Equivalence and Periodic discount rate: Difference between pages

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''European Union (EU) regulation.''
__NOTOC__
A cost of borrowing - or rate of return - expressed as:


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 excess of the amount at the end over the amount at the start
*Divided by the amount at the end


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.
==Example 1==
GBP 1 million is borrowed.  


GBP 1.03 million is repayable at the end of the period.


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 periodic discount rate (d) is:


<span style="color:#4B0082">'''''Equivalence recognition unlikely'''''</span>
d = (End amount - start amount) / End amount


:"In addition to disrupting supply chains, Brexit has caused some fragmentation of banking activity for corporates.
= (1.03 - 1) / 1.03


:It seems increasingly unlikely that we shall see ‘equivalence’ recognition for UK/EU financial services that were not covered by the Trade & Cooperation Agreement.  
= 0.029126


: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."
= '''2.9126%'''


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


==Example 2==
GBP 0.97 million is borrowed or invested


<span style="color:#4B0082">'''''Equivalence and passporting'''''</span>
GBP 1.00 million is repayable at the end of the period.


:"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.
The periodic discount rate (d) is:


:Passporting is the acceptance that once permitted to trade in one state, a business can trade in another without further compliance requirements."
(End amount - start amount) / End amount


:''The Treasurer magazine, March 2017, p12 - Technical briefing.''
= (1.00 - 0.97) /  1.00


= 0.030000


== See also ==
= '''3.0000%'''
* [[Brexit]]
* [[EU-UK Trade and Cooperation Agreement]]
* [[European Economic Area]]
* [[European Union ]]
* [[Free movement of labour]]
* [[Gold-plating]]
* [[Harmonisation]]
* [[Passporting]]
* [[Prudential Regulation Authority]]
* [[Schengen Area]]
* [[Single Market]]




== Other links ==
==Example 3==
[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]
GBP  0.97 million is borrowed.  


[https://www.instituteforgovernment.org.uk/explainers/future-relationship-equivalence UK-EU future relationships: options for equivalence, Institute for Government, February 2020]
The periodic discount rate is 3.0000%.


[[Category:Accounting,_tax_and_regulation]]
Calculate the amount repayable at the end of the period.
[[Category:The_business_context]]
 
===Solution===
The periodic discount rate (d) is defined as:
 
d = (End amount - start amount) / End amount
 
d = 1 - (Start amount / End amount)
 
 
''Rearranging this relationship:''
 
(Start amount / End amount) = 1 - d
 
Start amount = End amount x (1 - d)
 
Start amount / (1 - d) = End amount
 
End amount = Start amount / (1 - d)
 
 
''Substituting the given information into this relationship:''
 
End amount = GBP 0.97m / (1 - 0.030000)
 
= GBP 0.97m / 0.97
 
= '''GBP 1.00m'''
 
 
==Example 4==
An investment will pay out a single amount of GBP 1.00m at its final maturity after one period.
 
The periodic discount rate is 3.0000%.
 
Calculate the amount invested at the start of the period.
 
===Solution===
As before, the periodic discount rate (d) is defined as:
 
d = (End amount - start amount) / End amount
 
d = 1 - (Start amount / End amount)
 
 
''Rearranging this relationship:''
 
(Start amount / End amount) = 1 - d
 
Start amount = End amount x (1 - d)
 
 
''Substitute the given data into this relationship:''
 
Start amount = GBP 1.00m x (1 - 0.030000)
 
= '''GBP 0.97m'''
 
 
 
==See also==
 
*[[Effective annual rate]]
*[[Discount rate]]
*[[Nominal annual rate]]
*[[Periodic yield]]
*[[Yield]]

Revision as of 15:04, 26 October 2015

A cost of borrowing - or rate of return - expressed as:

  • The excess of the amount at the end over the amount at the start
  • Divided by the amount at the end


Example 1

GBP 1 million is borrowed.

GBP 1.03 million is repayable at the end of the period.


The periodic discount rate (d) is:

d = (End amount - start amount) / End amount

= (1.03 - 1) / 1.03

= 0.029126

= 2.9126%


Example 2

GBP 0.97 million is borrowed or invested

GBP 1.00 million is repayable at the end of the period.


The periodic discount rate (d) is:

(End amount - start amount) / End amount

= (1.00 - 0.97) / 1.00

= 0.030000

= 3.0000%


Example 3

GBP 0.97 million is borrowed.

The periodic discount rate is 3.0000%.

Calculate the amount repayable at the end of the period.

Solution

The periodic discount rate (d) is defined as:

d = (End amount - start amount) / End amount

d = 1 - (Start amount / End amount)


Rearranging this relationship:

(Start amount / End amount) = 1 - d

Start amount = End amount x (1 - d)

Start amount / (1 - d) = End amount

End amount = Start amount / (1 - d)


Substituting the given information into this relationship:

End amount = GBP 0.97m / (1 - 0.030000)

= GBP 0.97m / 0.97

= GBP 1.00m


Example 4

An investment will pay out a single amount of GBP 1.00m at its final maturity after one period.

The periodic discount rate is 3.0000%.

Calculate the amount invested at the start of the period.

Solution

As before, the periodic discount rate (d) is defined as:

d = (End amount - start amount) / End amount

d = 1 - (Start amount / End amount)


Rearranging this relationship:

(Start amount / End amount) = 1 - d

Start amount = End amount x (1 - d)


Substitute the given data into this relationship:

Start amount = GBP 1.00m x (1 - 0.030000)

= GBP 0.97m


See also