Discount rate and Equivalence: Difference between pages

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1.  
''European Union (EU) regulation.''


The quoted market rate for traded instruments quoted at a discount.  
In certain cases the EU may recognise that a non-EU legal, regulatory and/or supervisory regime is 'equivalent' to the corresponding EU framework.  


The market discount rate is quoted based on a percentage of the ''maturity amount''.  
That recognition, in turn, means authorities in the EU may rely on supervised entities’ compliance with the equivalent non-EU framework, and allow the entity to operate more freely than it might otherwise be able to (without equivalence).


This approach is designed to bring benefits to both the EU and third-country financial markets.


<span style="color:#4B0082">'''Example 1: Discount rate calculation'''</span>


The maturity amount for an investment is £10m.
The significance of the equivalence concept, for UK financial services, is that the UK might choose, post-Brexit, to keep its regulatory regime closely aligned with the EU regime, in order to benefit from the possibility of equivalence.


The gain for the single period from the start to the final maturity is £2m.


The periodic discount rate (d) is:
<span style="color:#4B0082">'''''Equivalence recognition unlikely'''''</span>


(d) = Gain / End amount
:"In addition to disrupting supply chains, Brexit has caused some fragmentation of banking activity for corporates.


= 2 / 10
:It seems increasingly unlikely that we shall see ‘equivalence’ recognition for UK/EU financial services that were not covered by the Trade & Cooperation Agreement.


= '''20%'''
:Treasurers will want to monitor the expiry dates (some in 2022) of various temporary permissions that came into effect post-Brexit, and to ask their banks whether there may be any implications for corporate clients."


:''The Treasurer magazine, Issue 4, 2021, p31 - Treasury in 2022.''


In the US the market discount rate is sometimes known as the ''discount yield''.


This is different from a [[yield]] or interest rate, which is conventionally quoted based on a percentage of the ''starting amount''.
<span style="color:#4B0082">'''''Equivalence and passporting'''''</span>


:"In brief, equivalence is the willingness of one regulator to accept that another regulator's rules achieve the same regulatory outcomes as their own, and so some element of cross-border activity can be allowed.


<span style="color:#4B0082">'''Example 2: Yield calculation'''</span>
:Equivalence must be agreed, but is subject to negotiation, market by market.


The starting amount for an investment is £8m.
:Passporting is the acceptance that once permitted to trade in one state, a business can trade in another without further compliance requirements."


The gain for the single period from the start to the final maturity is £2m.
:''The Treasurer magazine, March 2017, p12 - Technical briefing.''


The periodic yield (r) is:


(r) = Gain / Start amount
== See also ==
 
* [[Brexit]]
= 2 / 8
* [[EU-UK Trade and Cooperation Agreement]]
 
* [[European Economic Area]]
= '''25%'''
* [[European Union ]]
 
* [[Free movement of labour]]
 
* [[Gold-plating]]
Notice that the discount rate and the yield calculated above both relate to exactly the same deal.
* [[Harmonisation]]
 
* [[Passporting]]
£8m is invested now, and £10m is repaid at the end of one period.
* [[Prudential Regulation Authority]]
 
* [[Schengen Area]]
The discount rate of 20% and the yield of 25% both summarise the same deal, using different conventional bases.
* [[Single Market]]
 
 
 
2.
 
Cost of capital.
 
The yield used to calculate [[discount factor]]s and present values.
 
 
3.
 
The rate used to discount future liabilities of a Defined benefit pension scheme in order to calculate the present value of the liabilities, often for the purpose of comparing them with the market value of the scheme’s assets. 


Historically it was common to use the blended rate of investment return expected on the actual assets in the scheme, but typically now a market rate is used, such as the government bond or AA corporate bond yield for a fixed income security with a similar duration to that of the underlying liabilities.
4.
In the US, the interest rate that member banks pay the Federal Reserve when the banks use securities as collateral.  The discount rate acts as a benchmark for interest rates issued. 
Other central banks also have similar discount rates.
== See also ==
* [[CertFMM]]
* [[Cost of capital]]
* [[Discount]]
* [[Discount basis]]
* [[Discount instruments]]
* [[Discounted cash flow]]
* [[Interest rate]]
* [[Monetary policy]]
* [[Nominal annual discount rate]]
* [[Periodic discount rate]]
* [[Periodic rate]]
* [[Yield]]


== Other links ==
[https://ukandeu.ac.uk/rethinking-uk-financial-services-regulation-after-brexit/ Rethinking UK financial services regulation after Brexit, UK in a Changing Europe, December 2020]


===Other links===
[https://www.instituteforgovernment.org.uk/explainers/future-relationship-equivalence UK-EU future relationships: options for equivalence, Institute for Government, February 2020]
[http://www.treasurers.org/node/8837 Students: Triumph with timelines, The Treasurer, March 2013]


[[Category:Corporate_finance]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]

Revision as of 21:59, 30 November 2021

European Union (EU) regulation.

In certain cases the EU may recognise that a non-EU legal, regulatory and/or supervisory regime is 'equivalent' to the corresponding EU framework.

That recognition, in turn, means authorities in the EU may rely on supervised entities’ compliance with the equivalent non-EU framework, and allow the entity to operate more freely than it might otherwise be able to (without equivalence).

This approach is designed to bring benefits to both the EU and third-country financial markets.


The significance of the equivalence concept, for UK financial services, is that the UK might choose, post-Brexit, to keep its regulatory regime closely aligned with the EU regime, in order to benefit from the possibility of equivalence.


Equivalence recognition unlikely

"In addition to disrupting supply chains, Brexit has caused some fragmentation of banking activity for corporates.
It seems increasingly unlikely that we shall see ‘equivalence’ recognition for UK/EU financial services that were not covered by the Trade & Cooperation Agreement.
Treasurers will want to monitor the expiry dates (some in 2022) of various temporary permissions that came into effect post-Brexit, and to ask their banks whether there may be any implications for corporate clients."
The Treasurer magazine, Issue 4, 2021, p31 - Treasury in 2022.


Equivalence and passporting

"In brief, equivalence is the willingness of one regulator to accept that another regulator's rules achieve the same regulatory outcomes as their own, and so some element of cross-border activity can be allowed.
Equivalence must be agreed, but is subject to negotiation, market by market.
Passporting is the acceptance that once permitted to trade in one state, a business can trade in another without further compliance requirements."
The Treasurer magazine, March 2017, p12 - Technical briefing.


See also


Other links

Rethinking UK financial services regulation after Brexit, UK in a Changing Europe, December 2020

UK-EU future relationships: options for equivalence, Institute for Government, February 2020

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