection arrangement in question is effective and enforceable in the relevant jurisdiction.
In this Q&A we are highlight some of the aspects of the such CRR 194 opinions.
What is a CRR 194 opinion?
A CRR 194 opinion is a reasoned legal opinion provided to a lending institution under article 194 of the CRR confirming that a credit protection arrangement is effective and enforceable in all relevant jurisdictions.
Is it mandatory to obtain a CRR 194 opinion?
If a lending institution applies or intends to apply credit risk mitigation techniques when calculating its capital requirements in respect of credit risk such lending institution must upon request of the competent authority (i.e. the relevant national regulator) provide it with a reasoned legal opinion which confirms that the credit protection arrangement is effective in the relevant jurisdiction(s).
How does a CRR 194 opinion differ from a capacity or an enforceability opinion normally encountered in finance transactions?
The main difference between a CRR 194 opinion and an ordinary capacity or enforceability opinion is that a CRR 194 opinion is “reasoned”, i.e. it will specifically state for which reasons the lawyer deems the credit protection arrangement in question to be effective and enforceable. This will rarely be the case in e.g. an enforceability opinion which will simply state that subject to certain assumptions and qualifications the finance documents are legal, valid and binding and enforceable in accordance with their terms without providing an additional reasoning or analysis.
In addition, a CRR 194 opinion will contain additional assumptions which differ from the ones normally included in a capacity or an enforceability opinion and which will pertain to the lending institutions compliance with the various CRR requirements in relation to the eligibility of the various credit mitigation techniques.
It is necessary to obtain a CRR 194 opinion each time the lending institution enters into a transaction which utilises credit risk mitigation techniques?
Not necessarily. There is no explicit requirement to obtain a transaction specific CRR 194 opinion each time the lending institutions enters into a specific transaction.
The European Banking Authority (EBA) has indicated in its single rulebook Q&A that a lending institution may rely on a generic CRR 194 opinion depending on the nature of the transaction. More specifically the EBA states that: “If an institution engages in the same type of transaction, with counterparties located in the same jurisdiction and uses the same credit risk mitigation technique, then it can rely on the same opinion."
If a lending institution has adopted a standard netting agreement which it utilises across the board or relies on standard form mortgages etc., it could rely on a generic CRR 194 opinion.
However, any such reliance comes with the caveat that it is ultimately the lending institution’s responsibility to ensure that the generic opinion can be applied to the specific transaction, i.e. that the nature of the transaction is the same, the affected jurisdiction is identical, any underlying collateral is similar to the one referred to in the CRR 194 opinion etc.
Is it necessary to refresh CRR 194 opinions from time to time?
There is no explicit requirement in the CRR to that effect. However, article 194 of the CRR envisages that the opinions will be refreshed from time-to-time cf. the requirement to provide the competent authority with the “most recent version” of the opinion.
The issue about updating CRR 194 opinions is especially relevant in cases where the lending institution relies on a generic opinion.
We recommend that lending institutions have systems in place which monitor legal developments in the affected jurisdictions which may impact the CRR 194 opinions as well as adequate procedures to ensure that the CRR 194 opinions are reviewed and to the extent necessary are updated on a regular basis.
Is it necessary to appoint outside counsel to issue a CRR 194 opinion?
Article 194 states that the competent authority upon request must be provided with the most recent version of the independent, written and reasoned opinion.
This seems to indicate that the CRR 194 opinion should be prepared by outside counsel as such counsel per se would be independent from the lending institution.
The EBA has however stated that it may also be provided by internal counsel as long inter alia the condition of independency is fulfilled. If the lending institution contemplates to use its own internal counsel to prepare the relevant opinion, we would recommend that internal governance structures are in place in order to ensure that independence can be proved to the competent authority if needed.
What should a CRR 194 opinion cover?
A CRR 194 opinion should first and foremost confirm that the contemplated credit protection arrangement is effective and enforceable in the relevant jurisdiction. However, it should also specifically address and confirm that the general principles governing the eligibility of credit risk mitigation techniques as far as they concern legal matters have been fulfilled, cf. article 194 as well as the specific requirements in respect of the relevant credit protection agreement, i.e. section 2 (Eligible forms of credit mitigation) and section 3 (Requirements) of Chapter 4, Title II, Part 3 of the CRR.
Download Client Briefing
Our client briefing on CRR 194 Opinions in Denmark is available for download here:
Further Information
For more information on banking and financial regulation law in Denmark, please contact Dr. Andreas Tamasauskas or Michael Carsted Rosenberg at Carsted Rosenberg.
This briefing is intended to provide general information on CRR Art. 194. It is not intended to provide definitive legal or tax advice. No legal, tax or business decisions should be based solely on its content. The briefing does not necessarily deal with every important topic and is not designed to provide legal or other advice. It shall not be used as a substitute for legal advice and none may be inferred. It is only intended for general information on matters of interest. While we endeavour to represent the information as accurately and correctly as possible, we cannot accept any responsibility for any errors or omissions.
[1] Regulation (EU) (575/2013) of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012